National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

NCBRC News

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When a Return Is Not a “Return”

A tax return filed four years after it was due and one year after the IRS completed its own independent tax assessment is not dischargeable under section 523(a) because it does not meet the “honest and reasonable” standard set forth in the Beard test for what constitutes a “return.”  IRS v. Starling, Nos. 20-7478, 20-7954 (S.D.N.Y. Sept. 16, 2021).

When the debtor failed to file his 2002 federal tax return, the IRS, in 2005, sent a notification of delinquency informing the debtor that it had performed its own assessment on his behalf and providing instructions for the debtor to file his own return, contest the one completed by the IRS, or take other action. Upon receiving no response from the debtor, the IRS finalized its assessment in 2006. In 2007, the debtor filed a return for the 2002 taxes which mirrored the assessment conducted by the IRS.

The debtor then petitioned for chapter 13 bankruptcy and the IRS filed a claim for the delinquent taxes. Upon completion of his plan and discharge, the debtor had paid off only a portion of the 2002 taxes. The IRS, and its private collection agency, ConServe, continued to dun him for the remaining tax debt until the statute of limitations rendered the debt uncollectible. The debtor then filed a motion in the bankruptcy court seeking sanctions against the IRS and ConServe for violation of the discharge order, asserting that the tax debt had been discharged in his bankruptcy. The bankruptcy court agreed, In re Starling, 617 B.R. 208 (Bankr. S.D.N.Y. 2020), and, after the court denied its motion for reconsideration, the IRS and ConServe appealed to the district court. [Read more…] about When a Return Is Not a “Return”

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Attorney Cannot Enforce Lien Based on Improper Fees

A state default judgment lien was avoidable in bankruptcy under the court’s inherent power to police attorney conduct where the lien was security for unpaid attorney fees which were unreasonable. Moore v. Sanchez (In re Sanchez), No. 20-1267 (D. N.M. Sept. 22, 2021).

The debtor hired the creditor, Moore, to represent him in his divorce case. The case went two months without a fee agreement, then Moore presented the debtor with a bill for fees and costs in the amount of $15,000. The debtor paid him $7,000 and they reached a compromise as to the remaining portion of the bill. They entered into a retainer agreement providing for a 2% monthly interest rate on unpaid fees and an automatic lien on the debtor’s personal and real property as security. In January, 2011, Moore sued the debtor in state court to collect unpaid fees. The court awarded Moore a default judgment of $18,732.64 at 24% interest per year. By February, 2018, the debt had grown to $50,073.90, and Moore moved for foreclosure on the debtor’s home. The debtor filed for chapter 7 bankruptcy. In his petition, the debtor valued the house at $55,300.00 and claimed it as fully exempt. He also listed the debt to Moore as secured and disputed. He moved to avoid the judicial lien against his exempt property. [Read more…] about Attorney Cannot Enforce Lien Based on Improper Fees

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Absence of Evidence Defeats SJ for Both Debtor and Student Loan Creditor

Where neither the debtor nor the creditor presented sufficient evidence to establish or counter the three prongs of the Brunner undue hardship test, neither was entitled to summary judgment on the debtor’s adversary complaint seeking discharge of his student loan. Rosenberg v. ECMC, No. 20-688 (S.D. N.Y. Sept. 29, 2021).

The debtor financed his undergraduate and law school degrees in part with student loans. He worked for a time as a lawyer but found the work unsatisfying and quit to open his own business dealing in outdoor equipment sales and tours. At the time he filed for chapter 7 bankruptcy his consolidated student loans had grown to over $220,000.00. He was 45 years old, never married, and had no dependents, but had suffered an injury requiring surgery. It was undisputed that the debtor’s monthly expenses were $4,005.00 and his monthly income $2,456.24. The debtor filed an adversary complaint seeking to discharge his student loan as an undue hardship under section 523(a)(8). Both the debtor and the creditor, ECMC, filed motions for summary judgment. The bankruptcy court granted judgment in favor of the debtor and denied ECMC’s motion. ECMC appealed to the District Court for the Southern District of New York. [Read more…] about Absence of Evidence Defeats SJ for Both Debtor and Student Loan Creditor

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Property Appreciation Belongs to Ch 13 Debtor

Under the “estate replenishment” theory, post-confirmation appreciation on the chapter 13 debtor’s residence belongs to the debtor. In re Larzelere, 2021 WL 3745428 (Bankr. D. N.J. Aug. 24, 2021) (case no. 1:17-bk-34411).

When the debtor filed for chapter 7 bankruptcy on December 4, 2017, his residential property was valued at $219,000 and was encumbered by a $172,877 mortgage. He converted to chapter 13 and confirmed a less-than-100% plan, which he committed to paying out of future earnings. Three years into the plan, the debtor moved the court for an order allowing him to sell his property for $348,000, use the proceeds to make all of the remaining plan payments at once, and retain the remaining proceeds. The trustee objected. She argued that, as an above median debtor, the debtor cannot complete his plan in fewer than 60 months unless he pays 100 percent of the claims. She further argued that the proceeds from the sale of the house are property of the estate under section 1306. [Read more…] about Property Appreciation Belongs to Ch 13 Debtor

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Pawned Vehicle Is Part of Bankruptcy Estate

Where the maturity date on the vehicle pawn contract had not elapsed before the debtor filed for chapter 13 bankruptcy, she retained ownership of her vehicle, the vehicle became property of the estate, and the loan could be provided for in her chapter 13 plan. TitleMax of Alabama, Inc. v. Womack, — Fed. Appx. —-, 2021 WL 3856036 (11th Cir. Aug. 30, 2021) (case no. 21-11476) (unpublished).

The debtor filed her chapter 13 petition 11 days prior to the maturity date of the pawn contract on her vehicle and she proposed to pay the amount remaining on the loan through the life of the plan under section 1322(b)(2). TitleMax objected to confirmation, arguing that, under the terms of the pawn contract and state law, once the maturity date on the loan expired, the debtor’s choices were limited to redemption of the vehicle or forfeiture of title to TitleMax. The bankruptcy court overruled TitleMax’s objections, and the district court affirmed (see blog post here). [Read more…] about Pawned Vehicle Is Part of Bankruptcy Estate

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Third Circuit Reexamines Defense to Stay Violation

The Third Circuit’s 1992 precedent establishing that a creditor’s reliance on persuasive legal authority may be a defense to the “willfulness” element of a stay violation is still good law but does not apply to a creditor who argued unsettled law but did not rely on any compelling legal authority to justify its conduct. California Coast Univ. v. Aleckna, No. 20-1309 (3rd Cir. Sept. 9, 2021).

When the debtor completed the course work necessary for graduation from California Coast University, she still owed $6,300 in tuition. She filed for bankruptcy and then requested her certified transcript from CCU. CCU, aware of her bankruptcy filing, ceased its collection efforts and eventually gave her an uncertified copy of her transcript with no graduation date listed on it. CCU maintained that the incomplete transcript was part of its policy that students who owe tuition at the completion of their studies have not technically graduated. CCU conceded that the tuition debt was dischargeable. [Read more…] about Third Circuit Reexamines Defense to Stay Violation

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Panel Affirms Reduced Attorney Fees

The bankruptcy court did not abuse its discretion in reducing the chapter 7 bankruptcy attorney’s fees in two cases in which the attorney charged an additional $500 to clients due solely to their electing to pay his fees post-petition rather than up front. Ridings v. Cassamatta (In re Allen), No. 20-6023 (B.A.P. 8th Cir. June 21, 2021).

At issue in this case was Bankruptcy Attorney William Riding’s payment policy under which he offered two options for his chapter 7 clients. Under the first option, the debtor pays $1,500 prior to filing the petition. That amount comprises a $335 filing fee plus attorney fees of $1,165. Under the second option, the debtor pays nothing up front but pays $2,000 post-petition. That amount comprises the filing fee plus $1,665 in attorney fees. The services Mr. Ridings provided were the same regardless of whether the client paid up front or post-petition. [Read more…] about Panel Affirms Reduced Attorney Fees

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Absolute Right to Dismiss v. Bad Faith

Section 1307(b) grants debtors an absolute right of dismissal which is not limited by the court’s inherent power to punish bad faith conduct. Nichols v. Marana Stockyard & Livestock Market, No. 20-60043 (9th Cir. Sept. 1, 2021).

After the debtors filed their chapter 13 petition, they were indicted on a scheme to defraud the Marana Stockyard & Livestock Market. In order to avoid disclosing information that might harm their federal criminal case, the debtors declined to attend their 341 meeting of creditors, provide tax returns, or submit a proposed plan. Marana, acting as a claimant in the bankruptcy case, eventually moved to have the case converted to chapter 7 and the debtors responded with a motion to stay the bankruptcy proceedings. The bankruptcy court denied the motion for stay and granted the motion for conversion “for cause.” The debtors then moved for voluntary dismissal under section 1307(b) which provides: “On request of the debtor at any time, if the case has not been converted . . ., the court shall dismiss a case under this chapter.”

Denying the debtors’ motion for voluntary dismissal, the bankruptcy court relied on In re Rosson, 545 F.3d 764 (9th Cir. 2008), where the circuit court held that there was an implied bad faith exception to a debtor’s right to voluntarily dismiss. The Bankruptcy Appellate Panel for the Ninth Circuit affirmed. [Read more…] about Absolute Right to Dismiss v. Bad Faith

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Retroactive vs Prospective Relief from Stay

The bankruptcy court erred when it denied prospective relief from stay based on the same analysis it used when it denied the mortgage creditor’s retroactive annulment of stay motion. Wilmington Savings Fund Soc’y v. Fairbanks, No. 21-1019 (B.A.P. 9th Cir. Aug. 12, 2021) (unpublished).

When the debtor defaulted on her mortgage payments, she hired Home Matters USA to communicate with the foreclosure trustee. Home Matters assured her that, due to Covid foreclosure restrictions, her home would not be sold at auction. Home Matters failed to adequately protect her and her mortgage creditor, Wilmington Savings Fund Society, held a nonjudicial foreclosure auction where it sold the property for $7,000 in excess of the total debt. The sale was the first indication to the debtor that her property was not protected from foreclosure. In an effort to save her home, she immediately filed a chapter 13 petition. Three days later, the foreclosure trustee executed the deed and the purchaser recorded it within the statutory fifteen-day period. A month later, Wilmington moved for retroactive annulment of the stay to validate the transfer, or, in the alternative, for prospective relief from the stay to allow the foreclosure trustee to make the transfer again. The bankruptcy court denied both the retroactive and prospective stay motions. Wilmington appealed to the Bankruptcy Appellate Panel for the Ninth Circuit. [Read more…] about Retroactive vs Prospective Relief from Stay

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Court Requires Debtor to Pay Discharged Mortgage through Plan

In a poorly-reasoned opinion ignoring basic principles of bankruptcy, the Bankruptcy Court for the Eastern District of New York held that a junior mortgagee’s lien could be stripped in the debtor’s chapter 13 case, but the claim must be treated as a general unsecured claim despite the fact that the debtor discharged her personal liability on the debt in a prior chapter 7 bankruptcy. In re Hopper, No. 21-70139 (Bankr. E.D.N.Y. Aug. 5, 2021). [Read more…] about Court Requires Debtor to Pay Discharged Mortgage through Plan