National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Plan confirmation

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Fee-Only (almost) Plan Not Bad Faith

“In this Court’s view, attorney fees, which are governed by 11 U.S.C. § 328, should not be intertwined with § 1325(b)(1)’s requirement that debtors pay either 100% of general unsecured claims or all of their disposable income.” In re Jones, No. 17-40497, 2018 Bankr. LEXIS 1244 (Bankr. S.D. Ill. April 26, 2018).

Chapter 13 debtor, Gary Jones, proposed to pay secured creditors directly, and pay into the plan $100.00 per month with that amount going first to pay his attorney’s and the trustee’s fees in full, and then to pay 7.4% to his general unsecured creditors. Despite the fact that the attorney’s fees were below the court-approved no-look fee and that Mr. Jones could not afford to pay more into the plan, the trustee objected to confirmation on the basis that the plan was not filed in good faith.

Applying a totality of the circumstances inquiry into the issue of good faith, the court overruled the trustee’s objection. [Read more…] about Fee-Only (almost) Plan Not Bad Faith

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Debtor’s Attorney Fees Were Properly Paid Before Creditors in Chapter 13

In confirming the debtor’s chapter 13 plan, the bankruptcy court noted that “[a] debtor’s attorney fees are considered to be administrative priority claims and have priority above other claims . . .[under section] 507(a)(2).” In re Amaya, No. 17-70280 (Bankr. S.D. Tex. April 11, 2018).

In Evette Amaya’s chapter 13 bankruptcy, Propel Financial Services, LLC., filed a proof of claim in the amount of $25,303.63 secured by a tax lien on Ms. Amaya’s homestead. Ms. Amaya proposed a plan providing for two monthly payments in the amount of $1,100, and the remaining fifty eight monthly payments in the amount of $1,200. The plan specified that both Ms. Amaya’s counsel, to whom she owed $2,968.00  and Propel would be paid pro rata from month one through month fifty eight of the plan. The plan also provided that, subject to disposition of an avoidance motion, secured creditors would retain their liens. The trustee had her own internal distribution procedures under which she would pay Ms. Amaya’s counsel prior to other creditors. [Read more…] about Debtor’s Attorney Fees Were Properly Paid Before Creditors in Chapter 13

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EITC Is Income Which May Be Prorated and Offset with Expenses

The Bankruptcy Court did not err when it confirmed a plan in which the debtor prorated her expected Earned Income Tax Credit and offset the income with projected reasonably necessary expenses. Marshall v. Blake (In re Blake), No. 17-2809 (7th Cir. March 22, 2018).

Below-median chapter 13 debtor, Denise Blake, proposed a plan under which she pledged her federal tax refunds but retained any Earned Income Tax Credit. Notwithstanding that Ms. Blake worked full-time, lived in subsidized housing and had three dependent children, the trustee objected, arguing that Ms. Blake must count the EITC as income and include it in her plan payments. The bankruptcy court ultimately confirmed a plan over the trustee’s objection in which Ms. Blake treated the tax credit as income prorated over the course of the year and offset it with reasonable expenses. [Read more…] about EITC Is Income Which May Be Prorated and Offset with Expenses

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1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation

The mortgage creditor canceled the underlying debt when it filed a “cancellation of debt” form with the IRS and the debtors paid income taxes on the canceled debt. In re Lukaszka, No. 17-242 (Bankr. N.D. Ia. Aug. 4, 2017).

In their proposed chapter 13 plan, James and Darcey Lukaszka sought an order requiring First Federal Credit Union, a junior mortgagee, to release their mortgage lien on the basis that, four years earlier, First Federal had issued the debtors a “cancellation of debt” form, 1099-C, indicating that it was no longer seeking to collect on the debt. As a result, the Lukaszkas reported the almost $60,000.00 debt cancelation to the IRS as income and paid taxes on it.

First Federal objected to confirmation. [Read more…] about 1099-C Filing Plus Debtor’s Income Tax Payment Equals Debt Cancellation

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Forced Vesting Does Not Satisfy Confirmation Requirements

Section 1322(b)(9) does not permit a court to confirm a plan vesting surrendered property in an unwilling creditor. Wells Fargo v. Sagendorph, No. 15-40117 (D. Mass. Jan. 23, 2017).

Paul Sagendorph’s chapter 13 plan proposed to surrender property on which Wells Fargo held the sole lien, and vest title in Wells Fargo notwithstanding Wells Fargo’s objection. The bankruptcy court held that the Code permitted Mr. Sagendorph’s treatment of the secured debt and confirmed the plan. In re Sagendorph, No. 14-41675 (Bankr. D. Mass. June 2015).

On appeal the district court, like the bankruptcy court, looked to the interplay between sections 1322 and 1325.

Section 1325(a) provides that, in the absence of objection by a creditor, a plan shall be confirmed so long as it meets certain conditions with respect to secured debts. Subparagraph 1325(a)(5)(C) permits a debtor to meet the requirements for confirmation by surrendering the property that secures the lien. Section 1322(b)(9) states a plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.”

The district court began its analysis with the statutory text which it found to be unambiguous. “Surrender” means “make available” and says nothing with respect to the party to whom the property is surrendered. To “vest” is to confer title on another. Both the bankruptcy court and the district court agreed that surrender and vesting were separate and distinct concepts. However, where the bankruptcy court interpreted vesting as an action by the debtor—conferring title upon another, the district court interpreted it as an action by the creditor—accepting transfer of title. The district court therefore concluded that vesting required a willing recipient.

The district court found the bankruptcy court erred in treating surrender and vesting as coincident in time and, therefore, essentially synonymous. Because the plan tied surrender to transfer of title, the district court found the mandatory confirmability that would normally accompany surrender was incorrectly tied to permissive vesting by the bankruptcy court.

The court also disagreed with the bankruptcy court’s analogy between vesting in chapter 13 and chapter 11. The chapter 11 vesting provision, section 1123(a)(5)(B), differs in two significant respects from chapter 13’s. First, the chapter 11 provision is mandatory; it requires that a plan, to be confirmed, shall provide for vesting or other form of implementation. Second, the forced vesting in chapter 11 is implemented by section 1129(b)(2)(A) which requires a court to find that the property being vested in the creditor is “indubitably equivalent” to the debt. No such equivalence is required by chapter 13.

The court suggested that while the avenue pursued by Mr. Sagendorph in this case was unavailing, there was room to explore other ways a court could use its equitable power to assist a debtor to achieve his fresh start. Citing United States v. Energy Res. Co., Inc., 495 U.S. 545, 549 (1990), the court the conceded that “[f]orced vesting under Chapter 13 not only addresses debtors’ evolving needs in the aftermath of the housing market crisis but is also ‘consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.’” It went on to suggested use of section 1322(b)(2) where the property at issue is not a debtor’s principal residence, or the Code sections implicated by section 1322(c), or perhaps substitution of in-kind payments rather than cash.

Sagendorph D. Mass opinion Jan 2017

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Plan May Provide for Balloon Payment

A plan providing for periodic payments on a mortgage ending with a balloon payment during the plan, does not violate the Code’s requirement that plan payments be in “equal monthly amounts.” In re Cochran, No. 15-52314 (Bankr. M.D. Ga. Sept. 1, 2016).

William Jackson Cochran had a loan from the Bank of Perry which was secured by his residence and surrounding land. The terms of the lending agreement were that Mr. Cochran would make regular monthly payments for three years then pay off the remainder of the loan in a balloon payment. When the balloon payment came due, Mr. Cochran was unable to make it but continued to make the regular monthly payments. The Bank assigned the loan to RREF and RREF instituted a foreclosure action. Mr. Cochran filed a chapter 13 bankruptcy petition to save his home. His proposed plan contemplated continuing the payments he had been making as Adequate Protection Payments. The plan proposed to pay the remainder of the debt in a single payment within twelve months of confirmation. [Read more…] about Plan May Provide for Balloon Payment