Tag: chapter 13

Absolute Right to Dismiss Chapter 13 is a Happy Green Light

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

9th Cir BAP: Actually, Absolute Right to Dismiss means Absolute

Ninth Circuit Bankruptcy Appellate Panel finds no “eligibility” exception to right to dismiss a Chapter 13 bankruptcy

Recent BAP ruling answers the question if debtor’s right to dismiss a Chapter 13 bankruptcy after Nichols is absolute, or if debt limit ineligibility restricts it.

In re Powell is a recent Chapter 13 bankruptcy where the debtor tried to dismiss his case, and judgment creditor TICO fought the dismissal. and instead wanted Debtor’s case converted to Chapter 7. The Bankruptcy Court granted the motion to dismiss, citing the recent Nichols case.

Powell vs TICO Construction (In re Powell)
644 B.R. 181 (9th Circuit BAP, 2022)

ISSUE

Did the bankruptcy court err in granting Debtor’s motion to dismiss the Chapter 13?

RULING

No.

FACTS

This case tests the new “absolute right to dismiss” rule about Chapter 13 bankruptcies from the Ninth Circuit Court of Appeals Nichols case, and whether it applies even to people who could only file 7 and had no business in a Chapter 13 in the first place.

Here, there was a dispute between an employer (Creditor TICO Construction) and one of its former workers, Jason Powell (Debtor). Creditor claimed that when Debtor left its employ to form his own company, he took trade secrets, broke his non-compete clause, and misappropriated proprietary information. This seemed to cause all sorts of bad blood.

TICO then sued Debtor in state court, and got a judgment against Debtor for about $250,000, which it then recorded against all of Debtor’s property in Nevada. What should have been the end was only the beginning of the litigation between the two.

Debtor filed for Chapter 13 bankruptcy relief. Creditor then filed a flurry of motions and complaints in the bankruptcy. Creditor challenged Debtor’s homestead exemption, asserted Debtor was over the unsecured debt limit and hence not eligible for Chapter 13. It also filed motions to value collateral. Creditor also filed adversary proceedings to have its debt found nondischargable under 523(a)(4) and 523(a)(6), alleging, among other things, hiding assets via transfers from Debtor to his ex-wife, who was really still his wife due to a sham divorce.

It’s safe to say that Creditor believed Debtor was a bad actor guilty of fraud and bad faith, the exact type of person it felt that was not entitled to dismissal of a Chapter 13 under some case law. And that’s exactly what Debtor tried to do at this point. Having reached his own limit of the litigation and headaches, Debtor filed a motion to dismiss. Creditor said Debtor could not dismiss a 13, since he was never eligible to be in one in the first place, and wanted the case converted to a Chapter 7 or 11. The bankruptcy court granted the motion to dismiss. Creditor appealed to the BAP.

RULING

The Bankruptcy Appellate Panel considered whether the absolute right to dismiss under 11 USC 1307(b) has an exception here, and concluded that it doesn’t.

Section 1307(b)

Section 1307(b) of the Bankruptcy Code says, “On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable.”

That seems fairly ironclad, with words like “shall” and “at any time,” and even stating it can’t be waived. But as the BAP pointed out, this statute has somehow caused a split in the jurisdictions as to whether that right to dismiss is absolute.

Review of Case Law

The BAP then reviewed the case law. Some courts have held that it is indeed an absolute right to dismiss, regardless of findings of bad faith. In re Williams, 435 BR 552 (Bankr. Court, ND Ill, 2010). On the other hand, the Fifth Circuit has exceptions to the right to dismiss for bad faith or abuse of process. Jacobsen v. Moser (In re Jacobsen), 609 F.3d 647, 660 (5th Cir 2010).

Locally, the Ninth Circuit has been in the latter camp for a while, when the 9th Circuit Court of Appeals denied Debtor’s request to dismiss because of bad faith. In re Rossom, 545 F.3d 764 (9th Cir, 2008), The Rossom ruling of no right to dismissal for bad faith cited the US Supreme Court in Marrama v. Citizens Bank of Massachusetts, 549 US 365, (Supreme Court, 2007), which denied the right to convert a case because of Debtor’s bad faith.

In 2021, the Ninth Circuit then determined that Rossom was no longer good law, in light of the subsequent Law v Siegel ruling from the Supreme Court. In re Nichols, 10 F.4th 956 (9th Cir, 2021). No longer bound by Rossom, the Ninth Circuit in Nichols reviewed the Bankruptcy Code anew with a fresh eye. It found that “section 1307(b)’s text is unambiguous.” Id. at 963.

The 9th Circuit in Nichols then held, “We conclude that § 1307(b)’s text confers upon the debtor an absolute right to dismiss a Chapter 13 bankruptcy case, subject to the single exception noted expressly in the statute itself.” Id. at 964.

Back to 2022, Powell, TICO, and the BAP. After raising Marrama, the BAP quickly distinguished it, hinting that it doesn’t apply to the absolute 1307(b) right to dismissal by pointing to the Nichols case which overruled Rossom. “[A]s the bankruptcy court correctly held, the Ninth Circuit’s recent Nichols decision overruled Rosson and made clear that chapter 13 debtors have an absolute right to dismiss their case at any time, so long as the case had not been previously converted. Powell at 185.

Creditor TICO raised the issue that because Powell was over the debt limit, he was never a Chapter 13 debtor, and thus, Nichols and 1307 didn’t apply. The BAP wasn’t buying any of it, saying that there was nothing in 1307(b) which limits it to eligible Chapter 13 debtors, and to rule this way would be to create a new limitation not found in the statute.

In short, Nichols and 1307(b) even applies to people who had no business filing a Chapter 13. In the Ninth Circuit, the rule is clear: Marrama doesn’t apply to 1307(b), and after Law v Siegel, the statute’s plain text is unambiguous: it’s an absolute right by debtor that the court shall dismiss a case upon his request, if the case was not previously converted. Absolute really does actually mean absolute. Other circuits would do well to follow.

Bankruptcy can toll or extend the statute of limitations using Section 108(c)

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does Bankruptcy Toll the Statute of Limitations? 108c Top Points

Does bankruptcy’s automatic stay toll a statute of limitations for a creditor’s claim or judgment, or extend it in Calif and beyond. What to know.

When a bankruptcy is dismissed or discharged, is the statute of limitations tolled on an earlier claim by the automatic stay, and suspended? Or is the statute of limitations extended by a few weeks with just a little bit of time tacked on? The answer could make a big difference on how much time the creditor has the act on their claim, lawsuit, lien, or other collection actions.

Automatic Stay giveth, but what does it take away?

Extending time using Section 108
Live photo of someone extending time using Section 108

You probably already know there’s bankruptcy protection in 11 USC 362 called the automatic stay. In short, this means that once a bankruptcy is filed, all collections against the debtor have to stop. This is powerful and effective. In a typical case that successfully ends with discharge, the debt is no longer collectable, ever.

However, sometimes a Chapter 13 bankruptcy — sort of a years-long debt consolidation — doesn’t make it to discharge. If the case is dismissed, what happens to the statute of limitation timing on claims and judgments before the bankruptcy? Is the statute tolled (suspended), or is the timeline to collect extended?

Suspend: Tolling of the Statute of Limitations

Suspension would involve tolling the statute of limitations for the time in bankruptcy. A common example would be in California. Here, there’s a four-year statute of limitations for breach of contract. If three of those years have run, and then someone files Chapter 13 for two years before it’s dismissed, how much time remains to collect? If the statute was suspended or tolled, there would still be a year to file a law suit against debtor, post-bankruptcy.

Extend: Add some time to collect after bankruptcy.

Extension of time would be tacking on additional time to prosecute the case and file the lawsuit after the dismissal of the bankruptcy.

Let’s look at the law and see what it says for guidance.

Bankruptcy Code 11 USC 108

Section 108(c) of the Bankruptcy Code says:

…if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.

What this means is that Section 108(c) kicks in regarding someone protected under Chapter 12 or Chapter 13 bankruptcies (1201 or 1301), so it wouldn’t apply in the more common Chapter 7 bankruptcy cases.

It also specifically says that the period to commence or continue an action against the debtor doesn’t expire until the later of (1) the suspension of the period; OR (2) 30 days after notice of the stay ended, which sounds like an extension.

What does this mean? Let’s go to the Bankruptcy Appellate Panel in the Ninth Circuit: “In simpler terms, unless the limitations period under applicable nonbankruptcy law would expire later, a limitations period that did not expire prepetition will expire thirty days after the expiration or termination of the automatic stay.” In re Brown, 606 BR 40, 47 (9th Cir BAP, 2019).

So, there’s both suspension and extension. Are both in play as both are in the statute, or is it just one used practically, depending on jurisdiction? As usual, we look to the courts for interpretation.

Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108
Statute of Limitations have been both extended and suspended, depending on which court interprets Section 108

How the Courts have interpreted Section 108(c)

Differing opinions on suspend or extend

In the battle of suspend (toll) vs extend, the result seems to be specific to jurisdiction, facts, and the underlying nonbankruptcy law in play. The Supreme Court of the United States has weighed in: “Petitioners believe § 108(c)(1) contains a tolling provision. The lower courts have split over this issue.” Young vs US, 535 U.S. 43, 52 (Sup Ct, 2002).

Lower courts have made the same observation. “They [the parties] differ in interpretation, however, with CPI finding no separate federal basis for tolling state prescriptive periods and Rogers arguing that § 108(c) itself tolls the prescriptive period. We are not the first circuit to face this issue. Panels of both the Second and Ninth Circuits have examined the language and legislative history of this section of the Code. Unfortunately, they have created a potential split in result. Other federal courts have divided likewise.” Rogers v. Corrosion Products, Inc., 42 F. 3d 292, 296 (5th Circuit, 1995)

Statute of Limitations extended … A Little Bit

Some courts have used Section 108 to merely extend the statute of limitations. One example: “We hold that Section 108(c) of the bankruptcy Code extends a creditor’s right to bring an action through the pendency of a debtor’s bankruptcy case only for 30 days after the automatic stay expires by operation of law or is lifted by order of court.” In re Baird, 63 BR 60, 63 (WDKY, 1986).

While Section 362 doesn’t deal with time, Section 108 above has a few factors, and can extend contractual, statutory or judicial deadlines. Here’s the Second Circuit Court of Appeals: “…we observe that by its terms § 108(c) does not provide for tolling of any externally imposed time bars, such as those found in the two maritime statutes of limitations. The bankruptcy section only calls for applicable time deadlines to be extended for 30 days after notice of the termination of a bankruptcy stay, if any such deadline would have fallen on an earlier date.” Aslanidis v. US Lines, 7 F. 3d 1067, 1073 (2nd Cir, 1993).

A mere 30-day extension can be challenging for creditors, and good news for debtors, as it’s not always certain creditors will get notice of the bankruptcy dismissal in 30 days. If that’s the case, the 30 days can go quickly and then the debtor is safe from any claims brought from that creditor.

Suspended or Tolled Statute: California State Law CCP 356

Let’s start with this nugget of a quote:

“Although the automatic stay is a broad and powerful provision, it does not stay the passage of time.”

That is from Judge Sidney Weaver in the case Matter of Lauderdale Motorcar Corp., 35 BR 544, 548 (Bankr. Ct, SD FL 1983). Judge Weaver’s quote is consistent with the Second Circuit above in Aslanidis, and would seem to be very friendly to debtors. They can’t run out the clock in a bankruptcy, but a small 30-day window puts the odds in their favor.

But not so fast. Other courts (and state laws) have come to a different conclusion.

In California, the automatic stay suspends time for the SOL

Locally, in California, state law kicks in. We have CCP 356, which says: “When the commencement of an action is stayed by injunction or statutory prohibition, the time of the continuance of the injunction or prohibition is not part of the time limited for the commencement of the action.”

“A bankruptcy stay has been held to be a ‘statutory prohibition’ within the meaning of Code of Civil Procedure section 356.” Schumacher v. Worcester, 55 Cal.App.4th 376, 380 (1997) . Later, this was cited by another California court, which added: “The provisions of sections 362(a), 108(c), and Code of Civil Procedure section 356, as well as the relevant case law set forth above, enforce our conclusion that the automatic stay provisions applied here to toll the limitations periods.” Kertesz v. Ostrovsky, 8 Cal. Rptr. 3d 907, 914 (Cal Ct of Appeal, 4th Appellate Dist., 3rd Div. 2004), but note limitations in law construction that focused on the 1872 enactment date of Section 356. Inco Development, Court of Appeal of California, Fourth District, Division Two, August 4, 2005.

California law and the Discharge Injunction: also suspends time

That’s all well and good. It seems to be settled in California that because of CCP 356, the Automatic Stay of Section 362 suspends (that is tolls) the statute of limitations. But does CCP Section 356 have the same effect on tolling because of the discharge injunction of Section 524(a)(2)?

Surprisingly, the Ninth Circuit BAP says, yes, the discharge injunction also tolls and suspends time in California. To wit: “In sum, the Browns have not persuaded us that the discharge injunction is beyond the scope of C.C.P. § 356. To the contrary, we are convinced that the discharge injunction triggers the limitations period suspension provided for in the statute. Therefore, we reject the Browns’ principal argument on appeal.” Brown, 606 BR at 50.

But Beware Phillips v Gilman for Postpetition Fees and Costs in a Bankruptcy

When it comes to fees in a bankruptcy using nonbankruptcy statutes CCP 685.040 and 685.080, the Ninth Circuit BAP found that Section 108c doesn’t apply. Why? Because Section 108(c) involves seeking relief in a court other than a bankruptcy court; and that period must not have expired when the petition is filed. Both of these were missing.

The BAP of the Ninth Circuit ruled, “By their conduct, Creditors demonstrate that CCP § 685.080 did not require Creditors to act “in a court other than a bankruptcy court“; this fact alone renders § 108(c) inapplicable to their motions.” In re Gilman, 603 BR 437, 445 (9th Cir BAP, 2019). Further, “[b]ecause all of the fees were incurred postpetition, CCP § 685.080’s two-year period did not commence prepetition and, again, § 108(c) does not apply.” Id.

In short, as the Ninth Circuit Court of Appeals stated in an unpublished rejected appeal, “Section 108(c) does not apply here because Creditors filed their fee motions in the Bankruptcy Court for fees incurred after Debtor filed his bankruptcy petition.” Phillips v Gilman, unpublished, (9th Cir, 2020). The lesson? It’s in footnote 9 of the main BAP case: ” the bankruptcy court did not prohibit Creditors from filing CCP § 685.040 motions or memoranda at two-year intervals.”

The Ninth Circuit Extends for Judgments

Let’s go outside of California state law, but stay in the Ninth Circuit. What do we find there?

In 1989, the Ninth Circuit weighed in on the issue when it ruled that Section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate. Hunters Run, 875 F.2d 1425 (9th Circuit, 1989).

That settles it, then, right? Not so fast. The 5th Circuit Court of Appeals found 9th Circuit’s ruling “opaque” when it ruled: “Again, the general question was whether § 108(c) applied to the time limits of enforcement actions of liens. The court held that it did and that the time period was “tolled.” The court did not decide whether the “tolling” meant that the time period ceased to run, or simply that a thirty-day grace period existed under the statute if the time period had run.” Rogers, 42 F. 3d at 296-297.

The Hunters Run rule was discussed further in In re Spirtos, 221 F. 3d 1079 (9th Circuit, 2000), where the Ninth Circuit (not BAP) distinguished collecting on a judgment versus merely renewing a judgment. There, the Circuit Court recited what Hunters Run stands for, and then itself ruled the proposition that section 108(c) extends the limitations period so long as the creditor is barred by the automatic stay from enforcing its judgment against the property of the estate.

More recently, in evaluating an ORAP lien, the Ninth Circuit held “that the period in which a creditor may execute on a lien constitutes the continuation of the original action that resulted in the judgment and is thus tolled during the automatic stay.” In re Swintek, 906 F. 3d 1100, 1102 (9th Circuit, 2018).

The IRS, taxes, and 108(c)

Generally, taxes, tolling, and the bankruptcy automatic stay

Taxes are a very tricky issue in bankruptcy, much of it involving timing. As a rule, taxes are not dischargable in bankruptcy. The exception is that they can be eliminated if enough time has passed for various benchmarks.

Section 6503(b) of the Internal Revenue Code states:

The period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period the assets of the taxpayer are in the control or custody of the court in any proceeding before any court of the United States . . . and for six months thereafter.

How does the IRC’s 6503 interplay with the Bankruptcy Code’s 108? Or put differently, what if someone is in a Chapter 13 during the three years the IRS has to collect taxes in their priority status of 11 USC 507(a)(8)?

The Ninth Circuit BAP, citing Baird above, and reviewing Congress’ legislative intent, found that, “…it is clear that Congress, by enacting Section 108(c), intended to activate Section 6503(b) and thereby suspend the running of the statute of limitations for tax collection during a taxpayer’s bankruptcy proceedings.” In re Brickley, 70 BR 113, 115, (9th Cir BAP, 1986). Section 6503, then, takes over for Section 108, and the result for the tax clock is that it’s suspended. (But see In re Gurney, 192 BR 529, (9th Cir BAP, 1996), allowing the court’s Section 105 powers for equitable tolling balanced against the policy to prevent tax evasion schemes, limited in In re Gardenhire, 209 F. 3d 1145, 9th Circuit, 2000).

The Ninth Circuit Court of Appeals found the BAP’s logic in Brickley persuasive, and followed it in In re West, 5 F. 3d 423 (9th Circuit, 1993). There, the 9th Circuit reviewed the 240-day rule of Section 507’s interaction with Section 108. Considering using bankruptcy for tax evasion, the Ninth Circuit concluded, “The debtors’ joint Chapter 13 case suspended the running of § 507(a)(7)(A)(ii)’s 240-day priority period from the date of the bankruptcy petition until six months after the case was dismissed. ” West at 427.

Equitable Tolling and the Statute of Limitations in Bankruptcy

Sometimes, courts find that it’s just fair to prevent someone from using bankruptcy in a tax evasion scheme. In those situations, equitable tolling is used to provide the taxing authority more time to collect the taxes.

In the Young case discussed above, a person filed a Chapter 13 bankruptcy during the three-year lookback period, and then a Chapter 7 in an effort to run out the clock. The Supreme Court found equitable tolling, finding the just result was stopping the clock (ie: suspending) and the statute of limitations during the bankruptcy cases.

In the Ninth Circuit, that was not the result when Brenda Jones filed a Chapter 13 bankruptcy, and then filed her California state tax return owing money. The Franchise Tax Board (FTB) didn’t protect its claim in the 13, and then years later, Jones dismissed her case and then filed a Chapter 7. The FTB wondered if it could maintain a postconfirmation tax claim if the prepetition property of the estate revested in the debtor at confirmation. Here, the Ninth Circuit Bankruptcy Appellate Panel distinguished from Young and found no equitable tolling because the FTB didn’t seek relief from the automatic stay or file a motion to dismiss in the 13 for its priority taxes. In re Jones, 420 BR 506 (9th Cir BAP, 2009).

Summing up

The bottom line is, well, there is no bottom line. Cases are all over the map, depending on the state, circuit, and underlying nonbankruptcy law. It would seem pretty straightforward that once a bankruptcy is dismissed, you just wait thirty days and hope you don’t get sued. However, there are many courts, states, and situations where the statute of limitations is tolled, that is stopped, while the bankruptcy and automatic stay is active.

And so the short answer, like most things in law, is, “it depends.”

It's possible to change a Chapter 13 plan payment

Changing the Plan Payment in Chapter 13 Bankruptcy: What to Know

Changing the Plan Payment in Chapter 13 Bankruptcy by Motion to Modify: What to Know

A Motion to Modify can drop the Chapter 13 plan payment

You can change your payment amount in Chapter 13 bankruptcy, and this is done by a Motion to Modify. It can lower your payment. But beware, someone can also raise it. Here is everything you need to know.

So I can change my monthly payment for a Chapter 13?

Yes. Of course, there has to be a reason (and I want more money for movies and travel isn’t good enough). Let’s look and see what the law says.

Bankruptcy Code for Modifications of Plan: 11 USC 1329

Section 1329 of the Bankruptcy Code is the statute or law that discusses when you can modify or change your Chapter 13 plan. Section 1329(a) is the common one that comes up. It says:

At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to increase or reduce the amount of payments on claims of a particular class provided for by the plan modification

Let’s unpack this a little bit.

At any time after confirmation

This is saying that the plan can be modified after the case is confirmed. Confirmation is the stage of a Chapter 13 case where the proposal that we put together — the Chapter 13 Plan — is accepted and approved by the court. So, Section 1329 kicks in once the case is confirmed. Prior to that, it’s just a new proposal, which is what we can an amended plan. Amended, modified… they mean the same thing, but the rules and process can vary depending on the stage and if the plan has been confirmed.

Before the completion of payments

It’s very important that you can’t modify a Chapter 13 plan once all the payments have been made. Now, you might ask, “why would I want to modify the plan if I’m basically finished?” The answer is sometimes there are surprise claims or other things that spring up at the last minute. The trustee then demands a balloon payment to finish the case, which more often than not the debtor doesn’t have. Normally, you’d want to modify the plan, but if the last payment has been made, it’s too late.

Plan can be modified upon request of debtor, trustee, or claims

Quite often, one of my clients will ask to have their plan modified if their income has dropped during the plan term. Usually, Section 1329 and a Motion to Modify (or MOMOD) is the solution. We can typically lower the monthly plan payment to something that is affordable after the income change. (however, there sometimes are other factors in Chapter 13 like liquidation value, etc that require the payment to stay higher; your mileage may vary). So, debtor would want to file a MoMod, or a Motion To Convert to Chapter 7, as a solution to change in circumstances.

While Section 1329 is helpful so that the debtor can try to lower the payment, this can go both ways. Trustee or a creditor can also file a motion to modify. Why would she want to do that you ask? Stay tuned:

Increase or reduce the amount of payments

There it is: the trustee (or a claim/creditor) may want to file a Motion to Modify to increase the payment. Why? Because there is more income available due to a new job or a pay raise. This typically would happen after the trustee sees the annual tax returns or pay stubs during the Chapter 13, and discovers the debtor can afford to pay more.

The Standard: Section 1325, Good Faith, Substantial, Unanticipated

Section 1329 Points to Section 1325: Good Faith

What is the standard for the court to allow a modification? It’s spelled out in Section 1329(b)(1), which says, “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.”

Section 1325(a)(3) says in pertinent part, “the plan has been proposed in good faith.”

Substantial and Unanticipated?

The Fourth Circuit Court of Appeals has held that “[a] debtor’s proposal of an early payoff [of a bankruptcy plan] through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan.” In re Murphy, 474 F. 3d 143, 150-151 (4th Cir, 2007). It then went on to rule, “a debtor must experience a substantial and unanticipated change in his post-confirmation financial condition before his confirmed plan can be modified pursuant to §§ 1329(a)(1) or (a)(2).” Id. at 151.

The Ninth Circuit instead interprets Good Faith

9th Circuit BAP: substantial and unanticipated isn’t in the Bankruptcy Code

However, closer to home here in the Ninth Circuit, the standard is different from that in the Fourth Circuit. “Notably missing from § 1329 is any express requirement that a substantial and unanticipated change in the debtor’s financial circumstances is a threshold requirement to overcome the res judicata effect of a confirmed plan under § 1327(a).” In re Mattson, 468 B.R. 361, 367-368 (9th Cir BAP, 2012). “The First, Fifth and Seventh Circuits have rejected this approach and do not impose on parties seeking to modify a confirmed plan the threshold requirement of the substantial unanticipated change test.” Id. at 368.

Stick to Good Faith

The Ninth Circuit Court of Appeals has ruled on this, providing a ‘good faith’ standard: “whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner.” In re Goeb, 675 F. 2d 1386, 1390 (9th Cir, 1982). At footnote 9, the 9th Circuit in Goeb stated, “We emphasize that the scope of the good-faith inquiry should be quite broad.”

And here’s what Good Faith is

Now, back to Mattson, interpreting what good faith is. The 9th Circuit Bankruptcy Appellate Panel continued: [N]o single factor is determinative of the lack of good faith….. [D]eterminations of good faith are made on a case-by-case basis after considering the totality of the circumstances.” Id. at 371-372. “We continue to accept that a good faith analysis under § 1325(a)(3), although not an exact science, adequately guides the exercise of the court’s discretion for deciding plan modification issues.” Id. at 371. Summing up, it wrote: “At bottom, determinations of good faith are made on a case-by-case basis, after considering the totality of the circumstances.” Id. at 372.

So, in the Ninth Circuit, the guidance is given that to modify a Chapter 13 plan payment, bankruptcy courts look at good faith, using their discretion, while reviewing the totality of the circumstances.

lien in bankruptcy cars

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in bankruptcy typically survive and don’t get affected by the discharge. However, there are exceptions where the lien can be reduced or even eliminated. I try to break these down in simple terms that are easy to grasp. But don’t be fooled: bankruptcy is more complicated than you think. Get a consultation with an attorney, and make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

What is a Lien in Bankruptcy?

A lien is a security interest of a debt that encumbers a thing owned by the borrower until the debt is paid. One common example is a car and the car loan. The borrower who “owns” a car can’t just sell the car outright. He has to pay the debt secured by the lien against the car first. Then, once the debt is paid, the lien is satisfied and removed.

Section 101(37) of the Bankruptcy Code defines “lien” as:

charge against or interest in property to secure payment of a debt or performance of an obligation.

How does bankruptcy affect a lien? The General Rule

The general rule for liens in bankruptcy (and there are exceptions) is that bankruptcy doesn’t affect a lien at all. If a debt is secured by a lien and collateral, if you wish to keep the asset, then that debt will survive the bankruptcy. You don’t get a free house or car in bankruptcy. Here, let me put that in a fancy quote because it is so important:

You don’t get a free house or car in bankruptcy.

– Attorney Hale Andrew Antico

There is a reason this is emphasized so strongly. For some reason — be it wishful thinking or confusion because the lender stopped sending statements or something else — people sometimes stop paying for a house or car. This is a mistake that can result in foreclosure or repo.

house lien in bankruptcy
Not really representative of a lien in bankruptcy, but it shows money and houses so pretend there’s a chain encumbering them.

If you wish to keep the thing with a lien in bankruptcy (e.g.: your house), then you must continue to making regular payments on the loan or loans that goes with it. With that general principle out of the way, there are some specific exceptions or applications.

Chapter 7 bankruptcy and Liens

How does bankruptcy affect a lien in Chapter 7?

Chapter 7 bankruptcy is the simpler bankruptcy. You don’t normally pay unsecured debts back here. But how does bankruptcy affect a lien in a Chapter 7? The short answer: liens don’t go anywhere. If you started a Chapter 7 with a debt secured by a lien, you will most likely end the Chapter 7 with a lien. Nothing changes. Let’s look at a few different things that come up.

Vehicles in Chapter 7: You don’t get a free car

Repeat after me: In Chapter 7 bankruptcy, you don’t get a free car. If you are financing a vehicle, if you want to keep the vehicle, you must keep paying the loan. No matter what happens, you must keep current and paying for the car (or truck or RV or quad or other secured vehicle) if you want to keep it.

If your bank turns off your online access, you must keep current and paying for the car if you want to keep it. If your bank stops sending you statements or coupons, you must keep current and paying for the car if you want to keep it. If aliens abduct your Aunt Nana, you must keep current and paying for the car if you want to keep it.

You must be wondering why I’m spending three paragraphs repeating something that seems quite basic. You know, the concept that you must keep current and paying for a vehicle if you want to keep it. This is because no matter how obvious, no matter how many times this is repeated, people still somehow stop paying for their vehicle because they read on some message board on Google Esq. that they get a free car in bankruptcy.

But that’s false. You know why? Because there’s a lien on the car. And it remains. Why?

Because you don’t get a free car in Chapter 7 bankruptcy.

lien in bankruptcy car
Lien in bankruptcy doesn’t go anywhere with regard to a car in Chapter 7 because you don’t get a free car in bankruptcy.

Reaffirmation Agreements in Chapter 7

Definition of Reaffirmation Agreement

A reaffirmation agreement is an agreement where you … reaffirm a debt. This has the legal effect of you promising to owe a debt after the bankruptcy, no matter what. I think we can all agree that vowing to be liable on a debt regardless of what happens after a bankruptcy is the opposite of what bankruptcy is supposed to be.

Why on earth would someone say, for example, yes, please, make me owe my mortgage balance even if I ever lose my house to foreclosure? You wouldn’t. Because that’s crazy. That’s what a reaffirmation agreement is: a contract where you make yourself owe a debt after the bankruptcy, regardless of what surprises the future throws at you.

That is crazy. Why would I ever sign a reaffirmation agreement?

Good question. You would never voluntarily promise to undo the bankruptcy for a debt on which you are trying to avoid personal liability. Again, it defeats the purpose of bankruptcy to say yes, I’d like to owe this debt after bankruptcy.

Bankruptcy is intended to get you out of debt. Reaffirmation agreements are intended to get you back into debt.

But you just told me I’ll owe the car debt after bankruptcy no matter what.

Not quite. The example above is just talking about payments for a car that you intend to keep. If you want to keep the car, pay for it on time. What we’re talking about now is the possibility you lose the car or house or RV after the bankruptcy.

Let’s say a year after the bankruptcy is done, an asteroid hits your employer and you lose your job and the can’t pay for the house or car. They repo or foreclose and you lose the thing, right? Right.

But if you signed a reaffirmation agreement, you not only lost the house or car, but you also owe for the contract for the house or car you no longer have. Why? Because you signed a reaffirmation agreement. Can we agree that’s a bad outcome?

Holy cow, that’s terrible. Why would I ever sign a reaffirmation agreement?

You wouldn’t voluntarily sign a reaffirmation agreement unless you had to. And for vehicles, if you want to keep the collateral, you need to stay current on payments and you need to sign a reaffirmation agreement if they send one to you. For mortgages, you don’t generally need to or want to sign one. Any lender that tells you you needed one during your bankruptcy is mistaken, lying, or evil. Probably just mistaken.

Note: the law is changing in California in 2023 to bring back bankruptcy ride-through. SB1099 will make it no longer a default on a car loan if you don’t sign a reaffirmation agreement for a vehicle.

522f Lien Avoidance in Chapter 7: Judgment Liens

Recap of the rule: liens in Chapter 7

The rule for liens and lien avoidance in Chapter 7 bankruptcy is that the lien doesn’t go anywhere and you don’t get a free house or car in Chapter 7. If you started Chapter 7 with a lien on your car or a second mortgage on your house, you will likely end the bankruptcy with one, as there usually is no lien avoidance in Chapter 7. There can be one exception to this, and you have to qualify for it, contract for it, and yes, usually pay for it: judgment liens.

Possible Exception: What is a Judgement Lien

A judgment lien is when someone sues you, and as a result of the lawsuit, the judge rules against you. As a result, there is a now judgment against you. One way to collect on a judgment is a judgment lien against real estate or property you own or have an interest in. In California, the judgment lien cannot foreclose on you and take your house. However, it can sit there and grow with interest until you sell, refinance, transfer, or otherwise try to change the title. Then, it needs to get paid in full.

Oh no. What is a Judgment Lien Avoidance in Bankruptcy?

A judgment lien avoidance is where, in some cases, you can remove, or avoid, the judgment lien in bankruptcy… even Chapter 7 bankruptcy. Yes, it’s possible in Chapter 7 bankruptcy to avoid a judgment lien. However, it is not possible in every case, and doesn’t happen automatically. It’s extra work, and unless you contract for (and pay extra for) this extra work, the judgment lien avoidance won’t happen. Plus, the calculations around your home equity and lien amounts have to be right to qualify for it.

What are the factors to qualify for Judgment Lien Avoidance?

To qualify for lien avoidance in bankruptcy, we turn to Section 522(f) of the Bankruptcy Code, which says, in part: “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled.”

So, for judgment lien avoidance, you need to determine if the lien impairs an exemption. At its core, this is a simple math problem. Here, in the Central District of California, the form we use spells it out pretty clearly, as you can see below.

522f judgment lien avoidance calculations
522f judgment lien avoidance calculations from CDCA form F 4003-2.1.Avoid.Lien.RP.Motion

The factors are pretty self-explanatory:

  • Value of Collateral: that’s what the house is worth
  • First lien: this is usually the primary deed of trust, or first mortgage
  • Amount of Debtor’s exemption: the amount of the exemption Debtor is entitled to

Lien Avoidance Formula: Take the value of the collateral, then subtract the debtor’s liens which cannot be avoided, and then subtract the exemption amount. That’s the amount that remains to pay judgment liens.

Still, this can be confusing. Read on!

522(F) Judgment Lien Avoidance Calculator

Below is a judgment lien avoidance calculator to help with the math of determining whether a judgment lien is impairing an exemption per 11 USC 522(f). You can only avoid the lien up to the amount it is impairing the exemption. If there is only partial impairment, there can only be partial judgment lien avoidance.

Timing of amounts used for lien exemption

If you learned of a judgment lien now but had an old bankruptcy where you didn’t avoid it, you may still be able to avoid the old judgment lien using the old bankruptcy. But exemptions change over time. Which home value and exemptions amount do you use?

Chapter 13 Bankruptcy and Liens

Section 506: Lienstripping a junior mortgage, mortgage cramdown, or avoiding a second mortgage lien

What Does the lienstripping law say?

There are really a few sections to focus on. First, section 506(d) of the Bankruptcy Code states, generally:

To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void

Making a lien void is a very good thing, and in Chapter 13 bankruptcy this can sometimes be done. The problem is it can’t be done all the time; the circumstances — and the math — have to be just right. Sometimes Sections 506(a) and 1322(b)(2) come into play in helping define what is secured.

The 9th Circuit BAP clarified when this can be done in In re Lam, 211 BR 36 (9th Cir BAP, 1997). It was in this major ruling when the Bankruptcy Appellate Panel ruled, “The Nobelman decision holding that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor’s principal residence, does not apply to holders of totally unsecured claims.” Id. at 41.

liens in bankruptcy house
Liens in bankruptcy regarding a house, this time with a chain encumbering it in rich symbolism.

So, the key language in Lam is “totally unsecured.” Unlike avoiding a lien under 522(f) which can allow partial removal of a judgment lien, avoiding a consensual lien like a deed of trust or mortgage cannot be partially secured. “…a one dollar difference in property value could have a profound effect on a secured creditor’s rights.” Lam at 41. So the evidence for property value is key, and this can be where all the fight is.

Lam Lienstrip Examples

Let’s say Debtor has a home valued at $200,000 with a first mortgage of $225,000 and a second mortgage with a balance of $50,000. Because the second isn’t “touching” the secured house, it is totally unsecured and can be avoided with a lien-strip in a Chapter 13 bankruptcy. However, if that same property were valued at $230,000, then there’s about $5,000 of secured status for the junior mortgage. That’s enough to make it a secured claim, and then, because it’s not wholly unsecured, it cannot be avoided or lienstripped.

I made a handy calculator where you can test out the above lien stripping examples yourself, and of course, your own numbers to see if it’s totally unsecured and qualifies in the Ninth Circuit for lien avoidance under Lam.

If you are in the Los Angeles, Ventura, or Orange County, contact me and let’s go over your options.

Section 522(f) and Judgment Liens in Chapter 13 bankruptcy

Judgment liens, where for example, a credit card won in court against you and then liened your home, can be avoided in Chapter 13 if they impair an exemption. While there can be a huge benefit to removing a judgment lien in Chapter 13, it also wouldn’t be necessary if it’s a 100% plan. In other words, if you’re paying all your unsecured debt back, turning a secured debt to an unsecured one wouldn’t provide a whole lot of benefit but would increase legal fees. For a discussion – and a judgment lien calculator — see above in the Chapter 7 judgment lien section.

What is Cramdown in Bankruptcy (Chapter 13)?

Chapter 13 bankruptcy cramdown is where we can reduce the secured debt of a car to the fair market value of the vehicle. In other words, in Chapter 13, we can “cram down” the loan balance to what the car is worth if the loan was incurred over 910 days ago. The remaining debt gets paid through the Chapter 13 plan at the same percentage as the unsecured debt, potentially saving thousands of dollars on a vehicle loan.

A bankruptcy cram down example would be if a vehicle loan was $30,000, and the car was only worth $18,000. In Chapter 13, it’s possible to only pay $18,000 for the car loan, and treat the rest of the car debt like credit card debt. Again, this wouldn’t make a lot of sense if it’s a 100% plan or there is some doubt you’ll be able to finish the bankruptcy with the car “in the bankruptcy” because if the case is dismissed, you’re now late on the loan which was being partially paid through the case, which is now ended. You’ll need to ensure you can get to the finish line if you take this route. However, the benefit can be valuable.

Penrod and Negative Equity

Is The Negative Equity PMSI?

Penrod is not just a funny name, but a Ninth Circuit case. The Penrod case addresses trade-ins which had the old loan rolled into the new one, where the old loan is now called negative equity. We just learned that we can cram down a vehicle loan if the balance is more than the vehicle’s value if the debt was incurred over 910 days prior to filing. There is a way to remove the traded-in loan from the current loan, even if this happened in the 910 days before filing.

Marlene Penrod traded in an Explorer and bought (and financed) a 2005 Ford Taurus. She rolled about $7,000 of her old Explorer loan into the new Taurus financing. Less than 910 days later, she filed Chapter 13 bankruptcy. In the case, she bifurcate, or split, the Taurus loan into two, and said she’d only pay the new Focus price in full as Purchase Money Security Interest (PMSI). The negative equity from the Explorer wasn’t purchase money, and therefore wouldn’t be secured.

The new finance company objected, and the Ninth Circuit Court of Appeals agreed with Marlene Penrod when it wrote, “In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a vehicle traded in during a new vehicle purchase.” In re Penrod, 611 F. 3d 1158 (9th Cir, 2010).

Penrod and Gap Insurance and Extended Warranties

Not only can negative equity can be removed from a vehicle loan in a Chapter 13 in the Ninth Circuit, other bankruptcy courts in the circuit have broadened this to other areas. For example, in Washington state, a bankruptcy court has held that Penrod also applies to removing gap insurance and an extended warranty. This is because, like negative equity, they are not part of the purchase money security interest. In re Jones, 583 BR 749 (WDWA, 2018).

In Jones, the court ruled:

Accordingly, this Court finds the Option Contracts are not part of the “price” of the Vehicle secured by the PMSI. Like negative equity, the Option Contracts are not sufficiently related to the purchase of the Vehicle. Unlike other expenses listed in Official Comment 3, neither the purchase of optional gap insurance or maintenance contracts are akin to sales tax and license fees, which are not optional but are required in order to obtain the vehicle.

Jones at 755.

It went on to write, “The Court concludes that Kitsap Credit Union’s purchase money security interest in the Vehicle does not secure sums advanced to pay for optional gap insurance and vehicle maintenance contracts.” Id. at 759.

Tax liens in Bankruptcy

Tax liens in bankruptcy generally don’t go anywhere. In Chapter 7, because they didn’t get paid, they survive the bankruptcy case. A tax lien in bankruptcy (Chapter 13) will have to be paid as a secured debt to avoid it and remove it. This can create feasibility problems in your Chapter 13 bankruptcy case, depending on the size of tax lien and secured debt. As always, discuss with a bankruptcy lawyer.

In sum

Liens in bankruptcy are generally not removed, and you don’t get a free car or house. Sometimes liens can be reduced, stripped, or avoided, if the math works out right in various situations. There is a lot more flexibility in Chapter 13 bankruptcy to reduce or even eliminate liens. Arrange a consultation with an experienced bankruptcy attorney in your area to learn your particular options. Thanks for reading.

sell home chapter 13

Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

My clients ask me, “can I sell a home in a Chapter 13 bankruptcy?” As a bankruptcy attorney experienced in Chapter 13, selling a house is an issue that comes up often, particularly in a robust housing market. This is written without giving advice to the specifics of your case, but merely addressing whether it’s possible to sell or refinance a house during Chapter 13.

The answer is “yes… but.” It’s not always in your best interests to sell a home in Chapter 13, and you really should consult on this with your bankruptcy lawyer, as facts vary depending on judicial circuit, state, local practice, and your particular case and its Order Confirming. As I’m a Los Angeles bankruptcy attorney, I’ll be focusing on practice in the Central District of California here in the Ninth Circuit, so the following may not apply to you if you’re elsewhere.

Can I move during a Chapter 13 bankruptcy?

Let’s start with the basic question of whether you’re allowed to move and change residence during the term of a Chapter 13. The answer is, “Yes.” There is nothing in a bankruptcy that prevents you from moving, or even changing states. You are free to move about the country.

As leaving the state would likely mean you’re now working out-of-state from where the case was filed, you will almost certainly want to update your Schedules with your new employer, income and expenses, and this may potentially affect your plan payment, and the percentage of debt which you’re paying the general unsecured creditors. And that may turn into a Motion to Modify (MoMod) being filed with the court, leading to new legal fees.

Motion to Sell or Refinance in Chapter 13

A Motion to Sell or Refinance in Chapter 13 is where you ask the judge permission to sell or refinance your home. So, yes, you can sell or refi in Chapter 13. Whether it’s a smart decision or not will vary based on the circuit, district, and even your particular case, and you’ll want to seek advice with your bankruptcy lawyer.

Chapter 13 can pay only a fraction of your debts. But that can trigger a couple of things that lead to it getting fed more money. If you’re paying less than 100% of the general unsecured creditors, sometimes you don’t get to keep tax refunds in Chapter 13. Similarly, when there is a ton of extra money from a home sale or refi, that too can lead to more debt getting paid.

Revesting of the Estate and Form Plans

Revesting

One factor as to whether you should sell a home in Chapter 13 (or refinance in your Chapter 13 bankruptcy) depends on whether the estate revests at confirmation or at discharge. That’s all a fancy way of saying, “when does the ownership and control of your stuff — including your home — return to you, the debtor?”

In bankruptcy, here’s the crux of the matter: when you sell or refinance in a Chapter 13, do you have to use the sale proceeds to pay all of your general unsecured debt, or all of the part you are intending to pay during the bankruptcy? Remember, Chapter 13 bankruptcy doesn’t necessarily pay all your debt. If a Chapter 13 is only paying a fraction of the credit cards, how much of the credit cards get paid by the proceeds of the house or other sale?

A recent case on postpetition equity

The issue as to whether you can sell in a Chapter 13 and who gets the proceeds was recently seen in Colorado, when the Chapter 13 trustee fought to get the postpetition appreciation of an LLC. In re Klein, WL 3902822 (Bankr. D. Colo. 2022). The trustee argued that proceeds were postpetition property under Section 1306 (nothing about 541a6). However, debtor argued that Section 1327 says that property vests in the debtor at confirmation, unless provided otherwise in the plan. The two sides fought about the tension between 1306 vs 1327. Ultimately, the Court concluded that 1327 was more specific and the proceeds belonged to Debtor.

What about Section 1322(b)(9)? That says the 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.” That “may” (coupled with 1327b) also indicates that it may not.

More on that later.

This is the Tenth Circuit. What about here in the Ninth Circuit?

Black vs Leavitt (In re Black)

Glad you asked. That’s the issue the Ninth Circuit Bankruptcy Appellate Panel faced in 2019 in Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). There, the BAP decided that when someone tried to sell a home in a Chapter 13 (actually, a rental property), the property — and the proceeds — were the debtor’s to do as he wanted.

In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property.

Id. at 529.

Great news, right? Not so fast. There’s some key language in footnote 9 of the same case. There, the 9th Cir BAP wrote:

If the plan did not vest the Property in Mr. Black, the result would likely be different. See Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir. BAP 2007), aff’d sub nom. Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206 (9th Cir. 2010) (In a chapter 7 case, where property does not revest in the debtor, “[u]nder well-settled Ninth Circuit law, any postpetition appreciation in value in the residence in excess of the maximum amount permitted by the exemption statute invoked inures to the benefit of the estate.”); § 541(a)(6) (a bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate ….”).

Clearly, the issue of who gets the sale proceeds is determined by what the Chapter 13 plan says. It’s important to know this crucial fact before asking your bankruptcy attorney to submit a motion to sell or motion to refinance real property.

In re Berkley

In one case, the debtor was repaying one percent (1%) of his unsecured debt. The plan said the estate revests at confirmation. After the case was confirmed, he started getting stock options. At month 57 of his plan, he sold his postconfirmation stock options for $3.8 million. Trustee filed a motion to modify for some of the sale proceeds. The Ninth Circuit BAP held that Section 1329 and a modification allows for change of circumstances, and the millions of dollars means that debtor can repay his debts.

The 9th Circuit BAP acknowledged that the estate terminated at confirmation, citing 9th Circuit precedent of In re Jones, 420 BR 506 (9th Cir BAP 2009), aff’d by 9th Cir in 657 F3d 921 (9th Cir, 2011). In Jones, the Ninth Circuit adopted the “estate-termination approach.” This approach is where the estate ceases to exist at confirmation. In the estate termination approach, all property then becomes property of the debtor, whether acquired before or after confirmation.

The Berkley BAP then nodded at its own recent ruling in the matter of In re Black (above).

However, the BAP then held that “[u]nder § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.” In re Berkley, 613 BR 547, 553 (9th Cir BAP, 2020). It distinguished Black and Jones from the instant case, as it is solely concerned with postpetition wages.

Central District Form Plan

Whether the estate revests at confirmation or at discharge is a key determining factor about who gets the sale proceeds of postpetition appreciation from a prepetition asset. So what does the form plan say here in Los Angeles County, in the heart of the Central District of California?

Locally, here in the Central District of California, the estate doesn’t revest in the debtor until discharge. We know this because this is what our Chapter 13 form plan says. Your mileage may vary.

cdca chapter 13 plan revesting in debtor
The standard Central District of California Chapter 13 Plan revesting in debtor at discharge

There is the key language that controls when you sell a home in Chapter 13 bankruptcy in most cases in the Central District of California when there is a Motion to Sell or Refi with proceeds. It means that the debtor and proceeds must not only pay “all of the plan” debt, but “all of the all” debt. This can be a strong disincentive. It often is better to just stay in the Chapter 13 until discharge, and get forgiveness of potentially tens of thousands of dollars of unsecured debt. After discharge, the house, and what you do with the proceeds, are yours.

Now, I supposed there is nothing preventing debtor from adding a nonstandard provision to the plan that debtor’s property revests at confirmation. But that may lead to other hazards that involve the automatic stay and debtor’s property which are no longer property of the estate. Try this at your own peril.

Conclusion

So, yes, Virginia, you call sell a house in Chapter 13 bankruptcy. You have the right to move cities, even states, as long as you maintain your plan payments, and update your schedules to reflect current income and expenses. However, who gets the sale proceeds is very specific to where you live, what your appellate courts say, and what your local district’s forms say. As always, ask your bankruptcy attorney, and thank you for reading.

Automatic stay and bankruptcy protection

All About the Automatic Stay, the Ultimate Bankruptcy Protection

All About the Automatic Stay, the Ultimate Bankruptcy Protection

What is the Automatic Stay definition or meaning?

Automatic stay is the bankruptcy protection when a new petition is filed with the court. It protects against starting or continuing any debt collection. It’s a powerful provision, and stops all collection activity, maintaining the status quo on the day the bankruptcy papers are filed. Failure to respect the bankruptcy protection can lead to sanctions against the collecting creditor.

The Automatic Stay definition from the text of Section 362(a)

The official definition of the bankruptcy automatic stay is in 11 USC 362. Section 362(a) says:

“…a petition filed under section 301, 302, or 303 of this title… operates as a stay, applicable to all entities of:

  • the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
  • the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
  • any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”

The section goes on, but the quote above is where most of the action in bankruptcy protection comes from.

Interpreting the automatic stay meaning in simple terms

Let’s break down what the meaning of the automatic stay is in plain English. Section 362 says that the mere filing of a what? A petition that’s either voluntary, involuntary, or joint (301-303). That pretty much covers most bankruptcy filings. Then what? It stops (stays) the start or continuing most every collection, including enforcing a judgment or trying to take anything from you.

Bankruptcy protection automatic stay is like a dome over a city
The bankruptcy protection of the automatic stay is like a magical dome or enchanted shield over you & your stuff

That’s really broad, and covers almost anything you can think of. It’s like a protective shield around you, your things, and your life against all your debts doing anything to you, the person who filed bankruptcy. Or, to use another simile, the automatic stay is like a dome over a city, where the sun only shines and the birds sing, but outside the shield it’s stormy and dangerous.

There are a few limits to it, which I explain below.

When does the Automatic Stay begin?

The automatic stay is tremendous in that it begins the second the bankruptcy is filed. Why? It’s automatic. File a bankruptcy case, and boom, you’re safe. The fact that the bankruptcy protection starts the moment you file bankruptcy is extraordinary, in a sense.

“It is elementary that the automatic stay comes into existence automatically and immediately upon the filing of a petition in bankruptcy.” Webb Mtn, 414 B.R.308 (Bankr Ct, Tenn, 2009).

Normally, in law, if you want something to stop, you have to request that separately. Think of a temporary restraining order. That requires work, time, a justification, and approval. But bankruptcy protection, because it’s automatic, that is, no additional papers need to be filed to get it to kick in, it’s one of the rare exceptions in law.

You get all the benefits of safety, protection, and peace of mind at the beginning of this legal process. Your creditors have to file lawsuits, wait months or years, get the judgment, and then try to execute on the judgment to take action against you and your stuff. You merely have to begin the bankruptcy legal case before they can finish theirs against you. This is a huge time advantage for the debtor filing bankruptcy.

How long does the Automatic Stay last?

The automatic stay starts when you file bankruptcy, and typically lasts for the duration of the case.

What can end the bankruptcy protection?

There are a few things that can end the automatic stay:

  • Discharge: When a normal case ends successfully, the debtor gets a bankruptcy discharge and the case is usually closed soon after that. When the discharge is entered, the stay is over.
  • Dismissal: If a bankruptcy case ends unsuccessfully, the automatic stay is over also. The magic dome of sunshine disappears, and the storm clouds come right back. For that reason, dismissal is usually bad.
  • Motion for Relief of the Automatic Stay (MRS or RFS): Creditors have rights also, and if the stay is hurting them unfairly, they can make it go away. Repeat after me: “There is no free car or free house in bankruptcy.” If you stop paying for the house, the mortgage can get through the automatic stay and take your house. Or put differently, if there is a house or car or something you’re financing and you want to keep it, stay current with the payments.

Wait, back up. After bankruptcy discharge, the stay ends and creditors can collect against me?

Yes, and no. It’s true that the automatic stay ends when the case concludes with a discharge. The bankruptcy discharge triggers a few legally significant events. First, the discharged debts are no longer legally your obligations. Second, if you had a bankruptcy attorney help you, their representation, per contract, is likely ended. They completed their task and are no longer your lawyer. Third, the automatic stay is also ended, as there is no more active or open bankruptcy case.

However, the good news is there is something powerful replacing the terminated automatic stay. This new protection is the Order of Discharge.

Section 524(a) says that a discharge in bankruptcy:

operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived

The discharge court order says your debts are gone, and any attempt to collect a discharged debt is a violation. It’s not a violation of the automatic stay, but instead, a violation of a court order. You can and should inform the creditor of this, and if they don’t back off, reopen the bankruptcy and seek sanctions for a discharge violation.

Violation of the Automatic Stay

Definition of an Automatic Stay Violation

A violation of the automatic stay is when a creditor willfully collects after they knew of the bankruptcy protection. The creditor has to have known of the bankruptcy and the automatic stay, or else they can claim as a defense that they had no notice. For this reason, it’s important to document notice of the automatic stay. When the collection company claims they didn’t know of the bankruptcy — and they will — you’ll need to have ample and abundant evidence that they did know, and that they didn’t care and collected against you anyway.

What if the Creditor doesn’t have Intent to Violate the Automatic Stay?

Creditor, after being caught with its hand in the cookie jar, may claim that golly, it didn’t intend to violate the automatic stay. The Ninth Circuit Court of Appeals has said, too bad, you intended to do the act. Intent to violate the automatic stay isn’t a requirement. Intent to do the act that violated the stay is all that’s needed. In re Pinkstaff, 974 F.2d 113 (9th Cir, 1992), quoting In re Bloom, 875 F.2d 224, 227 (9th Cir, 1989), In re Pace, 67 F.3d 187 (9th Cir, 1995).

Examples of Automatic Stay Violations

Filing a Lawsuit

One example of violating the automatic stay is where you file bankruptcy, serve the creditor notice of the automatic stay, and maybe even a letter for good measure. Then, three months later, the creditor files a lawsuit against the debtor.

The lawsuit is the commencement of a judicial proceeding against the debtor that could have been commenced before the commencement of the case or to recover a claim against the debtor that arose before the commencement of the case under this title. Slamdunk violation of the bankruptcy protection.

Starting a Wage Garnishment

Another example of an automatic stay violation is where the creditor has already sued the debtor and won in court. Now, armed with a judgment, they’re closing in on collecting. The debtor files bankruptcy, and provides notice of the automatic stay to the debt collector. Next, the collection agent contacts debtor’s employer and starts garnishing the wages.

In this case, the wage garnishment is an enforcement, against the debtor and against property of the estate (the paycheck), of a judgment obtained before the commencement of the case. Again, another obvious and textbook violation of the automatic stay.

Foreclosing on a home

Finally, let’s say the debtor has fallen behind on his or her mortgage. The home loan company is getting cranky, and finally files a Notice of Default and Notice of Sale. Next thing you know, there’s a scheduled foreclosure sale. Debtor then files a Chapter 13 bankruptcy to repay the mortgage arrearages, and provides notice of the automatic stay to the lender. Mortgage company goes ahead with the foreclosure sale, and someone buys the house.

The home foreclosure is an act to obtain possession of property of the estate (the house) or to exercise control over property of the estate. Straight violation of Section 362 of the Bankruptcy Code. Check and mate, house lender. Automatic stay violation.

Effect of the Automatic Stay on Acts that Violate it

In that last example, the home has already been sold to someone else at a foreclosure sale. But it was the result of a stay violation. What is the effect of the sale?

In California, stay violations are void. The Ninth Circuit Court of Appeals has said that “actions taken in violation of the bankruptcy stay are void.” In Re Gruntz, 202 F.3d 1074, 1081-82 (9th Cir, 2000). Not voidable, void. In re Schwartz, 954 F.2d 569 at 571 (9th Cir, 1992). No action is required by debtor to undo the act. Id.

The law imposes an affirmative duty on creditors to remedy stay violations by restoring the status quo, and also to establish administrative safeguards to prevent stay violations from occurring in the first instance. In re Dyer, 322 F.3d 1178, 1192 (9th Cir. 2003).

What if the Stay Violation happens Before Notice is Received

Knowledge of bankruptcy sufficient for stay; notice doesn’t have to be official

There is no requirement that a creditor be given an official Court-issued notice or form regarding the bankruptcy case. “[A] party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay.” In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003).

Seizing the property doesn’t make it yours

Now that we have established stay violations are void, what if creditor didn’t know when they violated it? Courts have clearly answered: Petition date controls, not notice.

The U.S. Supreme Court has ruled that property seized prepetition to collect a debt doesn’t transfer ownership, and it must be returned, pursuant to Section 542(a), even if seized by the IRS. United States v Whiting Pools, Inc, 462 U.S. 198 (Sup Ct 1983).

Even property taken by the mighty IRS before filing must be returned. With that backdrop, let’s look at cases where property is wrongfully taken after filing, but before creditor had notice of the filing.

Keeping property seized after filing but before notice is a stay violation

In the Ninth Circuit, the Bankruptcy Appellate Panel ruled that retention of repossessed car after receiving notice of stay is a willful violation of the automatic stay. “[R]epossession of the debtors’ automobile, while initially inadvertent, became a willful violation of the automatic stay when appellees failed to take any reasonable steps to remedy their violation upon learning of the debtors’ bankruptcy.” In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir, 1991).

The Ninth Circuit also has held that the knowing retention of estate property violates § 362(a)(3). In re Del Mission Ltd., 98 F.3d 1147, 1151 (9th Cir.1996)(citing Abrams). The appellate court rejected the argument that creditor had no obligation to turn over the property until specifically requested. Id. at 1152.

“When a creditor lacks notice of a debtor’s bankruptcy, acts in violation of the stay may be inadvertent; however, such acts become willful stay violations when the creditor learns of the debtor’s bankruptcy but fails to take reasonable steps to remedy the violation.” In re Calloway, No. 08-18561SSC, 2009 WL 1564207, (Bankr. D. AZ. 2009) (citing Abrams)

Other courts outside the Ninth Circuit agree

Other bankruptcy courts have ruled that even if the creditor didn’t have knowledge, it must take steps to void the violation or face damages. Just to pick one: “Despite having this knowledge, Hunt deliberately refused to cooperate in voiding the sale and reconveying the Trenton property to the Debtor at any time after this date.

Clearly, these actions were willful and constitute a violation of the automatic stay for which the imposition of damages is appropriate under § 362(k).” In re Tyson, 450 B.R. 754 (Bankr Ct, Tenn, 2011), where buyer of home sold at foreclosure had no notice of automatic stay at time of foreclosure sale, failed to return home, and violated stay and paid damages.

Wrongful repo cases: repossession after filing without notice violates stay

A wrongful repo happened after a case was filed but before the repo company had notice. What it did next is what matters: “Rather than comply with its affirmative duty to remedy its stay violation and restore the status quo, Arizona Fleet chose to remain non-responsive, took no steps to confirm or inquire as to the pendency of this bankruptcy case, filed nothing with this Court requesting any form of stay relief, sent the Debtor a notice that it intended to sell the Vehicle, wrongfully continued to maintain possession of the Vehicle, and, without merit, continues to maintain that it was incumbent upon the Debtor to retrieve his wrongfully repossessed Vehicle.” In re Altamirano, Case No. 4:20-bk-11836-BMW (Bankr Ct, AZ, 2022).

In re Carrigg, 216 B.R. 303 (B.A.P. 1st Cir, 1998), where the repo happened after the bankruptcy was filed without the creditor knowing about it, but creditor failed to return repossessed vehicle after notice of case. The creditor was sanctioned with a willful violation of stay, even though creditor had no had notice of case when vehicle was repossessed.

Chicago v Fulton, and the Automatic Stay

What 362 Giveth, Fulton Taketh Away

It used to be that if someone took something to collect a debt, filing bankruptcy created an obligation for them to return it. All that changed in 2021 when a case percolated up through the courts. The City of Chicago makes quite a pretty penny on impounding vehicles. One person lost their car, filed bankruptcy, and asked for the car back. Chicago didn’t budge. Automatic stay violation? In many places, including here in California and the Ninth Circuit, until now, yes. The Sup Court read the statute, and limited the scope and power of the automatic stay.

The car repossession taken before filing

The above repo cases involve a car taken after the case was filed. However, if the car was taken before the case was filed, from now on, it doesn’t have to be returned upon as a possible violation of the automatic stay with notice of the bankruptcy. Chicago v Fulton (In re Fulton), 141 S Ct. 585 (2021).

In Fulton, the Court said that mere retention, to exercise control, of the property taken before filing (prepetition), without some act that would disturb the status quo, is not a violation of the automatic stay. This means that retention of the car (in this case) isn’t a stay violation, and that something else has to be done to get it back. The Court suggests that Section 542 (turnover) is invoked for an adversary proceeding for turnover of the property. The problem with that is that can take months to resolve. Justice Sotomayor, in a concurrence focusing on simple motions instead, writes that “bankruptcy courts may find it prudent to expedite proceedings or order preliminary relief requiring temporary turnover.” Fulton at 594.

Not just cars: other seized property falls under Fulton

When the Supreme Court first decided the case in early 2021, there was the thought (hope?) that maybe Fulton was limited to cars seized by tow yards. That it would be a limited, narrow exception which wouldn’t really impact us here with Los Angeles bankruptcy cases in California and the Ninth Circuit. As Fulton is applied by courts, that’s turning out to not be the case.

Bank Levy of Accounts and Fulton

Later in 2021, we saw a court extend it to bank accounts. In Pennsylvania, a lender sued a debtor, won a judgment, and filed a pre-petition attachment lien on bank accounts of the debtor. Debtor filed bankruptcy and then demanded creditor withdraw the attachment as a violation of the stay. A key difference is that, unlike Fulton, creditor was not in possession of property of the estate. No matter. The court said that Fulton requires an act that disrupts the status quo to find a stay violation when it wrote, “the Court finds that Defendants’ refusal to withdraw the valid state court pre-petition attachment of the Penn East Accounts does not violate §362(a)(3). Defendants admittedly took no post-petition affirmative action as to the garnished accounts.” In re Margavitch, 5:19-05353 MJC (Bankr Ct, MD 2021).

The Ninth Circuit BAP followed Margavitch when it had a bank levy case of its own. The facts were similar: a prepetition lawsuit, and a writ of garnishment on three bank accounts. Later, debtor filed bankruptcy and demanded the creditor instruct the bank to release the funds. After a refusal, debtor claimed it was a violation of the stay. The BAP found that the city’s inaction that merely maintains the status quo does not violate the automatic stay. In re Stuart, 632 BR 531 (9th Cir BAP, 2021).

The BAP made the point again in 2022 when it said that a lien that existed on petition date where an order granted postpetition about summary judgment regarding it did not disturb the status quo and thus, did not violate Section 362(a)(3). In re Censo, 638 BR 416 (9th Cir BAP, 2022). The rationale is that the automatic stay is inapplicable in lawsuits brought by the debtor, and a defendant can defend itself without an automatic stay violation.

Wage Garnishments and Fulton

While Stuart above was a bank account case, the BAP said in footnote 12 that, if it were a wage garnishment case where the creditor captured funds postpetition, the result would be different and a stay violation. Stuart v City of Scottsdale, 632 BR 531 (9th Cir BAP, 2021), citing In re LeGrand, 612 BR 604 (Bankr Ct EDCA, 2020).

Chapter 13 Codebtor Stay

What is the Co-debtor Stay?

Chapter 13 has a codebtor stay, while Chapter 7 doesn’t. Section 1301 and its co-debor stay protects the person who may owe on a debt without that other person having to file bankruptcy. For this reason, Chapter 13 can protect a non-filing spouse better than a Chapter 7 bankruptcy.

Community liability: you both owe the debts of the marriage

California’s Family Code 910 says:

Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.

Further, Calif Family Code 914 says:

…a married person is personally liable for the following debts incurred by the person’s spouse during marriage …a debt incurred for necessaries of life of the person’s spouse before the date of separation of the spouses.

Translating that, because California is a community property state, both spouses owe a debt during the marriage, regardless of who is managing the budget, or racking up the debt. You’re in this together.

So, if one half of a married couple incurred a lot of debt and files bankruptcy in Chapter 13, the other innocent spouse is protected by an automatic codebtor stay. In Chapter 7, the innocent spouse can still be called and harassed and risk losing any separate property (if any) to the spouse’s collecting creditors. Why? FC 914(b) says that the “separate property of a married person may be applied to the satisfaction of a debt for which the person is personally liable pursuant to this section.”

Section 1301 Co-debtor stay to the rescue

Now we know that a spouse (or other person who may owe on a debt) is liable for debts during a marriage, even though they didn’t incur them or even have any credit cards. If the spending spouse files bankruptcy, the innocent spouse may be left hanging in Chapter 7. But Chapter 13 has a solution.

Section 1301 says

creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor

There it is. A creditor may not act, start or keep doing something to someone liable on a debt with a debtor. In California, that’s typically a spouse. Automatic stay for the nonfiling spouse in the form of the co-debtor stay is a big benefit to Chapter 13 bankruptcy.

The hitch: creditors claim to not know about spouses & the codebtor stay

Amazingly, with all their fancy computers, creditors and their collection companies don’t have a way to know about or track nonfiling spouses. If John Doe files bankruptcy, they’ll flag his account, but they don’t know about Jane Doe, even though she’s listed as a Codebtor in the bankruptcy paper’s Schedule H. They do a scrub or routine check but will say they don’t know Jane’s SSN as a way to flag her, too. So they keep collecting against her, which pressures John, but golly, it’s just an accident.

This can require “educating” the creditor with notice of the stay before bringing an action for violation of the stay against them for harassing the spouse, in our example, Jane. The fallback position of the fancy slick credit card company will default to becoming Barney Fife. The billion-dollar corporation will morph into bumbling inept two-bit outfit in court who just didn’t know about the spouse and therefore didn’t have notice or any way to possibly avoid this and and thus will seek mercy from the bankruptcy judge for its incompetence. Thus, more notice, more evidence that the creditor knew about the spouse and the bankruptcy, will help you bring your violation of codebtor stay action and prevail.

Actions which are not violations of the Automatic Stay

While the bankruptcy protection of the automatic stay is wide and broad, we’ve seen with Fulton that it does have its limits. One other such limit is collection on a nondischargable debt upon property outside the bankruptcy estate.

That was the issue the Ninth Circuit BAP faced when it ruled, “‘Nevertheless, binding authority is clear that “the automatic stay provisions of Section 362 do not preclude the execution of a judgment, which has been held by the bankruptcy court to be non-dischargeable, upon property of the debtor which is not property of the estate.'” In re Cady, 266 BR 172, 180 (9th Cir BAP, 2001).

Damages: the Penalty for Automatic Stay Violations

The automatic stay is one of the few areas in bankruptcy where debtors can get their attorney fees paid by the creditor. The Bankruptcy Code provides at Section 362(k) that:

an individual injured by any willful violation of a Stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Let’s look at these one at a time.

Compensatory: Actual Damages

Costs

Actual damages comes in a couple different flavors. First, it’s whatever the debtor is truly, actually out-of-pocket as a result of the violation of the automatic stay. Judges typically want to see receipts. It can include as mundane things as copying costs, doctor visit copays, and so on.

Attorney Fees

In addition, the statute explicitly calls for the debtor getting reimbursed by the creditor for attorney’s fees. The lodestar method for attorney compensation is used in the Ninth Circuit bankruptcy cases. In re Yermakov, 718 F.2d 1465, 1471 (9th Cir. 1983). Lodestar compensation is “strongly” presumed to be reasonable. Burgess v. Klenske, 853 F.2d 687, 691-92 (9th Cir. 1988). The only limit on attorney’s fees is if the work was unnecessary or plainly excessive. The Ninth Circuit Court of Appeals, sitting en banc, concluded that Section 362 authorizes an award of attorney fees incurred in prosecuting an action for damages under the statute, limited by unnecessary or plainly excessive fees. In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir 2015)(en banc), overturning Sternberg v Johnston, 595 F.3d 937 (9th Cir, 2010).

Emotional Distress

Emotional distress damages are available in the Ninth Circuit “if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.” In re Dawson, 390 F3d 1139, 1148-1149 (9th Cir, 2004).

Punitive Damages

The statute calls for punitive damages in appropriate circumstances. The definition of “appropriate circumstances” varies by judicial circuit. Here in the Ninth Circuit, it means that punitive damages for violations of the Automatic Stay require “some showing of reckless or callous disregard for the law or rights of others.” In re Bloom, 875 F.2d 224, 227 (9th Cir., 1989).

The dreaded Wells Fargo case

Wells Fargo is notorious for their national policy of administrative freeze or holds, officially called “temporary administrative pledges” (which I wrote about in my list of 12 crucial things to do before filing bankruptcy). This is where someone files bankruptcy and has money on account at Wells Fargo. Then the bank freezes the account so the debtor can’t buy groceries. One would think this is a violation of the automatic stay, but it’s not an attempt to collect a debt, but to protect assets of the estate.

The Ninth Circuit BAP ruled that because defendant exercised control of debtor’s assets postpetition, debtors “have standing to seek sanctions against Wells Fargo pursuant to § 362(k) for willful violation of the stay with respect to their interest in estate property.” In re Mwangi, 432 BR 812, 825 (9th Cir BAP, 2010). But on appeal, the Ninth Circuit Court of Appeals said that the property, while exempt, is property of the estate, but somehow does not immediately revest to the debtor, but must wait 30 days for the FRBP 4003(b)(1) exemption objection time period to lapse. In re Mwangi, 764 F3d 1168 (9th Cir, 2014).

The court analyzed it as a 362(a)(3) situation (control of property), but if it were the more common commencement or continuance of an action of 362(a)(1), the result likely would’ve been different. So, the Wells Fargo case is not an erosion of the automatic stay.

Conclusion

The automatic stay is a powerful tool to protect your client in a bankruptcy. However, you must enforce it, and have proper documentation of evidence. I’ve successfully brought actions against major credit cards for violating the stay; it can be done. if you found this helpful and are faced with a stay violation issue, consider hitting the figurative tip jar. Regardless, thank you for reading, and never stop fighting for your client and the debtor’s rights. You have significant tools and bankruptcy protections here, and you should not hesitate to hold the creditor accountable for flaunting them.

Remote 341(a) meeting of creditors

Remote 341(a) Meeting & Zoom: What to Expect, post-COVID (2023)

Remote 341(a) Meeting of Creditors by Zoom: What to Expect in 2023

Los Angeles Bankruptcy lawyer explains remote 341(a) meetings post-COVID

Post-COVID, a remote 341(a) Meeting of Creditors in bankruptcy is becoming the standard, instead of in-person. Here’s what to expect. They can be terrifying, nerve-wracking, and unpredictable. As someone who has attended thousands of these in person (after coaching my clients with my list of prefiling do’s and don’ts), I answer your 341(a) questions and share with you what to expect at your 341(a) meeting in a post-COVID pandemic world where Zoom 341(a) meetings are more common.

What is the 341(a) Meeting of Creditors?

The 341a Meeting of Creditors is a requirement in every bankruptcy where the debtor (you) gets put under oath and is required to answer questions truthfully about your assets and financial condition. It’s a gathering, like a conference call. While it’s called a 341(a) meeting, it’s not really a meeting, but more like a polite, professional, semi-aggressive grilling.

Who attends the 341a Meeting?

You, the debtor, must attend the 341a meeting. Also, there will be a bankruptcy trustee. And of course, all of your creditors will get notified about it. Let’s break it down.

First, of course you must show up at your 341 meeting, which post-pandemic will likely be a remote 341(a) meeting. Again, this is done by telephone, Zoom, or some other technology. This choice is at the discretion of your Chapter 7 trustee. It varies trustee to trustee, so that’s why this is general; there is no one uniform set way how a trustee runs his or her 341(a) meeting.

Second, the Chapter 7 trustee will attend. It’s their show, and they will aggressively pursue assets you have or used to have, within the boundaries of the law. They run the meeting, which is more or less like a court deposition, with 20-40 other people able to hear or watch you on the phone or Skype.

bankruptcy 341(a) meeting of creditors sign
Bankruptcy 341(a) Meeting of Creditors sign back in the old days pre-2020 when 341a meetings were held in person instead of remote 341(a) by Zoom

Third, creditors can attend. These are the people to whom you owe money, and they have every right to show up, dial in or call and grill you under oath.

Fourth, the United States Trustee may call in or attend your remote 341(a) meeting of creditors. The Office of the US Trustee (UST or OUST) is the arm of the Department of Justice responsible for administering bankruptcies fairly and justly. They work with the FBI in the DOJ to investigate bankruptcy crimes, like hiding assets. The goal of the UST is to ensure that justice is being done, and everyone seeking relief is the “honest but unfortunate debtor.” If the US Trustee shows up at your Zoom 341(a), there’s a suspicion of mischief, such as moving your stuff around, making false statements in your papers, lying about income, or some other thing where maybe you’re not entitled to a Chapter 7 bankruptcy discharge… or worse, like prison time.

Fifth, other debtors will be waiting their turn for their remote 341(a) meetings. There will be about 30 people or so, all listening in, waiting their turn, trying to learn the standard 341(a) questions.

Finally, your bankruptcy attorney (and a bunch of other bankruptcy lawyers) will be there. This is probably (hopefully!) the only time in your life where you’ll be testifying under oath, with penalty of perjury. You can wing it and hope for the best, but you really want a lawyer who’s personally handled thousands of 341(a) meetings to be with you.

Do my creditors actually show up at the 341(a) Meeting?

Generally, your creditors won’t attend. This is because they know the bankruptcy trustee is representing their interests, and will ask you all the questions they would have asked. But they might. They know about the meeting because you have an obligation to list in your bankruptcy petitions or schedules (the bankruptcy papers) every debt you owe, or even might owe. You listed their addresses. When you filed the bankruptcy papers, the court clerk sent them all a notice. It’s each one’s choice if they want to show up and ask you questions under penalty of perjury.

So, who is the bankruptcy trustee who will be asking me questions?

In Chapter 7 bankruptcy, the trustee is an attorney, accountant, or other professional who is appointed by the Department of Justice to seek assets of yours they can take for the benefit of your creditors. They are bound by duty to follow the US Trustee handbooks and reference materials.

Wait, they can take my stuff?

You bet. That’s the trustee’s primary goal, and what Chapter 7 bankruptcy is all about. You read about “Liquidation bankruptcy” on boring websites, but that’s the whole idea. They can liquidate (fancy word for “sell”) your assets (fancy word for “stuff”), if those assets are beyond the exemptions in your state.

Then I’ll just give away or sell that thing to a good friend or relative.

You don’t want to do that. Transfers before a bankruptcy are often fraudulent transfers, and can end up causing a lawsuit for your friend or family, and you’ll lose the thing anyway.

Where is the 341(a) Meeting of Creditors?

Ever since the 2020 pandemic, you can usually attend your 341(a) meeting remotely by phone or Zoom.

So this could be just a phone call. This is super easy.

Don’t let the format deceive you. The remote 341(a) meeting should be treated like a formal court hearing, as if you’re under oath standing in front of a federal judge. Because if things go wrong, you very well might be.

How do they even know it’s me?

The bankruptcy trustee verifies your identity with two forms of identification. When 341(a) meetings were done in person, you would physically hand the trustee or their administrator your unexpired original photo ID and a Social Security card. Now that the hearings are done remotely, you or your bankruptcy attorney will have to provide a copy of these documents (picture ID and proof of SSN) to the trustee. When you go on Zoom, they’ll ask you or your bankruptcy attorney if these are really your documents.

What do I have to do before a 341(a) meeting?

Because the meetings are now done remotely, it’s not so simple anymore as just handing over documents. You now have to get the papers and identification to the bankruptcy trustee beforehand. They’ll typically email your bankruptcy attorney how and where to upload the documents. If you gambled and filed bankruptcy without a lawyer, you’ll likely get something in the U.S. mail. Most Chapter 7 trustees use an online portal where documents are uploaded, though it’s possible some will accept them by email.

What documents do I have to provide to the bankruptcy trustee?

You already know you need to get proof of your identity to the bankruptcy trustee, one with a picture of your face, and another that verifies your Social Security number. Most bankruptcy trustees have a bankruptcy debtor’s questionnaire. Back when the 341(a) meetings were done in person, you’d fill it out while sitting and waiting your turn. Now that we have remote 341a meeting of creditors, you’ll need to complete this in advance, and return it to the trustee. You also must provide your tax return for the last year filed. Many Chapter 7 trustees want to see your bank statements for all accounts for the months prior to filing. It’s possible the bankruptcy trustee will ask you for more documents like mortgage or car loan statements, property deeds, closing statements from refinances or sales you did years ago, etc. so be prepared for some homework.

What happens at the 341(a) Meeting?

On the day of the 341(a) hearing, you’ll connect to the Zoom 341(a) meeting of creditors, or phone in. You’ll mute your line so it’s not chaos and noisy. They call your name, they swear you in, the trustee then questions you like at a deposition, then invites your creditors who attended if they wish to examine you under oath. They often conclude your meeting, but sometimes continue it to a different date so that the trustee can get more documents or information as he or she does due diligence. Oh, and just in case you forgot already: mute your line until your name is called.

What does a US Trustee 341(a) Meeting Room look like?

The US Trustee 341(a) Meeting room is a room with chairs facing forward with this Department of Justice seal prominently in the room. This should impress upon you the seriousness and solemnity of the event. Because you’re attending the 341(a) meeting in your pajamas in the comfort of your own home you may be led to believe this is a very casual process. It is not. Look at the seal below. Now, imagine getting a formal letter from the Department of Justice with this picture at the top of it mailed to your house, with a deadline, because of something you said at the 341(a) meeting or put in (or left out) of your bankruptcy papers. This is a serious formal proceeding. Tell the truth about everything.

DOJ seal for bankruptcy 341(a) meeting rooms
DOJ seal displayed at bankruptcy 341(a) meeting rooms

What are the questions they ask at a 341(a) Meeting of Creditors?

There are questions every person must answer at a remote or Zoom 341(a) Meeting, and often the questions are custom-tailored to you and your situation. When it’s your turn, they call your name. You then and only then unmute yourself. First, they’ll tell you to raise your right hand and then ask, “Do you solemnly swear or affirm to tell the truth, the whole truth, and nothing but the truth?”

The bankruptcy trustee will then ask some of the following questions. This is not intended to be a complete list, but just to give you an idea of what you may be asked.

“State your name. Is the address on the petition your current address?”

Did you sign the petition, schedules, statements, and related documents and is the
signature your own? Did you read the petition, schedules, statements, and related
documents before you signed them?

“Are you personally familiar with the information contained in the petition, schedules, statements and related documents? To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time?”

“Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules?”

“Have you previously filed bankruptcy?

“What is the address of your current employer?”

“Is the copy of the tax return you provided a true copy of the most recent tax return you filed?”

“Do you have a domestic support obligation, and to whom?”

Have you read the Bankruptcy Information Sheet provided by the United States Trustee?

Do you own or have any interest whatsoever in any real estate?

“Have you made any transfers of any property or given any property away within the last four years?”

“Have you been engaged in any business during the last six years?”

Note that business can be as small as that side gig you have selling things on Ebay or Etsy, or driving for Lyft. If you do have a business or business income, that opens up other questions. You’ll also get other questions if you own a car, own real estate, bitcoin, life insurance proceeds, claims against anyone, and so on.

Always tell the truth, and again, even if you think you have nothing to hide, you really want to have an attorney representing you when you’re put under oath, and in any legal proceeding such as bankruptcy.

How do I prepare for a Meeting of Creditors?

You already know the bankruptcy petition, schedules, and statement of affairs, as it’s all about you, your life, and your financial condition. And of course, it’s all truthful and complete, listing all your assets, debts, and income. Because of that, there’s nothing to memorize.

You’ll want to get a good night’s sleep, and get to bed early so you’re well-rested. Before you go to bed, have the Zoom meeting number and password (or phone number and pin pass code) the chapter 7 trustee provided you ready so you’re not scrambling in the morning.

Also, read the bankruptcy information sheet. It’s often called the green brochure, green sheet, or green pamphlet, since back in the days of covered wagons when we were in person, that’s what it looks like.

Do I have to tell the truth at the 341(a) meeting?

I know what you’re thinking.

What?

You’re wondering about maybe telling a couple of little white lies and not disclosing assets or income or that one debt to see if you can beat the system.

Maybe.

That’s not going to work. You’re under oath in a federal legal proceeding. Tell the truth, and the full truth.

Yeah but how will they know if I don’t?

The bankruptcy trustee has government resources, databases, and records, and the UST and Dept of Justice have a budget and resources far greater than yours.

Also, FBI agents like this investigate bankruptcy crimes.

FBI agents investigating bankruptcy crimes, maybe.
FBI agents busy investigating a bankruptcy crime, maybe.

I was just kidding anyway.

Just tell the truth, about everything. Do you want to go to jail for bankruptcy crimes like Boris Becker?

No.

Then there’s your answer.

What about Chapter 13 Bankruptcy 341(a) Meeting of Creditors?

The Chapter 13 bankruptcy 341(a) Meeting of Creditors is similar, but there’s an entirely different focus than the Chapter 7 kind described above. This is because Chapter 13 bankruptcy is different. A Chapter 13 is administered by a (you guessed it) Chapter 13 trustee. Since the purpose of this chapter is to repay debts in a sort of federally-run debt consolidation program, there’s an emphasis on your cash flow, your budget, and your ability to repay. The 341a questions will be similar, but much of it will focus on your paystubs, number of people in your household, employment, and monthly spending. You will almost certainly get a to-do list when the meeting is complete. This punchlist must be completed if your case will get through to confirmation.

Is a bankruptcy trustee the same as the bankruptcy judge?

No, they serve different roles. A bankruptcy trustee is an administrator of sorts, and much more closely aligned with your creditors and debts. They are not your attorney, nor advocating for you. Your attorney is of course zealously fighting for you and your rights, and to help you get the best result with the facts presented to them. The bankruptcy judge — and each case is assigned to a bankruptcy judge — is a neutral person whose job is to decide disputes between your attorney and the trustee (or creditors).

I read that I don’t need an attorney for bankruptcy.

This is true. Just because you can file bankruptcy without an attorney, it doesn’t mean that you should. Same goes for self-surgery. Please strongly consider retaining one to help you with every step of this process. At the very least, arrange a consultation with an experienced bankruptcy lawyer.

Summing up 341(a) Meetings

Remote 341(a) Meeting of Creditors are new, and have their own sets of traps, especially in that it appears so casual and deceptively easy. With these tips and pointers, I hope this helps you navigate the terrain a little bit better.

And if you already have filed your case, relax, answer the Zoom 341(a) meeting questions honestly, and I hope the process works out for you and that you get the bankruptcy discharge you deserve.

Thank you for reading.

tax refund check in hand - chapter 13

Tax Refunds & Returns in Chapter 13

Tax Refunds & Returns in Chapter 13

Can I keep my tax refund in Chapter 13? It depends.

You ask, “can I keep my tax refund in Chapter 13?” Maybe. Chapter 13 tax refunds can be the one thing that sinks a successful bankruptcy case if you keep them. Things are sailing along, and suddenly, things go sideways. Fortunately, there are solutions and ways to fix it and save your case, and ultimately, the discharge you’re working towards.

I’m a Los Angeles bankruptcy attorney, serving all of Los Angeles County and the Central District of California. For years, I have served as the Chair of the Chapter 13 Committee of the cdcbaa, the largest association of bankruptcy attorneys in Los Angeles representing debtors. I’ve successfully gotten hundreds of Chapter 13 bankruptcy cases confirmed, and led a very high percentage of them successfully to discharge. I’ll be writing specifically about practice in the Central District of California, using our forms, CDCA local rules, and other local practices. If you’re anywhere else, the following may not apply to you; seek a bankruptcy lawyer local to you. But if you’re in Los Angeles, Ventura, or Orange County, read on.

Chapter 13 Tax Refunds: the rule

tax refund and tax return
The tax refund and tax return may go to the Chapter 13 Trustee every year during the term of the plan

The general rule in Chapter 13 bankruptcy is that you must turn over tax refunds over $500 each year to the Chapter 13 trustee, unless it’s a 100% plan. Commit this key point to memory: if there is a tax refund in your Chapter 13 bankruptcy, don’t spend it until you talk with your attorney. There is a very good chance that you will need to send it to the trustee.

You are also supposed to provide to the Chapter 13 trustee your tax returns each year, and often also your paystub (or more) and W2, for income-tracking purposes.

Whether or not the plan is what we call a “hundred-percent plan” can make all the difference here. It can make your life easy and not cramp your style. Alternatively, it can require that you turn over that sizeable tax refund check each year.

What is a 100% Plan in Chapter 13

Keeping it basic, a Chapter 13 100% plan is where all the general unsecured debt gets completely repaid. Usually, this means that the credit card debt gets paid, dollar for dollar over the Chapter 13 plan term. In the Central District of California, bankruptcy attorneys refer to this as Class 5 debt (or Class 5A), or more frequently, unsecured debt, or simply, the unsecureds.

In Chapter 13, you don’t always repay all your debt

Reviewing something I wrote about in my main Chapter 13 article, the plan payment in Chapter 13 bankruptcy is often what you can afford, after reasonable and necessary household expenses. Or put in other words, a lot of times (not always), you are paying what you can afford, and not all of the debt. Because the plan payment is usually driven by ability to repay and not debt size, this can result in you paying only a fraction of your debt.

Example: you can afford $400 a month for 60 months, but your unsecured debt (credit card) is $48,000. $400 x 60 is $24,000, divided by $48,000 is 1/2, or 50%. That’s grossly simplifying most cases, but that’s a 50-percent plan. The other 50% gets discharged at the end if you stick to the plan and make all your payments on time. You never have to pay the discharged half, they can never bother you again.

On the other hand, if you have enough cash flow each month where, in sixty months, you can pay all your credit card debts (because the monthly payment is bigger or the unsecured debt is smaller), that might become a 100% plan, and unlock all kinds of benefits and wonders.

Why do I have to turn over my tax refunds in Chapter 13?

You need to turn over your tax refunds in Chapter 13 bankruptcy because it’s closing a loophole. You over-withheld all year long, making your monthly payment small, then with the refund, get back all that withheld income at the end of the year. If you think about it in this extreme example, paying the trustee a dollar a month because that’s all you can afford, then you get $12,000 tax refund on April 15 isn’t fair. It’s a sweet deal for you, the debtor.

However, the trustee will argue (and be right) that you should have adjusted your W4 to lower and withhold the proper amount, increased your take home pay, and the plan payment would increase by approx $1,000 a month. To avoid the over-withholding backdoor loophole, you must send in your tax refunds if it’s not 100% plan.

The Central District of California uses a form plan. In it, there’s a paragraph that spells out to the debtor what is expected with tax returns, and what happens with tax refunds. This is part of every Chapter 13 bankruptcy filed in the greater Los Angeles area, and then the debtor signs it, and is mailed a copy along with the Notice of 341(a) Meeting when the case is filed.

chapter 13 plan tax refunds
The CDCA Chapter 13 form plan paragraph on tax returns and tax refunds.

What if my Chapter 13 bankruptcy is a 100% plan?

If it is a 100% plan, you’re already repaying all your general unsecured debt. You cannot pay more than all. So, when the refund comes, should you give it to your trustee? Ask your attorney. But generally, as long as you’re at 100%, the bankruptcy doesn’t need the refund.

Note: if you have a 100% plan and your bankruptcy gets modified during the bankruptcy term to pay less than a hundred percent to the unsecured creditors, you may need to pay to the trustee the past refunds you kept, retroactively.

As long as the Chapter 13 bankruptcy is paying all the debts, as a rule, the tax refunds don’t need to be turned over.

Does the Chapter 13 Trustee garnish my tax refunds?

No, the Chapter 13 trustee doesn’t normally intercept or garnish your tax refunds. You have to manually send the funds to her, at her normal payment address.

I have to mail in the entire tax refund, or I keep $500?

It depends. Look at the Order Confirming your Chapter 13 Plan (or the last order on motions to modify it). Usually, in the Los Angeles area where the Central District is, you get to keep $500 of each year’s refunds, but have to turn over the rest.

Does a given year’s tax returns offset each other if I owe on one?

Usually, yes, you get to offset the same year’s return. An example of this would be: let’s say on the federal tax return you got a refund of $1500. On the state tax return of the same year, you owe $400. You’d subtract the $400 from the $1500 (and presumably pay the state), then subtract $500 if your Order Confirming allows you to keep that amount. The result? $1500-400-500 = $600 sent to the Chapter 13 trustee.

The Order Confirming is the Controlling Document in a Chapter 13

The judge’s order in your case is what matters. You have to do whatever the Order Confirming your Chapter 13 plan says you have to do. It is pretty specific on plan payment amounts, due dates, and the percentage that the general unsecured creditors are receiving. It usually is pretty clear about what happens with tax refunds. Read it closely.

Order confirming on tax refunds
Order confirming on tax refunds

Take a look at the above. It’s a paragraph from an actual Order Confirming Chapter 13 Plan from one of my clients. The Order Confirming says that it’s not a 100% plan, or the bottom checkbox would be checked. It says that all refunds go to the Chapter 13 trustee during the plan term. It says that you get to combine the state and federal tax returns. And it says the debtor gets to deduct $500. But again, read the specific language of the order which confirmed your case. Your mileage may vary.

Do I keep my tax refunds in Chapter 7 bankruptcy?

It depends. Chapter 7 is a different animal than Chapter 13 (see my article on different types of bankruptcies). As I wrote above, Chapter 13 is generally about paying back what you can afford, but you can’t usually make your take home pay artificially tiny and then pocket the refund. Chapter 7 is all about assets and stuff. The California bankruptcy exemptions allow for keeping a lot of things and money, up to a point. If you’re using the California homestead exemption, there’s a really good chance you won’t be able to protect your tax refund. See a bankruptcy attorney for specific advice about your unique situation.

I kind of skimmed above, what’s the rule on tax refunds again?

The general rule is this (say it with me): if you’re not paying back all your debt, you need to turn over your tax refunds to the trustee each year.

What about my tax returns then?

While we’ve been talking about tax refunds, you need to send the Chapter 13 trustee your tax returns each year also.

Why does the Chapter 13 trustee care about my tax returns?

When you send in your federal and state tax returns to the trustee each year, she’s reviewing a few things. First, she’s looking to see if you got a refund (see discussion above). Second, she’s looking to see your annual income, and comparing it to what you earned when you filed the case. Third, she may be looking for any windfalls you received the previous tax year.

If my tax returns show higher income, will my plan payment go up?

Not always, but maybe. See 11 USC 521(f)(3-4). Ask your bankruptcy attorney.

Oops, I forgot to submit my tax returns. The Chapter 13 trustee is filing a Motion to Dismiss.

Easy! Send the tax returns to her, usually accompanied with the other documents she’s requesting: a recent paystub if employed, a W2 for the most recent year, and a 1099, if applicable. Do this as quickly as possible and this should save your case. But beware, because…

Oh no! There’s a Motion to Dismiss because I failed to turn over my tax refunds

If your plan is less than 100% to the unsecured debt like credit cards, you need to send in your tax refunds each year to the Chapter 13 trustee. If for some reason you failed to do that, the bankruptcy trustee may file a Motion to Dismiss. This motion to the court and bankruptcy judge is seeking to end your bankruptcy, end the automatic stay protection, end your attorney’s representation, and leave you to fend off your creditors and debts outside the terminated bankruptcy case. It is very serious. But you have some courses of action:

Possible responses to a Motion to Dismiss for failure to turn over tax refunds

File a Motion to Modify Chapter 13 Plan

The first possible solution to Motion to Dismiss for failing to hand in your tax refunds is to file a Motion to Modify (also called MoMod). The Motion to Modify can ask the judge to retroactively suspend turning in your tax refunds for year(s) in question, despite the fact that you knew or should’ve known you were supposed to because you signed the Chapter 13 Plan and read the judge’s Order Confirming which required it.

This can be a difficult hurdle, and the facts and evidence matter. If the trustee is demanding $3,000 of tax refunds and you can point to a hospital bill where you were forced to pay $3,100 in cash that same tax year, that may be a reasonable expense which you can document with the evidence of the hospital bill and receipt that you paid it. Maybe the Chapter 13 trustee wouldn’t oppose your MOMOD and/or the judge would grant the Motion to Modify, and let you keep your tax refund.

Note that Motions to Modify are not guaranteed to work. There’s a lot of work that goes into MOMODs, and there will be legal fees approaching (or exceeding $1000) for the work to do a MOMOD. Weigh the pros and cons, including the likelihood of success. Consult with your bankruptcy attorney.

Respond to the Motion to Dismiss with a Payment Plan

As a rule, you should respond to the Motion to Dismiss the case with a response if you want to keep the case alive. If you don’t file a reply (technically, a response) to the trustee’s motion, it will be unopposed and the judge will likely grant it, ending the case, bankruptcy protection, and lawyer representation. If you are going to file a motion to modify, your response to the trustee’s motion should explain that. Here, though, you aren’t modifying, but requesting a chance to catch up and pay the tax refund in installments.

With the response, be very specific as to when the payments will be, and when the tax refund will be completely paid to the trustee. Ideally, you will turn over the tax refund before the hearing date. Being current by the hearing is your best chance at saving the case. Everything else is putting yourself at the mercy of the trustee, and the court.

Dismiss and re-file, getting a new 60 months

It’s definitely not ideal, but if the case gets dismissed, you can often re-file a new case. This will get you a new 60 months to repay debt, but also incur a new legal fee to prepare all the petition, schedules, compute and craft a new plan, and statement of financial affairs again.

Your best best is often to get current and turn over the tax refund to the trustee by the hearing, but again, ask your bankruptcy lawyer.

In short

A Chapter 13 bankruptcy case can have many twists and turns over the years between filing and discharge. One requirement is to turn over tax returns, and tax refunds, each year. If you are paying back 100% of your debt, life can be a lot easier. On the other hand, if you’re paying less than 100% of your debt, make sure you send in your tax refunds each year. If you forget, there may still be a way to save it. Failing to send in tax refunds for multiple tax years is a much harder sell, since it’s harder to trace the income to a particular expense. But if you’re able to make up the amount in payments, with the approval of the trustee and judge, you just may be able to save your case.

chapter 13 bankruptcy in los angeles

Chapter 13 Bankruptcy Ultimate Guide

Chapter 13 Bankruptcy – the Ultimate Guide

What is Chapter 13 bankruptcy? Chapter 13 bankruptcy is like debt consolidation, but better. It’s a solution for people who have some money to pay some of their debts back. In five years from now, paying minimums on all your debt, you’d still owe much of your debt. It’s because of that darned interest, and you’re barely paying principle. Chapter 13 bankruptcy fixes the interest problem.

Who am I? I’m a Los Angeles bankruptcy lawyer. For years, I have served as the Chair of the Chapter 13 Committee of the cdcbaa. I’ve successfully confirmed hundreds of cases for my clients, and led those cases to discharge. I’ve been on committees with judges, trustees, creditor lawyers, and other debtor attorneys that have worked on forms and rules changes for our entire district, and have hosted, moderated, or presented on panels on the topic of Chapter 13 bankruptcy to other lawyers. Here I share just some of what I’ve learned over the last twenty years to help people trying to learn about this mysterious area.

Chapter 13 Bankruptcy Definition: In Chapter 13 bankruptcy, you pay some (not necessarily all) of your debt back, cannot be sued, the trustee doesn’t take your stuff, and interest is frozen so you’re not on the minimum payment treadmill forever. It’s a way out with peace of mind.

What is a Chapter 13 bankruptcy?

Filing bankruptcy under Chapter 13 is for people who have some discretionary income. With this extra money each month, the consumer bankruptcy debtor can repay some or all of their debts.

Discretionary income is money left after their normal and usual monthly expense are deducted from monthly income. For this reason, a Chapter 13 is called a “Wage Earner Bankruptcy” The focus is having money to repay debts, which we call “budget surplus.”

60 Monthly Payments

Chapter 13 Bankruptcy
Chapter 13 bankruptcy gives you a way out where you can’t be sued and you’re not paying interest forever.

A big difference between Chapter 7 bankruptcy and bankruptcy chapter 13 is that there are monthly payment plans for the chapter 13 debtor. The Chapter 13 plan payments can even help you pay back tax debt, which in Chapter 7 is usually not discharged. Plan payments are made to the Chapter 13 Trustee over a period of (usually) 5 years.

What are these payments? These payments are usually to firstly, tax debt. Secondly, they go to whatever you may be behind on your mortgage payment, or sometimes your car loans. Finally, they’ll go to pay some or all of your credit card debt. Chapter 13 bankruptcy therefore is a good way to stop foreclosure and save your house, as well as stop creditor harassment. And of course, all the California bankruptcy exemptions still apply, so you can keep your stuff.

Chapter 13 was intended to give the person with income a chance to make affordable installment payments. This comes out of future income so that creditors get paid at least something. The good new for you is that there is no liquidation in Chapter 13. The Chapter 13 bankruptcy trustee doesn’t take things. Generally, you keep your stuff.

You’re going to want a skilled Los Angeles bankruptcy attorney to help you so you can make your payment plan no more than you can afford for your Chapter 13.

The Stuffy Definition: Wage Earner Bankruptcy

Chapter 13 of the Bankruptcy Code lets debtors under Court protection apply a portion of future earnings to the repaying some or all their debts over time. Creditors can’t do anything during this time to collect the debts. The automatic stay protects the debtor while a plan of repayment is carried out. It is similar to a Chapter 11 Business Reorganization. In fact, Chapter 13 is sometimes called “Consumer Debt Adjustment.”

Consumer Chapter 13 Bankruptcy Overview

You currently have enough extra money at the end of the month to pay your credit card minimum payments. This, of course, is getting you nowhere. You’ll have the same debt in 8 years, and will still be paying $700 or $1000 or whatever it is each month… forever. There’s a way to eliminate debts on your terms, likedebt consolidation.

Or you’re behind in your mortgage payments, and want to keep your home. And you have extra money each month you’d like to use to catch up, but the mortgage company won’t work with you. This is one advantage of Chapter 13 over other types of bankruptcies.

In either situation, you can take that money you have left at the end of the month and start reducing the debt you owe so that you’re out of debt in 60 months.

Chapter 13 Bankruptcy Process

The process for filing Chapter 13 is a maze-like process, and you will want to have an attorney by your side. The paperwork involved is truly overwhelming, and the time is much greater than a Chapter 7 bankruptcy.

Preparing the Petition and Plan

Bankruptcy Petition

Like any bankruptcy case, you will need to have a bankruptcy petition for the court. This is often 30-50 pages thick and lists your debts, possessions and other information in a very particular order and fashion.

Payment Plan

The payment plan is the key to a Chapter 13 bankruptcy, and what sets it apart from a Chapter 7 bankruptcy. It sets out all the ways which the debt will be handled during the administration of the bankruptcy by the Chapter 13 Trustee. How much unsecured debt will be paid? Are you going to keep paying on the car, or give it back for a voluntary repossession? What about the mortgage: will it be caught up if you’re behind to avoid foreclosure, or if so, how long will it take to pay the arrearages that you’re behind?

In short, a lot of precise and important calculations go into the bankruptcy plan payment with the aim of determining the number that matters most to the debtor. This number, of course, is the monthly payment. You’ll pay this monthly payment for 60 months (yes, that’s 5 years). By definition, you’ll be able to afford it. A good bankruptcy attorney can ensure you are able to make the payment, but that it’s also something that can be accepted by the bankruptcy trustee and creditors.

Court Involvement

Filing the Bankruptcy Papers

After these are ready, the bankruptcy petition and payment plan are submitted to the U.S. Bankruptcy Court. The papers are filed and the case gets a number and the ball is rolling.

The Meeting of Creditors (341A)

Like a Chapter 7 bankruptcy, you must go under oath with penalty of perjury regarding the facts that are contained in your bankruptcy petition. You will need to appear in bankruptcy court to answer some brief questions. This is the 341(a) Meeting of Creditors.

Confirmation

After the bankruptcy court date, your attorney will need to return to court. This involves making sure that the numbers all add up, your chapter 13 payment plan is fair to both you and your creditors, and of course, to accept your next monthly payment. If all goes right, your plan will be “confirmed,” your plan is accepted and everything is on automatic pilot.

After Bankruptcy Court

After confirmation, from this point forward, you will just mail your monthly payments to the chapter 13 trustee. There usually are a couple of restrictions, such as notifying the trustee if you get a change in your income. Further, you’re not to get more than $500 on any future debt without permission. Something to remember: any extra money above and beyond your normal monthly expenses goes to the bankruptcy for debt. Consequently, the bankruptcy court and trustee follow anything that changes the formula of your confirmed plan. This is why the Chapter 13 trustee needs to see your tax returns, and gets any tax refund.

Read my in-depth article about tax refunds in Chapter 13bankruptcy.

Calculating the Bankruptcy Plan Payment

Chapter 13 Plan Payment, Generally

The Chapter 13 bankruptcy plan payment is often whatever you can afford. That is, it’s what’s left after your projected monthly income and reasonable and necessary expenses. By definition, the bankruptcy plan payment is affordable, and typically less than paying all your credit cards directly.

However, that’s not always the case. There are other factors that can set the “floor” of your Chapter 13 plan payment amount. Of course, if you can afford more than your floor, you normally pay what you can, up to the full amount of your unsecured debt , which I’ll call the “ceiling.” Somewhere between the floor and ceiling is your Chapter 13 plan payment amount.

Factors that can affect the bankruptcy plan payment

There are lots of things that can raise the “floor” and impact what your Chapter 13 bankruptcy plan payment. These exact figures aren’t usually known without some research or work.

  • the result of the long B22 form which analyzes all your pay stubs and income the past six months
  • while no one takes your assets in Chapter 13, they factor in what you would’ve lost in Chapter 7
  • the amount of your priority tax debt (both state and federal taxes)
  • the value of your financed car which is old enough that you can cram down and pay only what it’s worth, not the loan amount
  • the amount of mortgage arrearages, including all late fees
  • current value of any judgment liens on your residence
  • balances of all your credit cards bills, including nonpriority IRS and FTB debt
  • how much you owe in unpaid property tax debt
  • and more

Can you say with any certainty the values of any of these variables, let alone all of them? Of course not. Heck, even the answer to the first bullet point about the B22 often isn’t known until I see all your paystubs and bank statements. The bottom line is that while the ceiling is fixed to “all,” the floor of what you pay for your bankruptcy plan payment can rise or fall based upon the responses to all these and other factors.

So what’s my Chapter 13 plan payment amount?

Few of these factors are known for sure at the bankruptcy consultation. Consequently, anyone at the first meeting who predicts with any confidence your projected Chapter 13 plan payment amount is potentially ignorant, misleading, or both. The one exception is when someone says you need to pay all your debt, what we call a 100% plan, but even then, we’re not always sure of the exact balances of all your debts. Having a 100% plan can make it more sensible to sell a home in Chapter 13, give you less stress and more disposable income, and help you keep your tax refunds in Chapter 13.

However, in my best effort to help you, I can say this: while the above factors can throw a wrench into the works, your Chapter 13 bankruptcy plan payment is often based upon whatever you can afford, using average income minus reasonable and necessary living expenses.

Can I later reduce or change my Chapter 13 payment

Usually, yes, you can petition the court to reduce your plan payment in Chapter 13 if there’s a change of circumstances. This is done by a Motion to Modify, and needs to get approval from the trustee and, of course, your bankruptcy judge.

In bankruptcy, what’s allowable as a reasonable living expense?

People ask, since the Chap 13 plan payment factors in reasonable living expenses, what’s considered “reasonable?” Answer: whatever someone wearing black robe says it is. Ok, I kid (sort of). The truth is that what is considered reasonable types and amounts for expenses is often the type of thing debtors’ attorneys and the Chapter 13 trustee and creditors fight over. It typically is resolved by a bankruptcy judge. To make it even more complicated, the result is extremely fact-specific; what works for someone else may draw an objection here, or vice verse. An experienced bankruptcy lawyer will know what generally gets objected to and what is allowed. Let’s talk.

Why do I need a Chapter 13 bankruptcy lawyer

Chapter 13 bankruptcy cases are ones in which it is hard to be successful. Judge Johnson of the Central District of California (where Los Angeles is situated) has researched the topic. In his standing order, Judge Johnson finds that nationally, only 33% of Chapter 13 cases succeed. Locally, however, it’s much more rare. The judge finds that in the Central District of CA, only 3% of Chapter 13 bankruptcy cases succeed. He also found that this number drops to 0% when there’s not a bankruptcy attorney helping the debtor.

CDCA Low Chapter 13 Success Rates

Quoting the bankruptcy judge:

“A review of the Court’s records a few years ago indicated that only 3% of Chapter 13 cases in this district resulted in a completed plan with Chapter 13 debtors making all plan payments.”

That’s not a typo: 3%.

Judge Johnson Chapter 13 bankruptcy research
Chapter 13 bankruptcy is tough. Go with someone who knows what they're doing.

There’s no doubt that Chapter 13 bankruptcy is difficult to learn and navigate for the Los Angeles bankruptcy filer. Anyone who wanted to do one would need a bankruptcy lawyer to even out the odds of success. You’d want a bankruptcy attorney who had experience with Chapter 13. Not just experience, but success with these challenges.

Los Angeles bankruptcy attorney Hale Antico has Chapter 13 success

Bankruptcy filing statistics show that from 2008 to 2011 there was a peak of Chapter 13 filings.

Between 1/1/2008 and 12/31/2011, Los Angeles bankruptcy attorney Hale Antico filed 177 Chapter 13 cases.

Successful cases take 5 years to earn a discharge; unsuccessful cases end sooner.

Between 12/31/2013 and 12/31/2017, there were 104 of these earlier Chapter 13 bankruptcy cases which received discharges.

104 divided by 177 is 59%.

Or viewed differently:

Chapter 13 Bankruptcy Success Rates

The stats say you need an attorney for Chapter 13 bankruptcy. But not just any 3% successful bankruptcy lawyer. It would be a good move to go with one of the best bankruptcy attorneys whose success rate is almost double the national average, and 20 times higher than the local success rate.

Summing up Chapter 13 Bankruptcy

All in all, Chapter 13 bankruptcy is a successful debt consolidation where you pay a fixed payment for a fixed term. Everything after the term that didn’t get paid is discharged. Filing it freezes interest. Creditors can’t sue you. You just pay back what you can. This is often cheaper than what you’re currently paying all those minimum payments combined before the bankruptcy. Why? Because without bankruptcy all those minimums only go to interest. Chapter 13 bankruptcy works to get you out of debt.

Read my article of things to do (or avoid!) before you file bankruptcy. We’ve helped thousands of people in Los Angeles file bankruptcy. We’d be honored if you’d let us put our success to work to help you, too.

Contact us now.

    chapter 13 debt limits

    Chapter 13 Debt Limits (2023 update)

    Chapter 13 Debt Limits (2023 update)

    Debt Limits in Chapter 13 Bankruptcy

    2023 Update: Chapter 13 debt limits in 2023 just got a huge increase last June. There is a new law changes which, among other things, increases the Chapter 13 debt limit to $2.75 million dollars. This limit is for both secured and unsecured debt combined. It’s about double what the debt limits had been, and is extremely helpful for Los Angeles residents who have a second property and mortgage debt that exceeds $1.5 million. The 2023 Chapter 13 debt limit increase is temporary and will sunset in 2024, unless extended.

    March 2022: The Senate has introduced a bipartisan bill which would increase the Chapter 13 debt limits significantly if it passes. S3823, the Bankruptcy Threshold Adjustment and Technical Corrections Act (BTATCA) would almost double the amount of debt you can have in Chapter 13.

    Chapter 13 debt limits limits who can seek relief in Chapter 13 bankruptcy. These eligibility figures are set by law and are adjusted regularly, and restrict which cases can be in Chapter 13 bankruptcy. As you might know, Chapter 13 bankruptcy involves repaying some or all of your debt. People will sometimes ask, “do I qualify for chapter 13?” The answer, like to many legal questions is, “it depends.”

    The purpose is so that the Chapter 13 trustee doesn’t administer cases that are too large and burdensome. At some point, the line is drawn, and let’s face it, in Southern California where this Los Angeles bankruptcy attorney practices, the secured Chapter 13 debt limit is inadequate. If someone has a rental property, they’re probably over the line and don’t qualify, which is hardly fair.

    To qualify for Chapter 13 bankruptcy, the reorganization bankruptcy, a few things have to be looked at. First, a good Los Angeles bankruptcy attorney will examine your cash flow. That is, can you afford to repay your debts? Or are you struggling to keep your lights on?

    Unsecured and Secured: the Chapter 13 Debt Limits

    Second, you have to compare your debts against the debt limits. These numbers constantly change. And to be honest, we bankruptcy lawyers have to look them up, since in most cases they’re not a factor. And just when we learn them, they change again.

    2023 Updated Chapter 13 Bankruptcy Debt Limits

    Note: the following is superseded by temporary changes in the law effective June 2022 described at the top of this page.

    So, as of April 1, 2022, the Chapter 13 debt limits are

    • Unsecured debt: $465,275 (up from $419,275)
    • Secured debt: $1,395,875 (up from 1,257,850)

    These values are effective 4/1/2022, and seem to be still be the most current. Normally, you’d check a government website for updated values. However, as of this writing, even the courts are still listing the chapter 13 debt limits that are from before 2019. Other sites, though, seem to be more current.

    Some Blurred Line Debt Limit Examples

    Even this is oversimplifying things, because where do lawsuits against you fall? That is, if someone has taken you to court, is it a secured debt or an unsecured one? What if you think you’ll win: does it count as a debt at all?

    Another issue arises with student loans, particularly if you cosigned as a parent plus loan and it’s not really your debt. Or is it?

    Further, tax debt is another tricky one. Is it unsecured, secured or both? And what if it’s priority, can it also count against the unsecured debt? What if you dispute it?

    There are a lot more issues that can arise, so you’ll want to consult with a skilled Los Angeles bankruptcy attorney who specializes in Chapter 13 bankruptcy. I’d be honored to work with you.

    Contact us for a consultation

    If you’re in the Los Angeles County area, contact us and let’s arrange for a no-obligation Zoom consultation to see how bankruptcy would help you, and to determine your Chapter 13 eligibility.