Source: http://coxlawgroup.com/category/blog/
Timestamp: 2018-03-23 01:22:23
Document Index: 51348124

Matched Legal Cases: ['§ 541', '§ 541', '§ 541', '§ 1306', '§ 541', '§ 1306', '§ 541', '§ 541', '§ 1306', '§ 1327', '§ 1327', '§ 1306', '§ 1306', '§ 541', '§ 541', '§ 1306', '§ 541', '§ 541', '§ 1306', '§ 541', '§ 541', '§ 541', '§ 1306', '§ 348', '§ 348', '§ 237', '§ 1306', '§ 541', '§ 1306', '§ 1306', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 541', '§ 1327', '§ 1325', '§ 11', '§ 50', '§ 1325', '§ 1329', '§ 1325', '§ 255', '§ 1329', '§ 1325']

The DO’s and DON’Ts of Protecting a Tax Refund in Bankruptcy
For many people, a tax refund is a good way to pay for things, like Bankruptcy legal fees, that are often so difficult to save for during the year. Receiving large tax refunds right before a Bankruptcy is filed can create problems for some people, though, if they are not careful about how they spend their money. To help you have the best chance of keeping your tax refund & having a successful Bankruptcy, read the following “Dos and Don’ts” for protecting a tax refund in Bankruptcy.
DO tell your Bankruptcy Attorney about your tax refund so he or she can help your protect it.
DO keep up with how you spend your tax refund. Try to keep receipts and notes on the purchases you make.
DO save as much as you can to help you make ends meet during the year.
DON’T pay back family, friends or business partners without first talking to your Attorney.
DON’T feel like you must spend all of your tax refund before filing Bankruptcy or that you have to hide your tax refund. The best way to maximize your chances of keeping your tax refund is to disclose it to your Attorney and on your Bankruptcy papers.
DON’T give your tax refund as a gift to anyone and don’t put it in someone else’s bank account.
DON’T pay any large debts with your tax refund without first talking to your Bankruptcy Attorney about it.
The bottom line? Make sure you discuss these issues with your Attorney!
For small businesses, receiving a notice of a customer’s bankruptcy can be confusing. While the best advice is always to contact an attorney to determine the exact impact of the bankruptcy, the analysis can be broken down into a few basic steps following the receipt of a bankruptcy notice.
Stop Collections and Gather Information
With very few exceptions, upon the filing of a bankruptcy by an individual, the automatic stay of the bankruptcy code generally prohibits further collection activities or legal actions against that individual and his or her property. The focus of a business that receives a bankruptcy notice should first be on identifying the debtor in its customer records, determining what, if any, collection actions it has pending, and ceasing those collection actions as well as the generation of further billing statements to the customer.
Most creditors will learn of the bankruptcy filing by receiving a written notice in the mail. This notice is the first document generated by the Court upon the filing of a bankruptcy petition by an individual and it includes key information that the creditor should review. For example, the notice will indicate the full name and social security number of the debtor to aid in the creditor’s identification of the individual in its customer rolls. The bankruptcy case number will also be disclosed and should be referenced by the creditor in any correspondence it sends to the bankruptcy court related to the debtor.
The notice also includes the chapter that the debtor has filed, typically 7 or 13 for consumer debtors, and the date, time and location of the Meeting of Creditors. The chapter is particularly important because it will provide an early indication of whether funds might be available for the creditor in the case. Typically Chapter 13 bankruptcies provide some level of distribution to the creditor, albeit often just a small percentage for many general unsecured creditors. Chapter 7 bankruptcies may also produce dividends for the creditors, but whether funds will be available is typically not something that the creditor will be able to determine at such an early stage in the case.
Determine the Impact of the Bankruptcy
Many small business creditors mistakenly ask whether their debts are “included” in the bankruptcy. Technically this is not correct since all debts must be included, that is, listed and noticed, in the bankruptcy petition. The real question is whether a particular debt will be discharged or wiped out by the bankruptcy. The answer to that question depends in large part on whether the debt owed to the creditor satisfies one or more of the exceptions to discharge found in the Bankruptcy Code.
The Bankruptcy Code lists a number of types of debts that are not discharged in a bankruptcy. Examples include certain types of taxes, child and spousal support obligations, and student loans that would not typically impact a small business creditor. Small business creditors often need to look more to the manner in which the debt was incurred. For example, such businesses may be able to assert that a debt should not be discharged because it was incurred by fraud or by the misrepresentations of the debtor.
Also, the receipt of a bankruptcy notice does not necessarily mean that the creditor will not receive further payments toward the debt. In Chapter 13 cases, the debtor’s proposed plan will be mailed to all creditors and provides information on what payments a creditor might expect. In Chapter 7 cases, the debtor files a Statement of Intention that indicates whether he or she will continue to make payments to certain creditors that have liens on the debtor’s property.
Consider Whether Further Action is Necessary
When faced with a customer’s bankruptcy filing, the creditor’s range of options extend from taking no action to becoming actively involved in the case, reviewing all filings and attending court hearings. Although much of the initial information gathering can be done without the assistance of an attorney, determining the effect of the bankruptcy filing and evaluating whether further action is necessary typically will require the expertise and advice of an attorney.
The bankruptcy process actually includes a fair amount of safeguards for creditors even if they do not participate in the case. Other parties, such as case trustees, are assigned to all consumer cases and oversee parts of the process. Although these trustees are not responsible for protecting the rights of any particular creditor, they will often bring to the attention of the Court issues related to the debtor’s eligibility to seek bankruptcy relief.
Even if a creditor does not intend to become actively involved in a case, it should consider filing a proof of claim with the Court if distributions are likely. A blank proof of claim form normally will accompany the initial bankruptcy notice from the Court in all Chapter 13 filings since some level of distribution to creditors is anticipated in such cases. For Chapter 7 cases, the Court generally only issues a notice to creditors to file a proof of claim in a case where distributions are expected. Timing is important, however, and a creditor needs to ensure its proof of claim is filed before the deadline noted for such claims.
A common misconception is that creditors must attend the Meeting of Creditors hearing or they will not be able to further participate in the bankruptcy. This is not true. The failure to attend the meeting of creditors by the creditor does not eliminate any of its rights with respect to the bankruptcy. It is an optional meeting that simply provides basic information about the case and the opportunity for questions to be asked of the debtor regarding his or her debts and property interests.
Depending on the circumstances of a particular case, some creditors may consider becoming more deeply involved in the proceedings. Creditors will want to consult with counsel before taking actions such as objecting to the debtor’s plan of reorganization, filing a special lawsuit to ask the Court to determine that a debt is not discharged, seeking dismissal of the case, or asking the Court to lift the automatic stay in order for normal collections to proceed.
Although small business creditors are understandably concerned with incurring more expenses and legal fees when faced with a customer’s bankruptcy filing, hiring counsel is always advisable when dealing with significant accounts. As with any legal matter, a business is best positioned to limit the impact of a bankruptcy when that business understands the process and its options.
Of course, the question that forms the title of this article is asked tongue in cheek. For my clients, losing the property they want to keep is never the goal! So the real question is how do you maximize your chances of keeping your property in a Bankruptcy. The answer is simple. You follow the rules. Knowing the rules, though, is often the real challenge.
Unfortunately, in today’s world of the internet and easy access to information, it is easy for a potential client, armed with a little bit of knowledge from his or her internet legal research, to make some big mistakes before even meeting with an attorney in preparing for a Bankruptcy filing. Often, such an individual’s efforts to try to protect property or to limit the impact of a Bankruptcy on his or her loved ones backfires because the legal system has many built-in protections to ensure fairness to all parties and to discourage any “funny business” by clients to avoid their creditors.
What do I mean by “funny business?” I have had clients ask not to list a specific debt and tell me “I don’t want to include that family member in my Bankruptcy.” Other clients have reported to me at our initial meeting that they no longer have a car or other bank account when asked about their assets. When pressed, the client admits that in anticipation of our meeting, they have “put the car in someone else’s name so it won’t be a problem.” Of course, there are still other clients who never reveal information to me because they think that will help them better protect certain prized possessions. All of these efforts at trying to protect property or specific creditors are ill-advised and almost always result in the direct loss of that property or in sanctions on the clients themselves. Those sanctions can include the simple denial of a client’s discharge of debt, the loss of assets, or even imprisonment for fraud.
Not Listing a Family Member
A main tenet of the Bankruptcy system is fairness to all parties, including all of the creditors and the clients themselves. Of the misdeeds described in this article, arguably the most innocent may the desire of a client to not discharge a debt to his or her family member by not revealing that obligation on the Bankruptcy petition. While I can appreciate that such desire stems from a client’s interest in protecting his or her family member as well as protecting the client’s own pride, the Bankruptcy Code clearly requires that all debts are disclosed regardless of whether the money is owed to family, friends or one of the big national banks. The Bankruptcy Code is designed to ensure that all creditors are treated fairly and have notice of the proceeding. For example, if distributions will be made to creditors in the case, all creditors including family members have the right to participate. By failing to list a family member in a petition, the client is effectively denying that family member the right to receive distributions or to raise other appropriate issues in the Bankruptcy forum.
Recent Transfers of Property
Some individuals mistakenly believe that giving away, selling or transferring property “out of their names” will protect the asset in a Bankruptcy. Sometimes I see this with priceless family firearms that have been passed down through generations. Other times, for example, I have had clients tell me about cars they put in their son’s name or bank accounts they closed out. In most of these cases, the very action the clients have taken to try to protect their assets is the action that will ensure that they lose them.
With respect to the firearm example, a client in Bankruptcy typically could have easily protected the item through special inheritance or firearm exemptions if they just retained ownership of it and disclosed it. By transferring the property out of one’s name, the Bankruptcy Trustee might be permitted to void the transfer and recover the item to sell and pay to creditors. The example of the transferred car on the eve of Bankruptcy would work the same way with the same disastrous result. Typically it is easier to protect an asset by disclosing it in the Bankruptcy and applying the appropriate exemption.
In the case of bank accounts, there may, in fact, be limited amounts of cash a client can protect. However, with an experienced attorney’s assistance, a client may have opportunities to convert that cash into other exempt assets, like pre-need funeral contracts, necessary household goods and furnishings, or prescribed medical devices. Such pre-bankruptcy planning, though, can be fraught with complications for the client and should be approached cautiously and only with careful attorney instruction. If not, a well-meaning client might be seen as overreaching and face allegations of fraud. The courts rarely define how much pre-bankruptcy planning is appropriate, and legal scholars generally sum matters up with the simple maxim, “pigs get fed and hogs get slaughtered.” In other words, while some reasonable, appropriate and necessary pre-bankruptcy planning may be appropriate, if such efforts are too aggressive and appear in bad faith, the client risks losing his Bankruptcy discharge, the assets, or worse.
Hiding or Failing to Disclose Assets
The biggest mistake a client can make is to fail to disclose actual assets on a Bankruptcy petition. An example of this would be the client who does not report a potential claim they may have against a third party, such as a car accident personal injury lawsuit or other claim. If the goal behind the nondisclosure is a client’s expectation that it will keep the Bankruptcy from negatively impacting the lawsuit, the client will be surprised to learn that his or her very actions will actually bar the personal injury claim or other lawsuit from proceeding further. In fact, the client will effectively give up any rights he or she may have had to the lawsuit and to the damages award that might otherwise flow from it by failing to disclose the potential asset in the Bankruptcy petition. The irony is that in most personal injury cases, the damages award would be fully exempt and protected in a Bankruptcy proceeding if properly disclosed.
Over the years, courts all across the country have written opinions to reiterate that the “fresh start” offered by Bankruptcy is reserved for the “honest but unfortunate” individuals facing overwhelming debt. The key is in the word, “honest.” Preserving the right to the relief offered by Bankruptcy requires that the client proceed honestly, in good faith, and according to the rules of the system.
Without question, student loan debt is on the rise. The trend is likely due to a combination of factors, including a poor job market encouraging many to continue their educations, increasing tuition costs, and fewer parents with the financial ability to help out. The rising student loan debt stresses the budgets of many Americans and may be contributing to the delayed entry of young adults into the economy as they find they cannot afford to leave their parents’ homes, contribute to retirement, or make significant purchases like cars and homes.
Not only are more students graduating with student loan balances, but they are also borrowing more money for their educations. According to the Institute for College Access report, Student Debt and the Class of 2012 (http://projectonstudentdebt.org/), 71% of seniors graduated with student loan debt averaging $29,400.00. Another study by Fidelity found that the average had grown to $35,200.00 by 2013.
Repayment Begins but Default Persists
Upon graduation, a federal student loan borrower is given a 6 month grace period before starting the standard repayment typically amortized over a 10 year term. Borrowers can typically extend that repayment term through consolidation options and lower the monthly payment amounts. Often, though, many borrowers leaving school with student loan balances still find themselves unable to make even their minimum monthly payments. In fact, according to the Department of Education, the three year default rate for student loans is nearly 15%.
Deferments offer temporary assistance but all too often the borrower’s inability to pay back the loan does not improve and upon the expiration of the deferment he or she may find themselves in default of the terms of the loan. While rising debt loads combined with increasing default rates would normally lead consumers to consider bankruptcy options, student loan debt remains one of the few types of for which bankruptcy offers limited relief. In fact, student loan borrowers may find they have better options outside of a bankruptcy.
For most individuals, the assistance that bankruptcy provides comes in the form of obtaining relief temporarily from the draconian collection practices that student loan lenders may utilize. Federal loans, in particular, may be collected through wage garnishments, tax refund setoffs, and even social security payment intercepts. Even if a debt is not discharged by a bankruptcy, the case itself will provide at least temporary protection for the client from such collection pressures. While a typical Chapter 7 case would last only about 6 months, the period of protection afforded to a client can be as long as 5 years for Chapter 13 cases.
Beyond the temporary protections against collections, Bankruptcy can, in some rare cases, actually discharge the entire debt. Congress, however, has made the discharge of such debts extremely difficult by requiring a rigorous process with difficult evidentiary standards for the elimination of student loan debt. In fact, the process itself requires a separate federal lawsuit filed in addition to the Bankruptcy petition. These lawsuits are very expensive because the student loan lenders generally always vigorously defend them and exhaust all avenues of appeal if the borrower is successful at trial. Once the lawsuit is filed, the student loan client must prove to the Court that the debt imposes an “undue hardship” on the client and his or her dependents. 11 U.S.C. 523(a)(8).
The leading case establishing the test for “undue hardship”, Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987), requires that all three of the following, simplified for purposes of this article, must be met. First the client must not be able to maintain a minimal standard of living if forced to repay the loans. Second, additional circumstances must exist that indicate that this state of affairs will persist for a significant portion of the repayment period. Third, the client has made good faith efforts to repay the loan. While this standard may not seem difficult for the struggling former student, in practice the Bankruptcy Courts have applied tests for determining the standard that are very difficult to pass. In light of the significant added expense of the required separate lawsuit and the low success rate of such efforts, few clients file bankruptcy for the sole purpose of discharging their student loans.
Outside of Bankruptcy, many avenues for relief do exist, although the process for obtaining such relief can be burdensome and requires navigating through complex eligibility requirements. This article summarizes the most common programs, but readers are encouraged to further explore whether they qualify for the relief offered. An excellent starting point for such research may be found at the Department of Education’s website: www.studentaid.ed.gov. Several programs exist to offer relief based on a borrower’s budget. Care must be taken to understand exactly which type of federal loan may be included in these plans.
Certain federal student loans may qualify for income based repayment plans that reset the borrower’s payment about based on their budget. Once the borrower has paid such payment for 25 years, the balance of the loan is forgiven. Unfortunately under this plan, any forgiven indebtedness may be included as taxable income to the borrower unless certain exceptions apply.
Income Based Repayment Option
This program is also targeted to borrowers facing financial hardship and caps the reduced payment at 15% of the amount by which the borrower’s Adjusted Gross Income exceeds 150% of the applicable poverty level.
Pay as you earn plan is designed for borrowers with a financial hardship, and borrowers who have qualified for such plans may continue to make payments under the plan even if they later no longer have the initial financial hardship. The unpaid balance after 20 years of repayment under the plan is forgiven.
Other types of plans depend on the employment of the borrower and offer repayment and forgiveness benefits for those employed in certain types of work. While programs for teachers, government workers and charitable organization employees are described below, many other programs exist as well.
Government and Public Interest Jobs
Consumers with Federal Direct Loans may apply to have their outstanding loan balances forgiven after they have made 10 years of on time payments if they hold federal, state or local government jobs, or positions at a nonprofit that’s been designated as a 501(c)(3) tax-exempt organizations. Should the application for loan forgiveness be approved, the forgiven balance of the loan is not included as taxable income.
Teachers should see if they’re eligible for the teacher loan forgiveness program. They must work at a qualifying school for five consecutive years to receive up to $17,500 in forgiveness on certain federal loans
Anyone struggling with student loan debt should take the time and make the effort required to pursue the repayment options, deferments, and forgiveness programs offered by their lenders. Not only will the borrower likely find better success with this approach, but such efforts will go a long way in to support a finding that they have made a “good faith” effort to repay their loans if they later attempt to seek relief from the loans in the Bankruptcy Court.
Separating fact from fiction is difficult when trying to research how to improve your credit. Many credit repair companies market on television and radio commercials that they have the secrets to cleaning up credit, but is there really any magic to credit repair? The truth is that consumers do not have a right to force the removal of negative information from a credit report if it is true and made within the time limitations for reporting. While legitimate steps can and should be taken to improve one’s credit, unscrupulous credit repair companies that suggest you dispute accurate credit history or that encourage you to give misleading information on a loan application should be avoided.
The good news is that consumers can follow simple steps to rebuild their credit without having to pay for the assistance of a purported professional. With all the scams and misinformation on the web and in the airwaves, D.I.Y. is often the best policy for credit repair.
Before you embark on efforts to improve your credit, you should first take the time to check your credit report. The first step to improving your credit is to understand your credit report. Copies of your credit report may be obtained without charge instantly online from www.annualcreditreport.com once per year. Once you have obtained a copy of your report, review it for any mistakes or incorrect information. Take the time to follow the dispute procedures included with the report to alert the credit reporting agency of any errors on your report. Be sure to follow up after the disputes are lodged to ensure they are removed timely.
The most difficult part of improving your credit is the most obvious. Reducing or eliminating the balances you may be carrying on revolving debt, in particular, will begin to increase your credit scores. Focus your largest debt reduction payments on the highest interest rate credit cards first while still maintaining regular, timely minimum payments on your other cards and loans.
This part of the process may require real sacrifice to reduce your debt load. If you are like many consumers, your credit card balances likely increased because you were spending more money than your income permitted. To reverse the trend of growing debt, you may have to consider significant lifestyle changes. Significant but simple changes might include committing to no longer eating out at restaurants or dropping a premium cable package. If your expenses are cut as low as possible already, you may need to find ways to increase your income through a second job, a small part-time home-based business, or even yard sales.
Bankruptcy may also be an option if the debt is beyond your ability to manage it. While bankruptcy is a negative mark on your credit, its impact must be balanced against other factors that can more significantly drag down your credit score, such as judgments, repossessions and an overwhelming debt to income ratio. Although the bankruptcy will be noted on the credit report, the debts discharged will show a zero balance.
Start Building Positive Credit History
Once your debt is under control either by pay paying it down or through a bankruptcy, you need a strategy for building a positive credit history. While the most important aspect of improving your credit score is ensuring that you maintain timely payments to your creditors, the following specific steps will also help to boost your credit.
Obtain an installment loan. Remember that the credit reporting agencies care less about how much you borrow and more about how well you perform. Therefore, focus on getting a small installment loan, perhaps even just $1000. Be sure that the loan is from a bank or credit union that will report your loan to the credit reporting agencies. You want your good payment history to be known!
Maintain approximately two to three credit cards. Be sure to keep your balances on each card below 30% of the available credit. As with the installment loans, it matters less how much available credit you have and more that you keep the balances consistently low.
Do not max out your credit cards, even if you pay them off each month. Ideally the credit reporting agencies will see that you are keeping your average balances low. While paying off your credit card in full each month is generally a good idea, you may find that your credit is not improving like you might otherwise think it would if each month you are maxing out your credit limits. This is because your credit cards may be reporting your balances to the credit bureaus in the middle of your billing cycle when the balances are high. To the credit bureaus, your cards may appear to always be maxed out even though you are paying them off each month.
Consider a secured credit card. If you cannot get a standard unsecured credit card, find a bank or credit union that issues secured credit cards. Secured credit cards are typically issued to applicants with damaged credit because the consumer is required to keep on deposit some amount of savings as collateral that will secure the available credit under the card.
Build relationships with your banker. The best place to obtain credit is often at the bank or credit union where you maintain your accounts. Take the time to get to know your local banker. He or she can give you insight into what loan products they have that will best help you improve your credit and that you might most easily qualify for.
The importance of maintaining good credit is often not realized until a person is turned down for a loan. While it is never too late to start improving your credit, taking the time to understand and manage your credit now may save you the frustration and delay of having to rebuild credit later.
Inheritances Received by Chapter 13 Debtors after Confirmation and after the Filing of the Case: Exactly Whose Money Is It?
Experienced debtor’s counsel understand the difficulty in managing clients through a three- to five-year Chapter 13 process. Life continues for debtors, of course, even after confirmation, and situations arise for debtors that do not always have a clear answer in the Bankruptcy Code. One such situation with particularly significant consequences is the Chapter 13 debtor’s postpetition receipt of an unexpected inheritance during his or her case.
The debtor’s obligations under those circumstances are relatively straightforward if the death that triggers the right to the inheritance occurs within 180 days of bankruptcy. Section 541(a) brings the inheritance within the definition of property of the estate, including
(A) by bequest, devise, or inheritance[.]
11 U.S.C. § 541(a)(5)(A) (Westlaw current through P.L. 113‑13 approved 6‑3‑13).
Further, Federal Rule of Bankruptcy Procedure 1007 requires that the debtor file a supplemental schedule disclosing any § 541(a)(5) assets acquired postpetition “within 14 days after the information comes to the debtor’s knowledge or within such further time the court may allow.” Fed. R. Bankr. P. 1007(h). If an inheritance is acquired within 180 days of bankruptcy, the best-interests-of-creditors test would be implicated and may require a change to the debtor’s plan. See In re Pittman, No. 08-08662-8-RDD, 2010 WL 2206919 (Bankr. E.D.N.C. May 27, 2010) (concluding that debtor’s refusal to modify plan to account for inheritance acquired within 180 days of the bankruptcy was ground for dismissal pursuant to trustee’s motion). The consequences of failing properly to address such an inheritance may be dire for the debtor. See In re Knupp, 461 B.R. 351 (Bankr. W.D. Va. 2011) (debtor’s failure to disclose inheritance received postpetition resulted in the revocation of the discharge).
More difficult questions may arise out of the Chapter 13 debtor’s receipt of an inheritance postconfirmation and after the first 180 days following the filing of a case. For purposes of this article, such an inheritance is referred to as a “Postconf/180 Inheritance.” In addition to § 541 detailed above, two other sections of the Bankruptcy Code are particularly relevant in the Postconf/180 Inheritance analysis: §§ 1306 and 1327.
The definition of property of the estate in a Chapter 13 case is broader than § 541′s definition of property of the estate. Pursuant to 11 U.S.C. § 1306, property of the estate in a Chapter 13 case includes the following, in addition to the property specified in § 541:
(1) all property of the kind specified in such section [§ 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first[.]
11 U.S.C. § 1306(a)(1). Section 1327 returns some property of the estate to the debtor upon confirmation of the plan: “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” Id. § 1327(b). Unless the plan or confirmation order states otherwise, “the property vesting in the debtor under subsection (b) of this section is free and clear of any claim or interest of any creditor provided for by the plan,” id. § 1327(c), and the debtor shall remain in possession of all property of the estate under § 1306(b).
PROPERTY OF THE ESTATE?
Once the inheritance issue is raised, courts have utilized varying approaches to decide how the inheritance impacts the debtor’s case. Is the asset property of the Chapter 13 bankruptcy estate?
In In re Carroll, No. 09‑01177‑8‑JRL, 2012 WL 5960077 (Bankr. E.D.N.C. Nov. 28, 2012) (slip copy), appeal granted, No. 13-1024 (4th Cir. filed Jan. 4, 2013), the debtor, having received a Postconf/180 Inheritance, argued that § 1306(a) brings in property from § 541 but does nothing to supersede or eliminate the 180-day time limitation mandated by the specific subsection, § 541(a)(5). In other words, the debtor asserted that § 1306(a) recognizes that all of the provisions found in § 541 control in Chapter 13 cases, including those clauses that include property within the estate as well as those clauses that exclude property from the estate.
The Chapter 13 Trustee urged reading § 541 together with § 1306(a). Section 1306(a) expands only the time restrictions set by § 541and brings into the bankruptcy estate property of the type defined in § 541(a), such as an inheritance, regardless of when that property was received, so long as it was received during the case. Judge Leonard found that the Trustee’s position was consistent with the majority of cases that have considered the issue. He held that an inheritance acquired after the 180-day period of § 541(a) is brought in to the property of the estate in a Chapter 13 case under § 1306(a)(1). See In re Zeitchic, No. 09-05821, 2011 WL 5909279 (Bankr. E.D.N.C. Sept. 23, 2011). The issue ultimately will be resolved by the U.S. Court of Appeals for the Fourth Circuit.
Of course the language of the Bankruptcy Code leaves room for different interpretations of what is property of the estate, but the legislative history suggests that a Postconf/180 Inheritance should be excluded from the estate in a Chapter 13 context. With the apparent intent not to penalize Chapter 13 debtors for attempting and failing at a reorganization, Congress amended § 348 in the Bankruptcy Reform Act of 1994 to make clear that property of the estate in a case converted in good faith from Chapter 13 to Chapter 7 is “property of the estate as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” 11 U.S.C. § 348. If such a provision would exclude a Postconf/180 Inheritance from property of the estate in a good-faith conversion to Chapter 7, it is difficult to reconcile why that same property would be appropriated to benefit creditors in a Chapter 13 plan. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy § 237.1, at ¶ 12 (4th ed. 2000 & Supp. 2006).
Considering, by analogy, how the issue of postpetition wages are addressed in § 1306, the structure of the section itself also arguably offers support that a Postconf/180 Inheritance may be excluded from property of the estate in a Chapter 13. In that section, Congress addressed the exclusion of postpetition wages found in § 541(a)(6) by specifically bringing them back into the Chapter 13 estate through § 1306(a)(2), which includes “earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.” 11 U.S.C. § 1306(a)(2). Had Congress intended to eliminate the inheritance limitations of § 541(a)(5) in a Chapter 13, it could have done so explicitly the same way it did for postpetition wages.
Another issue presented by the several sections of the Bankruptcy Code and corresponding Bankruptcy Rule provisions is whether the debtor is under any duty to disclose a Postconf/180 Inheritance. Upon the filing of the bankruptcy petition, the initial forms required to be filed by the debtor are dictated, in part, by Rule 1007(b), including the filing of a list of assets of the debtor. Thereafter, Rule 1007(h) addresses postpetition assets but speaks only of assets specifically acquired within 180 days of filing and that fall within the umbrella of § 541(a)(5), that is, property acquired “(A) by bequest, devise, or inheritance; (B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or (C) as a beneficiary of a life insurance policy or of a death benefit plan.” 11 U.S.C. § 541(a)(5).
Despite the lack of specific direction in the Bankruptcy Code, cases have found an ongoing duty of the debtor to disclose a Postconf/180 Inheritance or other change in financial circumstances by amending his or her schedules. For example, in addressing a Postconf/180 Inheritance, the court in In re Euerle, 70 B.R. 72 (Bankr. D.N.H. 1987), concluded that the debtor was obligated to advise the trustee and also to file a supplemental schedule listing the additional asset under Rule 1007(h) because the inheritance was property of the estate under §§ 541(a)(5) and 1306(a)(1). Likewise, after first finding that the debtor’s postconfirmation claim for underinsured motorist benefits was property of the estate, the court in In re Waldron, 536 F.3d 1239 (11th Cir. 2008), determined that the Chapter 13 debtor had an ongoing duty to disclose any changes in his financial circumstances.
In contrast, the court in In re Walsh, No. 07-60774, 2011 WL 2621018 (Bankr. S.D. Ga. June 15, 2011), specifically distinguished the Waldron, 536 F.3d 1239, case from post-180 day inheritance cases because Waldron dealt with a § 541(a)(1) asset, the underinsured motorist benefits, that is not restrained by the 180 day limitation and not a § 541(a)(5) asset, like an inheritance. In a different case dealing with a debtor who converted from Chapter 13 to Chapter 7 and who failed to disclose a postconfirmation inheritance received over 180 days after the petition, the court in In re Doetsch, No. 04-63998, 2007 WL 2702645 (Bankr. N.D.N.Y. Sept. 12, 2007), was not persuaded by the argument of the trustee that the nondisclosure amounted to bad faith and required the inclusion of the inheritance in property of the converted Chapter 7 estate.
Disclosure requirements may also be mandated by local rules or the terms of a confirmation order. Nonetheless, despite the lack of clear statutory requirements to compel disclosure, the safest course for the debtor will be to err on the side of disclosure to avoid subsequent actions to deny him or her a discharge and to be in a stronger position to argue against potential motions to expand the scope of property of the estate or to modify the plan.
Arguably the debtor’s receipt of a Postconf/180 Inheritance does not alter the terms of a confirmed plan, and the debtor may rely on res judicata and the binding effect of the plan under § 1327. Some courts, however, have held that a debtor under such circumstances is compelled to modify the plan because of the change in value of property of the estate. In re Zeitchic, No. 09‑05821‑8‑JRL, 2011 WL 5909279, at *1 (Bankr. E.D.N.C. Sept. 23, 2011) (denying the trustee’s motion to dismiss the debtor’s case for the debtor’s failure to propose a modified plan to include an inheritance, provided that the debtor file such a plan.).
Chapter 13 Trustees have advocated modification of the plan on the theory that the Postconf/180 Inheritance requires increased plan funding based on the best-interests-of-creditors test. The court in In re Nott, 269 B.R. 250 (Bankr. M.D. Fla. 2000), reasoned that the inheritance should be included in determining the amount that unsecured creditors would receive in a hypothetical Chapter 7 case when applying the best-interests-of-creditors test under § 1325(a)(4) to any modified plan proposed in the case. See also In re Moran, No. 08-60201-RLJ-13, 2012 WL 4464492 (Bankr. N.D. Tex. Sept. 25, 2102) (best-interests-of-creditors test measured as of the effective date of modified plan; includes postconfirmation inheritance).
Similarly, when faced with the Chapter 13 Trustee’s motion to modify the plan to include payment of the Postconf/180 Inheritance, the court in In re Tinney, No. 07‑42020‑JJR13, 2012 WL 2742457 (Bankr. N.D. Ala. July 9, 2012), concluded that the inheritance was property of the estate and constituted a sufficient change in circumstances to warrant plan modification. As the court reasoned, “[t]he benefits of chapter 13 come with a price tag, and as we see in the instant case, some risk.” Id. at *3. The court explained that the “privilege of retaining encumbered assets and imposing a payment plan” on creditors requires that the debtor, in exchange, commit postpetition wages and property during the plan. Id.
Other courts have determined that whether an inheritance is property of the estate is not relevant to a trustee’s motion to modify the debtor’s plan and have concluded that the plan modification may be mandated by other factors. The inheritance itself creates a substantial and unanticipated change in financial circumstances that justifies modification of the plan. In re DelConte, No. 07-30583, 2012 WL 1739788 (Bankr. E.D. Va. May 15, 2012); see also Ch. 13 Prac. & Proc. § 11B:3 (Westlaw database updated May 2013); 5A Bankr. Serv. L. Ed. § 50:788 (Westlaw database updated July 2013) (collecting cases).
Absent from some cases considering whether a Postconf/180 Inheritance should be included in the best-interests-of-creditors test for postconfirmation plan modifications is an explanation of why such a test would not be utilized in the context of a converted Chapter 7 case. Does consideration of the best-interests-of-creditors test in the context of a postconfirmation modification require that a court examine the impact of a conversion to a Chapter 7 case to satisfy the hypothetical liquidation required by § 1325(a)(4)? In a case converted to Chapter 7, the hypothetical liquidation test would clearly exclude a Postconf/180 Inheritance unless there was evidence of bad faith.
To the extent a party argues a Postconf/180 Inheritance is income that compels a plan modification under § 1329 and an increase in plan funding to satisfy the disposable income test requirements of § 1325(b), Hon. Keith Lundin noted in his treatise the awkwardness of the application of the disposable income test in such a context since it is triggered only upon objection by the “trustee or the holder of an allowed unsecured claim.” Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy § 255.1, at ¶ 7 (4th ed. 2000 & Supp. 2006). If the party moving under § 1329 for plan modification to include the inheritance is the trustee or an unsecured creditor, is the disposable income test even implicated? If it does apply, is an inheritance “projected” as required by § 1325(b) if it has already been received? Is it appropriate to reconsider what is projected disposable income when that analysis was previously completed at the original plan confirmation and no inheritance was projected at that time?
The varied approaches taken by the courts with respect to Postconf/180 Inheritances, the unexpected nature of the windfall, and competing policy considerations all combine to complicate the challenges such an event creates in the context of executing the Chapter 13 plan. Determining the impact of these considerations on a particular debtor’s case will depend largely on the facts of each case. With so much at stake, likely the best approach for debtors and their counsel will be to disclose the inheritance and try to negotiate a mutually satisfactory resolution among the parties while preserving their arguments should the issues ultimately come before the court.
As homeowners across the country are painfully aware, the U.S. housing bubble burst in 2006 as home prices plummeted for several years thereafter and even into 2013. Homeowners have watched helplessly as any equity they had built in their homes quickly diminished to the point that many homeowners now find their homes “underwater.” When a property is underwater, the debt or mortgage owed against the property exceeds the current market value of the property, leaving the homeowner feeling like more of a renter than owner. Some homeowners become effectively trapped in the property, unable to sell their home in a traditional fashion without bringing significant cash to the closing simply to pass clear title to the buyer.
Some options exist, though, for homeowners in this situation. Understanding the choices they have is the first step a homeowner should take before determining how to best solve the problem.
Abandon Ship and Walk Away
Although tempting, simply ceasing payments on a home mortgage in Virginia and walking away from the property is not typically a good idea. Under such a scenario, the home would ultimately be sold by the lender at foreclosure, and the mortgage borrower would be left owing whatever deficiency remained on the mortgage loan after the proceeds from the sale were applied to the outstanding debt. While in some states such deficiency claims may not be asserted against and collected from the homeowner and borrower, Virginians are not so lucky. If you walk away from your home and mortgage, expect to be sued for the deficiency after foreclosure.
Weather the Storm and Stick it Out
Although this choice provides the least immediate relief to the homeowner, staying in the property and remaining current on the mortgage loans will minimize the negative impact on your credit. If the property suits a homeowner and his or her family’s needs, it is often best to stick it out and wait for property values to eventually recover if such option is financially feasible.
Chart a New Course with a Loan Modification
The buzz words in home lending and mortgage servicing for the last several years have been “loan modifications.” A loan modification is simply an agreement whereby the mortgage lender changes the terms of the loan typically to reduce the monthly payment amount, interest rate, principal balance or any combination of the above. Unfortunately, the reality is that few homeowners successfully negotiate and finalize loan modifications with their mortgage lenders. The promise of generous and widespread loan modifications simply has not become a reality. With that said, interested homeowners should certainly consider the option.
The process is started by contacting your mortgage lender and requesting a loan modification application. Be prepared to spend a great deal of time preparing and submitting such an application as careful documentation of every aspect of the transaction is key. Also be prepared to deal with the frustrations of the loan modification review process. No doubt you will have to submit and resubmit your application and supporting documents several times as the mortgage companies have become notorious for losing entire client files during the process. Nonetheless, homeowners should treat the process like a full time job, stay organized and patient, and they will have the best chance at successfully negotiating a loan modification.
Navigate to Safe Harbors with Short Sales and Deeds in Lieu of Foreclosure
Two other popular options are a short sale or a deed in lieu of foreclosure. From the homeowner’s perspective, these are similar options in that the end result of each is the loss of the home. In a short sale, the home is sold to a third party for less than the balance due under the mortgage loans. In order to pass clear title to the new buyer, though, the mortgage lender must agree to release its lien for less than the full payoff of the loan. Therefore, the mortgage lender is an important party to the transaction. A deed in lieu is the transfer of the home directly to the mortgage lender who will thereafter resell the property to a third party without ever completing the foreclosure process. In both of these transactions, the key for the homeowner is to negotiate with the lender as to whether the remaining balance of the mortgage loan will be forgiven and to document the same by some written agreement.
Decommission the Ship with the Planned Surrender of the Home in a Bankruptcy
Surrendering a home through a bankruptcy provides protection to the homeowner from the potential deficiency claim that might otherwise be collected from him or her after the foreclosure of the property is completed. Depending on the homeowner’s income and assets, such a bankruptcy might take the form of either a Chapter 7 liquidation or Chapter 13 reorganization, but either form of bankruptcy will provide the ultimate relief for the client. Another benefit of surrendering a home in a bankruptcy is that the homeowner may continue to reside in the property without making any mortgage payments until the ultimate foreclosure sale, often months or even years before the final sale is completed.
Lighten the Load and Eliminate Second Mortgages and Equity Lines
For those homeowners with multiple mortgages that want to remain in their homes but cannot afford their mortgage payments, a Chapter 13 bankruptcy permits a homeowner to void and remove second mortgages and equity lines to the extent that they are completely unsecured. In other words, if the balance of the first mortgage exceeds the value of the home, then the homeowner may use the Chapter 13 process to strip off and void the remaining inferior mortgage liens against the property. Second mortgages and equity lines were heavily marketed by some lenders in the early 2000′s as property values soared but these loans have choked the finances of many homeowners during the recession of the last several years. The ability to completely eliminate such a mortgage payment from a homeowner’s budget is a unique and powerful tool in bankruptcy that will often make the difference in whether the home may be saved.
Right the Ship and Get Back on Course through a Chapter 13 Bankruptcy
Another important use of a Chapter 13 bankruptcy is to help a homeowner stop the foreclosure process and catch up any missed mortgage payments through a Court approved repayment plan. Although such a scenario would not permit the homeowner to reduce his or her mortgage payment or otherwise modify its terms, a Chapter 13 bankruptcy may offer the struggling borrower the second chance necessary to save the home and recover from some temporary personal financial setback like a job loss, demotion or unforeseen medical complication.
A family’s largest single investment is typically the home. Trying to keep a home that is significantly underwater can in some cases prolong a bad investment and lead to financial pressures in the family. Options are available to such homeowners but they should always seek out professional legal advice to guide them through the process in order to navigate the smoothest course out of the financial storm.