Bankruptcy Filing Fees Increase

The Judicial Conference has announced that bankruptcy filing fees will increase for news cases filed on or after June 1, 2014. Most relevant to my clients will be Chapter 7 and Chapter 13 fees each going up by $29, but Chapter 11 fees will go up by a whopping $504.

The new bankruptcy filing fees will be:

  • Chapter 7 filing fees will increase from $306 to $335
  • Chapter 13 filing fees will increase from $281 to $310
  • Chapter 11 filing fees will increase from to $1,213 to $1,717
  • Adversary proceeding filing fees will increase from $293 to $350 (but will still be waived if the debtor is the plaintiff).

Chapter 12 fees will be $275 (up from $246), and Chapter 9 and 15 fees will be $1,717 (up from $1,213), just like Chapter 11.

If you’re preparing to file a bankruptcy case and are waiting until June for a specific reason, then a $29 increase probably won’t make that big a difference.  But if not, this increase may give you another reason not to delay.

Five Questions to Ask a Bankruptcy Lawyer before Signing an Agreement

Every bankruptcy attorney has a different approach to learning more about you. I personally don’t ask potential clients to fill out a questionnaire; I prefer to get that information through face to face conversation. And I don’t ask you to bring in a credit report; pulling that information is part of my due diligence.

Regardless of style, every bankruptcy lawyer is thinking about certain questions during an initial consultation: How helpful will filing a bankruptcy case be to this person? Which would be more helpful: a Chapter 7 case or a Chapter 13 case? Are there any red flags or complications?

As the potential client, you should be asking questions, too.

Maybe you’re “interviewing” lawyers to find the best one. But you also need to know what’s in store for you if you decide to hire this person. With that in mind, here are five questions to ask a bankruptcy lawyer before signing an agreement:

  1. Does this person make me feel comfortable? This is one you ask yourself, not the lawyer, but it’s the most important question. You’re putting a great deal of trust in this person, and you’re counting on him or her to accomplish something very important. Does he or she seem competent? Does he or she take the time to answer your questions? If it feels as if you might receive insufficient personal attention, or if the lawyer seems mostly interested in his or her own pocketbook, maybe you should look elsewhere.
  2. Is [thing that I’m worried about] going to complicate my case? Everyone’s situation is unique, and everyone has some detail that they’re concerned about. Most of the time, there’s nothing to worry about. Other times, the thing a client thinks is no big deal actually has a major impact. There’s no way to know unless you ask. Believe me, your lawyer wants to know about potential problems, and you’ll be happier with the outcome if he or she does.
  3. What’s the most likely outcome, and what’s the worst case scenario? Your lawyer wants your case to go smoothly. Unfortunately, not every case can go smoothly. Sometimes there are potential complications that might (or might not) arise. Other times there are complications that are virtually certain to arise. Find out what he or she thinks will probably occur, but also find out what he or thinks is a worst case scenario, and how likely that scenario is.
  4. What would happen if I filed a different chapter instead? This question gets to the heart of what the lawyer wants to accomplish for you in your case. Why is he or she recommending Chapter 13 instead of Chapter 7, or vice-versa? This question will also help you understand how bankruptcy law works and how it will affect you.
  5. What are the factors on which you based your quoted fee? It’s perfectly reasonable for you to inquire into quoted fees. I don’t recommend choosing a lawyer based solely on price: You get what you pay for after all, and I think comfort with your lawyer is more important (see question #1), but fees do matter. If a lawyer is quoting you more than he or she might quote a different client, it should be due to additional work he or she thinks your case will require, and that’s something you want to know about.

There you have it: Five questions to ask a bankruptcy lawyer before signing an agreement. You might notice that I didn’t include any questions about who will appear at your Meeting of Creditors or about the impact of a case on your credit score. Those questions are important, and you should certainly ask them. However, these five questions listed above get to the heart of the lawyer’s representation of you.

The Automatic Stay (Bankruptcy Basics)

The Automatic Stay is one of the basic concepts of bankruptcy law and is the fundamental protection that filing a case brings you. It is codified in Section 362 of the Bankruptcy Code.

The moment you file your case, your creditors are “stayed” from taking any action against you. That means no debt collection attempts, no foreclosures, no repossessions, no lawsuits, no garnishments, no levies, no letters or phone calls.

The Automatic Stay last for the duration of your case. For people filing Chapter 7 cases, the Automatic Stay is what stops lawsuits or wage garnishments that may be pending against you until you receive a discharge order at the end of your case.

In Chapter 13 cases, the Automatic Stay remains in effect for the entire five years of a typical plan. The Automatic Stay is what prevents a mortgage holder from proceeding with foreclosure actions while you are using your Chapter 13 plan to catch up on mortgage arrears. It is what prevents the holder of a student loan from trying to collect any more than what they are receiving from the trustee.

If a creditor violates the Automatic Stay, it can be subject to sanctions by the Bankruptcy Court, and an injured debtor can recover actual damages, attorney fees, and punitive damages.

Secured creditors may seek relief from the Automatic Stay, but only if they are not receiving payments that “adequately protect” their interest in the property.

Additionally, if you have had another bankruptcy case dismissed in the prior year, the Automatic Stay in the subsequent case only last for a month unless you obtain an order from the court extending it.

A few critical things to know about the Automatic Stay:

  • It only comes into effect when you file your case with the court, so give your lawyer enough advance time to prepare your case.
  • Notice to your creditors isn’t necessary for it to take effect (it is automatic), but in order to sue a creditor for violating it, the violation must have been willful (i.e. they had notice but committed the violation anyway).
  • It only protects you from collection attempts on debts incurred before you case is filed.  For debts incurred later, you’re fair game to debt collectors.
  • Once your case is closed, the Automatic Stay ends, so if you have non-dischargeable debts (e.g. taxes, mortgage/car loan arrears, or student loans), consider Chapter 13.

As always, there are qualifications and nuances to all of the above, and your situation is unique.  Be sure to talk to a lawyer if you’re considering a bankruptcy case.

Law v. Siegel: Debtor’s Homestead Exemption not Surchargeable for Misconduct, Holds Unanimous Supreme Court

Stephen Law filed a Chapter 7 bankruptcy case in the Central District of California, valuing his Hacienda Heights home at approximately $363,000. He listed two liens on the property; one held by Washington Mutual for approximately $147,000, and another for some $157,000 held by “Lin’s Mortgage.” The remaining equity (approximately $59,000), he protected from liquidation under California’s $75,000 homestead exemption. The Chapter 7 Trustee (Siegel) challenged the second lien, with the Bankruptcy Court ultimately determining that it was a fiction created by Law to preserve the equity in his home.

As a result, there was in fact $216,000 equity in the house. Ordinarily, after Law subtracted $75,000 for his homestead exemption, there would only have been $141,000 available to the Trustee upon liquidation. However, because the Trustee had incurred over $500,000 in lawyer fees, the Trustee sought to have Law’s homestead exemption “surcharged” to defray those fees. The Bankruptcy Court granted the motion, and first the Ninth Circuit BAP, then the Ninth Circuit, affirmed.

On March 4, 2014, in a unanimous opinion written by Justice Scalia, the Supreme Court overturned the decision. (Law v Siegel, Docket No. 12-5196) While acknowledging that a Bankruptcy Court has “inherent power to sanction abusive litigation practices”, the Court also pointed out that such general permission must yield to a more specific prohibition found elsewhere. Here, Section 522 of the Bankruptcy Code expressly entitled Law to his $75,000 exemption, and protected that amount from use for any administrative expense.

Clearly Law engaged in reprehensible misconduct.  And, as the Court noted, the decision forces the Trustee to shoulder a heavy financial burden. However, bankruptcy courts are not without other options: they can deny a dishonest debtor a discharge, and can sanction a dishonest debtor (with such sanctions surviving the bankruptcy case), but they can’t do what was done here. Thus, the decision represents a victory for debtors insofar as it restrains a bankruptcy court’s punitive powers within limits set by the Code.

The Difference Between Chapter 7 and Chapter 13 Bankruptcy

What is the difference between Chapter 7 and Chapter 13 Bankruptcy? I think of it this way: There are two main reasons why a person would file a case with the Bankruptcy Court. One, to get a discharge of debts. Two, to get protection from your creditors. Chapter 7 focuses on the discharge, while Chapter 13 focuses on the protection.

Chapter 7 Bankruptcy: Focus on Discharge

Chapter 7 bankruptcy is usually a fast process. You file your case, a month later you go to a hearing, and (usually) two months after that, you receive a “Discharge Order” from the Court. That Order “discharges” some kinds of debts. Unsecured debts (credit cards, personal loans, medical bills, deficiencies on repossessed cars and post-foreclosure second mortgages) are all discharged. Your legal obligation to repay is gone, and the creditor’s right to try to collect is gone.

With secured debts (mortgages, car loans), you basically have the choice of either keeping the thing & keeping the debt or getting rid of the thing & getting rid of the debt. Other kinds of debts (recent income taxes, government fines and penalties, support arrears) are entitled to “priority.” They are not discharged; at the end of a Chapter 7 case, you still owe them. A fourth category is student loans. They should be general unsecured debt, but Congress has given them special treatment. At the end of a Chapter 7 case, you still owe them too.

Chapter 7 is “means tested.” The simplified explanation of that is, if you made too much money in the past six months, you have to go to Chapter 13 instead. Also, Chapter 7 is “liquidation bankruptcy.” If you have assets over the exemption limits, a Chapter 7 Trustee is empowered to liquidate those assets and distribute the proceeds to your creditors.

In a nutshell, Chapter 7 is best for people with modest incomes, assets below the exemption limits, and whose debts are mostly dischargeable.

Chapter 13 Bankruptcy: Focus on Protection

Chapter 13 bankruptcy lasts for 5 years, and that’s a good thing. The moment you file your case, something comes into effect called the “automatic stay.” Your creditors are stayed from trying to collect on any debt. You then present the Court with a Plan. That Plan says you’re going to pay a certain amount of money to a Trustee per month for sixty months. He or she then turns around and distributes that money to your creditors.

The Trustee takes a cut for administering the estate. He or she will pay your lawyer. Then there are certain debts that need to be paid in full, including car loans, taxes, and mortgage arrears. Everyone else (credit cards, medical bills, etc.) get what’s left over. Whether that amounts to 1% or 100% of what they’re owed largely depends on your income and your assets.

So why would anyone file Chapter 13 instead of Chapter 7, when it lasts for years and only gets you a partial discharge? One reason might be that you don’t pass the Chapter 7 Means Test. Another might be that you have assets over the exemption limits, and don’t want a Chapter 7 trustee liquidating them.

One of the traditional applications for Chapter 13 bankruptcy is to stop foreclosure. If you’re six months behind on your mortgage and are about to get foreclosed on, Chapter 7 doesn’t help you very much. You’d go through the process, and three months later, you’d still be behind on your mortgage. In Chapter 13, you use your five-year plan to get caught up on your mortgage arrears. And since you’re not making payments on your credit cards, you can afford to resume making the ongoing mortgage payments. Meanwhile, since you’re under the Court’s protection, the lender can’t move forward with the foreclosure.

There are many other things that can be accomplished in Chapter 13 cases. One that is increasingly common in my practice is that people are using Chapter 13 to get a five-year break from paying their student loans. Other things that can be accomplished include “stripping” second mortgages, “cramming down” car loans, and paying off tax debt before a lien can be imposed.

Your Situation Is Unique, So Talk to a Lawyer

So that, in broad strokes, is the difference between Chapter 7 and Chapter 13 Bankruptcy. Of course, there are caveats and exceptions and qualifications to all of the above. It is only intended to give you a general idea of the two types of cases. Your situation is unique, and you should sit down and talk with a bankruptcy lawyer to determine what type of case is best for you.

In Chapter 13, §1306(a) Trumps 180-Day Rule on Inheritances –9th Circ BAP (Dale)

On February 5, 2014, the 9th Circuit Bankruptcy Appellate Panel (“BAP”) issued an opinion in Dale v. Maney (In re Dale, 11-30579), holding that an inheritance received by the debtor in a Chapter 13 case more than 180 days after the filing of the case but before confirmation of the plan is property of the estate.

Mr. & Mrs. Dale filed their Chapter 13 bankruptcy case in October 2011. In August 2012, before a plan was confirmed, Mr. Dale’s mother passed away, leaving him $30,000. Maney, the trustee, demanded turnover of the funds. The Dales refused, the trustee moved for dismissal. The bankruptcy court granted the motion, and the Dales appealed.

When you file a case with the bankruptcy court, something is created called the “bankruptcy estate,” which includes everything you owe and everything you own, and a trustee is appointed to oversee that estate. You can “exempt” certain items of property (for example, in California, we have a $26,925.00 “wildcard” exemption, as well as special exemptions for specific categories such as personal effects and retirement accounts), but any assets above those exemption limits are part of the bankruptcy estate. A Chapter 7 trustee can liquidate those assets, while a Chapter 13 trustee can demand that you pay that much more into your plan.

In Chapter 7 cases, property of the estate is fixed at the time of filing. However, § 541(a)(5) of the Bankruptcy Code provides that any “bequest, devise, or inheritance” received by the debtor within 180 days of the filing of the case becomes property of the estate. Additionally, In Chapter 13 cases, property of the types specified in §541 that the debtor acquires during the case continue to become property of the estate (see § 1306(a)(1)).  (That includes not just inheritances but also wages and rents collected.)

In deciding Dale, the BAP looked to the language of § 1306(a), which says that those types of property specified by § 541 continue to become property of the estate, even if acquired post-filing. It doesn’t say anything about the 180-day restriction. Therefore the Court held that § 1306(a), which is specific to Chapter 13 and which is intended to expand the property of the estate, overrides § 541’s 180-day time restriction.

The decision puts the Ninth Circuit in line with the Fourth Circuit, but leaves open the question of whether an inheritance received after the confirmation of the plan would similarly be property of the estate.

9th Circuit: Funds Offset by Checks in Transit Are Subject to §542(a) Turnover (Henson)

Ninth Circuit on Bankruptcy Trustee’s §542(a) Turnover Power:

On January 9, 2014, the Ninth Circuit issued an opinion in Shapiro v. Henson (In re Henson), where the debtor had filed her Chapter 7 case before over $6,000 in outstanding checks had cleared.  The trustee sought turnover of the funds that were in the debtor’s checking account as of the petition date, which were not exempted.  The bankruptcy court denied the turnover request because Ms Henson was not in possession of the funds at the time of the request.  The district court affirmed, and the trustee appealed to the Ninth Circuit.

11 U.S.C. § 542(a) provides: “[A]n entity . . . in possession, custody, or control, during the case, of [property of the estate, or exempt property], shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”

In an opinion by Judge N. Randy Smith, the Court held that the phrase “possession … during the case” contemplates possession at any time during the case, and that the phrase “or the value of such property” indicated intent by Congress to provide an alternative if a debtor no longer possessed a specific item of property (i.e. if it had been sold).  The Court also looked to historical practice in turnover actions, where present possession was not always necessary, and also to the practical consideration that if possession were required, a debtor could easily frustrate the trustee’s turnover powers by simply transferring the property.

The opinion puts the Ninth Circuit at odds with the Eighth Circuit, which held the contrary position in In re Pyatt (486 F.3d 423).

The upshot to people considering filing a bankruptcy case: Funds in your bank account at the time of filing are property of the estate, even if offset by checks in transit, and (in the 9th Circuit, at least), a chapter 7 trustee may demand turnover of those funds even if you no longer possess them.

You Can’t “File Bankruptcy On” Just Some Debts

Every now and then, a potential client says to me in reference to some debt or other, “I don’t want to include that in my bankruptcy.” Maybe it’s an amount owe to a doctor they like, or maybe to a family member. Maybe it’s a credit card they’ve had for ages and that bears a picture of their cat.

What I have to tell people at this point is that filing a case with the Bankruptcy Court isn’t a matter of “including” or “not including” specific debts. You don’t file bankruptcy “on” specific debts and “not on” others.

The Bankruptcy Code is very clear on this topic. When you file your case with the Court, you must provide a list of your creditors. That list must include the names and addresses of everybody to whom you owe even a penny. The law then puts your creditors into categories, based on the nature of the debt. For example, the debts in the “general unsecured” category (e.g. credit cards and medical bills) are subject to discharge. On the other hand, recent taxes go into the category of debts that are not subject to discharge.

The reason for this is that the Court can’t abide by similarly situated people being treated differently. Imagine you had five credit cards, and paid 100% to one, but nothing to the other four. One bank got its money, but the other four got the shaft, and the Court doesn’t like that. In order to preserve basic fairness, they all have to be treated the same.

So when you file your case, you have to list everybody. And when you get your Discharge Order, It applies to everybody. There isn’t any personal discretion involved.

What’s more, the reason why you’re going through all of this is to get rid of your debts. Why keep any of them? Even if it didn’t violate fairness principles, the fresh start, the very thing you’re trying to accomplish, would be impaired.

Bankruptcy Around the Web: September 2013

Here are some of the interesting and informative blog posts from bankruptcy lawyers around the country for this month:

  • Pittsburgh lawyer Shawn N. Wright has a blog post advocating for a “special classification” of student loans in Chapter 13 (i.e. continuing to pay them outside the plan), advice I agree with, but only IF you can afford to (and that’s a big if for most Chapter 13 debtors).
  • John Orcutt in North Carolina has an interesting post about the treatment of gambling debts in bankruptcy.  The upshot?  It’s dischargeable, but watch out for intent to pay at the time it was incurred.
  • At her own website, Cathy Moran has a blog post about a 9th Circuit decision holding that after a successful loan mod trial, mortgage lenders have to make the mod permanent or explain why not.  Meanwhile, over at the Bankruptcy Law Network, she has an interesting post about tax liens after Chapter 7 cases.

 

 

In re Flores: Ninth Circuit Overturns Kagenveama

On August 29, 2013, the Ninth Circuit issued an en banc opinion in the case of In re Flores, holding that above-median income Chapter 13 debtors only qualify for five-year plans, even if the Means Test shows a negative disposable income. This decision overturns In re Kagenveama (541 F.3d 868, 9th Cir., 2008), which had held that three-year plans were permissible in such cases.

When you file a Chapter 13 bankruptcy case, one of the documents you must file is the “Chapter 13 Means Test.” You add all the money you’ve earned over the past six complete months and divide by six. If that number is below the median household income in your state for a household of your size, you are a “below-median debtor,” and you qualify for a three-year plan. (A three-year plan may not be in your best interest, but at least you qualify for one.)

If the six-month average is above your state’s median for your household size, things get more complicated. You deduct standard amounts that the government thinks people nationwide spend on certain necessities. You deduct state standard amounts for other necessities. You deduct amounts that are specific to your situation, such as taxes, health insurance, payments on priority and secured debts, and so forth.

When you get to the end of the analysis, after all the deductions are accounted for, the resulting number is your Disposable Monthly Income (DMI). That number is the minimum amount that, based on this analysis, your unsecured creditors must receive per month through your plan. (There are other factors that also affect how much you pay your unsecured creditors, such as your assets and your anticipated future income.)

Under Kagenveama, if that number was negative (i.e. your allowed expenses exceeded your six-month average income), you could qualify for a three-year plan, despite having above-median income.

But in 2010, the U.S. Supreme Court decided the case of Hamilton v Lanning (130 S. Ct. 2464, 2010), which rejected a “mechanical approach“ to payments to unsecured creditors; bankruptcy courts were required to take into consideration “known or virtually certain changes” in a debtor’s income. (Lanning dealt with a debtor who, in the six-month period, had received a bonus she would never receive again, but such a “known or virtually certain change” could also be a layoff or a promotion.)

In Flores, the Court held that Kagenveama was “clearly irreconcilable” with the rationale of Lanning. True, an above-median debtor with a negative DMI would probably be paying nearly nothing to her unsecured creditors. However, with the forward-looking, non-mechanical approach dictated by Lanning, such a debtor has to be kept in her plan for five years due to the possibility that she might experience an increase in income, which would enable her to pay more.

Flores isn’t a great decision for debtors, but Lanning was, and the result in Flores is necessary to maintain logical consistency. Moreover, I think its impact will be somewhat small since (in my experience) relatively few above-median debtors with negative DMI would actually benefit from a shorter plan.  And what’s more, if a debtor is paying 100% to her unsecured creditors, a less than 60-month plan will still be available.