A Real Gem

A hardship discharge is available to debtors who are not current on their post petition support payments, even though such a delinquency would prevent a regular discharge.

I gathered this hitherto unknown bit from Henry Sommer in the panel on Marital Issues in Bankruptcy Saturday at the NACBA convention.

BAPCPA added to the prerequisites for a discharge a provision that the debtor must be current on post petition support payments. § 1328(a). Thanks to the prevailing economic conditions,  I’ve had far more occasions to seek a hardship for clients in the past two years than in all my prior practice.

Part of the appeal of a hardship discharge now comes from BAPCPA’s elimination of Chapter 20. When it was possible to get a discharge in a Chapter 13 immediately following a Chapter 7, conversion often seemed equally beneficial to the client.  Since 2005, I think harder about the choice.  By electing a hardship discharge, my client can file another 13 two years from the commencement of the case that is cratering.

This becomes especially important when the Chapter 13 filing was driven by non dischargeable taxes. The taxes will survive the hardship discharge, but by getting the hardship discharge, the debtor can file another Chapter 13 when their situation improves and avail themselves of the automatic stay.

Not having to worry about post petition support delinquencies makes the process just that much easier.  ‘Bout time something got easier.

Image courtesy of Wikipedia.

Got to file the 2010 tax return to get your Chapter 13 plan confirmed

But it isn’t due til April 15th and I usually get an extension, comes the reply.

Not this year. A case filed at any point in 2011 includes tax liability for 2010, since the tax is due as of the close of the tax year.   A Chapter 13 plan has to pay priority claims in full.  How can a Chapter 13 trustee assess feasibility or recommend confirmation if she doesn’t know what taxes may be due for 2010?

Practitioners should be aware of  §521(f) which allows the trustee to  require the debtor to provide the tax returns for the tax years ending  within the three years prior to the commencement of the case.

If the debtor uses a tax preparer, this can be your chance to request that  the preparer evaluate the adequacy of the client’s withholding for the current year.  It’s worth seeing if the number you’ve used in the means test for future taxes is consistent with any changes in the debtor’s income or in available deductions.  A decision to surrender a house will eliminate the mortgage interest deduction for this year.

Swimming upstream

Inflated value provided by client  in bankruptcy schedules comes back to bite debtor when Chapter 13 plan collapses.

The client’s case was driven by substantial taxes and a vehicle she just had to keep.  The asset mix included a timeshare which, even at the start of the recession, she valued at far more than I suspected it was worth.  I challenged the client’s number, but didn’t persist in the face of her assurance that her purchase was truly worth that.

Fast forward 2 years. The recession worsens, her income slides and she can’t make the Chapter 13 payments.  We’ve paid off the vehicle but put no dent in the taxes.  Seems like a good fact pattern for a hardship discharge;  discharge the unsecured debt now and  when things get better, she’ll be able to file another Chapter 13 and get the taxes paid in the subsequent case.

But, because of the d@*!* timeshare and its inflated value, we can’t show that creditors have gotten at least what they would have in a Chapter 7.

It’s not fun, disabusing your clients of their illusions about the value of their assets.  Whether it’s pride that keeps them from admitting that the thing isn’t worth nearly what they paid for it, or the desire to have some assets of value, they often cling to values that have no connection to the real world.

In this case, I didn’t swim up the stream of the client’s illusions to get a good value for something that is undoubtedly worthless.  I allowed myself to think the value won’t matter, since the plan is committed to paying taxes far larger than the value of  timeshare, even at the client’s number.  I gave in and my life and that of my client is more complicated as a result.

Never again.  Even old dogs can learn.

Image courtesy of Credit: California Department of Water Resources

This couple brought me their pending Chapter 13, fraught with trustee objections, inconsistencies, and omissions, you name it.  But the one rat’s nest  which better information, better attention to facts, or an amendment wouldn’t fix is the business lease.  Section 365(d) says the lease is terminated if not assumed within 120 days of the filing (or upon the earlier confirmation of a plan).

The clients diddled around signing and returning the representation agreement and retainer for my engagement, finally getting my office fully engaged Thursday after business hours.  Friday morning I sat down with the file and started work on the case by calculating when the 120 day period expired.  Found out that the period ran Saturday.  Another day or two, and the lease would have been rejected, dead and gone,  and the Code calling for surrender of the premises to the landlord.  Ouch.

Predictably for a troubled case, there wasn’t enough information to file the motion to assume the lease, so I filed a motion for an extension of time in which to do so.  This deadline can be extended once, for good cause.  Beyond that, thanks to BAPCPA, the landlord must consent to the extension.

Mercifully, I didn’t have to determine what effect dismissal of the case might have on this bankruptcy code provision:  could a  lease  terminated by terms of the Bankruptcy Code be revived if the Chapter 13 was dismissed?

Note that 365 has different rules and time periods for leases of residential real property and personal property.  Moral of the story:  identify executory contracts in your first meeting with the client and get the applicable deadlines on your calendar.

Reread one of the very first posts on this site on the initial interview with the client.

Image courtesy GregWiese.

As I looked over the petition, things got worse.  The schedules omitted the $5000 of 2009 taxes;  the attorney took 100% of his fee up front, and filed a plan that ignores the “best interests of creditors” test.  The I and J budget are inconsistent with the prior year income from the debtor’s business and raise questions of plan feasibility.

Then I got to Schedule C:  the attorney squandered a $26K exemption on a house that had no equity and left unprotected some $100K in business assets.  Yet, I find that the input for Schedule B was input on line by the debtors, and never, I bet, read, much less analyzed, by the attorney who got 100% of his fees up front.

And then I discovered that the business premises lease had not been assumed and the debtors were at risk of losing the site for their store.

I looked up the attorney’s web site.  He offered probate, criminal, personal injury, malpractice, and divorce, and, oh by the way, bankruptcy.

He clearly knew nothing about a Chapter 13 case.  At best,  I can hope he expected to learn some bankruptcy law in this case on the fly.   But it seems he will only learn something at this client’s expense.  Where this family will be if it loses the store that helps support the family, I don’t know.  If I take on the client, he may learn nothing.

Do it yourself bankruptcy education is expensive to the client.

These terms are alternative ways that the dividend to unsecured creditors in a Chapter 13 case is expressed in the plan.  In a percentage plan, the debtor promises a payout of a certain percent to creditors:  1% or 15% or 100%.

In a pot plan, the debtor commits to paying a certain sum into the plan, to be shared by creditors pro rata.  The exact fraction of each claim that is paid will be dependent on the sum of the  claims actually filed.  These are sometimes also referred to as “base” plans.

Chapter 13 is procedurally  quite variable and some districts have either required plans or ingrained custom that favors one approach over the other.

I tend to favor pot plans, since it provides certainty to the debtor as to the size of the financial commitment and it frees the debtor from reviewing filed proofs of claim. The debtor in a pot plan is indifferent how large any one claim is, since the only parties affected by an inflated claim are other creditors, whose slice of the pie shrinks with the filing of larger claims.

A percentage plan might be advantageous if you had lots of very old claims where a large number of claims could be expected to go unfiled.  If you had an unliquidated tort claim, you probably wouldn’t choose a percentage plan, where the debtor has a real stake in the size of the damages.

So, now you can add “pot plan” and “percentage plan” to your bankruptcy vocabulary.

Their attorney’s approach reminded me of the Greek story of the brigand Procrustes, who waylaid travelers, offered them the “hospitality” of his home, then racked them (or lopped off limbs) to fit his bed.  These people were going to fit in 13, in their attorney’s view, despite their protests it wouldn’t work.

They told me of medical expenses omitted from the budget, surgery planned for the near term, and fewer employment hours on the horizon.  The payments, a stretch at this point, would be unsustainable.

My thought:  do they need a discharge of the tax debt?  is there an administrative remedy within the IRS that would protect them?  Yes, said the enrolled agent I called up.  With a scan of the couple’s facts, he felt confident that he could get their case tagged as currently uncollectable.

By opening up to non bankruptcy solutions, I think I got a solution that will work for the clients better than the rote selection of Chapter 13.  Convert to 7, discharge what’s dischargeable, then approach the IRS.

There isn’t a non bankruptcy alternative for every situation, much as our clients wish, but we need to scan the horizon for alternatives before advising the client.

Image © Marie-Lan Nguyen / Wikimedia Commons