CHAPTER 13 BASICS. ©
By: John Gustafson, Chapter 13Trustee.
A. Chapter 13 Eligibility And Jurisdictional Issues.
1. Why Are Chapter 13s Filed?
Chapter 13 is used primarily for debtors who have: 1) fallen behind on their mortgages; 2) sought out an attorney at a time when their debts are still manageable; 3) a significant debt which would not be discharged in a Chapter 7, but would be discharged in a Chapter 13; 4) filed/received a discharge in a Chapter 7 more than four years ago but less than eight years ago; 5) a less-than-70% Chapter 13 within the last 6 years; or, 6) an aversion to filing "bankruptcy".
The biggest incentive to file a Chapter 13 is that it allows debtors to retain their property while making payments over time under the terms of their Chapter 13 Plan. This advantage is most often used when there is a problem with a mortgage arrearage and an imminent foreclosure. Often, lenders will not accept payments, or work out a payment plan, after a foreclosure is commenced. Filing a Chapter 13 can force the mortgage lender to accept payments on the arrearage over time, and the automatic stay stops the foreclosure. Stopping a foreclosure is a primary goal in most Chapter 13 filings.
Even absent a foreclosure, where there is sufficient disposable income, and there is equity in the debtor's residence, Chapter 13 can be the best and most comprehensive solution for the debtor. In other situations, a client who really needs bankruptcy relief may simply refuse to file "bankruptcy" for moral or religious reasons. In cases where a bankruptcy is needed but the client refuses to consider a Chapter 7, a "court supervised repayment plan" may be something this type of client can live with, even if Chapter 13 is not otherwise ideally suited to their situation.
BAPCPA has added a new reason to file Chapter 13 – above the median debtors with primarily consumer debts who can repay as little as $166.67 per month, or 25% of their unsecured debts, under the “means test” will be presumptively ineligible for relief under Chapter 7 under Section 707(b)(2) of the Bankruptcy Code.
In addition, the language of 11 U.S.C. §707(b) has changed the requirement for dismissal of a Chapter 7 case from the case being a “substantial abuse” of the provisions of Chapter 7, to simply an “abuse” of those provisions. This lower standard applies to debtors with primarily consumer debts who are below the median income level, as well as those with income above the median.
The Office of the United States Trustee brings motions to dismiss Chapter 7 cases under Section 707(b)(3) – the general “abuse” provision - in cases where no presumption of abuse exists under Section 707(b)(1) and the B22A “Means Test”. See generally, In re Haar, 360 B.R. 759 (Bankr. N.D. Ohio 2007); In re Mestemaker, 359 B.R. 849; 2007 (Bankr. N.D. Ohio 2007).
2. Section 109(a) And Venue.
Section 109(a) is applicable to all bankruptcy cases:
(a) Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.
Thus, to be eligible for bankruptcy protection under Chapter 13, an individual must meet one of the requirements set forth in 11 U.S.C. §109(a).
For venue purposes, under 28 U.S.C. Section 1408(1), a bankruptcy case can be commenced in the district in which the “domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district”….
The United States Trustee, using the Sixth Circuit Court of Appeals holding in Thompson v. Greenwood, 507 F.3d 416 (6th Cir. 2008), has been seeking dismissal, based on improper venue, for cases where Michigan residents who live near the state line have filed in Toledo. The most common exception to the venue restriction for Michigan residents who file in Ohio is ownership of real estate in Ohio.
3. Eligibility Under Section 109(e)
At the beginning of Section 109(e)’s list of requirements for eligibility to file a bankruptcy case under Chapter 13 is the statement that the debtor must be an “individual”. See, Section 109(e). The Bankruptcy Code defines the term “person” as an “individual, partnership, and corporation”. See, 11 U.S.C. §101(41). Inherent in this definition is the idea that an “individual” is a flesh and blood human being – as distinguished from business entities like a “partnership and corporation”. Accordingly, only real human beings are eligible to file a bankruptcy under Chapter 13.
Section 109(e) sets forth additional specific eligibility requirements for relief under Chapter 13, including a limitation on the amount of non-contingent, liquidated secured and unsecured debt that debtors can have at the time of the filing of the petition. These amounts are indexed to inflation [11 U.S.C. §104(b)(1)], and were most recently raised on April 1, 2007. Thus, 11 U.S.C. §109(e) currently provides, in pertinent part:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $336,900 and noncontingent, liquidated, secured debts of less than $1,010,650, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $336,900 and noncontingent, liquidated, secured debts of less than $1,010,650 may be a debtor under chapter 13 of this title.
Chapter 13 jurisdictional issues arise most often with the unsecured debt limits.
The Chapter 13 Trustee moves to dismiss cases where the debtor(s) appear to be over the debt limits based upon the case Matter of Pearson, 773 F.2d 751, 756 (6th Cir. 1985), in which the Sixth Circuit Court of Appeals stated: “. . . a court should rely primarily upon the debtor's schedules checking only to see if the schedules were made in good faith on the theory that section 109(e) considers debts as they exist at the time of filing, not after a hearing. We adhere to this construction as more harmonious with congressional intent and with the statutory scheme. First, section 109(e) provides that the eligibility computation is based on the date of filing the petition; it states nothing about computing eligibility after a hearing on the merits of the claims.” See also, In re Holland, 293 B.R. 425, 428-429 (Bankr. N.D. Ohio 2002).
The Ninth Circuit adopted the Pearson test, and stated it to be: “We now simply and explicitly state the rule for determining Chapter 13 eligibility under §109(e) to be that eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith.” In re Scovis, 249 F.3d 975, 982 (9th Cir. 2001).
While the debtors are, to a large extent, bound by what they have filed with the court, Chapter 13 Trustees can also look at the reality of the debts, not just what the debtors claim in their schedules.
For example, just asserting that a debt is “contingent” may not defeat a Chapter 13 Trustee’s motion to dismiss based on the jurisdictional dollar limits. "For purposes of §109(e), a contingent debt may be defined as "one for which the debtor will be called upon to pay only upon the occurrence of happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor." In re Martz, 293 B.R. 490 (Bankr. N.D. Ohio 2002), citing, In re Fostvedt, 823 F.2d 305, 206 (9th Cir. 1987); see also, In re Mazzeo, 131 F.3d 295, 302-305 (2nd Cir. 1997). A debt is not rendered contingent merely because it is a jointly owed debt. In re Martz, 293 B.R. 409, 411 (Bankr. N.D. Ohio 2002).
In addition, without regard to the nature of the underlying cause of action, if a debt has been reduced to a pre-petition judgment against the debtor, that debt is noncontingent and is counted toward the debt limit. See, In re Hammers, 988 F.2d 32 (5th Cir. 1993)(tax court judgment fixes claim); In re Miloszar, 238 B.R. 266 (D.N.J. 1999)(default judgment is a noncontingent debt); In re Monroe, 282 B.R. 219, 223 (Bankr. D. Ariz. 2002); In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio 1998); In re Mannor, 175 B.R. 639 ( Bankr. E.D. Pa. Mich. 1994)(pre-petition judgment against debtor precluded argument that debt was owed by a corporation and should be excluded).
Similarly, a security interest in the assets of another entity (other than the debtor) does not make the debt secured as to the debtor. See, In re Maxfield, 159 B.R. 587 (Bankr. D. Idaho 1993); In re Lane, 215 B.R. 810 (Bankr. E.D. Va. 1997).
Under bankruptcy case law, guaranteed corporate debt that is in default must be included as unsecured debt in calculating the guarantor’s eligibility for Chapter 13. See, In re Tabor, 232 B.R. 85, 90 (Bankr. N.D. Ohio 1999); In re Robertson, 105 B.R. 504, 508 (Bankr. D. Minn. 1989); In re Pulliam, 90 B.R. 241 (Bktcy. N.D. Tex. 1988)(corporate debt guaranteed at the date of filing is noncontingent and must be included in the calculation of the monetary limitations); In re Williams, 51 B.R. 249 (Bktcy. S.D. Ind. 1984); DeKalb Bank v. Flaherty, 10 B.R. 118 (N.D. Ill. 1981); In re Wilson, 9 B.R. 723 (Bktcy. E.D.N.Y. 1981).
Similarly, “Unsecured claims for taxes, claims by employees of a debtor engaged in business, and administrative expenses are examples of priority claims that would be counted as unsecured debts. Priority tax claims typically are not contingent for purposes of §109(e) because, with respect to prepetition years, all of the acts and events necessary to trigger the debtor’s liability have occurred. Most reported decisions also find that prepetition tax debts are liquidated for elegibilty purposes in the amount claimed by the IRS.” Keith M. Lundin, 1 Chapter 13 Bankruptcy, 3rd Ed. At 17-5 to 17-6.
A recent decision by a bankruptcy court in Kansas held that where a husband and wife have separate debts, for Section 109(e) eligibility purposes the debts are only counted to the extent each debtor is liable for each debt (even if the debtors file a joint petition). See, In re Werts, 410 B.R. 677 (Bankr. D. Kan. 2009). Under Werts, if a husband had $100,000 in debts that he was solely liable on, and the wife had $100,000 that she was solely liable on, and the couple had $200,000 in joint debts, they would still be eligible to file a joint Chapter 13 case, because each would have debts of $300,000, the total of the debt each was liable on, not $400,000, the total of both the husband and the wife’s debts. Werts is the first decision to address this issue, and it is unclear whether the decision will be accepted by other courts.
Note that if a debtor has debts greater than those allowed under Chapter 13, Chapter 11 is available.
4. Filings Prohibited Under Section 109(g).
Section 109(g) prohibits any debtor from filing if they have been a debtor in a bankruptcy case in the previous 180 days and: 1) the case was dismissed “for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case”; or 2) the debtor voluntarily dismissed the bankruptcy case after a motion for relief from stay was filed. This provision is intended to prevent serial filings, and provides a window for creditors to complete liquidation of their security before the debtor can refile a bankruptcy case.
Cases have held that the order dismissing the case does not have to explicitly state that dismissal is under Section 109(g) – the issue can be raised if a subsequent case is filed within 180 days. But, in the Northern District of Ohio, the Chapter 13 Trustee generally provides specific notice if dismissal is being sought under Section 109(g). Or, in some cases where there is questionable conduct, the debtor(s) and the Chapter 13 Trustee may stipulate that if the case is dismissed, it will be dismissed under Section 109(g), prohibiting any refiling for 180 days.
B. Procedural Matters.
1. Debt Counseling Requirement.
Because Section 109 is captioned “Who may be a debtor”, it appears that §109(h) actually sets up debt counseling as a jurisdictional requirement for debtors.
Under § 521(b) and Bankruptcy Rule 1007(b)(3) and (c), either a certificate from the approved credit counseling agency attesting to the fact that the debtor has received the required counseling, a certification under §109(h)(3), or a request for a determination under § 109(h)(4) must be filed with an individual’s voluntary petition.
The case law indicates that it will be very difficult to meet the requirements to obtain an extension of time, allowing the debtor to receive the credit counseling post-petition. The courts are emphasizing that each element of the statute must be met, in order to obtain an extension.
2. Payment Advices.
In a Chapter 13 bankruptcy, a debtor must file with the Court –
(6) Copies of all “pay advices” (pay stubs) that the debtor has received within 60 days before the date of filing;
If a debtor fails to file the pay advices within 45 days (plus up to an additional 45 days if granted by the Court) after the date of the filing of the petition, the case is “automatically dismissed” on the 46th day under Section 521(a)(1). In reality, the dismissal is generally not “automatic” after 45 days, but cases where no payment advices have been filed (or an affidavit that the debtor has not received any payment advices within the previous 60 days) will be dismissed upon the Chapter 13 Trustee’s motion, a creditor’s motion, or at some point, by the court.
3. Tax Returns: