Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Archives for June 2016

Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

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The bankruptcy means test was established by congress as a standard method of calculating the disposable monthly income of a debtor, to help determine the amount paid to the trustee of a Chapter 13 bankruptcy plan.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 1 of 4 of the transcript of that conversation.

Q: In a Chapter 13 bankruptcy, how is a debtor’s monthly plan payment amount determined?

Chris Holmes: In a Chapter 13 bankruptcy case, the general rule would be that the debtor must pay to the Chapter 13 trustee all of their disposable monthly income. So, we craft their budget to show how much their projected monthly income will be—gross income minus taxes—and then we calculate what they pay for rent, utilities, food, clothing and all of their living expenses. So, income minus expenses, whatever that difference is, that’s the primary way of determining the monthly plan payment. The bankruptcy code says a debtor must turn over all of their disposable income to the Chapter 13 trustee for the benefit of their creditors. And then, as long as they’re not already paying off 100 cents on the dollar, that’s what they have to pay.

Q: How do factors such as everyday expenses figure into determining what a debtor’s disposable income ends up being?

CH: Whatever their real expenses are or there are some IRS standards that we use on occasion. Obviously, a family of eight has expenses that are greater than a family of three. Jess and I have been doing this for so long, we understand, after putting thousands of budgets together, how far you can push the envelope on a food budget, for example, for a family of four. We know that if we go beyond a certain amount—a sort of comfort zone—that the trustee gives us some pushback and says, “Wait a minute. $1200 a month for two people?” So, for example, they can’t be going out to St. Elmo’s Steakhouse every night for dinner. They have to be reasonable in their budget. We’ve learned over time what a reasonable budget is, based on the household size.

The general rule of whatever is left over goes to the trustee was thrown out the window in a recent case we handled, because the husband had a job and the wife was disabled. She received Social Security benefits. Their combined income, including those Social Security disability benefits, exceeded their living expenses by $660 per month. Before the bankruptcy code changed back in 2005, and really up until just recently, their plan payment would have been $660 a month. However, in this case, our associate attorney Andrew DeYoung said we are only going to offer $250 per month. The concern was that the trustee would ask, “What about the other $410?” However, Andrew understood that there is an area of the law developing where judges have decided that because Social Security benefits are exempt—off limits to creditors—and that they don’t count in the means test that determines household income.

Q: So, Andrew was subtracting the disability payments from the means test equation?

CH: The wife collected about $1600 a month in Social Security benefits. Andrew was just arguing that not all of the couple’s disposable income should be turned over to the trustee, because the disability benefits are intended to provide the wife with a safety net, in case her health deteriorates or an unexpected medical situation arises.

Q: In this case, had both the husband and wife declared bankruptcy?

CH: Yes, it was a joint case. When the trustee asked why I only offered a $250 monthly payment, I stated there is some existing case law that suggests creditors cannot claim bad faith or abuse when debtors do not turn over all of their disposal income, because some of it—not all of it; just the disability benefits—is exempt from creditors. The trustee stated she was also familiar with that case law, so she dropped that disability income from the plan and, to our clients’ pleasure, accepted the $250 per month offered. I asked her if any Indiana judges had ruled on this type of situation or if there are any related 7th Circuit Court of Appeals cases. She stated not to her knowledge. The precedent for this is from some other jurisdiction where crafty bankruptcy lawyers have made this argument and evidently those judges have agreed, so she’s basically taken a position that maybe it isn’t money that she can demand from the debtors.

Q: You mentioned a family of four, which obviously includes children, and a related comfort zone of credible monthly expenses. Is there any entertainment budget that you can justify as not part of that family’s disposable income?

CH: There’s two things. There’s the means test, which looks at average monthly income over the past six months before filing. There’s also certain IRS standards for housing and food and whatever. If I refer to the computer program we use, I can look at how much is deemed to be reasonable for a four-person household. So sometimes when my clients don’t do a really good job on their budget, I’ll go to the means test and use the IRS standards to fill in a blank. Also, if a debtor shows too much money left over, and I know they really don’t have it, I’m going to find some place to use up that money, so they’re not too rich for a Chapter 7 bankruptcy. There are standards for what you can put into the different slots within a monthly household budget.

Q: Where do you find the means test you mentioned?

CH: It’s something that congress established, but our computer program provides all of this information, which is periodically updated. In Indiana, there’s currently a medium income for a one-person household of $43,422.

Jess Smith, III: The medium income varies from state to state.

CH: That’s the starting point. So if I have a family of four and their household gross income per year was less than $74,584, they immediately pass this test. The test is designed to determine if someone has an ability to pay back a significant percentage of their debt through a Chapter 13 plan.

Q: What happens if they fail the test?

CH: They’re ineligible perhaps for a Chapter 7, so we tell them that if they want relief from the bankruptcy code, they’ve got to file a Chapter 13 and offer this disposable income to their creditors.

Q: What happens if that disposable income figure turns out to be zero or just a couple of dollars?

CH: They really wouldn’t flunk the means test in that case. There’s an algorithm in the computer program that looks at what’s left over at the end of the month and what their debt is, and it figures out if you have an ability to pay back a certain percentage of that debt. The program indicates whether they’ve flunked or passed the test; it shows if you’re eligible for a Chapter 7. Sometime you can get around that, because we’re looking at income over the past six months. If the debtor has just lost a job and no longer has that income, we can override the test in a way, or at least show this special circumstance—they’re now destitute and don’t have any money—they’re not required to pay back some of this debt when clearly they don’t have an ability to do that.

Q: So that inability to pay back the debt determines whether you file for Chapter 7 or Chapter 13?

CH: Right. Most people will file for Chapter 7, wipe the slate clean, not make any monthly payments, and be done in three to four months. In Chapter 13, it’s three to five years where they’re making this monthly payment to a Chapter 13 trustee who then divvies up the money amongst the creditors in a certain way. Some people do Chapter 13 because they need it to save a house, to pay taxes, or do some other creative things, but there’s a small percentage of people who are required to file Chapter 13 because they are too rich to just wipe the slate clean. It’s not fair; it’s consider an abuse of the bankruptcy code for somebody who makes $100,000 to just get rid of all their debt.

Q: So that medium income is the number that determines whether you makes too much money?

CH: Right. It’s a starting point. If they’re below that number, they pass automatically. If they’re above that number, then we have to do this more-comprehensive test that looks at not just gross income, but where all of that money goes. Taxes, insurance, rent, food, utilities, car payments, student loans—all of those things. Then, after you plug in all of these numbers, the program shows a green happy face if you pass or a yellow unhappy face if you fail.

Bankruptcy Means Test

There’s a case we filed in which we received the green happy face. We filled in the debtor’s average monthly income and then on the next page it totals it up to $62,580. The median income for a family of this size is $62,431. So, because their combined income was a little bit above the median income, I had to go through the program and fill in additional fields, for example car payments and mortgage payments. There are certain standards, for example for a two-person household with two cars it’s $424 per month for gas, oil, and routine maintenance on a vehicle. At the very bottom of this test, in this particular case, we come up with this number for Disposable Monthly Income, which we call “DMI” and here it’s “minus $371.” So, clearly in this case they don’t have any money left over. That’s why the program gives us the green happy face, because it concluded that even though their income is above median income, because of all of their expenses, there is no money left over for the creditors. So they qualify for Chapter 7. Now if this had been a yellow unhappy face, and the DMI had been a significant positive number, then we would have to say to the debtor that the case would get thrown out or threatened with dismissal, so we just know that we have to file as a Chapter 13. Then they’re in this plan for 60 months, five years, to pay back as much of their debt as possible.

JS: And there are certain things that are not deductible on a Chapter 7 means test that are deductible on a Chapter 13 means test.

Q: Such as?

JS: Such as retirement account contributions or 401(k) loan repayments. Going back to the Social Security issue, the code says that, if you have a habit of making retirement contributions, you’re supposed to be able to continue those under this means test. Then you put your budget together going forward. Our associate Andrew DeYoung had a case where he tried to schedule the ongoing contributions, because she had done them within the six months. But he received a creditor objection and Judge Graham said, “I’m not going to allow you to keep socking away this kind of money while paying very little on your debt.

CH: Even though they’re in a Chapter 13, they get credit for it.

JS: Correct. She had a very low Disposable Monthly Income number under the means test, but when it came before the judge, the judge said this doesn’t pass the smell test. If the client were to appeal, maybe the client would have won, but the client didn’t have the resources to appeal.

Q: Was it because the IRA contribution was too high?

JS: It was substantial. Plus, evidence came out that the debtor worked for a university. If she contributed some phenomenal amount of money, her employer would match it with about 20% of the contribution. So this woman was trying to put away $9000 to $10,000 a year, hoping to get another $3000 to $4000 match. It was not the trustee who objected, it was an individual creditor who had loaned the debtor money and who spent enormous resources objecting to the proposed plan. I don’t know that every judge would have sided with the creditor, but this particular one did.

Q: So the judge threw out the IRA contribution entirely or forced her to lower the payment?

JS: She was in a Chapter 13, so the plan Andrew offered met the means test. But the creditor started objecting with old law—pre-2005 case law—and Andrew and I did not believe the creditor could win because it was such old case law.

CH: But it was an extraordinary amount of her income that she was contributing.

JS: Yes, it was about 15%, so a substantial portion of her income was being deferred.

CH: I’ve told people that if their contribution is 4%, or 6%, or even 8%, that no one is going to squawk. But if it’s 10% or more, that’s probably where it wouldn’t pass the smell test.

JS: In this case, the debtor was trying to only pay about $7000 on over $100,000 debt, so the judge said, “You’re not going to walk out of here with a fat 401(k).”

CH: This case illustrates the situation where you go to law school and think the law is black and white. You’re going to learn how to solve problems and there are definite rules. But the law is actually shades of gray. It’s almost never black and white. One judge might say, “That seems reasonable,” and another judge might say “It’s unreasonable.” It’s unpredictable, especially in state court law, where you go to one county and have one judge rule one way, then you go to another county, with the exact same facts, and another judge might rule a different way. Clients always ask, “Can you predict the results?” But that’s next to impossible, because you just don’t know how that judge on that day is going to interpret those facts in light of the law. Sometimes I’ve had judges where it was not what they knew that I was afraid of, it was what they knew that just wasn’t so. They thought that they knew the law, but they didn’t and they interpreted the law improperly. But you can’t go to the judge and imply they’re wrong. The only way you can do that is to appeal and most people we represent don’t have the financial ability or resources to appeal a decision, because that’s really expensive and time-consuming. The case mentioned earlier is a good example of the gray shades of the law and it’s fluidity, because by offering a plan with only a $250 monthly payment, instead of $660 a month, Andrew saved our client $24,600 over the life of the five-year plan.

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

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The primary difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is that a Chapter 7 bankruptcy can eliminate debt in a period of three to four months compared to the three to five years it takes to complete a Chapter 13 plan. Under certain circumstances, a Chapter 13 bankruptcy can be converted into a Chapter 7 bankruptcy.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 2 of 4 of the transcript of that conversation.

Q: For a debtor, in terms of moving forward with your life after you declare bankruptcy, what are the differences between between Chapter 7 versus Chapter 13? How does that affect your credit score or your standing in the financial world?

Jess Smith, III: In the short-term, a Chapter 7 is probably more advantageous, because when you’re in a Chapter 13 there’s always the risk that you won’t complete the plan and you’ll become eligible to convert it to a Chapter 7. Therefore, you can add debt to your bankruptcy that accrue from the time you file your Chapter 13 to when you convert to your Chapter 7. That makes lenders nervous about extending credit to you while the Chapter 13 is open, because they could take a hit.

Chris Holmes: I always tell people you’re in a case for three to four months under Chapter 7. Your done and you can do whatever you want. In a Chapter 13, you can’t borrow money without permission of the trustee or the judge. As Jess pointed out, debts that are incurred after the filing of the case, if they change their mind and switch to a Chapter 7, they can be thrown into the mix for discharge.

Q: So what would be the circumstance in which someone could switch from a Chapter 13 to a Chapter 7?

JS: A loss of income is the primary one.

CH: People start out and maybe they’re too rich. they make $100,000 a year and can pay back some of the debt. Then their job goes overseas and they’re making $10 an hour; income plummets; no money left over for the creditors; case is no longer feasible. And so we switch to a Chapter 7, dispense with the monthly payments, and just wipe out the rest of the debt.

JS: Another reason someone might want to start as a Chapter 13 and contemplate having the option of a Chapter 7 later is that you have people with substantial medical issues. Perhaps they have a few creditors coming after them now, where they need that protection. But they don’t want to file Chapter 7 now, because they know they’ve got medical issues within the next eight years that are going to crop up. Some of them will go into a Chapter 13, to establish a payment plan with those existing creditors, knowing that if a medical calamity happens before the Chapter 13 is done they can convert to a Chapter 7 and add those debts.

CH: It’s kind of a way to insure against uninsured events over this three- to five-year period, so if something terrible happens—they run up $50,000 of uninsured medical debt and they can’t afford to pay it—the law says we can switch from a Chapter 13 to a Chapter 7 and move those debts. Generally speaking, when you file the case, you’re going to list the debts prior to that date. In a Chapter 13 or a 7, you can’t add debts thereafter. Unless you switch it from a Chapter 13 to a Chapter 7, so that deadline before which debts can be added moves up to the date of conversion to a Chapter 7. So, all of those debts incurred in-between, that otherwise a debtor would have been stuck with, are added to the list.

Q: It seems as if wiping out debts completely under Chapter 7 is a more drastic financial transaction. Does that affect your credit score more negatively than filing a Chapter 13?

CH: You would think that someone filing under Chapter 13 who is paying back some of the debt would get some kind of credit for that. But my understanding is that a bankruptcy is a bankruptcy is a bankruptcy to most creditors, whether it’s a Chapter 13 or a Chapter 7. People don’t get credit, in a sense, for paying back some of their debt through a Chapter 13 plan.

JS: Not until the Chapter 13 discharge, but while you’re in it you get no positive benefit from it.

CH: No one is going to pat you on the back and say, “You’re paying back some of your debt, here I’ll give you more money.”

JS: At the end, if it shows you paid your mortgage on time and you paid your car off in full, you’ll get credit for those things. But your not going to get a boost for running into a Chapter 13 as opposed to a Chapter 7. Not in the short-term, no.

Q: But in the long-term?

JS: Potentially, yes.

CH: I tell people that supposedly debts stay on your credit reports seven to 10 years.

JS: Usually from petition date.

CH: So being in a Chapter 13 for three to five years, as opposed to a Chapter 7 for three to four months, won’t stay on your record any longer.

JS: A Chapter 13 will actually come off the credit report sooner. A Chapter 7 will be up there for up to 10 years; a Chapter 13 for about seven years.

Q: So an advantage to completing a Chapter 13, in the long-term, is that it will help you establish better credit sooner?

JS: Potentially. But in the short-term it’s the same.

CH: People always ask, “What’s a bankruptcy going to do to my credit rating?” Well, if you’ve got $50,000 of credit card debt, $30,000 of medical bills, and people are suing and garnishing and hounding you, your credit worthiness is already shot. In a weird sort of way, when you get a discharge in bankruptcy, you wipe that slate clean. You can’t file another bankruptcy for eight years, but if you have decent income and no debt, I would imagine that one’s credit worthiness is going to be enhanced by wiping the slate clean. We have debtors who tell us that just weeks later they start getting inundated with car loan applications, even though they’re in a bankruptcy. I assume that’s because the creditors are sophisticated enough to know they can’t file another bankruptcy and they can’t add any post-filing debt to the bankruptcy. So, any car loan after the filing can’t be added; they can’t file another Chapter 7 for eight years, and they’ve got decent income and they know all of this debt is going to be wiped out, a new loan can’t be discharged. I assume that’s why they are aggressively marketing to those people.

Q: So, you can’t file another Chapter 7 for eight years after having filed a Chapter 7?

CH: Date of filing plus eight years.

Q: How about if you file for Chapter 13, then complete that 60-month plan and the bankruptcy is discharged?

JS: If you file a Chapter 13 first and complete it, you can file a Chapter 7 six years after your Chapter 13 filing date, under certain circumstances. If you file a Chapter 7 first and then you file a Chapter 13, it has to be four years after your Chapter 7 filing to be eligible for a discharge. We have people who file them so close together they’re not eligible for any discharges. They complete an umbrella, so they can get their things sorted out. With an umbrella, the creditors are told to stay, while the debtor makes some sort of a payment plan. We have people complete those payment plans and then they still have to deal with the debt, because it wasn’t discharged. But, in the interim, that period of the five-year window, they’re able to live their lives and try to get their affairs in order.

CH: Or we put them in one of these bankruptcies just long enough until finally it’s been long enough to file a bankruptcy from which they can get a discharge. So, we let the case be dismissed and then re-file when it’s been long enough.

JS: I just placed someone into a Chapter 13 where basically the primary purpose was that her main debt was student loans. She made about $70,000 salary and, based on her household size, she could file a Chapter 7. But the student loan creditor said, “You owe us over $100,000, so we’re going to administratively garnish 15% of your wages. And she said, “No you’re not. I’m going to file a Chapter 13 and I’m going to pay you $500 a month for the next five years, so I can get my kids out of the house.” Otherwise she knew that 15% was going to have her end up being evicted, because it was too much of her income.

CH: Another reason we do Chapter 13 filings is because student loans are nondischargeable. If, for example, the debtor has other problems and the student loans is just too burdensome, we put them in a Chapter 13, so they can keep the student loan creditor at bay for five years. Meanwhile they can resolve some other cash issues or save their house or do whatever they need to do. But then, of course, because it’s nondischargeable, down the road that student loan is still there. Chances are that what was paid to the student loan through the five year plan won’t cover the interest that accumulates, so that student loan is probably going to be bigger. But at least they can get rid of all their other financial problems and then they can focus on the student loan at the end of five years. Hopefully at that time the money that was in the plan to solve other problems will be there to solve the student loan five years down the road.

JS: We refer to that as a Chapter 26. That’s when you get through your first Chapter 13 and shed everything but the student loan, and then if you’ve got all of the kids out of the house, maybe you’re in another Chapter 13 where your student loan is your only creditor and you try to knock it out during the second five-year plan.

Q: So, regardless of whether you file Chapter 7 or Chapter 13, student loans are not dischargeable?

JS: Correct. By and large, with rare exceptions.

Q: And that’s the same for federal taxes?

CH: Well, no. Taxes are a little different, although that gets complicated, too. But, generally speaking, if the taxes are less than three years old, you’ve got to pay them back. Taxes more than three years old may be dischargeable, but then you have to worry about whether there is a federal tax lien. Some of the tax might have to be paid back. I’m about to file a case for a debtor who had some taxes owed for 2012. The clock didn’t start ticking until April 15, 2013, because taxes are always due by April 15 the following year. So, I said to her, “Look, you’ve got all of these taxes owed for 2012; we don’t have to file your bankruptcy sooner than later. Let’s wait until after April 15, 2016, so they’ll be more than three years old and then maybe those 2012 taxes will be treated just like a credit card or medical bill, and be totally wiped out.” The threat was that in the interim, unbeknownst to me, the IRS filed a tax lien, which would make some of the tax payable. The hope is that the tax is going to fall off as a dischargeable debt.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Divorce and Child Support Can Impact a Bankruptcy

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Divorce is one of the major causes of bankruptcy. If your divorce agreement includes child support payments, your ex-spouse can play a significant role in determining whether or not your bankruptcy will be discharged.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 3 of 4 of the transcript of that conversation.

Q: Have you been dealing with any unusual circumstances recently?

Jess Smith, III: I have a gentleman who completed his Chapter 13 plan; he made all of his payments and was getting ready to file his motion for discharge. However, his ex-wife objected to it because he fell behind—not on his post-petition child support—on his share of the uninsured medical expenses for the child. She had taken him back to the divorce court and got a judgment against him for not paying his share of those medical expenses, which is classified as a domestic support obligation. She objected to his discharge under Chapter 13.

Chris Holmes: Before anyone can get a discharge under Chapter 13, they have to certify they have paid every single penny of child support that came due after the filing of the case up until the day of discharge. In this poor guy’s case, he had paid every single penny of child support, but then because that other expense—which is in the nature of child support—had not been paid, it became an issue. Child support is not just the weekly amount that’s paid, sometimes people are ordered to pay a percentage of medical and dental and optical expenses. Evidently, he didn’t pay his fair share, so she sued him and got a judgment against him.

JS: She filed a contempt on him in the divorce court. She also filed an objective to his bankruptcy discharge.

Q: If he was denied a discharge, would that mean his personal liability on all of those other debts would still be there?

JS: The bankruptcy judge waited to see if he was going to make any headway on it. No resolution was made, so the judge said to the debtor, “Either I’m dismissing this case or you might be able to convert to a Chapter 7 and there might be ramifications of that or not.” So, we converted to a Chapter 7 and we got his discharge. So, all of his other debts were discharged, but he did not get a Chapter 13 discharge, In this case, it was really of no consequence, because he was not paying taxes in the plan.

I’ve got another case in which the debtor had a Chapter 13, with taxes being paid in the plan. He also owed his ex-wife child support and he estimated that he owed her $5000 of child support. So the ex-wife got notice of the bankruptcy and was given a claims form. She never filed a claim. So, eventually the trustee was sitting on this money and he paid the taxes first. Then he said to the debtor, “We’ve got this $5000; you better file a claim for your ex-wife, otherwise I’m going to have to disperse it to Visa and MasterCard, and you won’t receive any child support credit for it.

CH: The ex-wife hadn’t file a claim and if you don’t file a claim you can’t get paid through a Chapter 13 plan.

JS: About a year and a half ago, I filed a claim for the ex-wife and I put the state court divorce number—the Indiana Support Enforcement and Tracking Number. Instead of sending the money directly to the mother, the debtor scheduled a flat $5000 payment and we had it go through the state address where they basically put that money onto a Visa debit card. The trustee pays it through the Indiana Child Support Collection Unit. In the meantime, he’s having his regular support deducted out of his wages. We’re getting close to the plan length, so we tell the debtor that he needs to come in to sign off that he is current. He says, “My kids are 19 and they’re still yanking it out of my check.” I ask, “Are you current or are you not?” So he hired me to find out why they are still taking out child support from his wages. I went to the state court, pulled 17 years worth of records, and did a hand audit. There were periods within those years during which he would miss eight months at a time, and despite the fact that he continued to pay support beyond the child’s 19th birthday, his estimate of what he owed his ex-wife was way low.  I created a spreadsheet that accounted for every nickel of child support he ever paid and then told him that he still owes about $5900, even after the recent $5000 payment. I tell him that I can’t file the certification for his Chapter 13 discharge, because it would be a false representation of his bankruptcy. For him to get a Chapter 13 discharge, he has to certify to the bankruptcy court that he has paid all post-filing and all pre-filing child support, unless there was an order in the state court to the contrary stating he doesn’t have to do it.

CH: He has to swear, under the penalties for perjury, that he has paid every single penny of child support from the date of filing to the date of discharge.

JS: The bottom line is I tell him we can’t do this. Meanwhile, the child is 19, so we file a motion to emancipate the child and determine an arrears. There’s a hearing set in June. Basically, I’ve talked to the ex-wife and she said, “I don’t care about the medical expenses, but I want every support payment that’s due. I’m not going to hold up his discharge, but I want my money.” What had happened is when he swore to me that he had paid everything, I filed a motion to terminate his withholding order. His employer received a copy of it, but with no order from the state court they just quit paying the ex-wife. She hasn’t received any money in about four months. But she says, “I want every nickel that is due to me, but I’m not going to hold up his discharge.” I then talked to the bankruptcy court and asked if they had ever had a case like this. They said, "No," and that we should make up a waiver form, have the mother sign it. and the judge will set up a hearing and grant the discharge, because the mother is not objecting to the discharge going through despite the fact that he has not technically complied with the bankruptcy code. If the mother did contest it, just like the other case, the judge would say, "I can’t grant the discharge."

Q: What would have happened if the mother contested the case and forced the judge to actually say, "I can’t grant the discharge."

JS: This particular debtor has only been in the bankruptcy about three years. I would probably put him back into the bankruptcy to stretch the plan out and pay it. But, I don’t want to do that because the trustee charges a fee on the money she collects to disburse to the state, so I’ve got the waiver worked out.

CH: That would be a remedy, if he had the luxury of stretching it out.

JS: If he had more time. We probably have about 16 months left now to delay, but I’m not going to go there.

CH: If it was a five-year plan, we couldn’t extend it. If she objected, the only other option would be to convert to a Chapter 7.

JS: If we converted to a Chapter 7, he would have to deal with some potential past issues in his particular case where he wouldn’t get the same benefits.

CH: Otherwise, he would be out of a bankruptcy without a discharge. So, if he only paid ten cents on the dollar on all of his debt, he would still owe his creditors the remaining 90%, plus interest and whatever late charges are nondischargeable.

JS: They could have closed the case without a discharge. It’s one of those gray areas. There’s no black and white in the code to deal with that issue. We have to kind of make it up as we go and see if the judge will bite on it.

CH: We’ve been doing this a long time. I’ve been doing nothing but bankruptcies since October 1997, when I joined Tom Scott, and Jess started focusing on bankruptcy shortly thereafter. There are attorneys out there who dabble in bankruptcy and there are lots of young lawyers right out of school. I can’t believe that without the experience that there is any way they render as effective legal representation to their clients as we do, because we’ve been there, we’ve done that, and we’ve seen so many strange situations.

In addition, we have the background to relate bankruptcies to other law. There are people who get out of law school now and just go straight into bankruptcy, not knowing how it impacts family law, personal injury, taxation, and other issues. Jess and I are both diversified lawyers. We started out as general practitioners, where we did criminal, divorce, probate, and everything that came through the door—we figured out how to do it.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 4 of Conversation: Being Discharged From Bankruptcy

Being Discharged From Bankruptcy

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When a Chapter 13 bankruptcy plan has been completed by a debtor, a few steps remain before the bankruptcy is officially discharged. The discharge process includes the filing of the Notice of Plan Completion by the trustee, along with the filing of two forms by the debtor: the Debtor’s Certification of Eligibility for Chapter 12/13 Discharge and the Motion for Entry of Chapter 12/13 Discharge. If the debtor has a mortgage, additional forms are required.

We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 4 of 4 of the transcript of that conversation.

Q: If you’ve filed Chapter 13 and you’ve made all of your payments on-time to the trustee over the course of the three- or five-year plan, what is the next step for the debtor to ensure that everything is legal and the bankruptcy is discharged?

Jess Smith, III: The trustee files a Notice of Plan Completion. Copies of this notice are e-mailed to anyone who receives electronic notification in the case. The debtor then signs a motion for discharge (Motion for Entry of Chapter 12/13 Discharge) and a document stating they’re eligible (Debtor’s Certification of Eligibility for Chapter 12/13 Discharge).

Q: Does the debtor need to go back to their lawyer?

Chris Holmes: Yes. Our paralegal, Margaret, takes care of all of that. She prepares these documents; the debtor comes in and signs them; and we file it. Generally, the debtor receives an order granting discharge.

JS: Typically, the trustee has received all of the money from the debtor and dispersed it out to the creditors. There is one other thing that they sometimes do. If there is real estate involved and the trustee had made any distribution to the creditors whatsoever, the trustee files what’s called the Notice of Final Cure Payment, to which the mortgage companies have a duty to respond, to state they think that the debtor is current on the mortgage or not current on the mortgage. It’s kind of a final chance for the mortgage company to speak up before a Chapter 13 discharge.

CH: We used to have these problems where we’d have people in Chapter 13s and we thought they’d paid all of their mortgage payments and were caught up on what they were behind. They’d get their discharge and then they’d get a notice from the mortgage company stating, for example, they were still two months behind, which would cause all sorts of problems. So the courts came up with this procedure to have the trustees state their belief that the mortgage is current, which shifts the burden to the creditor to come into bankruptcy court and prove otherwise.

JS: Or, the mortgage company would tack on fees, hide the ball, and not tell anybody until discharge. All of sudden they would say, “Well, we charged you $3000 to monitor your bankruptcy. You owe us next week or we’re going to foreclose.”

Q: That’s in the past?

JS: That’s in the past.

Q: So if a debtor has completed the 60-month plan; they’ve paid the trustee on-time each month; they’ve paid their mortgage on-time each month; the trustee will send a notice to the mortgage company?

JS: Yes. And to the debtor.

Q: The debtor takes that notice and brings it back to their lawyer?

CH: We get a copy, so we know at the same time.

Q: So when you receive a copy of the notice sent to the debtor that states they’re eligible for discharge, a paralegal in a bankruptcy law office will do what with that notice?

JS: There are two different documents. The first is the Notice of Plan Completion, which deals with the payments and disbursements to creditors. The second document is the Notice of Final Cure Payment, which strictly relates to the mortgage lenders. When the trustee sends the Notice of Plan Completion, the debtor has to move for discharge. When the trustee sends the Notice of Final Cure Payment, there’s a burden on a mortgage company to file a response, usually within 30 days, stating whether the mortgage is current or not. If a mortgage company doesn’t file one, usually the trustee sets a hearing.

CH: First of all, the debtor gets a discharge, so the rest of the debt that wasn’t paid is wiped out—rendered null and void. And if there’s not a controversy about whether the mortgage is current, there’s an order stating it’s current. That gives the debtor a fresh start, so that the next month they don’t have to worry about the mortgage creditor saying, "Wait a minute. You still owe us $500." When the order is issued, the mortgage company can’t foreclose.

Q: So, if there’s no mortgage, the law office receives a copy of the Notice of Plan Completion. At that point, the law office automatically…

CH: …generates a document to be signed by the debtor that we then file to get them the discharge.

Q: And if there is a mortgage, do you wait 30 days to see if you’ve received back anything from the mortgage company?

JS: Let me give you an example. Normally the mortgage company will say, “We agree the trustee has paid everything that was owed pre-petition,” and either, “We agree they are current,” as of the date they file the response or they say, “No, we disagree and they owe four months of payments,” as an example.

Q: And if the mortgage company ignores the Notice of Final Cure Payment?

JS: If they ignore it, the trustee sets a hearing.

Q: Normally, if the mortgage is current, will the mortgage company respond back as soon as they receive the notice?

JS: Right, But let’s say they either blow it off or they say the debtor is delinquent. If they blow it off, the trustee is going to set a hearing to get an order from the judge.

Q: Does the debtor have to go to the hearing or just the mortgage company?

JS: Typically, you want the debtor there. Here’s an example: In this particular case, the trustee said, “We’ve paid everything we should pay and we think the debtor is current.” But the mortgage company said, “Well, we agree that you paid what was owed prior to filing, but we did an escrow analysis eight months ago, and didn’t tell anybody, and the debtor’s escrow is now short by $700.” So the trustee said there needs to be a hearing on the matter, because it’s not his fault. The trustee was caught in a position of wondering if he needed to go extract money from Visa and MasterCard to pay it on the mortgage, because the mortgage company messed up. We had a couple of hearings on this matter and the mortgage company backed off of its position, stating we’re not going to get the money through the plan. But the judge said that if that mortgage company truly advanced the money, it’s entitled to reimbursement, so you need to work out an agreement. So, we worked out an agreement that states the debtor has six months after the bankruptcy is done to cure the escrow shortage by paying one-sixth of the delinquent amount directly to the mortgage company. As long as the debtor does that, the mortgage company can’t foreclose.

CH: The mortgage creditor has an affirmative duty to tell the trustee how much the regular monthly mortgage payment is to be paid through the plan, so the trustee knows how much to send. Evidently in this case, the mortgage company neglected to say that it needed to increase the payment to make up for that shortfall. The mortgage payment has principal and interest, plus it escrows every month for one-twelfth of the annual taxes and insurance premium.

JS: This was a mess where, after the trustee had made the payments every month for five years, when the case was getting ready to close, the mortgage company sent a letter to the debtor stating, “You need to start making these payments and here is the account number, per the proof of claim.” So the debtor started sending the payments, but they weren’t getting cashed. We finally got to the bottom of it: the account number had changed but the mortgage company did not tell that to anyone. There was a lot of incompetence by this mortgage company.

Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy

Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy