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Marriage & Divorce

Bankruptcy and Personal Injury Claims / Modifying a Chapter 13 Plan / Joint and Several Liability

February 5, 2017 by TomScottLaw

Bankruptcy and Personal Injury Claims

If you have a pending personal injury claim when you file for Chapter 7 bankruptcy, you relinquish to your trustee all control of the settlement of the case, but you retain some control with a Chapter 13 bankruptcy. In rare Chapter 13 cases, the cram-down method of reducing debt for an automobile can be used to reduce the first mortgage payments on a house.

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 how a debtor’s pending personal injury claim affects a bankruptcy case; how the cram-down method of debt reduction can be used for a mortgage in rare instances; the willingness of bankruptcy trustees to modify a Chapter 13 payment plan; how the Rash decision affects a debtor’s ability to surrender a car in the middle of a Chapter 13 plan; and the circumstances during a bankruptcy in which divorced spouses can both be held jointly and severally liable for debt incurred during their marriage.


Q: How does a debtor’s pending personal injury claim affect a bankruptcy case?

Jess Smith, III: If a debtor files for a Chapter 7 bankruptcy, he or she loses all rights and control over that personal injury action. The Chapter 7 Trustee has complete authority to prosecute it, settle it, or abandon it. Also, the Chapter 7 Trustee will, in all likelihood, take all of the net proceeds and distribute them amongst those creditors who file a claim against the Debtor. In other words, none of the net proceeds will be turned over to the Debtor unless those net proceeds exceed the total amount of the claims filed against the Debtor.

With a Chapter 13 filing, the debtor maintains some control over the personal injury claim regarding settling it or taking it to trial. If money is paid to the debtor as a result of a trial or settlement, then there is a negotiation between the debtor and the trustee as to how much goes to the debtor’s creditors and how much the debtor is allowed to keep for his efforts to acquire that money. That is why sometimes a debtor will choose to file a Chapter 13 bankruptcy versus a Chapter 7.

Typically, a Chapter 13 trustee will allow a debtor to keep one-third (1/3) of the net proceeds, with the remaining two-thirds (2/3) of the net proceeds going to the creditors.

Q: Have you recently handled any bankruptcies that included a personal injury claim settlement?

JS: Yes. In a current Chapter 13 case, the trustee is allowing the debtor to keep 50% of the net proceeds, because his bankruptcy plan is paying all of his creditors in full; therefore, I was able to acquire a little extra money for my client.

Q: If there is an existing Chapter 13 plan in place, which pays back all of the debt to the creditors, and all of the creditors had already agreed to that plan, why does the trustee want 50% of that personal injury claim?

JS: Because it gives the creditors some money right away, in the event the plan fails down the road. For some unforeseen reason, the debtor might run out of money and won’t be able to pay the creditors according to the plan. The trustee has a duty to at least get some of that personal injury money and disperse it now, as opposed to waiting on the debtor’s good promise and good intentions to pay it.

Q: If the debtor maintains the payment schedule, does that shorten the length of the plan?

JS: Yes, in a full-repayment plan it will shorten the length of the bankruptcy. If the debtor is not in a 100% repayment plan, the money received from the personal injury claim, usually two-thirds (2/3) of the net amount, is extra money for the creditors of the debtor.

Q: What are some of the more common circumstances you encounter in which a debtor does not meet the original payment schedule obligation of the plan to pay back creditors?

JS: Job loss or significant decrease in income after approval of the plan. Also, the divorce or separation of joint debtors can cause a plan to fail. Also, any other significant change in circumstances that causes an interruption in income.

Q: If that occurs, what happens to the filing of the bankruptcy?

JS: The case is dismissed, the Chapter 13 case is converted to a Chapter 7 case, or the Chapter 13 plan is modified and the plan payments are changed to redress the problems caused by a change in disposable monthly income.

Q: Let’s expand upon those options. If a debtor is not able to meet the obligations of a bankruptcy plan, why would that case be dismissed?

JS: Because the creditors are not receiving what they are entitled to receive.

Q: If the bankruptcy case is dismissed, what happens to the debts?

JS: It is as if the bankruptcy proceeding never happened and the creditors can resume their non-bankruptcy actions to try to collect on the debts.

Chris Holmes: It usually is a situation in which the debtor is unable to make their bankruptcy plan payments and they are not eligible for a conversion to a Chapter 7 case. As a result, the case is dismissed and their creditors are free to resume their efforts to collect on the debts. The primary reason a debtor would not be eligible to convert a Chapter 13 to Chapter 7 would be if they filed the Chapter 13 within eight (8) years of the filing of a prior Chapter 7 case. As a result, the only option is to allow the case to be dismissed and the debtor may be able to refile under Chapter 7 if it has been more than eight years since the filing of the previous Chapter 7 case.

Q: In most cases, if you’ve never filed for a Chapter 7 bankruptcy and you’re having trouble meeting the obligations of a Chapter 13 plan, then that option to convert to a Chapter 7 still exists?

CH: Yes, provided the debtor qualifies for relief under Chapter 7 of the U.S. Bankruptcy Code, the debtor has no nonexempt assets that can be confiscated and liquidated by the Chapter 7 Trustee, and the debtor is prepared to deal with certain secured creditors or nondischargeable debts outside the U.S. Bankruptcy Court.

Q: Have you had any extraordinary situations arise that are resolved more effectively by a Chapter 13 case rather than a Chapter 7 case?

CH: Recently, I had a very rare situation in which a woman owned a home that is worth less than the balance due on her first mortgage and, as a result, her second mortgage was wholly unsecured. As a further result, Chapter 13 of the U.S. Bankruptcy Code allows us to, as we say, “strip off” or avoid a wholly-unsecured second mortgage because there is no equity in the home to which that second mortgage can effectively attach.

JS: In other words, the debtor can change a secured debt into an unsecured debt and, as a result, we can treat that debt just like we would treat credit card debt or a medical bill.

CH: What made this particular case extraordinary, however, was how we treated the partially secured first mortgage in the debtor’s Chapter 13 Plan. First, I asked the debtor: “Do you really want to pay off a mortgage that, with interest, totals more than twice the current value of the home?” Given her home is located in a neighborhood in which the value of homes is depressed, and her home is in a state of disrepair, we concluded that it was unlikely that the creditor would want to foreclose on its mortgage and take possession of a home that will be impossible to sell for more than what the debtor owes on the mortgage. Also, the home would be expensive to maintain until it is sold. As a result, the debtor offered to pay the holder of the first mortgage only the current value of the home, plus a reasonable rate of interest, through the plan, and treat the balance of the mortgage as an unsecured debt. (If you recall, we do something comparable with certain auto loans—what we refer to as a “cram-down.” When an auto loan is more than two-and-a-half years old and the payoff exceeds the retail value of the car, the debtor can force the creditor to accept only the retail value of the auto plus a reasonable rate of interest, and then treat the balance of loan and any unpaid interest as an unsecured debt to be discharged.)

Legally, we can’t force the creditor to accept a “cram-down” on residential real estate; however, the debtor decided to give it a chance in the hope that the creditor preferred to accept what she offered rather than assume the risk of a worse outcome if it took possession of the property…and the creditor accepted! And given the debtor’s plan payment is roughly equivalent to her first mortgage payment, she will be able to resolve all of her debts using the money the debtor would have otherwise used for only the first mortgage. And should she successfully complete her plan, the balance due and owing on her other debts will be discharged and the debtor will own her home free-and-clear.

Q: In regards to debtors who do not successfully complete their Chapter 13 plans, what circumstances do you encounter most frequently as the cause?

CH: The primary reasons why Chapter 13 Plans fail: The debtor fails to make regular monthly plan payments due to a reduction in income caused by a job loss, or the debtor must use the money earmarked for their plan payments to pay some unforeseen, extraordinary expense such as car repairs or uninsured medical bills that arise after the filing of the case.

Q: Are there situations in which you adjust the plan payment to make it easier for the debtor to continue to make their payments on time?

JS: Yes, sometimes. If the debtor’s disposable monthly income decreases, then we can reduce the monthly plan payments accordingly.

CH: Also, if the debtor fails to make a few plan payments, then we can ask the Judge to modify or amend the debtor’s plan. For example, if the plan life is shorter than 60 months, then we can extend the life of the plan by the number of months in which plan payments were missed, in order to make up for the shortfall.

Q: What would happen if the debtor’s plan is already set at 60 months?

JS: I’ve just been in communication with a debtor who has a motion to dismiss. Her current plan payment is $1000 per month and she is behind by two months. What we’ve agreed to do is tack on an additional $100 per month for the next 20 months to catch up on the total amount due. This will place her in kind of a probationary status. If she misses another payment, the trustee can then choose a quicker route to get the case dismissed.

Q: How willing are trustees to negotiate to modify plans?

JS: The longer you’ve been in the plan, and the trustee sees your making a sincere genuine effort, the more likely the trustee will be to work with you. For example, I have a married couple as a client and they have a plan that is supposed to be 60 months long. For most of the plan, the debtors were having a portion of the trustee payment deducted from their wages, but one them lost their job, so they fell slightly behind in their plan payments.

At the end of the 60 months, the trustee stated the payments were two months short of the total amount due and filed a motion to dismiss. I objected, because payments were still being made to the trustee. The hearing is now set in about month 63. As long as that money is still coming in, the trustee will agree to just continue the hearing on the motion to dismiss until all of the money due has been paid.

Q: Does the trustee need to go back to the creditors to get them to agree to the extended period of time it will take to fully pay the amount due?

JS: No, it’s within the trustee’s discretion. If a creditor wanted to show up at the hearing and voice their own displeasure, they could. But most of the time the unsecured creditors rely upon the trustee to have the more intimate knowledge of what’s going on with the case and the debtor’s situation.

Q: So in any circumstance where you try to go back and renegotiate the terms of the plan, is it strictly up to the trustee to accept the proposal?

CH: No, the creditors can object if the modification of the plan negatively impacts them. For example, if the debtor’s plan base (i.e., the total of all plan payments) is reduced and, as a result, the amount of money to be distributed amongst the creditors is decreased, then the creditors must be notified and given an opportunity to object if the creditor believes the modification will be unreasonable or unfair.

Q: Is it like you’re going back to the beginning of the bankruptcy filing process?

JS: Yes, if you’re reducing the plan base. There is some interesting case law out there, which fortunately doesn’t come up much in our district.

For example, let’s say a debtor had a $15,000 car that they were going to pay for through the plan. The debtor gets the benefit of driving the car while the trustee is giving the creditor who made the car loan a few dollars every month towards the car payment. Three years into the plan, the car breaks down and the debtor says, “I don’t want the car anymore. I’m going to change the plan, reduce the amount owed on the car by cutting it out of the plan, and have the lender come pick up this piece of junk.”

Most of the time, in this district, the creditor will not object. But there is case law in other circuits outside of Indiana, such as the Rash decision (In the Matter of Elray and Jean RASH; United States Court of Appeals, Fifth Circuit.; Decided: July 30, 1996), which deals with this type of situation. The Rash decision is a widely-followed decision that states if a bankruptcy case is approved and a secured creditor is to receive a specified amount for a car, the creditor can object to a plan modification that surrenders the car back to them, because the debtor is the person who drove the car into the ground, not the creditor.

Those are some issues in limited circumstances—where you try to give back a secured asset after it breaks—in which a creditor will sometimes object. And if the creditor would push it, they would probably win. At that point, the debtor would have to decide to either (A) give the creditor the money they’re entitled to and fix the asset, or (B) to convert to a Chapter 7 bankruptcy, if otherwise eligible, or (C) to let the case be dismissed and start all over. Those are all options, but fortunately we’re fairly lucky in this district that we don’t have a lot of secured creditors object when we try to surrender an asset after the plan has been approved.

CH: I can’t remember the last time a creditor objected to the surrender of a car midway through the plan.

JS: I’ve seen a few instances with certain lawyers based in Kentucky who cite the Rash decision.

CH: In our previous conversation we talked about a debtor who owed his ex-wife a property settlement debt based on their divorce agreement. Because the debtor filed a Chapter 13 bankruptcy, that property settlement debt was dischargeable; whereas, it would not have been dischargeable in a Chapter 7 case.

I had a similar situation recently in which our client told me she had a car loan from the marriage that both her ex-husband and she had co-signed. In the divorce decree, the judge ordered our client to pay that debt and to hold her ex-husband harmless (that is, to protect the ex-husband from any liability thereon).

As it turned out, our client couldn’t make the loan payments, the car was repossessed, and the car was sold for less than the unpaid principal balance on the loan. As a result, there is a deficiency balance—the unpaid portion of the debt—for which both her ex-husband and she are jointly and severally liable.

In a Chapter 7 bankruptcy, her obligation to hold him harmless is a nondischargeable debt. That means the ex-husband could ask the divorce court judge to hold our client in contempt for not holding him harmless, should that car creditor sue him for that deficiency balance. According to Chapter 13 of the U. S. Bankruptcy Code, our client can list her obligation to the ex-spouse—to hold him harmless on that debt—as a debt to be discharged, which is another compelling reason why some people opt for a Chapter 13 case rather than a Chapter 7 case. As a consequence, our client will be able to discharge her personal liability on this $12,000 deficiency balance, and her ex-husband will not be able to go to ask the divorce court judge to hold our client in contempt for not holding him harmless on the underlying debt.

Q: It sounds like the husband thought he was going to be protected, but ended up not being protected. Did he make some sort of a mistake in his negotiation of their divorce agreement?

CH: Sometimes divorce lawyers will insert language into a property settlement agreement that asserts that such obligations are in the nature of alimony or maintenance and, therefore, nondischargeable. Whether such a provision is enforceable is a matter for the Judge of the U.S. Bankruptcy Court to resolve.

Filed Under: Chapter 13, Chapter 7, Marriage & Divorce, Mortgage, Non-Dischargable Debt, Trustee, Vehicles Tagged With: Deficiency Balance, Joint and Several Liability, nondischargeable debt, Rash Decision, Wholly-unsecured Second Mortgage

Bankruptcy Can Affect a Divorce Settlement / Advantages, Disadvantages, and Misunderstandings of Bankruptcy

December 14, 2016 by TomScottLaw

Bankruptcy Can Affect a Divorce Settlement

You can use a Chapter 13 plan to catch up on child support arrearage or spousal maintenance support (alimony) arrearage. If you have received a Chapter 7 bankruptcy discharge, you may still be obligated to relinquish to the bankruptcy trustee assets you receive in the future, such as your next tax refund check, a pending inheritance, or the eventual settlement from a pending personal injury case.

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 property settlement in a divorce; alimony and child support payments; the different eligibility requirements for filing a Chapter 13 bankruptcy compared to filing a Chapter 7 bankruptcy; surrendering exempt assets to protect non-exempt assets; and misunderstandings about being sued and garnishment in relation to bankruptcy.


 

Q: How can filing for bankruptcy affect a divorce settlement?

Chris Holmes: Recently I had a client who, in his Decree of Dissolution of Marriage, was ordered to pay his ex-wife $900 per month for 10 years. He provided me with a copy of his settlement agreement, so I could look for language that indicated whether or not that monthly payment was in the nature of property settlement or if it was in the nature of alimony or maintenance.

There was absolutely no language in the agreement that indicated it was in the nature of alimony or maintenance. The reason that’s significant is that anything that’s in the nature of alimony or maintenance is a nondischargeable debt, whether you file for a Chapter 7 or Chapter 13 bankruptcy. (Child support is another example of a nondischargeable debt.) In this particular case, the Judge awarded $900 per month to the ex-spouse as a way to equalize the respective value of their respective retirement accounts, because his was worth more than hers.

Because the obligation to the ex-wife appeared to be a property settlement, and because Chapter 13 of the bankruptcy code allows a debtor to discharge property settlement debts, I urged this particular client to file a Chapter 13 case, rather than a Chapter 7 case, so he could seek the discharge of this property settlement debt to his ex-wife. (NOTE: He would be required to pay back some of the property settlement through the plan; however, the portion of the property settlement not paid through the bankruptcy plan would be discharged (i.e., rendered null and void). As a result, he decided the benefits of a Chapter 13 case, because he still had over three years worth of payments to make to her, outweighed the additional costs of a Chapter 13 case.

Q: What are some of the other advantages and disadvantages of a Chapter 13 bankruptcy compared to a Chapter 7 bankruptcy? Are there certain circumstances in which you would always lean towards one or the other?

CH: Sometimes people must file Chapter 13 case because it has been less than eight (8) years since they filed a previous Chapter 7 case, which renders them ineligible to file another Chapter 7 until it has been more than eight (8) years since the date of filing the previous Chapter 7 case. In other words, if they desperately need debt relief during that eight-year time frame, they must file for relief under Chapter 13 of the U.S. Bankruptcy Code.

Q: Is there a similar ineligibility time frame for someone who has filed a Chapter 13 bankruptcy?

CH: You can file a Chapter 13 anytime, but a debt will not receive a discharge unless the new case is filed more than four (4) years after the filing of the previous Chapter 13 case. Also, some debtors are rendered ineligible for a Chapter 7 case because they earn too much money to qualify for a Chapter 7 case because of something called the Means Test. In other words, the computer program we use determines that a debtor has the ability to pay back a significant portion of their debt; therefore, they are not allowed to discharge certain debts in their entirety under Chapter 7 of the U.S. Bankruptcy Code. As a result, they must file a Chapter 13 case and pay back as much of their debt as they can afford during a five-year plan.

As we’ve discussed before, we file Chapter 13 cases for debtors who are behind in their house payments and are either threatened with foreclosure, or are in foreclosure, and they need more time to catch up on those overdue mortgage payments.

We also have some clients who have significant income tax problems that are not addressed as effectively by a Chapter 7 case because certain taxes can be paid back through a Chapter 13 Plan without penalties and without interest over a longer period of time.

Also, we have situations like in our recent conversation, in which the debtors are so far upside-down on a car loan (that is, the payoff on the loan exceeds the fair market value of the auto by a significant amount and/or the interest rate is significantly higher than the prime rate of interest plus 1 ½ %. Through a Chapter 13 plan, the debtor can effectively refinance, or “cram-down,” the higher payoff and reduce it to the fair-market value of the auto. As a result, the debtor pays only the fair market value of the auto, plus a lower rate of interest, which saves the debtor a lot of principal and interest.

Sometimes, people are just behind in their car payments and they are desperate to keep the vehicle. We can use a Chapter 13 plan to either catch them up on those payments or to pay the loan in full through the plan. As a result, the debtor is given more time to catch up on their car payments than the lender might otherwise demand.

Q: Going back to the issue of divorce, if alimony and child support are nondischargeable debts, would there be any advantage or disadvantage to someone in a divorce proceeding or having been divorced to lean toward either a Chapter 7 or a Chapter 13?

CH: Let’s say a debtor is behind in their spousal maintenance or child support payments. A debtor can use a Chapter 13 plan to resolve those problems as well. A debtor can use the plan to catch up on child spousal maintenance or child support arrearages. Sometimes, when the obligation is short-term and the payments are too great to be affordable, a debtor can put that obligation into a Chapter 13 plan to extend its payment over 60 months, which reduces the monthly amount to be paid on those obligations to an amount that is more affordable.

It should be noted, however, the bankruptcy code changed in October 2005, and we would need the cooperation of the state court or the child support recipient, because the automatic stay in a bankruptcy case no longer stops the collection of child support. Currently, only with the consent of the other party, can the debtor use a Chapter 13 plan to cure an overdue child support situation.

Q: Have you recently dealt with any unusual bankruptcy cases?

CH: A situation I hadn’t dealt with in many years in a Chapter 7 case arose in which the debtors had assets that were worth a significant amount more than what the law would allow them to protect or exempt. In other words, the debtor filed a Chapter 13 case to pay an amount to their creditors that exceeds the amount the creditors might have received in a Chapter 7 had the debtor’s nonexempt asset been taken and liquidated by a Chapter 7 Trustee for the benefit of the creditors had the debtor filed a Chapter 7 case.

In this case, however, the debtors did not have the disposable income to fund a Chapter 13 plan to pay any money to those creditors. In that case, the Chapter 7 Trustee was threatening to take and liquidate some real estate to get at the equity the debtors could not protect. Fortunately, the debtor owned some vehicles they could live without; therefore, the debtors offered those vehicles to the trustee for liquidation because the net result would be enough to satisfy the Trustee.

In exchange for surrendering assets they normally could protect through a Chapter 13 Plan—the vehicles—the debtors were able to convince the Trustee to abandon his interest in the real estate the debtors could not protect.

Q: So, they chose a Chapter 7 case rather than a Chapter 13 case because the debtors did not earn enough money?

CH: Yes. The debtors were not eligible for Chapter 13 case because they did not have regular, steady income above and beyond their regular living expenses to pay what needed to be paid through a Chapter 13 plan.

Q: What is the most misunderstood aspect of bankruptcy? In other words, what do a lot of people you initially meet with believe concerning bankruptcy about which you have to set the record straight for them?

CH: By the way, sometimes debtors assume that after they’ve been sued and a garnishment has been entered against them, that they can’t stop the garnishment. Fortunately, even if a garnishment order has been entered, as soon as we file the bankruptcy case we can stop and prevent any further garnishments. Also, I’ve met with debtors who believed that if they file a bankruptcy case that they must give everything they own to the bankruptcy court for liquidation and they’ll be left with nothing; however, Indiana law allows debtors to protect an ample amount of assets in order to get a truly fresh start.

Jess Smith, III: One thing some people don’t understand is why they have to turn over tax refunds.

Q: So, why do people who file for bankruptcy need to surrender their tax refunds?

JS: Because, when you file bankruptcy, the bankruptcy trustee takes control and possession of all of your assets until they are abandoned or are determined to be exempt. Certain portions of a tax refund may be exempt, but usually it is a non-exempt asset.

People don’t understand that even though a bankruptcy case is fully closed at the time of the discharge, the asset portion of the case remains open. That confuses a lot of people.

Q: So, after you receive the discharge document from the court, the case may not actually be finished?

JS: One of the roles of a Chapter 7 trustee is to determine if you qualify for a Chapter bankruptcy. A second role is to determine if the debtor has any non-exempt assets that can be liquidated for the benefit of creditors.

So, when people receive their Chapter 7 discharge, they sometimes forget about their non-exempt assets, because they might not have received their tax refund at the time they filed their case, but they have accrued their rights to at least a portion of their tax refund. That portion is what becomes an asset.

People don’t understand that they have to trade that asset in exchange for their discharge. If they don’t cooperate with the asset portion of the case, then their discharge can be revoked.

Q: So, in other words, if a debtor receives a bankruptcy discharge notification in October of this year, the refundable portion of the income taxes they paid prior to the discharge date can be considered a non-exempt asset subject to be taken by the trustee, even though the debtor doesn’t receive their refund check until next year?

CH: Yes. The debtors still have the duty to cooperate and turn over that asset, even though the debtor has received a discharge. Let’s say, for example, a debtor filed a Chapter 7 case on October 12, 2016, which is day 286 out of the 366 days in this leap year. Let’s also assume that as of this date, the debtor might receive a 2016 tax refund, when they file during the next tax season, in 2017. In the eyes of the U.S. Bankruptcy Court, approximately 78% of their Federal and State tax refunds have accrued as of this date. As a result, a Chapter 7 Trustee will force the debtor to provide a copy of the tax returns, which will show the refunds for the year, and then the Trustee will determine that portion of the tax refunds, less the Earned Income Tax Credit, which is exempt, and can’t be taken; whereupon, the Trustee could take and then distribute to the creditors 78% of the non-exempt portion of the tax refunds.

Other similar types of assets a debtor might receive in the future, which the trustee could take, include an impending inheritance or the settlement from a pending personal injury case, if they stem from an event that happened prior to the bankruptcy petition date.

We’ve learned from experience that if the amount of that pending asset is less than $1000, then trustees would probably ignore it, because they would not be able to provide a meaningful distribution to the creditors.

JS: But that decision is up to each individual trustee. Trustees make a commission based on what they collect from debtors on behalf of creditors, so some trustees spend more time than others pursuing small assets.

Filed Under: Exemptions, Marriage & Divorce, Misperceptions, Wage Garnishment

Divorce and Child Support Can Impact a Bankruptcy

June 7, 2016 by TomScottLaw

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

Filed Under: Chapter 13, Chapter 7, Marriage & Divorce, Wage Garnishment Tagged With: Child Support, Indiana Child Support Collection Unit, Indiana Support Enforcement and Tracking Number

Divorce and Bankruptcy

July 27, 2015 by TomScottLaw

We recently interviewed Christopher Holmes and Jess M. Smith, III, the senior partners at Tom Scott & Associates, P.C. Below is Part 1 of that interview, which focuses on a few aspects of how a divorce can impact bankruptcy.
Q: We know that divorce is one of the major unfortunate events that cause people to file for bankruptcy. For someone who is considering a divorce or who is already divorced and is considering whether or not to file for bankruptcy, what circumstances might they encounter and how can those be handled to their advantage?
CH: We had a client from Avon, which is in Hendricks County, in his thirties, who was divorced not so long ago. In the divorce decree, his ex-spouse was awarded a property settlement of over $46,000. He had some other financial woes, but this property settlement was the biggest, so he wanted to file bankruptcy.
I told him that under Chapter 7 of the bankruptcy code that the divorce settle was a non-dischargeable debt, so he would be wise to file under Chapter 13 of the bankruptcy code, because we could discharge the vast majority of that settlement.
Q: What was the nature of the debt that would make it different under the those two chapters of the bankruptcy code?
CH: Because it was a property settlement, the bankruptcy code states that it is a non-dischargeable debt under Chapter 7. He was going to keep the properties and she was going to get money in exchange for her equitable interest in those properties. So this settlement was a debt that, according to Chapter 7, you cannot get rid of, but the United States Congress made it a dischargeable debt in Chapter 13.
JS: Congress created the legislation on the theory that if you do the best you can and pay what you have to pay, and the ex-spouse gets in line with the other debtors and receives a portion of what you owe, that’s fine under Chapter 13. But you just can’t file under Chapter 7 and walk away from the property settlement debt completely.
CH:  So as long as the settlement debt is not deemed to be in the nature of alimony, maintenance, or child support,  he pays back a few pennies on the dollar. Then, upon the discharge of his bankruptcy, the rest of the debt is wiped out, rendered null and void. So, the ex-wife thought after the divorce was finalized that she was was going to be receiving money in exchange for the physical properties he kept as part of the divorce settlement. But that money owed to her went into the Chapter 13 and she had no recourse but to accept those pennies on the dollar.
JS: The other time where property settlement comes into play is when you have one credit card that both divorced spouses used while they were married. One spouse is ordered to pay that credit card debt and says, “I didn’t incur that credit card debt,” but the divorce judge say, “I don’t care. You’re paying it.” That is a debt in Chapter 13 in which they can list the bank or financial institution that issued the credit card and the ex-spouse as creditors, so they pay pennies on the dollar to the original creditor and the ex-spouse – and then the credit card company goes after the ex-spouse for the difference.
CH: In that situation, she can’t go back to the divorce court and ask the judge to hold her ex-husband in contempt for not paying the debt as he was originally ordered to do in the divorce decree. In addition to that debt, to further this gentleman’s problems, he has a child support obligation that he has been unable to pay in full, so he has what is called a child support arrearage. so, in a Chapter 7, he is pretty much at her mercy with a non-dischargeable debt. The benefit of a Chapter 13 would be that he can force the woman to accept the cure of that child support arrearage over the life of the Chapter 13 plan. Meanwhile, she can’t go back to divorce court to ask that judge to hold in in contempt for not paying all of the child support. So, he has a very powerful remedy to keep his ex-spouse at bay on both the back child support and the non-payment of the property settlement.
Q: If alimony was a part of the divorce settlement, would it be covered in this situation as well?
CH: Alimony is non-dischargeable, but if he is behind in paying the alimony, he could use a Chapter 13 to, as we say, cure, or catch-up on that situation. It also forces the ex-spouse to accept that cure or re-payment over a 3 to 5 year period, as opposed to being forced to come up with it in a much shorter period of time.
Q: Does this individual’s employment status affect the case?
CH: He is a self-employed home remodeler with two children, so unfortunately his income is variable, which prevents him from paying his child support in a timely manner, because his income goes up and down. What we are hoping to do in his plan is to buy him more time to resolve that problem.
Q: What is the process you would go through to make his case or a similar case to the divorce court judge?
CH: Luckily, the bankruptcy code has provisions that make it pretty clear-cut that if we propose this plan, unless there is some legitimate objection, whether the ex-spouse likes it or not, she is compelled to comply with the terms of it,or at least accept the terms of the plan.
Q: Were there any legitimate exceptions that you feared might come into play when proposing the plan on his behalf?
CH: My fear was that her divorce court lawyer might try to assert that this property settlement was in fact in the nature of maintenance. I’ve had that happen in the past where even though it clearly stated “property settlement” in the divorce decree, they convinced the state court judge to say, “Oh no, what I really meant was that this is in the nature of maintenance, which makes it a non-dischargeable debt,” and therefore the client couldn’t get rid of it in the Chapter 13 bankruptcy.
JS: I’ll give you an example of an experience our associate Andrew DeYoung had. The bankruptcy code says that an above median debtor can contribute to the retirement accounts during the bankruptcy – basically shielding money from their creditors. Andrew had a case recently in which the debtor, his client who is a divorced woman, proposed to still contribute big chunks of money into her retirement account. Her ex-husband’s attorney said, “This plan is not being proposed in good faith, because she could stop these contributions to put more money into the plan.” The judge agreed the contributions were in contravention of the code and basically said, “I don’t think you should fully fund your retirement account and I’m going to make you offer some more money to the bankruptcy plan.” The judge didn’t state what that amount would be, but it forced them to eventually reach a deal that both sides could live with.
I think had Andrew’s client had the money to go up to the Court of Appeals, he might have won the case for her, but she didn’t have the money to pay for an appeal. That particular judge did not like the – quote, exorbitant, unquote – amount, about $800 per month, being put into her IRA, which her employer would then match on top of that, so she had great incentive to contribute to her protected retirement fund. Her ex-spouse objected and the judge agreed that she could not soak all of that money away from the settlement and just pay three cents on the dollar, so she had to do something else. As I stated, they eventually worked it out and agreed upon an amount she could put into her IRA.

Parts 2 and 3 of This Interview

Part 2: An Experienced Bankruptcy Attorney Can Help You Keep Your Personal Property
Part 3: Tax Returns, the Affordable Care Act (Obamacare), and Bankruptcy

Filed Under: Chapter 13, Credit Card Debt, Marriage & Divorce, Non-Dischargable Debt Tagged With: Arrearage, Child Support, Dischargeable Debt, Individual Retirement Account, IRA, Median Debtor

$20,000 Contempt Penalty Because Mother Hurt Father’s Credit Should Be Dischargeable In Bankruptcy

September 8, 2014 by TomScottLaw

*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
Q: A state court judge orders the mother to pay the father $20,000.00 following a contempt hearing as a penalty for actual costs of petitioner’s attorney fee. The award is a contempt penalty following the Judge’s determination that the mother has not been paying student loans in a timely manner thus harming the father’s credit and that the mother has not complied with a parenting time order. Is that penalty dischargeable in Bankruptcy?
A: Bankruptcy Code Section 523 provides a list of debts that are not dischargeable in bankruptcy. Specifically 523(a)(7) states: A bankruptcy discharge “does not discharge an individual debtor from any debt – … (7) to the extent that such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss…”
Under section 523(a)(7), civil contempt sanctions are generally non-dischargeable where, they are imposed to uphold the dignity and authority of the court. For example see U.S. Sprint Communications Co. v. Buscher, 89 B.R. 154, 156 (D.Kan.1988); PRP Wine Int’l, Inc. v. Allison (In re Allison), 176 B.R. 60, 63-64 (Bankr.S.D.Fla.1994). In these cases, the dischargeability of a prior fine was at issue in a subsequent bankruptcy.
A “debtor seeking to discharge a pre-petition sanction faces an uphill battle. While he has the ability under Bankruptcy Rule 4007 to seek a determination of the dischargeability of the sanction in that subsequent proceeding, the bankruptcy court will evaluate and adjudicate the prior debt’s dischargeability guided at least in part by § 523(a)(7). It is for this reason that a representative of a corporate debtor, like Mr. Hansbrough, is not free flatly to ignore the bankruptcy court’s orders, absorb any sanction the court can muster, and then simply file a personal bankruptcy petition before a different court and obtain a discharge as a matter of course.” In Re Hercules Enterprises, Inc., d/b/a JP’s Health Club, Debtor. James Hansbrough, Appellant, v. David Birdsell, Chapter 7 Trustee of Hercules Enterprises, Inc.’s Bankruptcy Estate, Appellee, 387 F.3d 1024 (9th Cir, 2004).
Accordingly, my reading of the Bankruptcy Code is that Section 523(a)(7) creates a two prong test to determine whether a civil contempt action is dischargeable in bankruptcy:
1) The debt cannot be discharged if the penalty is payable to and for the benefit of a governmental unit; AND
2) The debt cannot be discharged if the penalty is not compensation for actual pecuniary loss [a “pecuniary loss” is defined as “a loss that can be evaluated in money terms” (Black’s Law Dictionary)].

If mother files a Chapter 7 bankruptcy and receives a discharge, even if the current $20,000.00 penalty is dischargeable, the underlying order to remain current on student loans is not dischargeable. The mother should file a Chapter 13 bankruptcy to attempt a discharge of both the civil contempt penalty as well as the property settlement order.

In the facts presented, the state court order was that the money be paid directly to the father and not payable to or for the benefit of the any governmental unit. Therefore, the first prong is not met and the debt can be discharged in bankruptcy. The second prong is that the debt cannot be discharged if the debt is not compensation for actual pecuniary loss. Conversely then, the debt is dischargeable in bankruptcy if the penalty is for actual pecuniary loss. In this case, the court order does specifically state that penalty is for actual compensation so it should be dischargeable in bankruptcy.
More importantly, however, is that the divorce decree directed the mother to remain current on student loans and hold the father harmless as a co-debtor. Through issuance of this divorce decree order, the state court has created another potential debt for the mother; that is, the father can collect money for damages if the mother does not remain current on student loans. This potential debt to father will remain in effect until either the student loan is timely paid or the divorce decree order is discharged. A Chapter 7 bankruptcy will NOT discharge any debt to a former spouse that was incurred by the debtor in the course of a divorce. Therefore, if mother files a Chapter 7 bankruptcy and receives a discharge, even if the current $20,000.00 penalty is dischargeable, the underlying order to remain current on student loans is not dischargeable. Accordingly, if the mother ever falls behind on student loans in the future, the father could simply seek another post-discharge contempt order and the mother would have to appear again before an already unhappy judge. Therefore, I would recommend that the mother file a Chapter 13 bankruptcy to attempt a discharge of both the civil contempt penalty as well as the property settlement order.

Filed Under: Chapter 13, Chapter 7, Credit Score, Marriage & Divorce, Non-Dischargable Debt, Questions About Bankruptcy Tagged With: Section 523

Discharging Property Settlements in Divorce Cases: Chapter 13 and Why to File – Overview of Bankruptcy, Part 8

July 3, 2014 by TomScottLaw

Series: #13 0f 13
The previous article in this Overview of Bankruptcy series discussed how stripping off wholly unsecured mortgages is a valuable option in a Chapter 13 case, giving a debtor the opportunity to modify a wholly undersecured second or other junior mortgage. In this last article of the series, we will take a brief look at discharging property settlements during a divorce.

Discharging Property Settlements to Spouse, Ex-Spouse, or Children

Pursuant to 11 U.S.C. § 523*(a)(15), a Chapter 7 filing will not discharge any debt to a spouse, former spouse, or child of the debtor (and not child support) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record.
Certainly an argument can be made that a divorce decree that orders the debtor to pay debts of the marriage or attorney fees incurred in a divorce (which are not in the nature of alimony, maintenance or child support) may not be dischargeable in a Chapter 7 filing. The filing, completion and discharge of a Chapter 13 allow the discharge of such debts and protect the debtor from an angry ex-spouse and/or state court judge.
Oftentimes, the ex-spouse has already filed his or her own Chapter 7 in which case, the debtor may be able to file a Chapter 7. A careful review of the divorce decree and the ex-spouses filing (to determine what debts have been listed and discharged) should be taken before making any determination as to the appropriate chapter.
__________
As we mentioned at the beginning of this series, there are many reasons in which a debtor may find as much or more “stress-relief” in a Chapter 13 reorganization. The attorney must be careful to analyze all the benefits and risks (as required by 11 U.S.C. § 526(a)(3)(B) and rules of professional responsibility) before making such a determination as to which chapter is appropriate. If a Chapter 13 is appropriate, then the attorney needs to carefully determine whether such a plan is feasible and offered in good faith to the court. If all of these factors are met, confirmation of the plan is likely to follow.

* Source: Cornell University Law School Legal Information Institute

Filed Under: Chapter 13, Chapter 7, Marriage & Divorce Tagged With: discharge debt

Do both spouses have to file for bankruptcy?

July 5, 2013 by TomScottLaw

No, there is no requirement in the Bankruptcy Code that a married couple must file bankruptcy jointly. In fact, in many cases our office will not recommend a joint filing. For example, if a couple is newly married and one spouse has brought significant debt to the marriage, then it may be best that only one spouse file.
However, there are circumstances where a creditor might be able to sue spouses even if one spouse did not sign a contract for the debt. You should seek advice from an attorney regarding the applicability of the “Doctrine of Necessaries” to your fact pattern.
The Indiana Supreme Court has held that “each spouse is primarily liable for his or her independent debts.” Typically, a creditor may look to a non-contracting spouse for satisfaction of the debts of the other only if the non-contracting spouse has otherwise agreed to contractual liability or can be said to have authorized the debt by implication under the laws of agency.
When, however, there is a shortfall between a dependent spouse’s necessary expenses and separate funds, the law will impose limited secondary liability upon the financially superior spouse by means of the doctrine of necessaries.” See In Bartrom v. Adjustment Bureau, Inc., 618 N.E.2d 1, 8 (Ind. 1993).

Filed Under: Marriage & Divorce, Questions About Bankruptcy

Does being divorced affect bankruptcy?

July 5, 2013 by TomScottLaw

Yes, it might in several ways. There are certain debts that may be incurred during a divorce through a written court order or property settlement that may not be dischargeable in a Chapter 7 bankruptcy.
An experienced attorney will need to review a divorce decree to determine whether you may face contempt actions for filing to abide by the order following completion of a Chapter 7 bankruptcy. A Chapter 13 may be used as a “super-discharge” to eliminate non-child support divorce orders.
In addition, property that you may receive in the future through a divorce decree may be taken in a Chapter 7 filing. Any time there is a divorce that is pending or recently completed, you should advise your attorney of this fact and supply a copy of the divorce decree and property settlement.

Filed Under: Marriage & Divorce, Questions About Bankruptcy

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