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What Can I Do If I Cannot Afford My Monthly Vehicle Loan Anymore?

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What can I do if I cannot afford my monthly vehicle loan payment anymore? The problem is you have a vehicle loan payment that is too high and causing you problems each month with your bills. What can you do about it? There are any numbers of options to try and reduce the payment or get rid of the vehicle in the real world. Most of them end with the vehicle loan company sending you a bill once the vehicle is gone. This article focuses on forcing a set of terms, more favorable loan terms, on loan companies by filing for bankruptcy protection.

Depending upon the circumstances bankruptcy can reduce the principal amount owed on a loan and reduce the loan percentage rate thereby reducing your vehicle loan payment amount each month. The entire point of filing for bankruptcy protection is to eliminate, reorganize and reduce debts. Here we are talking about redeeming a vehicle for its fair market value in a Chapter 7 bankruptcy or cramming down on a vehicle loan in a reorganization case under Chapter 13, 9, or 12 by filing a motion to value the collateral of the secured loan.

So What Are The Savings To You?

The simplest answer is the savings will be the difference between what your vehicles is worth and what is owed on the vehicle loan, plus any reduction in the loan percentage rate. The larger the gap between the value and loan balance the larger the savings. If you vehicle is only worth $10,000 and the balance on your loan is $18,000 filing bankruptcy can reduce the amount you have to pay back to what your vehicle is worth ($10,000), not what is owed on the vehicle loan. So in our example the difference or savings is potentially $8,000. See below for issues that could make the savings less though.

Redeeming A Vehicle For Its Retail Value or Fair Market Value In Chapter 7 Bankruptcy

In a Chapter 7 the result is substantially the same as in a Chapter 13 reorganization case, but the law is different in reducing the vehicle loan. In Chapter 7 liquidation cases vehicle loans are reduced by redeeming the vehicle for its fair market value with new financing. A new loan is obtained for the retail or fair market value of the vehicle, as in our example $10,000, and the old loan company is forced to take the $10,000 in satisfaction of the original $18,000 vehicle loan. This is a 722 redemption. A motion has to be filed with the court and depending upon the jurisdiction a hearing may have to be held. In the Northern District of California we can notice motions on scream or die notice and seek a default if no opposition or request for hearing is filed with the court. The motion should cost anywhere from $500 – $1,400 depending upon your bankruptcy attorneys. The catch here is usually the new financing, new loan to pay off old loan, has a high percentage rate and there are process and origination fees usually. I have to say I am not a fan of redeeming vehicles for their fair market value under 722 of the Bankruptcy Code.

Courts have previously articulated its general approach to redemption under § 722 in the case of In re Lopez, 224 B.R. 439 (Bankr. C.D. Cal. 1998). Under that approach, the proper date for valuation of property under Bankruptcy Code §722 is the date of the hearing on the redemption motion. In re Lopez, 224 B.R. at 444. But see In re Eagle, 51 B.R. 959, 962 (Bankr. N.D. Ohio 1985) (date of valuation is petition date).

Cramming Down A Vehicle Loan In A Reorganization Case

In a Chapter 13 or some other reorganization case a motion to value the collateral, the vehicle, is filed and the value of the collateral is determined. This is the amount that has to be paid through the chapter 13 plan to the original vehicle loan company. Again, in our example a motion to value the vehicle would be filed valuing the vehicle at $10,000. What many bankruptcy attorneys do not tell you is you have to add in the attorneys’ fees and the chapter 13 trustee fee to truly calculate the savings via a chapter 13 case and chapter 13 plan. In our example I will use attorneys’ fees of $4,000 [$67 of the monthly chapter 13 plan payment] and the chapter 13 trustee gets a percentage of the monthly plan payment. I will use $67 a month for the chapter 13 trustee too, or $4,000 over the life of the chapter 13 plan. Even if the savings is not huge, no matter what, the monthly payment will decrease significantly since the chapter 13 plan will re-amortize the loan in the three to five year chapter 13 plan. For example the original loan in our example has a principal balance owed of $18,000 at 17% interest. The total amount financed is $28,841 and the monthly vehicle loan payment is $447 a month for five years. After filing for chapter 13 bankruptcy and valuing the vehicle/collateral at $10,000 with percentage rate of only 5% the total payoff is reduced to $11,323 and the monthly vehicle loan payment is reduced to $189, a reduction of $258 each month. For many people this reduction allows them to keep the car and pay their other living expenses on time each month without stress.

How To Value The Vehicle Under The Bankruptcy Code?

There is no absolute formula when determining the value of a vehicle. Courts will generally begin with determining the retail value figure based upon the year, make, model and mileage for the vehicle.

As a general principle, absent unusual circumstances, the retail value of a vehicle should be calculated by adjusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors. See In re Coleman, 373 B.R. 907, 912-13 (Bankr. W.D. Mo. 2007); In re Carlson, No. 06-40402, 2006 WL 4811331, at *2 (Bankr. W.D. Wash., Dec. 8, 2006); In re Eddins, 355 B.R. 849, 852 (Bankr. W.D. Okla. 2006).

There are usually competing appraisals provided to the bankruptcy court. One from N.A.D.A. or another from KBB. Or two different valuations from KBB. Regardless the court has to make a determination of what value to start at. After that the bankruptcy court should look at the specific condition of the vehicle as of the date the petition for bankruptcy protection was filed. If the vehicle in excellent (less than 5% of vehicles) good or fair condition. The will then make a reasonable adjustment to the starting point valuation discussed above.

What Evidence Should I Present To Prove Value?

I am of the opinion that more is more and not more is less under these circumstances. A picture does speak a thousand words. Take a picture of each scratch in the pain and each dent. That could result in 30 pictures of every little scratch or dent. So be it. Take pictures of the interior of the vehicle and each and every discoloration or stain on the upholstery. Every crack in windows and even measure what is left on the tire tread. Does the timing belt need to be changed? When was the last oil change? Are the windshield wipers new or in need of replacement? You can sure assume the vehicle loan company will provide value of the vehicle as if everything is perfect on the vehicle. Declarations describing the condition of the vehicle and pictures showing the condition of the vehicle is essential. Then there are the vehicles currently being sold and advertised prices. There is what KBB and N.A.D.A. says about value and then there is the real world. Just because KBB says the retail value is one number does not mean the real world market agrees. Review advertisements for the sale of vehicles similar to your own. Are the retail advertisements higher or lower than what KBB or N.A.D.A. says your vehicle is worth? The bottom line here is to leave nothing out for the Bankruptcy Court to consider in determining the value of your vehicle.

A debtor may also wish to submit photographs of the vehicle and evidence as to the retail values of other like vehicles for sale by retail merchants in the debtor’s geographic area. Evidence of this nature will assist the court in determining whether an adjustment to the guide retail value is warranted.

At the very minimum include the following basic information:

(1) a description of the vehicle, including any options installed and special features;
(2) a description of the condition of the vehicle as of the petition date, including any damage, general deterioration, and past or necessary repairs;
(3) the vehicle’s mileage as of the petition date; and
(4) the age of the vehicle as of the petition date.

Was The Chapter 13 Petition and Plan Filed in Good Faith?

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In a Chapter 13 reorganization case there are a number of requirements that a Chapter 13 Plan must meet to be confirmed or approved by the bankruptcy court. Section 1325, Confirmation of Plan, of the Bankruptcy Code provides the requirements that must be met. Section 1325(a)(3) and 1325(a)(7) provide the bankruptcy petition and chapter 13 plan must be proposed in good faith. This issue has been framed as a petition or plan is in bad faith. What you are trying to prove though is lack of “good faith.” Prove that the petition or plan were not filed in good faith. The word bad faith does not appear anywhere. The term “good faith” is not defined by the Bankruptcy Code so case law is all we have to go on.

Good Faith Pursuant to Section 1325 of the Bankruptcy Code

Again, the debtor will argue the petition and plan were filed in good faith. Lack of good faith can be shown by considering: (1) whether the debtor misrepresented facts in his/her petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his/her chapter 13 petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor only intended to defeat state court litigation; and (4) whether egregious behavior is present. See Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999) (internal quotation marks and citations omitted); see also Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1132 (9th Cir. 2013).

Mendez, Appellant v. Harwood, Appellee

In a recent decision by the Ninth Circuit Bankruptcy Appellate Panel the issue of good faith based upon an objection to confirmation filed by judgment creditor Ronald Mendez. According the court records, Mr. Mendez was a former client of the bankruptcy filer Sterling V. Harwood. Mr. Mendez paid Mr. Harwood a total of $18,000. At some point Mr. Mendez was dissatisfied with Mr. Harwood’s services and requested his money back. Mr. Harwood refused and from prison Mr. Mendez sued Mr. Harwood in Santa Clara Superior Court for breach of contract and fraud. Mr. Harwood did not respond to the lawsuit and a default judgment was entered against him for approximately $26,000. After five months Harwood tried to have the default judgment vacated for improper service of the summons and complaint. The Superior Court of California ruled Harwood’s motion to vacate the default judgment was not timely and that personal service of Harwood was proper. The default judgment stood.

Harwood’s Chapter 13 Bankruptcy Cases

Mr. Harwood filed a skeleton Chapter 13 bankruptcy petition to stop garnishment of his wages to satisfy the state court judgment of Mr. Mendez. A skeleton petition describes the filing of the basic documents to start a Chapter 13 bankruptcy case. The rest of the petition must be filed within 14 days or the case will be dismissed. There are almost no successful Chapter 13 reorganizations without the assistance of bankruptcy lawyers. Mr. Harwood’s first case was dismissed.

Harwood’s Second Chapter 13 Bankruptcy Filing

This first case was dismissed for failing to complete the credit counseling course or complete the bankruptcy petition. After retaining a bankruptcy attorney Mr. Harwood filed a second Chapter 13 bankruptcy case. To be fair Mr. Harwood has plenty of reasons to reorganize his debts. In addition to the Mendez judgment for $29,000, Mr. Harwood was behind on this mortgage payments and needs to obtain a loan modification to keep the his home, he is also behind on his property taxes, he has another judgment entered against him in San Mateo Superior Court totaling $5,837.90 owed to another attorney, Donald S. Tasto, Esq. Attorney Tasto unfortunately passed away while Mr. Harwood’s second bankruptcy filing was pending. Mr. Harwood also has $112,219.87 in general unsecured debts. Mr. Harwood listed his income from employment as a professor as $3,336 a month and business income of $25,362 a month in Schedule I (total monthly gross income after deductions is $26,452.84) and monthly expenses of $26,286 in Schedule J. With a gross income of over $26,000 a month there is only $166 to make the Chapter 13 Plan payment. Most of Mr. Harwood’s expenses are business related. Mr. Harwood’s wife does not work or have income.

The first filed Chapter 13 Plan proposed to pay $165 a month for 60 months. The only debt being paid through the Chapter 13 Plan are attorneys’ fees of $7,400 and the trustee fee to administer the plan. No actual creditors received any distribution through the first chapter 13 plan filed. There is authority to support an argument that filing a Chapter 13 Plan that pays nothing to creditors was not filed in good faith. This is a litigated issue though. An argument is how can someone reorganize their debts when they are not paying any of their debts back? What debts are reorganized? A Chapter 13 plan that pays nothing to creditors is more or less a Chapter 7 then, a complete discharge of eligible general unsecured debts. So the argument goes the actual reason a Chapter 13 plan like this is filed must be for some improper purpose or unfair manipulation of the Bankruptcy Code.

The First Amended Chapter 13 Plan proposed to pay $165 for 24 months then $365 for the remaining 36 months of the 60 month plan. Total plan payments would equal approximately $17,100 over the life of the plan. Mr. Harwood’s attorneys also increased their attorney fees to $8,800 or about half of the proposed plan payments. The second filed Chapter 13 Plan also proposed to reject an advertising contract with a radio station, avoid the judgment lien of deceased attorney Donald Tasto, Esq., and provide language about seeking modification of their first mortgage on his primary residence. Mr. Mendez objected to confirmation of this plan arguing it was not filed in good faith.

The Third Amended Chapter 13 Plan filed by Mr. Harwood proposed to reduce the plan payments to $165 for 24 months then $360 for the remaining 36 months. The Second Amended Chapter 13 Plan also included the following special provisions: “By April 30th of each year during the pendency of the case, the debtor shall provide the Trustee with a copy of all Federal income tax returns required to be filed; or, if an extension has been obtained, a copy of the extension and the tax return within ten (10) days of filing the return but no later than ten (10) days after the expiration of the extension date The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of his law office in Vietnam and outlines the average monthly income and expenses for the business. The debtor shall file a declaration on January fifteenth and July fifteenth of each calendar year, beginning July 15, 2014, which states what the status is of the malpractice case against his spouse’s former bankruptcy attorney.”

Mr. Mendez’s Argument For Lack of Good Faith

Mr. Mendez argues the petition was not filed in good faith given Harwood misrepresented the nature of the debt owed to Mr. Mendez. Harwoods’s Amended Schedule F describes Mr. Mendez’s judgment claim as: “Incurred: 2013 Consideration: Alleged breach of contract Debtor disputes any liability to this individual. A default was taken based on improper service.” Mr. Mendez argues that the Santa Clara Superior Court ruled that service was proper and there is no alleged debt, Mr. Mendez obtained a valid judgment against Mr. Harwood. Whether true of not the description of the nature of a debt is a minor issue in the big scheme of things and does not really change the treatment of Mr. Mendez’s claim under the Bankruptcy Code. Minor discrepancies in the petition will not rise to the level of not having good faith. While the description of the claim owed to Mr. Mendez in Schedule F is arguably not correct, the bankruptcy court found that the description was adequate under the circumstances and the description is not evidence of trying to mislead the court or manipulate the Bankruptcy Code.

Mr. Mendez next argues the first filed case and Chapter 13 Plan were not filed in good faith given it was filed for the stated purpose of avoiding wage garnishment and frustrate the enforcement of the state court judgment of Mr. Mendez. This argument is not a good one absent some additional facts. A very high percentage of bankruptcy cases filed involve some sort of state court lawsuit. Filing bankruptcy to stop a wage garnishment, bank levy or foreclosure of a home is perfectly normal. If the state court case was at the eve of trial or some other additional circumstance this argument could work.

The bankruptcy court agreed and held that Mr. Harwood was well within his rights to file for bankruptcy protection under Chapter 13.

Mr. Mendez next argues that Mr. Harwood is seeking to discharge in Chapter 13 his judgment that would not be discharged in Chapter 7 and therefore Mr. Harwood has unclean hands. This is a tough argument given that Mr. Mendez’s judgment for fraud against Mr. Harwood is arguably not dischargeable in both Chapter 7 and Chapter 13 if proven pursuant to Section 523(a) of the Bankruptcy Code. The exceptions to discharge set forth in §523(a)(2), (4) and (6) of the Bankruptcy Code are not self-executing. See Mohsen v. Wu (In re Mohsen), 2010 WL 6259979 at *6 (9th Cir. BAP Dec. 21, 2010). Rather, § 523(c)(1) provides, with exceptions not applicable here, that a creditor must request and receive a judgment that the debt owed is not dischargeable. To have certain types of debts deemed not discharged pursuant to Sections 523(a)(2),(4) and (6) an adversary lawsuit must be filed and a judgment received. Then the debt can be enforced again under state law.

9th Circuit BAP Agrees With Bankruptcy Court

Mr. Mendez lost the appeal given the Ninth Circuit Bankruptcy Appellate Panel could not find error in the bankruptcy courts overruling of Mr. Mendez’s objection to confirmation of Harwood’s Chapter 13 Plan. Based upon these facts anyway the petition and plan were found to be filed in good faith.

What Not To Do If You Know You Will Receive A Significant Inheritance When Filing Bankruptcy

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The definition of property of the estate under Section 541 of the Bankruptcy Code is very broad. So if you know you are going to get a significant inheritance why file bankruptcy? Like everything I guess “significant” could mean something different depending upon the circumstances. If you only have $50,000 in debt and know you will receive $100,000 from someone’s estate that has already passed, that is a significant inheritance in my opinion. An argument could be made for still filing for bankruptcy protection, but be careful. The inheritance is part of the bankruptcy estate, must be disclosed and held for the benefit of your creditors if you file bankruptcy. The following is a rundown of what not to do if you know you will receive a significant inheritance when filing bankruptcy. This Ninth Circuit Bankruptcy Appellate Panel case deals with what happened to a debtor that received a significant inheritance right before filing for bankruptcy protection in the Bankruptcy Court for the Southern District of California. See: Jason Scott Brown v. Thomas H. Billingslea, Jr., Chapter 13 Trustee; 9th Cir. BAP No. SC-14-1388-JuKlPa. After discussing the initial Chapter 13 bankruptcy filing and then Mr. Brown’s appeal, this article concludes with what is currently taking place after this appeal (spoiler alert) in the Chapter 7 case. What did the Chapter 7 Trustee do upon conversion for the benefit of Mr. Brown’s creditors?

In this case the debtor, Jason Scott Brown, filed a Chapter 13 Bankruptcy petition on December 13, 2013, three days before the closing of the sale of a property he inherited when his father, Herbet D. Brown, who passed away July 20, 2012. The sale of the inherited property closed on December 16, 2013, and Mr. Brown received $65,812 in proceeds. I do not really know why Mr. Brown filed for bankruptcy knowing he was entitled to over $65,000 from the sale of the property. I will not begin to speculate because there may be a very legitimate and reasonable reason why. I just do not know what it is. What I do know is what happened next in his Chapter 13 bankruptcy case. Mr. Brown represented in his Schedule B that he was only going to receive $2,500 in inheritance and his Schedule F listed $33,499 in general unsecured debts. Also upon receiving the probate funds Mr. Brown did not amend his schedules.

At the Section 341 meeting of the creditors the Chapter 13 Trustee and Mr. Brown entered into a pre-confirmation modification of the Chapter 13 Plan requiring Mr. Brown to turn over to the trustee for the benefit of his creditors $3,224 in probate proceeds within 45 days of receiving the funds. Why $3,224 instead of the $2,500 he listed in this schedules is unknown. At some point the Chapter 13 Trustee found out about the actual amount of the proceeds Mr. Brown was receiving from the sale of his deceased father’s house via probate. In April 2014 the Chapter 13 Trustee moved for dismissal of the case and objection to confirmation arguing that $37,569 should be turned over to the trustee for the benefit of unsecured creditors.

The Chapter 13 trustee’s objection to confirmation included documents from the probate proceeding and sale of the house. Again for some unknown reason Mr. Brown’s brothers assigned him their beneficial interest in the inheritance from their father’s estate on August 7, 2013. At some point in May 2014, Mr. Brown changed Bankruptcy Lawyers and immediately amended his schedules to allege his share of his father’s estate was only $12,372 and fully exempt from creditors. Mr. Brown alleged that his three brothers were each entitled to 25% of the inheritance. After some more legal wrangling the Chapter 13 Trustee also requested the case be converted to Chapter 7 given Mr. Brown did not disclose the inheritance and this was an abuse of the bankruptcy process. See: Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 767 (9th Cir. 2008).

In another strange turn of events, Mr. Brown’s Bankruptcy Attorneys on his behalf on June 17, 2014, filed a status report telling the court that Mr. Brown misunderstood that the inheritance was property of the bankruptcy estate. Therefore to make it right Mr. Brown would pay 100% of his unsecured debts in the Chapter 13 Plan after objecting to a claim of a creditor. See section below about the Chapter 7 case regarding this objection to claim.

At the hearing on the Chapter 13 Trustee’s objection to confirmation on July 8, 2014, Mr. Brown informed the court that his part of the inheritance was put into his business and the rest of the inheritance as paid in CASH to two brothers and by check to a third brother. At this hearing the Bankruptcy Court noted that given the source of payment for creditors, the inheritance was gone, continuing to pursue Chapter 13 reorganization was not in good faith. The Bankruptcy Court also found based upon the facts that cause existed to convert the Chapter 13 case to Chapter 7 so that a Chapter 7 Trustee could seek return of the inherited funds via fraudulent transfer or transfer avoidance powers for the benefit of creditors. Mr. Brown timely appealed the conversion of his case to Chapter 7.

Cause To Convert The Case To Chapter 7

On appeal the Ninth Circuit Bankruptcy Appellate Panel found the Bankruptcy Court’s finding of cause was not clearly erroneous. The Ninth Circuit BAP also noted that Mr. Brown’s appeal focused on the fact that Mr. Brown proposed a 100% Chapter 13 Plan and not that the Bankruptcy Court’s findings were erroneous. Also cleverly noted is that Mr. Brown never actually filed an amended plan or motion to modify the confirmed chapter 13 plan to pay creditors 100%. Mr. Brown only orally alleged he would propose a 100% chapter 13 plan upon objecting to a creditor’s claim. If successful with the claim objection Mr. Brown “believed” he would be able to pay unsecured creditors 100%. How could this be possible though? Mr. Brown’s income was only social security and was not sufficient to fund a 100% Chapter 13 Plan and he used and gave away all of the inheritance . . . . so.

The 9th Circuit BAP also noted that Mr. Brown’s case was pending for seven months and Mr. Brown could have paid all of his unsecured creditors in full with the inheritance and did not even though the Chapter 13 Trustee requested him to turn over the inherited funds. Mr. Brown instead used the inheritance for his business and paid the inheritance to his brothers. Mr. Brown’s creditors suffered prejudice from the loss of the money.

Conversion of the Chapter 13 to Chapter 7

A case can be converted to Chapter 7 for cause, including the failure to make Chapter 13 Plan payments. In Mr. Brown’s case he did not pay the Chapter 13 Trustee the $3,224 of the inheritance he agreed to turn over in the pre-confirmation modification agreement he signed. Section 1307(c)(4) applies to debtors when Chapter 13 Plan payments commence and then the debtor pays less than what the Chapter 13 Plan on file requires. See: In re Mallory, 444 B.R. 553, 558 (S.D. Tex. 2011) (citing In re Jenkins, 2010 WL 56003, at *2 (Bankr. S.D. Tex. Jan. 5, 2010). Mr. Brown argued he did not turn over the $3,224 on advice of this counsel.

Lack of Good Faith

The Bankruptcy Court found two factors of lack of good faith by Mr. Brown: (1) that Mr. Brown misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his petition or plan in an inequitable manner, and (2) there was a presence of egregious behavior. In response Mr. Brown argued he never misrepresented facts in this petition or plan and he disclosed the inheritance to the court. The Ninth Circuit Court of Appeals discussed two cases: (1) Marrama v. Citizens Bank of Mass., 549 U.S. 365, 368 (2007) and (2) In re Rosson, 545 F.3d at 771; Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 336 (9th Cir. BAP 2012).

In Rosson the debtor communicated to the Bankruptcy Court that he was going to receive a large arbitration award to fund his Chapter 13 Plan. When Rosson received the award he did not turn over the funds to the Chapter 13 Trustee and the Bankruptcy Court found Rosson was rebelliously horsing around with bankruptcy estate assets and therefore converted the Chapter 13 case to Chapter 7. Rosson then tried to voluntarily dismiss his Chapter 13 case and the Bankruptcy Court denied the motion. The decision was affirmed upon appeal.

In Marrama the debtor filed a Chapter 7 bankruptcy case and allegedly misrepresented the value of a piece of real property in Maine and denied transferring the property into a trust for no value during the year prior to filing Chapter 13 to protect the property from his creditors. After the debtor admitted to the above improprieties he requested conversion to Chapter 13. His main creditor objected saying the conversion was in bad faith. In Marrama the debtor argued the information provided incorrectly about the Maine property were due to scrivener’s error and that now that he is employed he was eligible to proceed under Chapter 13. The Bankruptcy Court denied conversion to Chapter 13.

Mr. Brown on appeal tried to argue his facts are not like those in Rosson or Marrama. The 9th Circuit BAP was not convinced. They provide the following in support of a finding of bad faith:

– Mr. Brown’s failure to provide an accounting of the inheritance funds was bad faith;
– Mr. Brown’s explanation for disbursing the funds to his brothers, but found that his explanation did not justify his actions when the Chapter 13 Trustee had made demands on Debtor to place the funds in Trustee’s lockbox account or deposit the funds in his counsel’s client trust account;
– Evidence showed that Mr. Brown already had the proceeds from the sale of his father’s house at the time he filed his schedules but Mr. Brown disclosed that he anticipated receiving only $2,500 from the probate estate. There is no explanation in the record from Mr. Brown as to how he came up with the $2,500 number;
– Mr. Brown claimed his brothers were entitled to 75% of the inheritance but his brothers had filed waivers of their beneficial interests with the probate court.

Best Interest of Creditors

Another factor of consideration is the best interest of creditors when converting or dismissing a case. Mr. Brown argues that now that there are no inheritance funds to distribute to creditors the case should remain a Chapter 13 case and allow Mr. Brown to pay creditors via the Chapter 13 plan. The Bankruptcy Court correctly originally noted Mr. Brown’s income was not sufficient to fund a 100% Chapter 13 Plan and the inheritance was gone. On appeal the Ninth Circuit Bankruptcy Appellate Panel noted there was no court order allowing Mr. Brown to dispose of the inheritance. Under Section 348(f)(1)(A) Mr. Brown argues that the inheritance has been eliminated from the bankruptcy estate therefore making the Chapter 7 case a “no asset” case.

This is a strange argument given that if it were true, then any Chapter 13 debtor could file Chapter 13 after disposing property of the bankruptcy estate fraudulently, then convert to Chapter 7 and creditors would get nothing? Mr. Brown is making this argument in an attempt to remain in Chapter 13 and not face being sued for fraudulent transfer of the inheritance or have his brother’s potentially sued for the turnover of the inheritance funds their received by the Chapter 7 trustee upon conversion. That is the whole point in converting the case really. Chapter 13 Trustee’s traditionally do not seek to avoid fraudulent or preferential transfers of assets. The 9th Circuit Bankruptcy Appellate Panel provides Section 348(f)(1)(A) is not a “safe harbor” for debtors that fraudulently dispose of property of the bankruptcy estate while in Chapter 13. See: Wyss v. Fobber (In re Fobber), 256 B.R. 268, 279 (Bankr. E.D. Tenn. 2000).

Mr. Brown also argues that upon dismissal creditor would be free to collect against Mr. Brown from his potential assets. Mr. Brown is arguing creditors would be worse off with conversion to Chapter 7. More or less Mr. Brown wants to stay in Chapter 13 and try and pay his creditors via the Chapter 13 Plan 100%. The problem again is that Mr. Brown’s income is not sufficient to pay creditors 100% and Mr. Brown never actually filed a motion to modify his plan to pay creditors 100% of the allowed claims. The Ninth Circuit BAP noted there is no evidence that Mr. Brown’s creditors would receive any prompt payment if the Chapter 13 case was dismissed and held there was no error in Bankruptcy Court’s conversion to Chapter 7.

Absolute Right To Dismiss Chapter 13 Case

There kind of used to be an absolute right to dismiss a Chapter 13 case. Section 1307(b) provides: On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. There was a split in authority between different circuit courts whether this was an absolute right. In cases where there was improper conduct of the debtor some circuit courts held a debtor should not be able to dismiss the Chapter 13 case. In other circuits court held that Section 1307(b) does not provide for a good faith or bad faith component but says on request of the debtor at any time the court shall dismiss a case. The 9th Circuit BAP cites In re Rosson, 545 F.3d at 771, 774. The right to convert pursuant to Section 1307(b) is not absolute but a qualified right to prevent an abuse of the process pursuant to Bankruptcy Code Section 105(a). Section 105(a) provides: The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

The bankruptcy court is after all a court of equity or fairness. So, it is not fair to creditor or the bankruptcy process to make misrepresentations in your schedules, mislead the bankruptcy court and trustee, or dispose of bankruptcy estate assets without permission of the court and then try and voluntarily dismiss your Chapter 13 case.

So What Took Place In The Chapter 7 Case After Conversion?

Well first of all, something that was not brought up in the appeal, Mr. Brown on September 9, 2014, filed an objection to the claim they mentioned in their argument to stay in the Chapter 13 case and pay creditors 100%. On October 27, 2014, Mr. Brown then filed an amended objection to the claim to correct a problem in the first objection to the claim. Mr. Brown was arguing that if this claim was not allowed then he could pay his creditors 100% and the case should not be converted. The objection is meaningless given the case was converted to Chapter 7 and Mr. Brown lost the appeal. The Chapter 7 trustee will now object to claims if there are grounds to object. I just thought it interesting that Mr. Brown in fact filed the objection to the claim.

On October 14, 2014, Santander filed a motion for relief from stay to request permission from the Bankruptcy Court to repossess Mr. Brown’s 2008 Dodge Caravan for his failure to make the monthly vehicle loan payments. This is a problem when a Chapter 13 case is converted the Chapter 7. In some Chapter 13 cases the monthly vehicle loan payment is paid through the Chapter 13 Plan. Some plans call for payments on the vehicle loan before a Chapter 13 Plan is approved by the court and then the Chapter 13 Trustee makes payments to the vehicle loan company. So in Mr. Brown’s case he either stopped making his vehicle loan payments or while his Chapter 13 case was pending for the last ten months Santander did not receive any payments from the Chapter 13 Plan. On November 5, 2014, the Bankruptcy Court granted the motion for relief from stay giving Santander permission to repossess their collateral, the 2008 Dodge Caravan.

On April 21, 2015, after conclusion of the Section 341 meeting of the creditors the Chapter 7 Trustee, Christopher Barclay, filed his notice of abandonment of property of the bankruptcy estate. One of the arguments on appeal by Mr. Brown was that in the Chapter 7 case there would be no assets to distribute to creditors and the Chapter 7 case would therefore be a “no asset” case so the case should remain in Chapter 13. The filing of the notice of abandonment of property of the estate kind of confirms there are no assets. The Chapter 7 Trustee did not abandon the bankruptcy estates claim against Mr. Brown for transferring the inheritance or Mr. Brown’s brothers that received the inheritance.

Chapter 7 Adversary Proceeding

On May 19, 2015, the Chapter 7 Trustee filed an adversary lawsuit against Mr. Brown and his three brothers for conversion and requesting punitive damages, objecting to Mr. Brown receiving a discharge and/or revocation of discharge pursuant to Sections 727(a)(2(A), 727(a)(2)(B), 727(a)(3), 727(a)(4), 727(a)(5) and 727(c). The adversary lawsuit also seeks avoidance of the post-petition transfer of the inheritance pursuant to Section 548 of the Bankruptcy Code. Adversary Case No. 15-90085-MM. As for timing, remember the appeal was filed on August 12, 2014, and the court entered the order converting the case to Chapter 7 on July 28, 2014. The Ninth Circuit Bankruptcy Appellate Panel entered their decision on October 26, 2015, affirming the bankruptcy’s conversion of the case to Chapter 7. Sometimes an adversary lawsuit will be stopped or stayed due to an appeal being filed. In this case the court held the adversary lawsuit should continue regardless of the appeal.

Motion to Dismiss Adversary Proceeding

On June 19, 2015, the three Brown brothers, Cutis, Kenneth and Christopher filed a motion to dismiss the adversary lawsuit against them alleging that the claims against them of the bankruptcy estate do not exist upon conversion to Chapter 7 pursuant to Section 348(f)(1)(A) of the Bankruptcy Code. Mostly the motion to dismiss alleges deficiencies in the timing of the adversary complaint and its causes of action.

Subsequent First Amended Adversary Complaint

On June 29, 2015, the Chapter 7 Trustee filed a first amended complaint and reply to the Brown Brother’s motion to dismiss the case. On July 27, 2015, the Brown Brother’s filed an answer to the first amended complaint filed against them. On August 4, 2014, the debtor, Jason Brown, filed an answer to the first amended complaint. Again, note the appeal was not decided until October 26, 2015.

So, as of right now the debtor, Jason Brown, and his three brother’s motion to dismiss the adversary complaint were denied by the court and the appeal failed to undo the conversion to Chapter 7. The Chapter 7 case will continue and so will the adversary lawsuit. The discovery deadline, the process of obtaining evidence, is January 21, 2016 and the next status conference hearing in the case is scheduled for January 16, 2016, at 10:00 a.m.

To Sum This Case Up So Far

Mr. Brown received over $50,000 in inheritance and had under $40,000 in general unsecured debts. As a result of choosing to not pay his unsecured creditors in full in the original Chapter 13 case or negotiate settlements with his creditors with lump sum cash payments from the inheritance outside of bankruptcy, Mr. Brown had to fight about the terms of his chapter 13 plan, litigated the conversion of this case to chapter 7 and lost, filed and lost an appeal regarding the conversion to Chapter 7 and is now having to litigate his alleged fraudulent transfer of the inheritance to his three brothers. Mr. Brown is also facing not receiving a discharge at all in the Chapter 7 case and more or less getting nothing from having filed bankruptcy to begin with. To really put the cherry on top the Chapter 7 Trustee is seeking punitive damages to punish Mr. Brown for his alleged misconduct via conversion. By my estimation Mr. Brown, not counting his three brother’s mounting legal fees, Mr. Brown may have incurred over $20,000 in attorneys’ fees and costs already and the adversary lawsuit is not over yet. At what point will the attorneys’ fees and costs exceed the original inheritance received by Mr. Brown?

Why Did I Receive A Letter From REM Division of Notification?

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So you filed for bankruptcy protection under Chapter 7, 11 or 13 and now you are receiving all this information/marketing material in the mail. One of the letters could be from REM Division of Notification. If you do not have much time right now just throw the letter away, burn it, shred it or return it to the sender and stop reading now. REM Division of Notification DOES NOT have any to do with the United States Bankruptcy Court or have anything to do with your actual bankruptcy case. They are just trying to pry some money out of your hand for now good or apparent reason.

Filing Bankruptcy Is A Public Record

Yes, the bankruptcy filing is a public record. Like all legal matters bankruptcy records are open to the public. You need a Public Access to Court Electronic Records account and login. After you create a PACER account it will cost $0.10 a page to review the documents. So companies like REM Division of Notification pay $0.10 a page to obtain your information and send marketing material to you. There is nothing wrong with that until you read the letters that come in the mail. I have yet to read a marketing letter that is not misleading or confusing to our clients. Sage Financial sends marketing material to bankruptcy filers to complete the second required course for around $50.00. While it is true a second course is required to receive a discharge of eligible debts when filing bankruptcy. The company we recommend to our clients only charges $7.95 for the second required course. Every now and then we have a client get fooled by Sage Financial and use them for the second course and they waste $40+. On a side note, Google also finds the bankruptcy filing information because the meeting of creditors hearings are posted as a PDF on the bankruptcy court’s website.

REM Division Of Notification’s Letter Is Misleading

First, REM Division of Notification has nothing to do with the government or the United States Bankruptcy Court. The letter in the top left-hand corner says “Bankruptcy Notification Division” as if the letter is an official communication from the bankruptcy court. The second misleading statement is in the first sentence. The letter says “Your Bankruptcy has been filed by the Court System and the information needed to access your records is printed above.” No, that is false and misleading again. Your bankruptcy attorney has records of your bankruptcy petition and all you should need to do is call them for a copy of the filed documents. The REM Division of Notification letter actually does not provide any information to access records. Next the letters says, “Please keep this letter because during your bankruptcy there will be 3 stages you will go through in order to complete the process. Many times the data centers are very slow in or with sending you the information you need so we will keep you informed and supply you with any available court information you may request using our web site during your proceedings.” What data centers? Once a bankruptcy case is filed certain documents are served directly by the court and the court is NOT slow in providing service. There are deadlines for everything, so it is actually not possible for notices to not be sent timely.

You Should Be Receiving The Information You Need From Your Bankruptcy Lawyer

Hopefully you used good judgment and retained a bankruptcy lawyer to prepare and file your bankruptcy petition. If so, then that lawyer should be providing you with all the information you need from start to finish. That is part of what you are paying the lawyer for. So what does REM Division of Notification actually do? Who knows? It appears they will provide you will the filed documents from your bankruptcy case for a fee. These are the same documents you should get from your attorney for free or can obtain directly from the bankruptcy court yourself for $0.10 a page. REM Division of Notification probably only has a normal PACER account just like me, pay $0.10 a page for documents, then fool people into using their service and charge people something far over $0.10 a page so they make a lot of money.

Ask Your Bankruptcy Attorney

If you filed for bankruptcy protection and have questions about the documents you are receiving in the mail ask your bankruptcy attorney to explain them to you. Before calling your bankruptcy attorney scan and email the letter or fax the letter to your attorney first. It is difficult to explain a document or answer questions if we cannot read the actual letter the questions are about. So please forward the document first, then call and ask questions.

How Can I Try to Dismiss a Chapter 13 Case if I am a Creditor?

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If you are owed money and just received a notice of meeting of creditors and deadlines in the mail time is of the essence. Once a bankruptcy case is filed it sets in motion a number of deadlines that are extremely important to creditors. If you are a creditor then mostly likely you may have an interest is trying to get the Chapter 13 bankruptcy case dismissed in its entirety to prevent the discharge of the debt owed to you. So how can a chapter 13 case be dismissed prior to approval or confirmation of the Chapter 13 Plan?

Review the Filed Petition and Attend the Meeting of Creditors

Once the case is filed there is a limited amount of time to review the bankruptcy petition and chapter 13 plan. The meeting of the creditors is scheduled about 30 days after the case is filed. In most jurisdictions objections to approval or confirmation of the chapter 13 plan must be filed on or before the first scheduled meeting of the creditors. Depending upon the type of debt you are owed (secured, priority or general unsecured) the plan will provide how the different types of debts will be treated in the plan. If you have a secured claim or priority claim then generally the plan should provide for full payment over the life of the plan. If you have a general unsecured claim then you will receive a percentage of what you are owed. In the majority of Chapter 13 cases general unsecured creditors receive less than 10% of their claim or less. If the debtor is not treating your claim properly or is not committing all of their monthly disposable income to the chapter 13 plan your bankruptcy attorney may have grounds to file an objection to confirmation or approval of the chapter 13 plan on your behalf.

Objection to Confirmation of the Chapter 13 Plan

The most basic procedure to try and dismiss a chapter 13 case is to object to the confirmation of the chapter 13 plan. To object to the plan you need to have the proper grounds though. Section 1325 of the Bankruptcy Code provides the requirements to confirm a chapter 13 plan. If the proposed plan does not meet the requirements of Section 1325 you can object to approval of the plan. If the plan does not treat your claim properly under state law or the bankruptcy code you may object to confirmation of the plan. Generally the bankruptcy filer’s bankruptcy lawyers will try and work out the problem so that you will withdraw the objection to confirmation of the plan. If no solution can be agreed upon then a confirmation hearing will have to take place for the judge assigned to the case to decide who is right and whether the chapter 13 plan can be confirmed over the objection. If the court agrees and sustains your objection to confirmation of the chapter 13 plan, then the court may allow the debtor to amend the plan again. Eventually the court will seek dismissal of the chapter 13 case if a confirmable plan cannot be submitted within a reasonable amount of time.

Seek Dismissal Pursuant to Section 1307 of the Bankruptcy Code

If the chapter 13 case is just dragging on and on with little to no progress, then a party-in-interest, creditor or trustee may file a motion with the court to request a hearing and dismissal for unreasonable delay. A recent Ninth Circuit Bankruptcy Appellate Panel case discussed this process and procedure. The case, In re Debra Sue Phillips, BAP No. NV-14-1359-JuKuD, the debtor, Debra Sue Phillips, appeals the bankruptcy court’s dismissal of her chapter 13 case pursuant to Section 1307(c) of the Bankruptcy Code.

Section 1307(c) provides that a bankruptcy court may either dismiss or convert a chapter 13 case for cause, whichever is in the best interest of creditors.

– Section 1307(c)(1) provides dismissal or conversion for unreasonable delay that is prejudicial to creditors. In reality the Chapter 13 Trustee’s office will seek dismissal under 1307(c)(1) if the case is dragging on without confirming a chapter 13 plan. § 1307(c)(1). “A debtor’s unjustified failure to expeditiously accomplish any task required either to propose or confirm a chapter 13 plan may constitute cause for dismissal under § 1307(c)(1).” Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. 904, 915 (9th Cir. BAP 2011)
– Section 1307(c)(2) provides for dismissal or conversion for nonpayment of any fees and charges required under chapter 123 of title 28.
– Section 1307(c)(3) provides for dismissal or conversion for failure to file a plan tmely under section 1321 of this title. Rule 3015 provides that a plan is untimely unless it is filed within fourteen days of the petition date. Subsequent plans required by the court are also subject to § 1307(c)(3). Ellsworth v. Lifescape Med. Assocs., P.C. (In re Ellsworth), 455 B.R. at 916.
– Section 1307(c)(4) provides dismissal or conversion for failure to commence making timely payments under section 1326 of this title.
– Section 1307(c)(5) provides for dismissal or conversion upon the denial of confirmation of a plan under Section 1325 of this title and denial of a request made for additional time for filing another plan or modification of a plan.
– Section 1307(c)(6) provides for dismissal or conversion upon a material default by the debtor with respect to a term of a confirmed plan.

If the court finds there is sufficient cause and proper additional grounds then the court must choose conversion to chapter 7 or dismissal of the case entirely. Okay, well, what is cause then? Cause is not specifically defined in the Bankruptcy Code in Section 101 (Definitions). In the Phillips case Section 1307(c)(5) was the section cited to request dismissal. Under Section 1307(c)(5) the first element for there to be cause is denial of confirmation of the Chapter 13 plan and denial of leave to amend and file a new plan. Nelson v. Meyer (In re Nelson), 343 B.R. 671, 674-75 (9th Cir. BAP 2006) In the Phillips case at the time of the hearing on the motion to dismiss the Phillip’s bankruptcy attorneys did not have a current plan on file and the court had denied confirmation of the prior seven proposed chapter 13 plans. The court in Phillips also gave Phillips ten weeks to file an eighth amended plan for consideration, but Phillips did not file an eighth amended chapter 13 plan. The bankruptcy court found cause under Sections 1307(c)(1) and (c)(3) to dismiss the case.

The court must also consider the best interests of creditors when deciding whether to dismiss or convert a case to Chapter 7. In the Phillips case neither the trustee’s motion or the debtor requested or considered conversion to Chapter 7. Accordingly, the 9th Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court’s granting of the trustee’s motion to dismiss the case.