Tag Archives: Chapter 13

Chapter 13 Bankruptcy and Escrow Payments and Projected Escrow Shortages

By

Let the insanity begin. What I will be discussing today are mortgage payments that include property taxes and insurance. The property tax and insurance have been “impounded” as part of the normal monthly mortgage payment and is traditionally called an escrow account. So this type of mortgage payment includes principal, interest, property tax and insurance. Before discussing how this has become extremely frustrating when filing a Chapter 13 bankruptcy case in the Northern District of California let us look at why this situation exists to begin with.

Why Are Property Taxes and Insurance Not Paid Directly By The Borrower

Lenders need to protect their investment. Fine, so as part of that lenders need to ensure property taxes are paid timely and the home is insured. No problem. Here in California lenders cannot force an impound escrow account unless the borrower’s loan to value ratio exceeds 80 percent. I believe this is the most common reason why impound accounts exist. A house is purchased via some favorable program that allows less than a 20% down payment at the time of purchase resulting in a ratio 80% or more. So if you put 20% or more as a down payment then the mortgage company cannot force you into an escrow or impound account. A lender or loan officer could also suggest the borrower have an impound escrow account and the borrower then would voluntarily agree to it.

Also here in California servicers and lenders are required to pay 2% interest to borrowers on funds held in escrow accounts. See Cal. Civ. Code Section 2954.80.

Pursuant to the Real Estate Settlement Procedures Act (RESPA) the servicer or mortgage company must review the property taxes and insurance each year to make sure they are not holding a surplus. At the same time RESPA allows the servicer or lender to collect up to two additional months of escrow payments as a cushion or reserve to protect the servicer or lender in the event a borrower misses monthly mortgage payments. See 12 U.S.C §2609(a)(1).

This is where the problem is created.

How Can A Borrower Have A Projected Escrow Shortage If They Paid All Mortgage Payments When Filing a Chapter 13 Bankruptcy Case?

The key words here are “projected escrow shortage” at the time the chapter 13 bankruptcy case is filed by the bankruptcy attorney of the borrow. So yeah, property taxes change and so do insurance premiums, but not that much. When a borrower files for relief under chapter 13 and is current with all mortgage payments at the time of filing the petition the bankruptcy filer normally just keeps paying the servicer or mortgage company directly just like prior to the filing of the chapter 13 since there are no missed mortgage payments. If no missed payments then no problem; life goes on regarding the loan even though the chapter 13 petition is filed. The chapter 13 should have no effect on the servicer or mortgage lender or the borrower as the bankruptcy filer. The servicer or mortgage lender is a secured creditor and normally files a proof of claim in the chapter 13 bankruptcy case providing the amount of the total secured debt owed and that there are no mortgage arrears or missed payments prior to the case being filed.

Here is when there are more and more problems because of escrow or impound accounts and alleged shortages. Proof of claims are being filed for escrow shortages or projected escrow shortages even though the bankruptcy filer has paid the servicer or mortgage lender all mortgage payments as required.

If the shortage is projected the shortage does not yet exist until some future date? If it does not exist how can this projected shortage be part of a proof of claim? Or if there is future projected escrow shortfall the only way for the servicer or mortgage company to obtain the shortfall is supposed to be by increasing the future escrow payments after the bankruptcy case is filed just like if no chapter 13 had been filed in the first place.

But wait just a second. So now this touches on what is a “claim” in bankruptcy? The Supreme Court of the United States provides “right to payment” in the definition of “claim” meant “nothing more nor less than an enforceable obligation[.]” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991). “Congress intended by this language to adopt the broadest available definition of `claim.'” Id; see also FCC v. NextWave Pers. Commc’ns Inc., 537 U.S. 293, 302, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003). So applying these definitions to a projected escrow shortage we can all agree the shortage is a “right to payment” pursuant to RESPA and the cushion of two escrow payments and can be part of a proof of claim.

Why is this happening though? The servicer of mortgage company is not properly calculating their RESPA cushion prior to the chapter 13 being filed. After the servicer or mortgage company pays a borrower’s property tax there should be a balance in the escrow account representing two escrow payments, the RESPA cushion. This is not happening and when the chapter 13 case is filed it triggers a review of the escrow account and behold there is a projected shortage.

I am not sure why this has become an issue when this dynamic of escrow accounts and RESPA cushion have existed for a very long time, but it is a problem now. Creditors referring to other Circuit opinions that provide that the collecting of pre-petition projected escrow shortages through post-petition mortgage payments is a violation of the automatic stay and arguably opens the creditor to possible sanctions for the violation of the automatic stay. There are a number of potential solutions to the problem, but the one that makes the most sense is that servicers and mortgage companies just properly calculate the RESPA cushion upon review of escrow accounts like they are supposed and this should never be a problem upon the filing of a bankruptcy case. After all, the borrower has made all payments as required by the servicer or mortgage loan company. What more can the borrower to make sure this is not a problem but make the payment requested each month on time?

Another solution is the include language in the chapter 13 plan that provides the service or mortgage lender may collect a pre-petition escrow shortfall from post-petition payments and not be in violation of the automatic stay. This will most likely trigger the necessity of having a confirmation hearing regarding the chapter 13 plan when a hearing would not normally be necessary. This is a waste of judicial resources, the chapter 13 trustee’s time and the attorney for the debtor’s time given the servicer or mortgage loan company did not properly calculate the escrow payment prior to the chapter 13 being filed.

Another solution is to stipulate that the creditor may collect pre-petition projected escrow shortages from post-petition mortgage payments. There is no guarantee that the trustee’s office will sign-off on this stipulation and again could end up with a hearing regarding confirmation of the chapter 13 plan that normally would not have to take place.

To be fair I could also provide any number of scenarios that a debtor or their bankruptcy attorney creates in the course of seeking confirmation of a chapter 13 plan that creditors, the Court and trustee’s office believe to waste their time over and over again so ………… I am just writing about this issue from a bankruptcy filer’s perspective and their attorney.

Why Is It Difficult to Project Escrow Account Funds?

Here in California we have Proposition 13 that limits how much property taxes can increase each year. You would think this would allow servicers and mortgage companies to easily estimate future property taxes and property insurance payments year after year so that there are no issues. Again, I get how sometimes getting numbers right is difficult even when a good faith effort is made to get the numbers right.

It just appears the escrow analysis that is required by law is not happening until the chapter 13 case is filed and the projected escrow shortage is created. If the chapter 13 case was never filed the servicer or mortgage lender would just continue to send statements with a monthly dollar amount owed and the borrower would just keep making the payment each month and there would be no issues. The part of the monthly escrow payment would increase or decrease depending upon the whim of the servicer or mortgage company ……….

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

By

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.

What is a Hardship Discharge in a Chapter 13 Bankruptcy Case?

By

If you are currently having problems making your Chapter 13 plan payments each month due to circumstances that you cannot control there may be some help for you. If you currently have a bankruptcy attorney you should seek his or her advice immediately before your case is dismissed for nonpayment. Most Chapter 13 trustees have a quick trigger finger when plan payments become delinquent. If you do not have a bankruptcy attorney you need to consult with one immediately to see what your options are. There are generally three main options if you are unable to make your Chapter 13 plan payments. The first one is to modify your Chapter 13 plan to a lower payment you can afford either temporarily or permanently depending upon the circumstances. Some Chapter 13 trustees will enter into a stipulation to repay the missed payments without filing a motion to modify and obtain court approval. Another option is to convert your case to a Chapter 7. The third option is to obtain a hardship discharge. All three of these options are dependent on court approval and would depend on your particular circumstances. Today we are going to discuss the hardship discharge.

Pursuant to 11 U.S.C. §1328(b), a hardship discharge is available for people that cannot modify their Chapter 13 plans in a practical manner and had circumstances come up that they could not be held accountable for that made them unable to continue their Chapter 13 plan payments. Additionally, they need to have paid into the plan not less than what they would have paid to their Chapter 7 creditors if their bankruptcy estate was liquidated. It is also important to note that the hardship discharge is only available to people whose Chapter 13 plan was confirmed or approved by the bankruptcy court. If your plan was not confirmed you are not eligible for the hardship discharge. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014).

So what exactly does the hardship discharge cover? Does it discharge all your debts or only some of them? To truly understand the hardship discharge we need to know about what is dischargeable or not in a regular Chapter 7 bankruptcy and what is dischargeable in Chapter 13 bankruptcy cases. In a Chapter 7 bankruptcy your general unsecured debt is dischargeable unless it fits into a category under 11 U.S.C. §523(a). These are debts such as those incurred through false pretenses or fraud, priority tax debt, student loans, domestic support obligations, death or personal injury caused by operation of motor vehicle while driving under the influence, restitution, unscheduled debts, and much more. For a complete list you should review the exceptions to discharge under §523(a). Be sure to provide your bankruptcy attorney detailed information about how your debts and how they were incurred if there are any not so good circumstances.

Chapter 13 bankruptcy discharges are broader than Chapter 7 bankruptcy discharges. There are certain debts that are non-dischargeable under §523(a) that are dischargeable in a Chapter 13 case. Pursuant to 11 U.S.C. §1328(a), you are entitled to a full discharge of your debt except for the following debts: debts that provided for a cure for any defaults on any secured or unsecured debts (for example: if you were behind on your mortgage or car payments and the Chapter 13 plan provided for the cure amount), debts for priority taxes, student loans, money obtained by false pretenses or fraud, unscheduled debt, fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny, domestic support obligations, death or personal injury caused by person filing for bankruptcy who was driving under the influence. Additionally, debts for restitution included in the sentencing of a conviction of a crime or restitution awarded in a civil action against the person filing for bankruptcy as a result of willful or malicious injury that caused personal injury or death to someone is also non-dischargeable in a Chapter 13. Thus, if you successfully complete the Chapter 13 plan, the non-dischargeable debt in §523(a) other than the debts enumerated in the above paragraph will be dischargeable. Some issues pursuant to Section 523(a) may require an adversary proceeding to be filed to prove the grounds for a debt to be not discharged.

So what happens if you initially filed a Chapter 13 case but circumstances occurred where it was no longer feasible for you to continue making payments in your Chapter 13 plan? You can obtain the hardship discharge, but the discharge is narrower than the normal Chapter 13 bankruptcy case discharge if you complete the plan and receive a §1328(a) discharge given all of the regular §523(a) exceptions to discharge provisions apply. See Toste v. Smedberg (In re Toste), BAP 9th Cir., 2014). You can look at it as you are receiving a Chapter 7 discharge rather than a Chapter 13 discharge.

Can I or Should I File a Motion to Reopen My Bankruptcy Case?

By

Bankruptcy cases normally close for two reasons: 1) all of the requirements have been fulfilled and the allowable debts have been discharged or 2) one or more of the requirements have not been completed as requested and the bankruptcy case has been dismissed. The debts in cases that have not met all the requirements that are closed have not been discharged. If you need anything further from the bankruptcy court after the closure of your case you need to file a motion to reopen your bankruptcy case. Pursuant to 11 U.S. §350(b), “A case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause.” Federal Rules of Bankruptcy Procedure Rule 9024 indicates a motion to reopen a bankruptcy case is not subject to the one year limitation prescribed in the Federal Rules of Bankruptcy Procedure Rule 60. This means that you may bring your motion to reopen a case years after your case was closed. The court charges a filing fee to reopen your case. So why would you want to reopen your bankruptcy case? Here are several more common reasons why you may want to do so:

1. You did not File a Financial Management Certificate with the Court

One of the requirements in receiving a discharge pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is that you take a mandatory financial management course. This class provides information about managing your finances and attempts to teach you how to budget. Once you complete the course you receive a certificate of completion. This certificate is also referred to as the financial management certificate. You need to file this certificate with the court in order to receive a discharge of your debts. If you do not file this certificate with the court your bankruptcy case is closed without a discharge. This means that all your hard work leading up to and including the bankruptcy filing is for naught as the creditors can still try to collect their debt from you after the bankruptcy case is closed. This is true even if you were in a Chapter 13 bankruptcy case and you made all the required payments to the Chapter 13 trustee according to your Chapter 13 plan. If your case is closed without a discharge because of the non-filing of the financial management certificate, the fix is simple: contact your bankruptcy attorney to reopen your bankruptcy case (and pay the court filing fee) to file the certificate. Once you file the certificate you will receive a discharge of your debts and the case will be closed again.

2. You did not Pay the Filing Fee Installment as Required by Court Order

Some people choose to pay the court’s filing fee in installments due to financial issues. The court issues an order with deadlines to make each filing fee installment payment. If you miss one installment even by one day the court may dismiss your case for not following their order. If this is the case you need to file a motion to reopen the bankruptcy case (and pay the court filing fee to reopen) to pay the remainder of the filing fee. Note there are two fees discussed here: the court filing fee to file your bankruptcy case and the court filing fee to reopen your case.

3. You did not Pay the Chapter 13 Plan Payment as Required

If you filed a Chapter 13 Bankruptcy you must make each and every monthly payment to the Chapter 13 Trustee to obtain the relief you seek. If you do not abide by the terms of the approved Chapter 13 plan, and miss a payment the trustee, the trustee will file a motion to dismiss your case with the court. If you are unable to pay the entire amount of arrears you can consult with your bankruptcy lawyer to see what alternatives are available to you. If your case is dismissed you may choose to reopen your bankruptcy case to pay the missed payments and continue on with your Chapter 13 Plan.

4. You Want to File a Motion to Avoid a Judgment Lien

You can file a motion to avoid a judgment lien from your personal or real property in a Chapter 7 or Chapter 13 bankruptcy case if the lien impairs your exemptions. Many people who file Chapter 7 bankruptcy cases pro se or with a bankruptcy petition preparer (meaning they did not have a bankruptcy attorney and they represent themselves in the case) do not know the law, that judgment liens can be avoided or know how to file a motion to avoid a judgment lien. This is one of the many reasons you should always consult with bankruptcy lawyers before filing bankruptcy. Even if your case is closed and your debts are discharged you may file a motion to reopen your bankruptcy case to file the motion to avoid a judgment lien that impairs your exemptions.

5. You Want to Add Creditors to Your Bankruptcy Case

If you forgot to list a creditor in your bankruptcy case, your debts have already been discharged and your case closed, you can reopen your bankruptcy case to include your forgotten creditors depending on the jurisdiction in which you live. In the 9th Circuit if you have a no-asset Chapter 7 bankruptcy case (meaning all your assets are exempt and therefore no assets were administered by the Chapter 7 Trustee) this is not necessary given the creditors would not have received anything even if they were notified of your bankruptcy filing.

The above list is not an exhaustive list of why a motion to reopen a bankruptcy case may be filed. There are numerous other reasons why other parties like the trustee assigned to the case might want to reopen a bankruptcy case. The closure of your bankruptcy case does not necessarily mean your case is over.

New San Francisco and Oakland Divisions Model Chapter 13 Plans

By

The Chapter 13 Plans for the Oakland and San Francisco Divisions of the Northern District of California have undergone a significant makeover. The Oakland and San Francisco Divisions are using a new Model Chapter 13 Plan effective August 1, 2013. The Oakland Division’s Chapter 13 Plan went from being a one page plan to a five page plan. Oakland is the division with the biggest change in terms of the way the plan looks, but the way the Chapter 13 plans are administered have not significantly changed. The San Francisco Division has about the same amount of pages but the Chapter 13 plan has been reorganized.

The new Model Chapter 13 Plans for the Oakland and San Francisco Divisions are laid out and organized by classes. Class 1 is for secured claims that have arrears. This is where you would include your mortgage arrears if you want to pay them back in your Chapter 13 plan. Class 2 is for secured claims that are being modified in your Chapter 13 plan. This is where you would include a vehicle that you are “cramming down” to its fair market value or junior liens that are wholly unsecured. You should consult with bankruptcy attorneys if do not know what this means and you think that this may be beneficial to you. Class 3 claims are for secured claims in which you are surrendering the collateral. If you want to surrender your vehicle or house for whatever reason this is where you would include that claim. Class 4 claims are for secured claims that you are current on and what to pay directly to the creditor. A bankruptcy lawyer can explain to you the significance of either paying the claim through the Chapter 13 plan or paying the claim directly to the creditor outside the plan. The benefits of each one are dependent on your particular circumstances. Class 4 is also where you would include claims you are trying to obtain a loan modification for. If you are in the process of obtaining a loan modification for your mortgage and you want the arrears to be taken care of as part of your loan modification, then you would include them in Class 4. Class 5 is for unsecured priority claims. This is where you would include the claims you owe to the taxing authorities like the Internal Revenue Service and Franchise Tax Board. These are the taxes that are non-dischargeable. You would also include any child support or alimony arrears or other claims that are considered a priority claim. If you do not know what is considered a priority claim, contact an experienced bankruptcy attorney for guidance. Class 6 claims are designated for unsecured claims that would be pain in full even if the other nonpriority unsecured debts are not. You are essentially saying that the creditors in Class 6 deserve special treatment and you would need to indicate why they should have special treatment. Lastly, Class 7 claims are for all other unsecured nonpriority debt. This is where the claims for your credit card debt, medical bills, personal loans, and other unsecured debt would be listed.

The new Model Chapter 13 Plans for the Oakland and San Francisco Divisions may take some getting used to, but be sure to use the correct plan or it can be rejected by the court and you would need to file a new one. Chapter 13 bankruptcies are normally more complicated and it is highly recommended that you retain experienced bankruptcy attorneys to help you through the process.