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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.

Ninth Circuit Bankruptcy Appellate Panel Affirms Decision That Tuition Credits Are Not Excepted From Discharge

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On July 15, 2014, I wrote an article about tuition credits and a case of first impression since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in the Ninth Circuit Bankruptcy Court for the Northern District of California regarding whether tuition credits are excepted from discharge or not discharged. On March 27, 2015, the Ninth Circuit Bankruptcy Appellate Panel affirmed bankruptcy court’s ruling that tuition credits are not excepted from discharge, BAP No. NC-14-1336-PaJuTa, and not excepted from discharge pursuant to Section 523(a)(8)(A)(ii). Ms. Christoff received tuition credits from a for-profit education company named Institute of Imaginal Studies dba Meridian University prior to filing for bankruptcy protection. This is a blow to the for-profit educator sector and a little consolation prize for students with tuition credits. Other for-profit colleges have come under fire recently for their lending practices and the job prospects of their students. At least a student with a tuition credit can discharge that part of their debt when filing for bankruptcy protection.

Procedural History

The debtor, Tarra Nichole Christoff, filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on April 19, 2013, in the Northern District of California, Bankruptcy Case No. 13-10808-DM-7. As part of her petition Ms. Christoff listed a general unsecured debt of around $11,000 owed to Meridian. Meridian proceeded to file an adversary proceeding (lawsuit within the main bankruptcy case) to determine whether the tuition credits and resulting loan from Meridian to Ms. Christoff was excepted from discharge pursuant to Bankruptcy Code Section 523(a)(8)(A)(ii).

Section 523(a)(8)(A)(ii) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend;

After Meridian filed a motion for summary judgment in the adversary proceeding the Bankruptcy Court denied the motion for summary judgment and entered a judgment in favor of Ms. Christoff. The Honorable Dennis Montali starts the memorandum of decision: “In addressing the issue court must consider two powerful competing principles: the need to give the honest debtor a fresh start and the seemingly endless desire of Congress to except more and more student loans from discharge absent undue hardship.” Meridian’s bankruptcy lawyers argued that Ms. Christoff received a loan from Meridian and the loan proceeds went directly to Meridian and Ms. Christoff then received the education. Ms. Christoff’s bankruptcy attorneys argued she never received any funds from Meridian or anyone else. The Honorable Judge Dennis Montali in the adversary proceeding held that no funds were received even though the transaction between Meridian and the Ms. Christoff resulted in loans for repayment of tuition credits to Meridian. Therefore, the tuition creditors are not excepted from discharge. The decision in the adversary case was immediately appealed to the Ninth Circuit Bankruptcy Appellate Panel for review.

Ninth Circuit Bankruptcy Appellant Panel Affirmation of the Bankruptcy Court’s Ruling

Ms. Christoff, the debtor, was awarded $6,000 in financial aid to pay for some of her tuition. She signed a promissory note. She did not actually receive any funds from Meridian though. Instead, what she received was a tuition credit. The terms of the note required her to pay back the funds at $350 per month after she finishes her coursework or she withdraws from Meridian along with 9% interest to be compounded monthly. She received another $5,000 in tuition credit the following year after signing a promissory note with the same terms. She withdrew from Meridian after completing all her coursework and clinical hours but before she completed her dissertation.
In interpreting the funds received requirement in Section 528(a)(8)(A)(ii), the Ninth Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court and held Meridian simply agreed to be paid the tuition later and it did not receive any funds from a third party financing source. The key here is the language in Section 528(a)(8)(A)(ii) that grants exception to discharge for “an obligation to repay funds received.” That means funds received by the plain language of the Bankruptcy Code. The long stand principle is that exceptions to discharge should be confined to those plainly expressed. Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 666 (9th Cir. 2014) The plain language of this prong of the statute (Section 523(a)(8)) requires that a debtor receive actual funds in order to obtain a nondischargeable educational benefit.” Cazenovia Coll. v. Renshaw (In re Renshaw), 229 B.R. 552, 555 n.5 (2d Cir. BAP 1999), aff’d, 222 F.3d 82 (2d Cir. 2000)) Again, no funds were received so Section 528(a)(8)(A)(ii) did not except from discharge the tuition credits Ms. Christoff received.

Can My Social Security Benefits Be Garnished or Levied From My Bank Account?

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The short answer is yes it is possible, but rare depending upon the circumstances. Your social security benefits are general exempted from garnishment and levy by normal creditors and possibly the state you live in. In California, the State of California does not levy on your social security benefits. Your creditors also cannot garnish your social security benefits or levy on your bank account that contains your social security benefits. A creditor can still sue you and obtain a judgment to enforce against you, but how will they enforce the judgment is the question.

The Internal Revenue Service Will and Can Absolutely Levy on Your Social Security Benefits

Please see 26 U.S.C. Section 6334(c) regarding property exempt from levy and the IRS’s ability to enforce unpaid taxes. Section 6334(c) provides reference to Section 207 of the Social Security Act. Section 207 provides: (a) The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. (b) No other provision of law, enacted before, on, or after the date of the enactment of this section, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section. (c) Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, if such withholding is done pursuant to a request made in accordance with section 3402(p)(1) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person’s representative payee.

Section 3402(p)(1) more or less treats social security payments as payment made by an employer as wages, which can be garnished and levied on in a bank account. The path to garnishment or ability to levy by the Internal Revenue Services is a twisted one, but nonetheless, the IRS can garnish social security benefits and levy upon social security benefits held in a bank account under certain circumstances.

If Your Only Income is Social Security Benefits You are Generally Considered Judgment Proof

If you owe a debt that is unsecured, that means there is no collateral securing the repayment of the debt, a creditor will have to sue you in state court and obtain a judgment to force repayment of the debt incurred. If your only income is social security benefits and you do not own real property, a house or raw land, then the options to enforce the judgment are very limited. Thus, the term judgment proof is described for this situation. A creditor can obtain a judgment against you, but how can the judgment be enforced? If you seek the counsel of a bankruptcy attorney regarding your debts be sure to let them know your only income is from social security. This should come out during a standard consultation but you never know. Make sure they know.

Some People That are Judgment Proof Still Choose to File Bankruptcy and Discharge Their Eligible Debts

If you are behind on your payments to unsecured creditors you know that the phone calls start relatively quickly after missing a payment and the letters demanding payment start relatively quickly too. Every now and then we have a client come in with income that is only social security. We inform them that they are for the most part judgment proof as described above. Some choose to file bankruptcy and discharge their eligible unsecured debts and others do not. For most they just want to move on with life and not worry about debts hanging out there to worry about. Everyone is different though. It is truly up to you what you believe is right for you. Filing for bankruptcy protection should stop the harassing phone calls and letters in the mail. As soon as the bankruptcy case is filed the automatic stay becomes effective stopping any and all collection activity. Once you receive a discharge in your case your creditors are barred from attempting to collect on a discharge debt incurred prior to the date the bankruptcy case was filed. Every now and then a creditor attempts to collect a debt after discharge and they can be held in contempt of court and sanctioned for this impermissible behavior.