Ch. 13 Debtor Sanctioned for Failing to Turn Over Tax Returns

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By Diane Davis

Oct. 24 — A debtor’s failure to comply with a Chapter 13 plan requirement that she annually turn over her tax return to the trustee doesn’t mean her bankruptcy case should be dismissed or modified ( In re Sanchez , 2016 BL 350620, Bankr. S.D. Fla., No. 10-23140-BKC-LMI, 10/19/16 ).

Judge Laurel M. Isicoff of the U.S. Bankruptcy Court for the Southern District of Florida Oct. 19 concluded that the debtor’s failure to turn over her tax returns wasn’t a “material default” of the debtor’s Chapter 13 plan.

However, the judge said the debtor should be sanctioned $2,500 as the “consequences for a willful default” under the plan.

The court gave the debtor an alternative sanction of making a $2,500 donation to the §501(c)(3) entity of the debtor’s choice that provides legal services to the poor in the Southern District of Florida.

The Bankruptcy Code doesn’t define the term “material default,” which is a reason for conversion or dismissal of a Chapter 13 case “for cause” under Bankruptcy Code Section 1307(c).

Ch. 13 Plan Provision

Debtor Christine E. Sanchez’s confirmed Chapter 13 plan stated that she was to provide a copy of her federal income tax return to the Chapter 13 trustee each tax year while the case was still pending.

Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of her debts over a three to five year period.

The debtor didn’t comply with this requirement in the plan, and the trustee argued that the case should be dismissed because the debtor was in material default of her plan. At a minimum, the trustee argued that the debtor must modify her plan to pay what appeared to be increased income to the unsecured creditors.

According to the debtor, her net income didn’t increase, therefore her failure to provide timely tax returns should have no consequences.

There Must Be Consequences

Because the five years of the debtor’s plan had expired, the court said there was no basis to modify the debtor’s Chapter 13 plan.

The court declined to find the debtor’s failure to turn over the tax returns as a “material default” under the plan, but found that the debtor had breached the contract. For that willful default, there are consequences, the court said. “A failure by a debtor or a creditor to abide by that system must carry consequences,” to protect the “integrity of the bankruptcy system,” the court said.

The court used its general authority under Section 105(a) to order the debtor to pay sanctions.

Michael A. Frank, Miami, represented debtor Christine E. Sanchez, aka Christine Galliano; Chapter 13 Trustee Nancy K. Neidich, Miramar, Fla.; Office of the US Trustee, Miami.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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