Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
by Daniel Gill
May 12 — A debtor can remain in Chapter 13 after propounding a plan which provided for payments only for the filing fee, her bankruptcy attorney's fees, and the Chapter 13 trustee's statutory commission; creditors would receive nothing.
Judge Robert D. Berger of the U.S. Bankruptcy Court for the District of Kansas on May 3 entered a memorandum opinion and order overruling the Chapter 13 trustee's objection to the debtor's proposed plan. He also denied the trustee's motion to dismiss the case or to convert it to a Chapter 7 proceeding.
In its ruling, the court considered the “totality of the circumstances” of the case and expressly rejected prior authority holding that to confirm a fees-only plan the debtor would have to meet a “heavy burden” of establishing “special circumstances.”
Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay a portion of his debts over a three to five year period. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors.
The court said that there was “no doubt” that the debtor, Jennifer Jo Doucet, needed financial relief in bankruptcy. She had faced 17 recent garnishments, multiple eviction proceedings and had lost at least three vehicles to repossession. She was “living day-to-day on the financial outskirts of the economy,” the court said.
The court added that, “A Chapter 7 trustee would likely abandon [the debtor's] nonexempt assets in a Chapter 7 case because they are not worth liquidating”— a typical goal of an attorney filing a consumer Chapter 7 case.
Because she was unable to save enough money to pay a bankruptcy attorney in full to prepare and file a petition to commence a case under Chapter 7, the debtor instead elected to seek relief under Chapter 13. A Chapter 13 case would allow her to pay her counsel over time, post-petition—not an option available in Chapter 7.
Of course, the debtor could not be advised to borrow money for the purpose of paying for filing for bankruptcy (incurring debt while contemplating bankruptcy could lead not only to an order of non-dischargeability, but could be grounds for the debtor to lose her discharge altogether).
The court noted that Chapter 13 carries two good faith requirements — petitions must be filed and plans proposed in good faith, citing Bankruptcy Code Sections 1325(a)(3) and (a)(7).
Although the trustee conceded that the debtor needed bankruptcy relief, he filed an objection to the plan, as well as a motion to dismiss the case or convert it to Chapter 7. The trustee asserted that the debtor's inability to pay attorneys fees for filing a Chapter 7 case did not constitute “special circumstances” necessary to permit the fees only case to continue in Chapter 13.
Without those special circumstances, the trustee argued, the proposed plan is not one made in good faith.
The court rejected the trustee's argument and the authority he cited to support his position. Instead, Judge Berger adopted the reasoning of those cases which focused only on the totality of circumstances of the individual case. The court explained that those courts which sought to add a requirement that there be “special circumstances” justifying a fees-only Chapter 13 plan were in fact examples of courts creating exceptions to the black letter of the Code, strictly prohibited by the Supreme Court in Law v. Siegel, 2014 BL 57926, 134 S. Ct. 1188 (2014) (26 BBLR 311, 3/6/14).
The court ultimately concluded that everything in the case pointed to the debtor acting in good faith — there were no inaccuracies in her schedules or plan; she was in dire need of a discharge; and the subject attorneys fees ($2,900) were reasonable in the district. The court also said that the Bankruptcy Code does not require a minimum payment to creditors in Chapter 13 (except, of course, that a plan must provide that creditors get paid at least as much as they would receive in a straight Chapter 7 liquidation).
In an interesting side-note which the court said did not alter its decision in this case, Judge Berger said that the Chapter 13 process works well in Kansas. The plan confirmation rate in Kansas between 2007 - 2013 was over 90 percent, compared to a national average of 70 percent.
The plan completion rate for the same period in Kansas was over 60 percent, while the national rate was only 36 percent. Finally, the court noted that Kansas debtors had one of the lowest bankruptcy refiling rates in the country, less than 1 percent.
The debtor was represented by Chris W. Steffens, Mack & Associates, LLC, Topeka, Kan. The Chapter 13 trustee, William H Griffin, Roeland Park, Kan., appeared on his own behalf.
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