Chapter 12 Family farmer bankruptcy, similar to a Chapter 11 or 13, whereby the farmer is able to keep the family farm at the end of the plan.

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2 Bankruptcy is controlled by a federal statute /law, which provides a process by which a debtor (someone who owes money) can reorganize and/or eliminate debts to his/her creditors (the persons to whom the debts are owed). The current version of the Bankruptcy Code (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. 101 et seq.) became effective October 20, The changes in the code allowed for special treatment of a Domestic Support Obligation (DSO) (i.e. child/spousal support), whereby child support offices could continue efforts to collect and enforce a support obligation. The purpose of the law: 1. Provide for discharge of some debts, allowing the debtor a fresh start. 2. Provide a set of rules for fairly dividing the debtor s property to the creditors. 3. Provide for the rehabilitation of financially insolvent businesses. Effectively, the basic principals with regard to a DSO: 1. A bankruptcy filing should interfere as little as possible with the establishment and enforcement of ongoing spousal/child support. 2. The Bankruptcy Code should provide a broad and comprehensive definition of a DSO, and provide favorable treatment under the process to the DSO. 3. The bankruptcy process ensures the continued payment or ongoing child/spousal support and arrearages, with minimal need of participation by the support creditor. 2

3 Chapter 7 -- total liquidation of person s debts. The trustee collects and sells the assets of the debtor, then distributes the proceeds to the creditors in a pro rata order of priority. Debtor may keep only certain exempt property. Chapter 11 used primarily by businesses to reorganize their debt, while business continues to function. Can also be utilized by individuals who have excessive debt ($383,175 in unsecured debt; or secured debts over $1 million+). Chapter 12 Family farmer bankruptcy, similar to a Chapter 11 or 13, whereby the farmer is able to keep the family farm at the end of the plan. Chapter 13 similar to a business reorganization, where the debtor s future income is used to pay creditors. The debtor files a plan that provides for periodic payments to creditors, which are then made and distributed by the Chapter 13 trustee. The plan can take up to 60 months. All post-petition income is part of the bankruptcy estate, so the automatic stay becomes effective. 3

4 The Automatic Stay immediately becomes effective at the filing of the bankruptcy petition, and no one may proceed to collect any debt, without obtaining a relief from the stay thru the bankruptcy court. In effect, the stay prohibits any creditor from taking an action against the debtor or his/her property, or taking an action that would impact the bankruptcy estate. However, certain IV-D actions are not subject to the automatic stay (which are explained in further detail later in the program): Establishing paternity Establishing a child support order Establishing a medical support order Reporting the debtor to a consumer repoting agency Suspension of a license Intercepting federal/state tax refunds Denial of a passport Income withholding The penalties for violating an automatic stay depend on whether the violation was deliberate or innocent. Innocent violations are limited to the infirmity of the act, where the creditor would be ordered to restore the property or money to the bankruptcy estate. Deliberate violations are far worse, where compensatory damages may be ordered, along with costs, attorneys fees and, most importantly, punitive damages. Finally, the IV-D agency is not immune to suffering the consequences of the violation, and could be sanctioned by the bankruptcy court. 4

5 The bankruptcy begins with the debtor filing a bankruptcy petition in bankruptcy court. The debtor is responsible for naming all of the creditors in the filing, who then receive notice of the action. The debtor is, or course, the person who is filing the action, typically seeking relief from the collection activities of his/her creditors. The creditors include anyone who is owed money. Usually in the child support area, the creditor is not the IV-D agency, but rather the payee/custodial parent in the support action (unless the arrears are owed to the state agency supporting the child/ren). The trustee administers the bankruptcy. In Chapter 7 cases, the trustee is responsible for the collection and liquidation of the bankruptcy estate. In Chapter 13 cases, on the other hand, the trustee is not liquidating but rather managing the bankruptcy estate and is responsible for collecting and disbursing the payments under the Plan. The Chapter 13 trustee is less adversarial to the debtor. The US Attorney General appoints the US Trustee for each regional area. This person is responsible for appointing a standing Chapter 13 trustee, who oversees all Chapter 13 cases in that region. The Chapter 7 trustees are typically appointed by the US Trustee in the region on an interim basis, until the creditors committee can select a regular trustee. The bankruptcy judge is appointed by the US Court of Appeals within a federal court region. Their term is usually 14 years long. There can be many attorneys involved in a bankruptcy action one representing the debtor, but others representing the creditors and even the trustee. In order to ensure that a creditor is part of the bankruptcy, the creditor must file a Proof of Claim, that provides information to the court about what the creditor is owed. More detailed information is covered later in this program. 5

6 Formation of Bankruptcy Estate: Establishment of bankruptcy estate occurs automatically upon filing. Legal entity, apart from debtor. Debtor s non-exempt property passes to estate. Property Included In Estate: Consists of extensive range of rights & interests in property (regardless of property s location/entity in possession), as well as various causes of action & claims held by debtor. S. 541(a). Individually Owned Property: Estate consist of all legal/equitable interests of debtor solely owned property of any kind as initiation of case. S. 541(a)(1). Legal Interests: Bank deposits, stocks, bonds, rights to compensation, personal injury claims, causes of action for damage to property, copyrights, patents and licenses, remainder interest in real property. Equitable Interests: non-spendthrift trust beneficial interest, right to redeem foreclosed property under state law. Estate has no greater interest in asset than debtor had. Community Property: Encompasses all community property under debtor s sole, equal or joint management and control. S. 541(a)(2)(A). Post-petition earnings from services of debtor are property of estate in a Ch. 12/13 case, but not CH. 7. Earnings beyond plan payments vest in debtor after confirmation unless confirmation order provides otherwise. Bankruptcy Ct v. State Ct Jurisdiction Over Spousal Property: Resolving Spousal Property Rights: Bankruptcy court has jurisdiction over all aspects of estate property, including power to adjudicate spousal property rights. Bankruptcy court doesn t have right to determine spouses rights in assets that aren t estate property. Debtor s Property Rights Determined By State Law: Unless state law provides for preliminary interest in other spouse s interest in divorce, non-debtor spouse s interest in debtor s property blocked by filing bankruptcy petition. Property Distribution: If pending divorce action filed prebankruptcy, state court loses jurisdiction over estate property. Stay will normally be lifted to let debtor s ex-spouse continue proceedings in state court to resolve parties interests in property, as bankruptcy court decides how to distribute property. Child Support: CP s DSO claim not property of her bankruptcy estate. CS arrearage owed to child, not payee parent. Co-Owner s Rights: Sale of Entire Asset: Bankruptcy trustee of debtor owning a divided interest in asset can only sell entire asset under certain circumstances (partition is impractical, sale of fractional interest alone would realize less than estate s interest in proceeds, benefit to estate outweighs detriment to co-owner & asset is not use in production of certain types of energy.) S. 363(h). Co-Owner has Right to Purchase: For price bid by 3rd party. If asset was community property, debtor s spouse also has right purchase asset but has no right thwart sale on account of equitable considerations. Property Acquired Post-Petition: S. 541 CH. 7: All earnings and property not related to prepetition property remain property of debtor and don t become estate property. Ch.13: Includes not only debtor property at time petition filed, but also property acquired and income earned by debtor up to time case closed, dismissed or converted. Post-petition assets acquired by debtor that are unnecessary to effective reorganization under plan may be considered debtor property, not estate property. 6

7 Overview: Not only file a petition, propose a plan for payment of creditors. Be sure to review the plan. In many plans, Domestic Support Obligations are not specifically set out on monthly payments. In theory, the NCP may have up to the end of the Plan to pay the debt in full. Therefore, it is possible for NCP not to make any payments on back child support for five years. Once Plan is confirmed, you are bound by the terms of Plan. CH. 13 should have regular earnings, likely more affluent, more possessions, creditors may be more active, may seek to have stay lifted. Creditors may challenge interest rate, form and time of payments under the plan. Petition/Filing: Schedule of creditors, assets & liabilities, current income and expenditures, executory contracts unexpired leases statement of debtor s financial affairs. Overview of Plan and Prerequisites for Confirmation: Debtor s proposal for resolution of Chapter 13 case. Plan has three components: States income & assets used to fund plan, Proposes treatment to be given claims, Provides for Various Optional Matters. Optional provisions under Sect 1322(b) include classification of unsecured claims, modification of claims, cure of default. Mandatory Provisions under Sect 1322(a) 3 Rules: Must bind the debtor to pay future earnings to trustee sufficient to execute plan, Must provide for full payment of priority claims, If it classifies claims, must treat claims in same class equally. Ch. 13 Plan may provide for payment of pre-petition DSOs by payments by debtor thru Ch. 13 trustee 7

8 Plan Confimation: Sect 1325(a). Six criteria: 1. Plan must comply with Ch All fees must be paid 3. Plan must be proposed in good faith 4. Distribution to be paid to each unsecured claimnant under plan must be equal to what it would have received had the estate been liquidated under CH. 7; 5. Plan must either provide for the collateral to be surrendered to claimnant or must preserve claimant s lien and provide for full payment of present value of the secured claim. 6. Plan must be feasible. Neither Code nor Rules state exactly when confirmation hearing must occur. If confirmation refused, debtor may amend the plan to correct objectionable elements. If plan is not satisfactorily amended, party of interest may move for dismissal or conversion. Sect Trustee distributes debtor s pre-confirmation payments under Sect 1326(a) when plan confirmed, court will sometimes allow debtor to pay creditor outside the plan. Confirmation Consequences: Plan binds debtor and all creditors, whether or not their claims are provided for by the plan or whether they accepted or rejected it. Sect 1327(a). Upon confirmation, estate property vests in the debtor. Creditors only opportunity to challenge plan is objection to confirmation. Creditor is bound by plan, even if they don t like plan, they are bound ( crammed down ). Although debtor s post-petition property continues to enter estate under 1306 and 541, all estate property passes back to debtor upon confirmation except for that property or income committed to performance of plan. CH. 13 does not operate as a discharge. If debtor defaults and plan converted to Ch. 7, balance of claims against debtor remains recoverable. Debtor receives discharge under 1328 only after plan has been consummated. In Re Gellington: Texas AG sought postpetition garnishment above amount specified in plan, debtor sought sanctions. Bankruptcy court found in favor of Texas finding exception to 362(b)(2) stay IWO exception, but on appeal found Texas violated Sect 1327(a). Confirmation is the bright line in the life of a Chapter 13 case at which all the important rights of creditors and responsibilities of the debtor are defined Court imposed no sanctions Once plan confirmed, assets need to fund the plan become resolved. Wages exceeding that which is necessary to fund plan are not estate property and may be garnished. 8

9 Seeking Dismissal: For Non Payment of Current Support: One of the most important BAPCPA rules. Section 1208(c)(10), 1307(c)(11). Dismissal For Multiple Filings: : Sect 109(g)(2): No person can be a debtor within 180 days of voluntary dismissal made after a creditor has sought relief from automatic stay. Any creditor has standing to file. Dismissal for Inherent Power of Bankruptcy Court to Prevent Abuse: Sect 105(a) give court sua sponte power, suppressing abusive filings by restricting future access to the bankruptcy court upon finding that debtor is a vexatious litigant. Repeated attacks in bankruptcy on state court judgments will allow court to issue an injunction prohibiting further abuse of bankruptcy process. Repeated vexatious challenges in bankruptcy proceedings to a state court judgment will support sanctions prohibiting debtor from filing further appeals. Injunction against filing in federal district court include bankruptcy courts in the district and district court my also extend injunction to entire federal court system. Dismissal For Filing Simultaneous Bankruptcies: Individual may not be a debtor under two different bankruptcy chapters simultaneously. For Cause: Sect 1307 Allows to seek dismissal for Unreasonable Delay, Nonpayment of court costs/fees, Failure to file timely plan, Failure to commence making payments to the trustee 30 days after filing petition, Denial of Confirmation, Material Default in plan Compliance, Revocation of Confirmation and Denial of Modified Plan, Termination of Confirmed Plan By Reason of the Occurrence of a Condition Specified in the Plan Other than Completion of Payments, Failure to File Required Schedules (Trustee Only), Lack of Good Faith Effect of dismissal: Dismissal doesn t bar discharge of debts which could have been discharged in the dismissed case when debtor files subsequent bankruptcy. Dismissal reinstates any transfer that was voided under Sect 522 and 724(a) (property exemptions and lien avoidances); Sect 544 and 547 (preferential and other transfer recoveries); 545 (statutory lien avoidance by trustee); 548 (fraudulent transfer recoveries); 549 (recoveries of post-petition transfers of estate property) unless court orders otherwise. No avoidance of real property liens in CH. 13 cases until plan is completed and discharge received. Lien avoidance in Chapter 13 cases must be contingent upon debtor s successful completion of plan. After trustee is ordered to turn over any funds in the his possession to debtor, such funds may be levied upon as any other property of debtor liable to enforcement of debt 9

10 Generally: Statutory forgiveness of balance of claims of debts that aren t fully paid in bankruptcy. Principle reason for seeking bankruptcy relief. Goal: Fresh start meant to help honest debtor and not provide a means for unscrupulous evasion of debt. Bad Faith Remedies: Dismissal denies bankruptcy relief to debtor, including discharge & is means of preventing discharge privilege abuse. Debtor was denied discharge because he omitted income earned in 2009 & 2010 from Statement of Financial Affairs & he misrepresented on Schedule 1 that he was unemployed since Nov In re Virovlyanskiy. Chapter 7 : Purpose is fresh start, must be granted unless one of 10 independent statutory grounds for denial of Ch. 7 discharge applies. Effect of discharge to discharge debtor from all debts that arose prior to order for relief under Ch. 7. Objections to be filed within 60 days of 341 meeting, if no objections, discharge can occur at any time after that. Discharge may be revoked for fraud if movant for revocation did not discover the fraud until after discharge, debtor acquired or became entitled to acquire property that would constitute property of estate, and debtor knowingly & fraudulently failed to disclose fact or turn over property to trustee, or debtor committed acts of impropriety under S.727(a)(6). Chapter 13: Purpose: Ch. 13 more permissive. Creditors are expected to receive higher level of payment in CH. 13 than Ch. 7. Broader discharge benefits common good. Typical CH. 13 includes all debts provided for by plan or that have been disallowed by court under S Certain debts like child support may not be discharged. Individual may receive discharge under Ch. 13. Corporations & partnerships may only receive discharge if it undergoes rehab under Ch. 11 or 12. Objections: Party of interest requests, ct. may order trustee to investigate debtor s conduct to determine whether there s basis for denying discharge. Objections can be filed any time up to last payment. Discharge occurs when all payments have been made under plan. Discharge may be revoked on fraud if revocation applicant did not know of fraud until discharge granted, must be made within year of discharge. Res Judicata and Collateral Estoppel not applicable: In Re Diaz: Fla. Dept of Revenue filed POC of $67000, debtor objected, FLA didn t respond timely, Court reduced claim to $ Debtor paid off plan, discharged. FLA started collecting thru demand letters, IWO and DLS. Diaz sued, won in district court, reversed on appeal, saying matter wasn t being relitigated, because was never litigated in bankruptcy. App. Court noted that if this were so, it would lead to defacto modifications. Compare In re Hann: Student loan case. ECMC filed POC for $53000, debtor objected, court found $0, court used a two prong test to allow the claim, saying that by not allowing the claim it determined it was not a valid claim. 10

11 Domestic Support Obligations: Major change in BAPCPA. 11 USC 101(14A) Definition of DSO: Debt that accrues before, on, or after the date of the order for relief in a care under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law. Owed to or recoverable by a spouse, former spouse, child of debtor or such child s parent, legal guardian or responsible relative or a governmental unit, in the nature of alimony, maintenance or support (including government assistance) of such child s parent, without regard to whether such debt is expressly so designated; established or subject to establishment before, on or after date of the order for relief, by reason of a separation agreement, divorce decree, or property settlement agreement, an order of a court or record or a determination made in accordance with applicable non-bankruptcy law by a governmental unit. Beyond Family Custodians: Can mean foster care, see In re Hernandez, or a guardian ad litem see In re Rackley. But nature of support determined by element of need, see In re Galiardo (overpaid spousal support case of $222,650 wife to husband). Priority: Allowed unsecured claims based on domestic support obligations must be paid before other priority & non-priority claims in Chap 7 cases. A Ch. 13 debtor must pay in full all pre-petition & post-petition DSOs. Discharge: DSO claims cannot be discharged, DSO judicial liens cannot be discharged in bankruptcy. 11

12 Domestic Support Exceptions To The Stay: Sect. 362(b)(2). Automatic Stay doesn t apply to the commencement or continuation of a legal proceeding against the debtor: 1. To establish or modify order for DSO Sect 362(b)(2)(A)(ii) 2. To establish paternity Sect 362(b)(2)(A)(i). 3. Automatic stay doesn t prohibit collecting DSO from property not property of debtor s bankruptcy estate Sect.362(b)(2)(B); income withholding Sect362(b)(2) ; 4. DLS, PLS,RLS Sect 362(b)(2)(D); 5. Federal/state tax offset Sect.362(b)(2)(E); 6. Credit Reporting Sect 362(b)(2)(F); 7. Medical Enforcement Sect 362(b)(2)(G). 8. Commencement/continuation of criminal contempt proceeding not stayed if purpose is to punish, not coerce payments. Case Law: But when a wife sought contempt hearing to collect post petition income instead of income withholding, court found stay violation. In re DeSouza, 493 B.R. 669 (2013). Automatic stay does not proscribe right to support first arouse after debtor filed for bankruptcy and action does not seek possession of property that s part of debtor s bankruptcy estate or seek to create, perfect, or enforce lien against property of debtor s bankruptcy estate. 12

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14 Modification of A Confirmed Plan: Sect Request for post-confirmation modification of plan occurs under circumstances where income or expenses of debtor have changed materially & unexpectedly. Can happen any time after plan has been confirmed. Can result in larger or smaller payments to particular class, longer or shorter payout period, change in amount to be paid to creditor. Seeking Modification of Plan Under S. 1329: Child support creditor may seek to reduce time frame for debtor to make payments or seek to increase payments under plan. Extend or reduce time for such payments or change amount to be distributed to creditor who has been otherwise paid. Once payments have been completed plan has been completed, modification not option. Debtor & creditors bound by modified plan if creditor fails to object. Proposed modified plan must meet confirmability requirements of S and contents requirements of S. 1322(a) &(b). One of confirmation requirements is that creditor will be paid at least as much as he would receive in Ch. 7 cases. S. 1325(a)(4). Substantial change in Debtor s Financial Status Merits Modification of Confirmed Plan. S. 1329(a) allows trustee to seek increase in payments to particular class, subject to same code requirements enforced when initial confirmation was at issue & warranted by substantial change in debtors financial condition. Burden of substantial change in debtor s financial circumstances on movant. Objecting To Confirmation of Plan: Two Basic Areas: If debtor proposes less than full payment of assigned support debts, objection made that debtor is not applying all of his disposable income to plan payments. If debtor proposes plan provisions not authorized by law. Under 1325(b), debtor must prove that as of the effective date of plan, value of property to be distributed under plan on account of such claim not less than amount of such claim or all debtor s projected disposable income will be applied to payments of plan within commitment period of plan. Debtor has burden of proof once creditor has made prima facie objection Revocation of Confirmed Plan: S after notice & hearing within 180 days after entry of confirmation order & that confirmation was fraudulently procured. Revocation=discretionary. If revoked, ct. may allow debtor to modify plan, or court could convert or dismiss CH. 13 under S

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16 Effect of objecting to plan See 11 U.S.C

17 The Pros/Cons of collecting only through the bankruptcy plan: If plan completes, payment by trustee within five years without additional effort. If plan fails, there will be a delay from last bankruptcy payment until close of the bankruptcy case, causing missed payments The Pros & Cons of collecting using hybrid of Paying Outside Plan & Paying in Plan Payment of all arrears within five years without interruption of payments already being received. Requires active participation in bankruptcy case to a greater degree. Negotiation with Debtor s Attorney: Since entire arrearage must be paid under plan terms, you may not need entire amount paid during five years of plan. Can be win/win if the bankruptcy is not dismissed, you can keep lien and get payments. Often debtors will make this deal. 17

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20 Case files with pending Chapter 13 case stay with assigned Deputy Prosecutor Deputy Prosecutors communicate on cross reference cases Substitutions of counsel occur when case assignments change or Deputy Prosecutor leaves office Example of Chapter 13 log: NCP Name ISETS Case Number Bankruptcy Case Number When Bankruptcy Filed When POC Filed Date of Objection to POC Payments Paid Inside or Outside Plan? Plan Confirmati on Date Motion For Relief Filing Date Discharge or Dismissal Date Bill Smith /5/2009 N N Outside 11/2/2009 N 9/5/14 John Doe /3/ /22/2012 N Inside 2/12/2013 N Jane Jones /23/2011 9/30/ /8/2011 Inside 12/19/2011 4/23/ /31/14 Greg Brady /4/ /30/ /16/2012 Inside 3/24/2013 6/21/

21 What to Do If Debtor Objects to Proof of Claim Review Objection-- Nature of objection? Objection Has Merit? Clerical Error on POC? Mathematical Error? Unknown Child Support Order? If Objection Has Merit, Correct Problem & Amend POC Review Objection-- Nature of objection? Objection Has Merit? Clerical Error on POC? Mathematical Error? Unknown Child Support Order? If Objection Has Merit, Correct Problem & Amend POC If Arr. Dispute Can t Be Resolved, File Response & Motion for Relief If BK Court Sets Hearing, internally docket case File PTDA in IV-D Court & Set for Hearing When BK Grants Relief. Once IV-D Court Decides Arrearage File Amended POC Amended POC Resolves Pending Matter, BK Court Should Vacate Seeking to Lift the Automatic Stay DPA To Establish Child Support Arrearage In Original Court If NCP Can t Pay Pre-Petition Debt In Plan Period, Consider Seeking To Lift Stay 21

22 Liens Once Ch.13 Plan confirmed, lien removal should be referred to assigned attorney. BMV Liens Shouldn t Be Removed Simply Because of Pending Ch. 13 DPA Shouldn t Attempt To Execute Liens For Foreclosure/Attachment During Ch.13 Driving License Suspension 42 U.S.C. 666(a)(16); 11 U.S.C. 362(b)(2)(D) Driving License Suspended Prior to Bankruptcy Being Filed: Negotiation Tricky? Can t Coerce But DLS Is Allowed During Bankruptcy NCP is making payments outside of the Plan Via IWO, Reinstate. If NCP complying with BK Plan terms through Plan, proceed DLR, have PP noted BMV Specialist Checks ISETS Notes To See If Chapter 13 Pending. Suspending Driving License after the Bankruptcy Filed: Negotiation From The Practitioner s Standpoint Pitfalls Seek Suspension Before Plan Confirmed. Plan Modification= Acceptable Solution to Resolve DLS BMV Specialist Contact DPA to Handle DLS During Chapter 13 DPA Should DLR If Debtor has Complied With Confirmed Plan. Dismissal Amend/Terminate IWO to Include Arrearage. Remove any STOP codes on enforcement. Update Bankruptcy Log of dismissal. Monitor case and be weary of case being reinstated. If Reinstated, Amend IWO, STOP Codes, Log Updated Update ISETS case notes. 22

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