Procedure – Page 8 – Rochester Bankruptcy and Debt Relief

Converting From Chapter 7 to Chapter 13 Bankruptcy

What happens if you’re in a Chapter 7 bankruptcy, and fall behind in your payments on secured loan, such as your home mortgage or car loan? Under those circumstances, it is possible to covert to Chapter 13 bankruptcy where you can make payments though the plan and to stop a foreclosure or car repossession. While it is not as simple as it is to convert from a Chapter 13 bankruptcy to a Chapter 7 bankruptcy, it can be done by filing a motion with the court and placing your creditors on notice.

The bankruptcy court will require a good reason for granting your motion, and if one is provided, the court will convert the case. There are rules about converting for “bad faith” or if you have already converted the case before, but generally, requests for conversions are granted. Once the motion is granted, your bankruptcy lawyer can file a Chapter 13 plan which will allow you to cure any arrears and to give you time to repay house or car payments, and stop the foreclosure or repossession.

Similarly to converting from Chapter 13 to Chapter 7 bankruptcy, your petition will need to be updated. Also, some of the debts might be treated differently in Chapter 13. You will need to prepare a plan, and there will be a new trustee appointed and a new 341 hearing held. Eventually, your plan will need to be confirmed by the court. Overall, the process isn’t too difficult and you are likely to be able to save your home or car. For many debtors, the benefits of converting their case are worth it. A bankruptcy attorney will be able to guide you through the process.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Converting From Chapter 13 to Chapter 7 Bankruptcy

While debtors who file Chapter 13 to protect certain assets are usually diligent in making their payments, sometimes the circumstances have a way of interfering with their ability to meet the plan’s requirements. It is possible that the debtor loses his/her job, missed a few payments, and creditors lifted stay, or the debtor decided that the assets were not worth preserving. One option that is always available in Chapter 13 is to dismiss the case, which the debtor has a right to do at any time in a Chapter 13. But this may leave you with credit card or other debt, or you may be worried that the house or car will be sold at foreclosure or repossession, or that the lender will go after you for a deficiency. In these cases, the best option is to covert your case to a Chapter 7.

In those situations, the debtor may still seek relief from the bankruptcy court, and convert the case from Chapter 13 to Chapter 7 bankruptcy, provided that the means test can be met. When converting the case from a Chapter 13 to a Chapter 7, there is still some paperwork that needs to be taken care of. The petition and schedules need to be updated with respect to the property, whether or not it is kept by the debtor. With respect to any property securing the debt, arrangements must be made with the creditor in order to keep it.

Schedules I and J for your income and budget along with the Means Test have to be updated to reflect that you no longer have the money to make payments in a Chapter 13 case . Once all of the paperwork has been revised, then the debtor must sign the amended schedules, so that they can be filed with the court.

Once the attorney files a Notice of Conversion with the Court and pays the $25 conversion fee, the Court will convert your case to a Chapter 7. There are also other consequences associated with the conversion. Initially, any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to to the debtor. Any plan payments that are withheld from the debtor’s paycheck will be returned as well. A new Chapter 7 Trustee will be appointed and a new 341 hearing (meeting of the creditors) will be held. The debtor will also have to file a Statement of Intention with respect to any assets subject to creditors’ claims, and also file amended schedules listing any additional debt incurred between the filing of the Chapter 13 and the date of conversion.

Chapter 7 Bankruptcy and Denial of Discharge for Willful or Malicious Injury

One of the limitations on receiving a discharge in a Chapter 7 bankruptcy is that the debtor cannot discharge any debt for willful or malicious injury.

Section 523(a)(6) of the Bankruptcy Code precludes the discharge of a debt “for willful and malicious injury.” As noted by the United States Supreme Court in Kawaahua v. Geiger, 523 U.S. 57, 61 (1998), the “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” For the same reason, nondischargeability under this section will attach only to injuries that are malicious. In the Second Circuit, the Court of Appeals set the standard for “willful and malicious injury” in its decision in Navistar Financial Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (1996). The Court concluded that “[t]he term ‘willful’ in this context means ‘deliberate or intentional,’” and that “[t]he term ‘malicious’ means wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Id. at 87 (citations omitted).

In a recent case, In re Alessi, Judge Bucki held that the deliberate failure to abide by the terms of the contract, amounted to willful and malicious injury. In Alessi, the debtor, Mrs. Alessi, not only failed to pay a debt, but a failure to pay from funds that the debtor had agreed specifically to earmark for that purpose. The uncontroverted facts showed that the funds resulting from a real estate transaction were accessible and not otherwise encumbered, that the debtor knew of her obligation to turnover the funds, and that through his counsel, Mr. Alessi made timely demand for payment, even though not obligated to do so. The resulting injury was willful, in that Ms. Alessi deliberately and intentionally refused to turn over the sale proceeds. By violating a contractual provision for use of committed funds, Amy Alessi inflicted a wrongful financial loss without just cause or excuse. Hence, she caused an injury that was malicious within the meaning of section 523(a)(6).

Thus, if you are a debtor, you may have an obligation to follow through on the contracts where the funds are specifically designated for a given purpose. If you fail to do so, you may be denied a discharge.

Debtor and Bank’s Right of Setoff

One of the common issues that may arise in a bankruptcy, is that the debtor may have one or more accounts at a bank to which the debtor owes money. In those situations, the bank may assert its right of setoff.

The right of setoff in New York is available to a lending institution pursuant to Section 9-g of the Banking Law. Under that section, banking institutions have a long established right of setoff where a borrower is indebted to the institution and also has money on deposit with the institution. This right of setoff is preserved in bankruptcy by Section 553(a), which provides that,

“Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case[.]”

At a first glance, the setoff appears to require a motion to lift the automatic stay since Section 362(a)(7) specifically covers “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor[.]”. Thus, under the statute, in order to exercise that right, the bank must make a motion to lift automatic stay. However, here in Rochester, in In re Catalano, Judge Ninfo has ruled that under some circumstances, the bankruptcy court will not require the motion to lift stay and set the following policy.

If a banking institution has a clear right of setoff under New York law and the debtor has funds on deposit with it in the amount of $750.00 or less, and also owes the institution a debt in excess of the funds on deposit, the institution may setoff the amount on deposit without obtaining formal relief from the automatic stay, provided that it gives the written notice described herein, and the trustee or debtor does not demand a hearing because there is a genuine dispute as to the asserted right of setoff.

As stated in the decision, the banking institution shall give written notice to the trustee, debtor and debtor’s attorney, if there is one, that: (1) asserts its right of setoff; (2) is accompanied by copies of the debtor’s schedules or other documentation that demonstrates the right of setoff; (3) sets forth a “contact person” at the institution, along with that individual’s address, direct telephone number and a fax number; and (4) advises that unless the trustee or debtor has a genuine dispute as to the validity of the asserted right of setoff, it will be effected ten (10) days after the date of the mailing of the notice. In the event that the trustee or debtor notifies the contact person of a genuine dispute as to the asserted right of setoff, the banking institution shall be required to bring a formal motion to terminate the automatic stay under Section 362(d).

This policy makes it extremely important that the debtor fully discloses his/her financial situation to the bankruptcy lawyer and also allow the bankruptcy attorney to engage in prefiling planning to protect the debtor’s assets from the potential right of setoff.

Your Homestead Exemption in Chapter 7 Bankruptcy

In New York, the debtors can protect the equity in their residences by utilizing their homestead exemption. Equity is typically defined as the difference between the market value of the property and the debt owed on it. The homestead exemption is one of the most ways to protect your biggest asset, your home, from the claims of your creditors. In New York, an individual debtor can protect up to $50,000 of equity in home by filing Chapter 7 bankruptcy, $100,000 if the debtor spouses are filing jointly. In order to take the benefit of the homestead exemption, the property has to be your residence when you file the bankruptcy.

I am often asked if the debtor can lose the benefit of the homestead exemption. My usual response is that the debtor could lose the benefit of the homestead exemption only in extreme circumstances. Typically, in order to lose the benefit of the exemption, the debtors must engage in fraudulent conduct or a clear showing of bad faith. Further, the wrongful conduct must be related to the homestead exemption.

If, for example, you own a $300,000 investment property in addition to your $100,000 residence, but you wrongfully claim in your bankruptcy petition that you live in the $300,000 property, you may lose the right to claim the exemption. As long as the debtor does not lie or attempt to hide the property from the bankruptcy court, the debtor will not lose the homestead exemption.

Creditor Can’t Contact Debtor After the Bankruptcy Is Filed

When you file your bankruptcy case,the creditors must stop calling you. They can’t continue garnishing your wages. They must stop all collection activities because every bankruptcy case protects the debtor with the “automatic stay.” The automatic stay prohibits creditors from taking actions against you, unless they obtain a permission from the bankruptcy court.

While there are some exceptions, primarily for matters involving marital obligations, otherwise known as “domestic support obligations”, for most people and most debts, bankruptcy provides real relief.

If creditors keep calling you, mailing you, garnishing your wages or taking other actions against you, call your lawyer immediately. Regardless of whether the creditors acted with or without the knowledge of your filing, a bankruptcy lawyer make them stop. Also, regardless of whether the creditors acted with or without the knowledge of your filing, the creditors may be liable for actual and even punitive damages as well as attorneys fees.

Section 362 of the US Bankruptcy Code states that § 362. Automatic stay states that the filing of a petition in bankruptcy operates as a stay “applicable to all entities, of the commencement or continuation, of any action against the debtor.” Section 362(k) states that an individual injured by any willful violation of a stay shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

So what’s a willful violation of a stay? The creditor needs to know that you have filed for bankruptcy. It must take an action to collect against the debtor after that stay is in effect. The creditor doesn’t need to willfully violate the stay, it needs to willfully take the action. That means the creditor needs to send out the collection letter after that creditor knows of the stay.

Here in Rochester, Judge Ninfo addressed the issue of willful violation of automatic stay in In re Engel, holding that mailing of a billing statement after the bankruptcy was filed was a willful violation of automatic stay. In Engel, the creditor was listed in bankruptcy schedules and was also contacted by the debtor’s attorney who demanded that the creditor stop any and all contact with the debtor. Even after the debtor’s attorney notified the creditor, the creditor mailed two additional billing statements. While the creditor claimed that the contact with the debtor was an unintentional mistake, the court found that the creditor’s actions were intentional and ordered a hearing on damages.

Chapter 7 Bankruptcy and Reaffirmation Agreement

When you file a Chapter 7 bankruptcy case, as a part of your petition, you also file a statement of intention with respect to property that is secured by consensual liens. That means that you have to inform the bankruptcy court here in Rochester what you intend to do with such property, such as your home that has a mortgage, your car, if it has a loan associated with it that is secured by a lien, or any other property in which your creditor has a valid security interest. You are given a choice of whether to continue to pay on such obligations or to, if you do not wish to sign a reaffirmation agreement, to allow the creditor to take the property back. A reaffirmation agreement in bankruptcy is a new contract signed between you and a lender that reaffirms your debt and personal liability for the obligation. The law requires you to “perform” your intentions regarding financed personal property within 45 days of the Meeting of Creditors (341 Meeting) or the automatic stay terminates. Before signing a reaffirmation agreement, it is a good idea to discuss it with your bankruptcy lawyer as it is a binding legal document. You can revoke it within 60 days after signing. It is not difficult to revoke the reaffirmation agreement since all that is needed, is a letter saying “I don’t want this agreement”, with the letter being sent to the court and to the creditor.

The Bankruptcy Reform Act of 2005 (“BAPCPA”) states that any reaffirmation agreement(s) must be entered into prior to the filing of a discharge in bankruptcy. The reaffirmation agreement must also be approved by the court and not rescinded by the debtor prior to the discharge being filed. The court can also refuse to sign the reaffirmation agreement, if it is of the opinion that the debtor cannot afford the payments called for under its terms. Some lenders state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders feel that it is better to receive monthly payments rather than lose money by selling repossessed vehicles at auction prices.

As a debtor, there is little risk in signing a reaffirmation agreement provided that you feel you really need the property (such as a car or a home) and you know you can afford the payment.

Failure to Disclose Assets in Bankruptcy, Confirmation of Chapter 13 Plan and Revocation of Confirmation Order

What happens if the debtors fail to disclose certain assets in their Chapter 13 bankruptcy and those assets come to light after the confirmation of their Chapter 13 plan? This situation was recently addressed by Judge Ninfo of the United States Bankruptcy Court for the Western District of New York in In re Cram.

On March 24, 2004, Richard and Pamela S. Cram filed a petition in Rochester, in the United States Bankruptcy Court for the Western District of New York, initiating a Chapter 13 case. A Chapter 13 trustee was appointed. On their Schedule B of Personal Property, the debtors stated that they had no “[o]ther contingent and unliquidated claims of [any] nature….”. On April 30, 2004, the court orally confirmed their Chapter 13 Plan, and on October 5, 2004 an order confirming the plan was entered.

At the time the bankruptcy was filed, the debtors had a pending medical malpractice claim which resulted a subsequent lawsuit. On June 14, 2005, the debtors’ lawyer filed an amendment to their Schedule B of Personal Property, which amended the answer to question No. 20 regarding contingent and unliquidated claims, but did not amend their Schedule C to claim any proceeds that might be received from the malpractice claim as exempt.

Between June 14, 2005 and April 7, 2008 the debtors or their attorneys did not notify the court of the existence of the pre-petition medical malpractice claim set forth in the amendment, which was a Section 541 asset of the estate at the time the court confirmed their plan, even though in confirming their plan pursuant to Section 1325(a), the court believed that the requirement of Section 1325(a)(4), that the creditors would receive at least as much under the plan that they would in a Chapter 7 liquidation.

Section 1325(a)(4) provides that:

(a) Except as provided in subsection (b), the court shall confirm a plan if—
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.] 11 U.S.C. § 1325 (2009).

This section is known as “the best interests test”.

Once the trustee learned of the settlement, he moved to revoke the discharge, as well as for other relief. He asserted that on April 28, 2008, after the discharge order had been entered on April 7, 2008, the trustee learned that the claim had been settled on or about February 20, 2008 for $125,000 and that neither the debtors, their bankruptcy attorneys nor their personal injury attorney ever notified the trustee of the settlement or any prior settlement offers. The trustee argued, inter alia, that in view of the settlement, the debtors’ confirmed plan did not meet the best interests test.

Unlike in Chapter 7 cases, the court, in confirming a plan in a Chapter 13 case, makes an affirmative determination, as required by Section 1325(a), that, among other things, the plan meets the best interests test. Judge Ninfo held that because of the debtors’ failure to disclose the malpractice claim, which was a Section 541 pre-petition asset of the estate, either at the time of the oral confirmation of their plan or when the confirmation order was entered, the plan did not meet the best interests test, and neither the debtors, nor the trustee, ever corrected that failure by taking the necessary steps to insure that the plan was amended to include the proceeds of any recovery on the malpractice claim, either before or after the settlement. Thus, the confirmation order had to be vacated, and with no confirmed plan completed, the debtors would not be entitled to a Section 1328 discharge and the court vacated the confirmation order pursuant to Section 105(a).

Judge Ninfo further held that when the debtors filed the amendment to include the malpractice claim, they, as debtors, and their bankruptcy attorneys, as officers of the court, had an affirmative obligation to advise the court, not simply the trustee or their creditors, of the undisclosed asset, so that the court would be aware that its confirmation of the plan was improper and its confirmation order incorrectly entered, and could insure that the confirmation order was vacated or a proper modification to the plan filed to include any recovery.

The court further granted trustee’s motion to dismiss the bankruptcy, unless prior to July 6, 2009, the debtors: (a) pay to the trustee the amount necessary for the trustee to make a distribution to their unsecured creditors of 100% plus 9%; or (b) otherwise make arrangements with the trustee for the payment of the necessary amount within a reasonable period of time that is acceptable to the trustee and the trustee files with the court the details of such an acceptable arrangement.

The lesson of this case is that the debtors and their bankruptcy lawyers have an affirmative obligation to disclose any and all assets of the debtors, including any contingent or unliquidated claims. In this case, the consequences to the debtors could have been much more severe.

Pay Stubs Requirement and Bankruptcy

One of the current requirement under BAPCPA is that a debtor must file all of their pay advices (pay stubs) for the 60 days preceding the filing with their bankruptcy petition. What happens if a debtor or his/her attorney omits one or more pay advices (pay stubs)? The answer to that question is that under the statute, it is a serious problem and the bankruptcy judge may dismiss your case.

However, some debtors are either unemployed at the time of the filing, or receiving unemployment, workers’ compensation or social security benefits, and therefore do not have pay stubs that can be filed.

In In re LaPlante, Judge Bucki held that because section 521(a)(1)(B)(iv) requires the filing only of those payment advices that a debtor receives from an employer, section 521(i) cannot effect the dismissal of a case filed by a debtor without income as an employee. Neither the Workers’ Compensation Board nor the Social Security Administration are employers of the debtor, and therefore the 60 day requirement is not applicable.

Thus, if you are receiving workers’ compensation benefits, social security or other non-employer payments, it is important to tell your bankruptcy lawyer about it in advance, so that appropriate documents are filed with your bankruptcy petition.

Workers Compensation and Chapter 7 Bankruptcy

If you file a Chapter 7 bankruptcy, what happens if you have a pending workers’ compensation claim? Generally, if you file for bankruptcy in New York, any money received as certain public benefits is usually exempt. However, workers’ compensation claims can result in significant lump-sum awards and a bankruptcy trustee may file an objection to the debtor claiming such award as exempt.

Here in Rochester, Judge Ninfo dealt with a similar situation in In re Herald, and his decision resolved these issues in Western New York. In order to resolve this issue in favor of the debtor, Judge Ninfo had to find that worker’s compensation award fell within the scope of §282.2(c) of New York’s Debtor Creditor Law, which exempts benefits received as a result of “disability, illness or unemployment benefit.”

After analyzing the legislative history of §282 of New York’s Debtor Creditor Law, Judge Ninfo concluded that the legislative intent was to exempt workers’ compensation proceeds. He further noted that in some situations this may give a debtor a head start, as opposed to a fresh start, where the debtor will receive a significant award after the bankruptcy filing, but found that any such award to be exempt nonetheless.

Thus, if you have a workers’ compensation case pending or your are receiving worker’s compensation payments, you can file a Chapter 7 bankruptcy and keep the award when you receive it. It is important to tell your bankruptcy lawyer about it in advance, so that the workers’ compensation claim is listed as exempt on your bankruptcy petition.