IV. The Constitutional Problem With A § 706(b) Motion

I thank Daniel Press, an attorney practicing in Virginia, Washington, DC, and Maryland, for giving me his notes, which served as an afflatus for some of today’s post.

A. Historical Background

 1. The Chapter 13 Context

When Chapter 13 was enacted in 1978, it provided that only an individual could be a Chapter 13 debtor (11 U.S.C. § 109(e)), imposed limitations on the amount of debt a Chapter 13 debtor could have (11 U.S.C. § 109(e)), and — most important for today’s discussion — included postpetition earnings in the bankruptcy estate (11 U.S.C. § 1306(a)(2)) from which the debtor made Chapter 13 plan payments (11 U.S.C. § 1325(b)(1)(B)).

For a Chapter 13 Plan to succeed, the debtor must be a willing and active participant in the reorganization. Congress explicitly stated that an involuntary Chapter 13 would create a thirteenth amendment problem: Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 4

III. Dealing With A Motion To Convert Pursuant To Section 706(b)

This post assumes familiarity with my last two posts (Part 1 and Part 2) of this multi-part series. Thus, while you can certainly read this post without reading those previous ones, you’ll get more out of it if you read those posts first.

A. Oppose Any Motion To Extend The Time To Enter A Discharge

If the Court has already granted a nonconsumer debtor a Chapter 7 discharge, the judge will probably not entertain a motion to convert the Chapter 7 case to one under Chapter 11, pursuant to § 706(b). Therefore, oppose any motion to extend the time for the Court to enter the discharge. Here’s the argument: Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 3

In my last post I began to set the stage for a discussion of § 706(b) motions to convert a Chapter 7 bankruptcy case to one under Chapter 11 by considering § 707 motions to dismiss. I noted that § 707(b)(2) only applies to individual cases in which the debtor’s debts are primarily consumer debts.

In today’s post I’ll focus on the question of what kinds of debts are nonconsumer debts because in determining whether a Chapter 7 case should be dismissed, there can be a battle over which debts are nonconsumer and which are consumer. Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 2

There is an alarming trend facing us, and it is not the latest teen-age fashions. It is the filing of motions pursuant to 11 U.S.C. § 706(b), to convert individual nonconsumer Chapter 7 cases to Chapter 11.

Because the topic of § 706(b) motions is a bit complicated, and requires some background information to understand it, my discussion will span a multi-part series of posts. In this first post I’ll set the stage by beginning with the more commonly seen terrain of 11 U.S.C. § 707 motions to dismiss. Continue Reading The Fight Against An Alarming Trend: Section 706(b) Motions – Part 1

In a recent issue of the L.A. Times, Liz Weston compared bankruptcy and debt settlement as ways to deal with overwhelming debt.  Her column was good, but given the limited space she had, it was a bit brief.  In this post I will expand on her discussion.

 

I.  Debt Settlement

 

The idea behind debt settlement is pretty simple:  You ask the creditor to accept less than you owe in full satisfaction of the debt.  You can do the negotiation yourself, or you can hire someone to negotiate on your behalf.

If the creditor agrees to lower the balance, you pay the reduced amount, either in one lump sum, or in a stream of payments.  Unless you have a friend or relative to help you, the lump sum approach isn’t too likely because if you had the lump sum the creditor would assume you could get more and would demand more. Continue Reading Bankruptcy vs Debt Settlement

Suppose you’re driving home from a New Year’s Eve celebration.  At the party you had one too many glasses of Krug Champagne.  Suddenly a light pole leaps in front of you and you hit it.  You’re badly injured.  You get fine treatment at the hospital, and later receive a bill for $100,000 for the care.  You can’t pay it, so you file for bankruptcy protection.  Is the medical debt dischargeable?

Notice that the party who was physically injured in the accident is the bankrupt debtor ― not some third party.  But is the hospital a party that was also injured as a result of your drunk driving?

 

I.  A Brief History Of Drunk Driving Debts In Bankruptcy

 

Let’s change our hypothetical fact pattern a bit.  Suppose that when you drove home from the New Year’s Eve bash, you hit, not an errant light pole, but another car.  In the process you injured the other driver ― someone you didn’t know.  Now you have a bill for $100,000 for the other driver’s medical care.  Is that debt dischargeable in bankruptcy?  There was a time in American history when the answer was a resounding, “Maybe.”  (That’s a nice vague answer.  Someone once told me that if he didn’t know what he was talking about, he kept his comments vague.  However, in this case “maybe” is not a vague answer because it comes with the qualification that it depended on the facts and the court in which the case was heard.)

 

     A.  The Relevant Statute At The Time

 

At the time when the answer to our question was maybe, the relevant statutory provision that plaintiffs used was:

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 — . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.

11 U.S.C. § 523(a)(6). Continue Reading Drunk Driving Debt: Dischargeable If Debtor Was The Injured Person?

For those of you who have been living in a cave without access to any news of the day, I would bring you up to speed on the ever expanding sex abuse/sexual harassment scandal that implicates many famous Hollywood types, politicians, religious leaders, big business execs, . . . , and the list just keeps on growing; but if you’re still living in your cave, you probably won’t read this post.

For those of you who aren’t living in a cave, but haven’t been paying attention to the salacious details, here’s the classic comic book version.  Many famous and powerful people have recently been accused of sexual harassment.  The list of the accused includes both men and at least one woman.  As the list grows, the likelihood that at least one accuser (maybe many more) will file civil actions against the accused increases.  Since this is a bankruptcy blog, our question of the day is:

Question:  Can the accused discharge any financial liability associated with the (alleged) harassment in bankruptcy?

 

Leaving aside the fact that most, if not all, of the accused are multimillionaires who probably won’t seek bankruptcy protection, the question is still worth addressing because people who don’t occupy the rarified world of big ticket corruption can still face such accusations. Continue Reading Harvey Weinstein, et al., and Bankruptcy

Tax debt not dischargeable after SFRI have written several times about discharging income tax debt in bankruptcy.  Some time ago I wrote a post that dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  At the time, I reported that the question hadn’t been addressed by the Ninth Circuit Court of Appeals.  That statement is no longer correct.

 

Martin Smith v. IRS

 

I watched the oral arguments in Martin Smith v. IRS case that took place on May 12 at 9:00 a.m.

The Court sided with the IRS in this case, and held that Mr. Smith’s tax debt was not dischargeable in his Chapter 7 bankruptcy case.  This case illustrates the old maxim that bad facts make bad law.

The Court summarized Mr. Smith’s history with the IRS:

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on information it gathered from third parties.  In March 2006, the IRS mailed Smith a notice of deficiency.  Smith did not challenge the notice of deficiency within the allotted 90 days and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for the year 2001 on which he wrote “original return to replace SFR.”

The fact that Mr. Smith filed his return seven years late, and three years after the IRS had filed an SFR clearly bothered the Court.  On that basis the panel held:

Here, Smith failed to make a tax filing until seven years after his return was due and three years after the IRS went to the trouble of calculating a deficiency and issuing an assessment.  Under these circumstances, Smith’s “belated acceptance of responsibility” was not a reasonable attempt to comply with the tax code.

Suppose Mr. Smith had filed his return a month after the IRS filed the SFR.  Would the Court have sided with him?  Probably not because of the locution:  “. . . after the IRS went to the trouble of calculating a deficiency and issuing an assessment.”  In sum, it appears that a return filed after an SFR is not a return for bankruptcy discharge purposes in the Ninth Circuit.

 

Discharging tax debt:  Late filed return, but before the IRS files an SFR

 

What if you file a return late, but before the IRS files an SFR?  Will that return qualify as a return for bankruptcy discharge purposes?  The Court never considered the question.  Therefore, the Fifth Circuit’s draconian holding in In re McCoy, 666 F. 3d 924 (5th Circuit 2012) (a late filed return is not a return for bankruptcy discharge purposes) has not yet polluted Ninth Circuit jurisprudence.  So, at least for now, if you’re in the Ninth Circuit and you filed your return late, but there was no SFR, then if you satisfy the three-year, two-year, 240-day rule, you should be able to discharge the tax debt in bankruptcy.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Based on Flicker Image  (Licensed) by Chris Potter

ZombieIn today’s LA Times, Sean Pyles wrote a nice summary of the problem of zombie debt.

He began with the observation that when the statute of limitations has passed on debt collection actions, creditors are estopped from suing you to collect.  However, I suspect that in the interest of saving columnar space, he elided over some of the details.  One of my previous posts fills in the lacuna:

According to Cal. Civ. Proc. Code § 337, the statute of limitations for most debt collection lawsuits in California is four years.  Therefore, if you receive a summons telling you that you are being sued by a debt collector, review your records.  If it has been more than four years since the end of the grace period after the last time you made a payment, you may have a statute of limitations defense.  But you must assert it immediately by filing a written response with the court within thirty days of being served with the summons.  Otherwise that defense is deemed forever waived.  And just because you assert it, does not mean that you will win.  Be prepared to prove that the defense is valid.  By the way, successfully using the statute of limitations defense does not mean that the debt is invalid.  It just means that the collector cannot use a lawsuit to collect it.  If the debt is valid, the collector can still call you to try to collect the debt.  However, if the collector loses the lawsuit because you successfully applied a statute of limitations defense, you will probably never hear from that collector again.

Because debt collectors can still try to collect time-barred debt ― they just can’t use the courts to facilitate their efforts ― Mr. Pyles suggested bankruptcy as an option for dealing with zombie debts.  And, of course, he’s right.  Bankruptcy will take care of the problem once and for all.  But in Chapter 13 there’s a wrinkle.

Unlike Chapter 7, which just wipes out debts without you paying a dime on them, in a Chapter 13 bankruptcy you enter into a multi-year debt repayment plan that is administered by the Bankruptcy Court.  If a creditor is to be paid in Chapter 13, it must file a proof of its claim in a timely fashion.  Otherwise, it gets left out in the cold.

There is a species of alleged humans that buy debts in bulk.  Their purchases include debts discharged in bankruptcy, and debts that are time-barred.   Debt collectors with time-barred debts have tried to resurrect them by filing proof of claim in Chapter 13 bankruptcy cases.  I have written about this problem, so I won’t get too thick into the weeds.  Instead, I will say that the most effective tool for challenging the claims is the Fair Debt Collection Practices Act (“FDCPA”) that is alive and kicking in other circuits, but not in the Ninth Circuit because of the unfortunate holding in Walls v. Wells Fargo Bank, NA, 276 F. 3d 502 (9th Cir. 2002) decision.  If you have a case with good facts, it might be worth asking the Ninth Circuit to reconsider its Walls holding.  If you have the right fact pattern, I would be delighted to discuss representing you in the litigation.

The reasoning in Johnson vs. Midland Funding, LLC, Nos. 15-11240, 15-14116 (11th Cir. 2016) would be a good starting point.  Here is the gist:

In two separate Chapter 13 proceedings, two different “bulk debt buyers” filed proofs of claim, both of which were time-barred.  The case eventually bubbled up to the Eleventh Circuit.  The Court held the Bankruptcy Code did not preclude an FDCPA claim in a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows is time-barred.

The Court held that while the Bankruptcy Court has the authority under the Bankruptcy Code to disallow improper claims, that authority does not preempt the FDCPA:  “The FDCPA easily lies over the top of the Code’s regime, so as to provide an additional layer of protection . . . .”  If only the Ninth Circuit would drink of the sensible ambrosia of the Eleventh Circuit’s Johnson decision.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Image courtesy of Flickr (Licensed) by Omar Bariffi

CourtroomI have written several times about discharging income tax debt in bankruptcy.  My most recent post on this topic dealt with the question of whether a return filed after a substitute for return is a return for bankruptcy discharge purposes.  I reported that the question hasn’t been addressed by the Ninth Circuit Court of Appeals.  That is about to change.

In a society with a government class and a nongovernment class, the government class will naturally protect itself against the nongovernment class.  I hope the Ninth Circuit will break from that mindset and do the right thing in the Martin Smith v. IRS case.  Oral arguments are scheduled for May 12 at 9:00 a.m., and I intend to watch them at: http://www.ca9.uscourts.gov/media/live_oral_arguments.php.

If you’re a debtor in the Central District of California who is considering using bankruptcy to deal with your debts, call an attorney who is a board-certified bankruptcy law specialist to represent you.

 

Image courtesy of Flickr (Licensed) by Karen Neoh