The State of Chapter 13

Earlier this week I posted an update over at my LinkedIn page about managing to shove two Chapter 13 plans through confirmation over the trustee's objections and without breaking the clients' nonexistent bank accounts.  That page is for business PR, so I keep it civil.  Not so much here.



First, you have to understand what bankruptcy "reform" in 2005 did (Look here for my unvarnished opinion on what BAPCPA was really about.).  BAPCPA shifted the presumptive chapter for consumers from 7 to 13, from liquidation to a 3-5-year repayment plan (bka release-time debtors' prison).  That means that, if you are an ordinary schmoo, and you can't jump through a bunch of special and frequently shifting hoops, you have to go for Chapter 13.  Which means the Chapter 13 trustee effectively dictates who gets bankruptcy protection and who doesn't.


Second, understand that, according to my sources, Chapter 13 problems are not limited to Utah.  Chapter 13 trustees all over the country are slamming the door in people's faces for no good reason other than they can (Example: Why do the trustees push, and why do the courts order, the inclusion of Social Security in projected income?  Just because there's a line for it on Schedule I, in spite of the express definition of "disposable income" in 1325(b)(2)?  And in spite of creditors not being able to reach Social Security if the debtor were liquidated?  You decide to make it unfeasible for a substantial population of elderly and disabled citizens to obtain bankruptcy protection?  Aside from being, IMNSHO, an error of law, there is a term for this: jerkitude.).  Why on Earth are Chapter 13 trustees more intent on wrecking debtors than Chapter 7 trustees are?


But there are peculiarities to Utah.  First, the trustee routinely throws three sets of objections at a debtor: one for the 341 meeting, one after that, and another just before the confirmation hearing.  How many bites at the apple does it take?  Second, has anyone in that office run a business?  A frightening percentage of the "objections" to business financials are just tragic.  Third, why is everything a last-minute sandbagging?  I know you're busy, but so am I, and I don't like wasting my time at a hearing where you're raising new issues or resurrecting issues I thought we had resolved.  Or raising things that aren't before the court, just to stir the pot (Example: In a recent confirmation hearing that ended up being continued, the trustee noted to the court that I had objected to several claims.  True, I had, because those creditors had not bothered to document their claims, and I was entitled to object [The rules say so.], but the trustee insinuated I was being sneaky and obstructionist.  The court then proceeded to unload on me and accuse me of a bad faith filing.  Well, the creditors amended their claims, and I filed a withdrawal of my objection, but to cover myself, I laid out the legal basis for the objection.  I wanted to make it clear to the court that there has been a change of law and to the trustee that I was not amused, but mostly (no, really) I wanted to fire a warning shot over the bows of any creditors who were thinking of taking me to task.  But in the end, not one step of that trip was necessary.).


Finally (No, not really.  See below.), why does the Chapter 13 trustee mess with exemptions?  Utah is an opt-out state, so we use only the state exemptions, not the federal.  Some of those exemptions are based on the item, not the value.  For example, your refrigerator is exempt, regardless of how much it's worth.  Nevertheless, the Chapter 13 trustee insists that each exemption have a specific value.  Have you ever tried to value used carpet?  On top of that, if the trustee doesn't fancy your value, you're facing an objection that will have to be resolved at the confirmation hearing.  Why does this matter?  Because the US Supreme Court recently ruled that a debtor can lose part of an exemption by claiming less than the full value of the exempt item.  I'm not interested in setting a $10,000 value on the household appliances only to have their value ultimately pegged at $15,000 and having the trustee demand an additional $5,000 be paid into the plan.  I have a work-around I've devised, but I'm waiting for the trustee to object to it.  Because then the fight will start.


But the thing that really bugs me is something that has bugged me about the bankruptcy court since I first walked through its doors over a quarter-century ago: It's a sealed society.  We have an extensive code and extensive general and local rules.  We have standardized forms, best-practices manuals, and regular training sessions.  But it's all for show.  In reality the bankruptcy court is a Star Chamber that functions via secret handshakes and Captain Midnight decoder rings.  Case in point: I've been trying to figure out a number of the requirements the Chapter 13 trustee imposes on plans.  Not in the code, not in the rules, not in the handouts.  Finally stumbled across a blog the trustee established over three years ago (and hasn't updated in over three years) laying out the office's interpretation of the new model plan.  Not the authorities, just the conclusions.  But there it was, all laid out (No, I'm not going to give you the URL.  A guy has to have some trade secrets.), everything they've decided to require in a Chapter 13 plan.  All I can say is "Wow, just wow."  A model of transparency.


Which is a long-winded rant of a way of saying, forget what you read on the self-help sites on the Internet.  If you're planning on filing bankruptcy, especially Chapter 13, seek help from somebody who does it for a living.  Because what it says in black and white isn't the way things work in the real world.

Bankruptcy Exemptions

OK, enough ranting and back to some nuts and bolts.

Last June the SCOTUS a decision in Schwab vs. Reilly concerning when a party could challenge a claimed exemption. Debtor had claimed an exemption in some personal property and set the value for it at exactly the exemption amount. It turned out the property was worth more than that, and the trustee wanted to liquidate the property and distribute the difference. Problem was that the trustee didn't object by Rule 4003's 30-day deadline. The majority ruled, "Sorry, Debtor, notice matters, you gave no notice there was anything to be objected to, so you only protected the property up to the value you listed, and the trustee can pursue the overage." The dissent wrote, "30 days means 30 days. Period. The property should be fully exempt."

This case arose because Debtor was in a state that had not opted out of the Federal exemptions and so had a "floating exemption" that she could split among different pieces of property. That's why she low-balled the value of the property at issue; she would have more of the exemption left over for other property. Some states have that floating exemption too. For those of us in opt-out states that don't provide a float, the opinion was not very exciting. Here in Utah, you get a $2,500 exemption for your car. You list its value as $2,000 but it turns out to be $3,000, you get the same exemption.

But what about exemptions that don't have set limits? Suppose you valued the exempt property at X, but it turns out to be worth twice that. Can the trustee come in at any point and say, "You only exempted the claim amount, and I'm taking the rest"? I don't know. I do know that in Section III of its opinion, the SCOTUS reaffirmed Taylor, which held that listing an exemption value as "unknown" gives notice of a valuation issue and sets the 30-day clock running (Yes, Taylor concerned an exemption with a fixed limit, but to me, the issue is notice, and "unknown" is a red flag.). I've always used "unknown" in the schedules when we didn't know a value. Some people get bent out of shape by that, but until they amend the Code or the Rules, I'm going to keep on using it, and now I have an extra reason. Setting a value where I don't have one is nothing but a trap for the debtor.

On a side note, the alignment of justices in Schwab was perhaps more interesting than the opinion. The majority was written by Thomas (?) and joined by Scalia, Alito, Kennedy, Sotomayor (!), and Stevens (!!). The dissent was written by Ginsburg and joined by Breyer (!) and Roberts (!!!!!!!!!!!!!). Go figure.