TOP 10 PROBLEMS WHEN FILING A CHAPTER 13 BANKRUPTCY. Terry Bankert Flint Bankruptcy Attorney 235-1970

The following is a list of the 10 most common objections filed to Chapter 13 plans:

1. Failure to commit income tax refunds to the Chapter 13 plan.The Sixth Circuit has held that tax refunds are disposable income under 11 USC 1325. Freeman v Schulman  (In re Freeman), 86 F3d 478 (6th Cir 1996). However, if the Chapter 13 plan proposes full repayment to unsecured creditors within the applicable commitment period, the disposable income test does not apply. 11 USC 1325(b)(1) should be read in the alternative: the debtor must propose to pay all of his or her unsecured creditors in full OR devote all of his or her disposable income to pay unsecured creditors. To facilitate compliance with the obligation to pay tax refunds to the trustee, the Eastern District has issued a notice stating

   that in each case in which an order confirming the plan has not yet been entered and in which the debtor’s plan provides for the payment of tax refunds to the trustee, the debtor shall sign, as requested by the trustee, (1) any appropriate IRS forms that authorize the IRS to forward the debtor’s tax refunds directly to the trustee, whether by check or direct deposit, and, (2) any appropriate form that will authorize the trustee to endorse, negotiate and deposit the debtor’s tax refund check for the debtor’s Chapter 13 account.

   
   
   Notice Regarding Tax Refunds in Chapter 13 cases (Bankr ED Mich eff. Mar 26, 2010). In cases in which the meeting of creditors has not been held, the debtor must sign these forms at the meeting. In cases in which the meeting of creditors has been concluded, the debtor must sign the forms at the confirmation hearing or as a condition of confirmation, as directed by the judge. When only one spouse files a Chapter 13 case but the debtor and the nondebtor spouse file a joint tax return, the debtor must provide the trustee on request the appropriate IRS forms signed by the debtor and by the nondebtor spouse. Thus, if a trustee requires the debtor to execute an IRS power of attorney form (form 2848), the form must be signed by both the debtor and the nondebtor spouse as a condition for confirmation of the debtor’s Chapter 13 plan. This is to ensure that any refund with respect to a joint tax return will be transmitted by the IRS to the trustee so that the debtor’s share of the joint tax refund will be applied to the debtor’s obligations under the debtor’s Chapter 13 plan. When the debtor and the nondebtor spouse file a joint tax return, the order confirming the Chapter 13 plan must include a formula or mechanism for allocating any joint tax refunds between the debtor and the nondebtor spouse to avoid unnecessary litigation in the future. When the debtor and the nondebtor spouse file a joint tax return and a joint tax refund is received by the Chapter 13 trustee, the trustee must promptly remit to the nondebtor spouse his or her share of the joint tax refund.Notice Regarding Refunds on Joint Tax Returns in Chapter 13 Cases (Bankr ED Mich eff. June 28, 2010).
2. Failure to document or verify income on schedule I and the means test. Pay stubs provided should match income and deductions listed.
3. Underfunding. Underestimating the claim amounts; incorrectly calculating plan payments needed due to failure to account for attorney fees; adequate protection and continuing payments to mortgage company that come due before confirmation.
4. Feasibility. The debtor’s budget underestimates or omits ongoing expenses.
5. Failure to devote sufficient income or the existence of unreasonable expenses. Debtors whose means test results in a negative or nominal dividend to unsecured creditors are no longer bound by the pre-BAPCPA specific requirement to commit all net disposable income to the Chapter 13 plan. However, many courts have found that the means test is not the last word and may only be a starting point. See Kibbe v Sumski  (In re Kibbe), 361 BR 302 (1st Cir BAP 2007); In re McCarty, 376 BR 819 (Bankr ND Ohio 2007); In re Hardacre, 338 BR 718 (Bankr ND Tex 2006).
6. Failure to provide treatment for debts. These include debts from domestic support obligations, 401(k) loans, residential leases, condo association fees, taxes, employer loans, student loans, etc.
7. Failure to provide required dividend to creditors. This is the result of amounts required by Chapter 7 liquidation analysis and disposable income requirements determined by the means test.
8. Failure to disclose information on the statement of financial affairs. This is most often related to business interests, prior addresses, and lawsuits.
9. Equal monthly payments to secured creditors. See 11 USC 1325(a)(5)(B)(ii), (iii).
10. Failure to account for preferences and fraudulent conveyances in the liquidation analysis of the plan. 11 USC 1325(a)(4)requires funds that would be recoverable by a Chapter 7 trustee be included in the liquidation analysis and funds paid into the plan equal to what a Chapter 7 distribution would provide.

See Handling  Consumer and Small Business Bankruptcies in Michgian