The Right of Debtor to Dismiss Debtor’s Chapter 13 Bankruptcy is Absolute in Some Jurisdictions

In In re Mills, 2015 WL 6601191 (10/28/15) the Bankruptcy Court for the District of Kansas held  that a debtor has an absolute right to dismiss the debtor’s Chapter 13 bankruptcy case.  Some courts have held that this right to dismiss is qualified to cases where the debtor has not engaged in bad faith or above of the bankruptcy process.  The Court found that the language in  §1307(b) explicitly mandates the right to voluntarily dismiss at will, regardless of the conduct of the debtor.

Last year the U.S. Supreme Court unanimously ruled that bankruptcy courts may not order a debtor’s exempt assets be used to pay administrative expenses as a result of the debtor’s misconduct.  The higher court determined that the bankruptcy court had exceeded its statutory and inherent powers in surcharging the debtor’s homestead exemption.   Law v. Siegel, 134 S. Ct. 1188, 1192 (2014).

This Supreme Court decision is casting a shadow over the bankruptcy courts attempting to use its inherent powers to police the bankruptcy process. The Bankruptcy Court in Kansas was certainly responsive to the strict construction of the bankruptcy statutes exemplified by the Law v. Siegel case.

The Ninth Circuit which governs the Western District of Washington does not recognize an absolute right of debtor to dismiss a Chapter 13 case.  Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764, 772 (9th Cir. 2008).  It remains to be seen whether the newer Law v. Siegal case is fodder to upend the Ninth Circuit decision in the Rosen case.

Terminating Convenience Bank Accounts on the Eve of Filing Chapter 7 Is Not a Fraudulent Conveyance or Grounds to Object to Discharge

A Michigan bankruptcy court has ruled that when a debtor just days before filing bankruptcy removes the debtor’s name from a joint account with a family member, and the account contained only the family member’s funds, the change in the bank account was not an avoidable fraudulent conveyance or grounds to object to the debtor’s discharge. (In re Demeter, 2015 WL 6437654).  It was important to the court that the debtor was on the account  in case of the debtor’s mother’s illness or death, i.e., a convenience account.

Consumer Debt Hits All-Time High

Consumer borrowing rose by $16 billion in August according to the Federal Reserve.  Total consumer debt is now $3.47 trillion. Credit card borrowing rose by $4 billion.  Consumer spending, which accounts for seventy percent of economic activity, is projected by economists to remain strong in the coming months, offsetting weakness in other parts of the economy.

Student Loan Forgiveness for Survivors of 9/11

The following people may qualify to have their entire student loan debt forgiven:

(1) Spouses and parents of eligible public servants and other eligible victims of the September 11, 2001 terrorist attacks; and

(2) Spouses and children of an eligible public servant or eligible victim who died or became permanently and totally disabled due to injuries suffered in the terrorist attacks on September 11, 2001.

Not all student debt qualifies for this program.  Only the following loans can be forgiven under this program:

  • Stafford loans,
  • Parent PLUS loans,
  • Graduate PLUS loans,
  • Perkins loans, and
  • Consolidation loans made to pay off loan amounts that were owed on September 11, 2001.

Private student loans are not covered; nor are loans made under the FFEL or HEAL programs.

This program was created in 2006 but has not receive much press coverage.

[Edit:  The government website with the PDF application was deleted 12/27/2017.]



Using Bankruptcy To Attack IRS Tax Debts

In a Chapter 7 bankruptcy case, unexempt assets can be sold by the trustee and the proceeds distributed to the creditors in proportion to the size of their debt.

Thus, it’s unfair for a creditor to post a bogus amount of the debt to get more from the bankruptcy distribution.

Sometimes that creditors posting a bogus amount is the IRS.  Bankruptcy Courts have no problems determining the correct amount of the tax debt.  In many cases the amount of a tax debt cannot be litigated unless the taxpayer first pays the full amount of the tax and then sues for a refund.  Thus, the ability to litigate the tax debt without first having to pay it is a big deal.

However, in a no asset bankruptcy case, cases where all of the assets are exempt–which describes most Chapter 7 cases–the court generally will not entertain litigating the tax debt because there will be no distribution to creditors.  This is a big downer.

The alternative is to file a Chapter 13 case first, get the tax debt litigated, and the convert to Chapter 7.  This should work in most cases.  In Chapter 13, creditors are paid pursuant to a court approved plan.  The amount debt very much can affect the Chapter 13 Plan, so the court has no choice but to hear arguments about the validity of a debt, including IRS tax debts.


Pot Businesses Cannot File Bankruptcy

In a quickly growing area of case law, bankruptcy courts are ruling that business and individuals selling marijuana cannot file bankruptcy.  In Colorado, where such business is legal under state law, the bankruptcy dismissed a Chapter 7 case.  In California the court dismissed a Chapter 11 case for a medical marijuana dispensary  which is legal under state law.  In both cases, the courts cited that the business was illegal under federal law.

More troublesome is an Arkansas Chapter 11 case that was dismissed because the debtor merely leased warehouse space to a marijuana growers.

Attorney fees

Bankruptcy courts may not award attorney fees for time spent by law firms defending their fee applications.  Baker Botts lost their attempt before  the US Supreme Court to get fees for defending their $5 million dollar fee award in
Baker Botts, LLP, et al. v. ASARCO, LLC, (No. 14-103, U.S. Sup.).

ASARCO filed Chapter 11 to manage various claims arising from environmental harm.  Baker Botts was awarded 120 million dollars in attorney fees, but sought additional fees for an exceptional outcome, largely for recovering billions of dollars in a fraudulent conveyance action relating to a company in Peru.  ASARCO objected to the fee enhancement.  The lower court awarded $4 million for enhanced fees plus $5 million for the cost of defending the enhanced fees.  The $4 million enhanced fee was upheld on appeal, but ultimately the Supreme Court did not affirm the order approving the $5 million fee for defending the enhanced fee.  The Court found a lack of statutory language in the bankruptcy code reversing the common law American Rule whereby each party bears their own cost of litigation.

401-K withdrawals are not income for Means Test purposes

A withdrawal from a deferred compensation plan may not be used for the Means Test.  If the income was earned at the time of contribution to the plan, then it is not income but rather just property when withdrawn at a later time.

In Simon v. Zittel, Nos. 07-31616, 07-31805, 07-31719, 2008 WL 750346 (Bankr. S.D.Ill. Mar.19, 2008) the court held that the 401(k) distributions were properly excluded under § 101(10A)(A) because the debtors “received” income when their wages were earned and deposited into the retirement accounts.
In re Cram, 414 B.R. 679 (Bankr. Idaho, 2009); Zahn v, Fink (06-6072, ( Eighth Cir. 2008) offer similar opinions.