Consumer Bankruptcy

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Consumer Bankruptcy February 2015

Until 1994, three options existed for the disposition of plan contributions held by the chapter 13 trustee upon conversion to chapter 7: The funds could be given to (1) the chapter 7 estate, (2) to the debtor or (3) to creditors. Since the 1994 amendments to the Bankruptcy Code revised § 348(f), the first option for the disposition of funds from a converted chapter 13 case after confirmation of the plan was resolved: The chapter 7 estate is not a recipient of the funds unless the conversion to chapter 13 was made in bad faith. In Harris v. Viegelahn, the Supreme Court resolved the rights of the other competing parties to the funds by holding that a chapter 13 debtor who voluntarily converts to chapter 7 is entitled to the return of any post-petition wages not yet distributed by the chapter 13 trustee.

Unsecured junior lien cannot be stripped in chapter 7.

In an opinion written by Justice Thomas, the Court declined to limit its prior opinion in Dewsnup v. Timm, 502 U.S. 410 (1992), to partially underwater liens, reversing the Eleventh Circuit in two cases and holding that chapter 7 debtors cannot use § 506(d) to void wholly unsecured junior liens. The amounts owing on first mortgage liens exceeded the current market values of the debtors’ homes, leaving the junior liens with no supporting value. Section 506(d) permits voiding the liens only if the bank’s claims were not allowed secured claims, and the only dispute here was whether the claims were “secured” within § 506(d)’s meaning.

Petitioner Wellness International had a long history of chasing debtor Sharif, including obtaining default judgment against him as a plaintiff in Texas, which led to discovery in aid of collection efforts. Sharif allegedly evaded answering discovery and ultimately filed a chapter 7 petition in Illinois. The debtor failed to list assets that he contended were the assets of a trust that his mother created and for which the debtor served as trustee and his sister as the beneficiary. He testified about these assets and answered discovery relating to these assets, but he did not escape Wellness’s complaint objecting to his discharge. Wellness included as Count V in its complaint a claim for determination that the trust is the alter ego of the debtor and that trust assets are property of the estate pursuant to § 541.

Denial of chapter 13 plan confirmation not a final order for appeal.

Affirming the First Circuit, the unanimous opinion of the Supreme Court, written by Chief Justice Roberts, held that an order denying confirmation was not a final order that the debtor could immediately appeal. The bank holding a mortgage on a multi-family house objected to the chapter 13 debtor’s proposed plan to bifurcate the debt and pay only $5,000 on the $101,000 unsecured portion, while paying the regular mortgage payments to satisfy the secured portion over the life of the original loan. The bankruptcy court denied confirmation, rejecting the hybrid plan and holding that the secured portion of the debt would have to be paid in full within the plan term. The Court held that while confirmation, like case dismissal, alters that status quo, denial of confirmation that is not coupled with case dismissal leaves the debtor with a right to propose another plan.