Consumer Bankruptcy

Editor's Note: David Morris is the Senior Deputy Prosecuting Attorney for the Marion County Prosecutor’s Office Child Support Division and an adjunct professor at Indiana University’s Robert H. McKinney School of Law.

Proposed revisions to the Federal Rules of Bankruptcy Procedure and Official Forms are now published for comment. The proposed revisions affect Rules 2002, 3002, 3007, 3012, 4003, 5009, 7001 and 9009.  Most of the changes affect practice in chapter 13 cases. 

The Bankruptcy Rules Committee has been engaged in a multi-year review of the Bankruptcy Rules, with careful focus on consumer practice. Part of the proposed Rule changes includes the addition of an Official Form for the Chapter 13 Plan. This effort is a critical step toward ultimate data-sharing and enabling efforts in chapter 13 cases. The current draft of the Official Form for the Chapter 13 Plan is included in the items published for review and comment.

Clients can’t all be sweet little grandmas on Social Security. Sooner or later, every consumer lawyer will end up running into the occasional “bad actor”: someone hoping to dodge criminal fines, restitution or benefits overpayment. Someone who has done something a little sketchy.

That’s not a bad thing, per se. “The fresh start” is one of our axioms, and that fact (that it’s an axiom) implies certain things about human nature. We see (hopefully) in our clients that people are dynamic and learn from their mistakes, and that poor decisions often issue from places of terror or need. The credit counseling and financial management requirements would suggest a hypothesis that sometimes, people find their way into our offices because they didn’t know any better. They might have caused their own financial mayhem, but a lot of our clients will get it right the second time.

The facts are simple. A debtor files for chapter 13 and proposes a plan, which is confirmed. The debtor makes payments pursuant to the terms of the plan but is unable to continue funding the plan a considerable time later. The case is converted to chapter 7, and on the date of conversion, the chapter 13 trustee is holding funds that were earmarked for creditors but have not been paid out. The trustee intends to disburse the accumulated funds to the creditors under the plan, but the debtor files a motion requesting that the trustee refund those funds. So who gets the money? In In re Smith,[1] the U.S. Bankruptcy Court for the Western District of Missouri was charged with the task of making that determination. This article addresses a question that has been an enigma for many courts, the answer to which has not been as straightforward as the facts.[2]

Many Americans are questioning the future solvency of the Social Security program and, although its severity is inconclusive, many doubt that they will receive Social Security payments, causing them to seek additional financial arrangements. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of retirement savings plans, including 401‌(k) plans.[1] Thus, debtors who seek release from personal liability for certain debts through chapter 7 of the Bankruptcy Code continue to make qualified payments to their 401‌(k) accounts because participation in a 401‌(k) plan is an ongoing endeavor, and they claim that these voluntary contributions should not be taken into consideration while determining one’s eligibility for chapter 7 relief.

[1]Chapter 7 individual debtors with business debts and surplus income, beware! In Schlehuber v. Fremont Nat’l Bank & Trust Co. (In re Schlehuber),[2] the Eighth Circuit affirmed a Nebraska bankruptcy court’s order to convert an individual debtor’s chapter 7 case to chapter 11 — not under § 707‌(b), as commonly used in consumer cases with facts similar to Schlehuber — but under § 706‌(b). Section 706‌(b) states that “[o]‌n request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time.”[3] This article examines the reasoning behind courts’ decisions to grant or deny § 706‌(b) motions for involuntary conversion when the debtor is an individual with non-consumer debt.

[1]On June 12, Sens. Elizabeth Warren (D-Mass.) and Sheldon Whitehouse (D-R.I.) introduced S. 2471, the Medical Bankruptcy Fairness Act of 2014,[2] which would amend §§ 101, 104, 109, 521, 522, 523, 707 and 1325 of the Bankruptcy Code to create a new class of “medically distressed debtors.” A debtor could qualify as medically distressed if he/she:

[1]The common belief that all student loans are protected from discharge in bankruptcy is based on a misunderstanding of 11 U.S.C. § 523‌(a)‌(8). Since 1990, bankruptcy courts have been misreading the statute to prevent any student debt that could be construed as providing educational benefits or advantages from discharge. The flawed logic in student bankruptcy cases has thus become (1) all debts that confer educational benefits are protected from discharge; (2) the debt in question facilitated the debtor’s education and as such, conferred educational benefits; and (3) the debt is not dischargeable. This application was never intended by Congress. Section 523‌(a)‌(8) currently protects from discharge:

Whether 11 U.S.C.

The Bankruptcy Code requires debtors to file a schedule of their assets and liabilities. [1] Official Bankruptcy Form 6, Schedules A through J provides the means by which debtors notify the bankruptcy court, creditors and other parties in interest of their various assets, liabilities, income and expenses.