Consumer Bankruptcy

The Child Tax Credit statute (CTC), codified in 26 U.S.C. § 24, has received varying degrees of protection in bankruptcy proceedings. Consumer debtors receiving a tax refund attributable to the statute must decide how to treat tax refund proceeds early on in their bankruptcy proceeding. Two emergent trends from bankruptcy courts around the country demonstrate that consumers may either (1) try to exclude the proceeds as nonestate property, free from the claims of creditors; or (2) acknowledge the proceeds as property of the estate protected by use of an appropriate exemption.

Understanding the Benefits

The CTC provides tax relief to taxpayers who receive earned income with at least one “qualifying child.” However, the statute restricts the meaning of “qualifying child” to a person “who has not attained the age of 17.”

The extensive 2017 changes to the Bankruptcy Rules included a model chapter 13 plan. These changes were designed to bring more uniformity to chapter 13 practice. Uniformity is helpful for both consumers and creditors alike; where courts agree on a majority practice across the country, national lenders become more efficient in their practices. The need created by the absence of uniformity in deadlines imposed by local and federal rules is great. This disparity hits consumer debtors the hardest. Consumer practitioners should be aware of the relative lack of uniformity that exists, and note the differences that exist between the relevant local rules and federal rules.

For example, Federal Bankruptcy Rule 3015 was amended to add a specific deadline of seven days prior to confirmation to object to a chapter 13 plan:

In 2019, the U.S. Supreme Court adopted an amendment to Rule 6007 of the Federal Rules of Bankruptcy Procedure that makes clear that a creditor that files for abandonment of property of the estate under 11 U.S.C. § 554(b) must serve its motion on all creditors pursuant to Fed. R. Bankr. P. 7004. One consequence of the amendment was to increase the administrative burden and cost to creditors and their attorneys of obtaining an order of abandonment. That burden/expense can be substantial in a chapter 7 case with a significant number of creditors.

A recent Fifth Circuit ruling provides significant protection of a debtor’s inherent rights under the Bankruptcy Code. In Brown v. Viegelahn,[1] the court struck down the bankruptcy court’s requirement upon confirmation that the debtor agree to add the following so-called “Molina language” to the Order confirming plan:

The plan as currently proposed pays a 100% dividend to unsecured claims. The Debtors shall not seek modification of this Plan unless said modification also pays a 100% dividend to unsecured claims. Additionally, should this Plan ever fail to pay a 100% dividend to unsecured claims the Debtors will modify the Plan to continue paying a 100% dividend. If the Plan fails to pay all allowed claims in full, the Debtors will not receive a discharge in this case. Molina v. Langehennig, No. SA-14-CA-926, 2015 WL 8494012, at *1 (W.D. Tex. Dec. 10, 2015).

As overall consumer debt has increased over the years, student loan debt has correspondingly increased to astronomical levels. In 2019, 45 million borrowers collectively owed more than $1.5 trillion in student loan debt.[1] By comparison, in 2005 — the year the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect — student loan debt was $391 billion with 24.7 million borrowers. The delinquency rate has increased as well. The percentage of loans that are 90+ days delinquent has increased from around 6.5% in 2005 to 11.4% in 2019.[2] These numbers beg the questions: How did we get here, and what can we do to mitigate the crisis?

Happy Birthday to the “means test,” enacted in 2005 and the centerpiece of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).^[1] In chapter 7 cases, the means test stands for the general proposition that consumers with the “means” to repay some or all of their debts are barred from filing. More accurately, debtors with family income in excess of their state median are subject to a “presumption of abuse.”^[2] Such cases receive additional scrutiny from the U.S. Trustee (UST), which can result in a motion to dismiss.^[3] Conversely, in chapter 13 cases, the means test helps determine the amount of money that over-median debtors should pay to their general unsecured creditors.^[4]

The Consumer Bankruptcy Committee hosted a riveting webinar on July 17 on the “Evolution of Consumer Bankruptcy Practice in the COVID-19 Era.” Panelists were Margaret Burks (Chapter 13 Trustee; Cincinnati), John Crane (Robertson, Anschutz, Schneid & Crane LLC; Duluth, Ga.), Jenny Doling (J. Doling Law, PC; Palm Desert, Calif.) and Charissa Potts (Freedom Law PC; Eastpointe, Mich.).

The Supreme Court’s opinion in Taggart v. Lorenzen[1] articulated an objective standard for determining whether a party should be held in civil contempt for a violation of the discharge order.[2] In light of Taggart’s recent one-year anniversary, we are revisiting the Supreme Court’s opinion and cases that have applied it.

Recap of Taggart

In the underlying case, a plaintiff in a pre-petition state court suit sought post-petition attorneys’ fees from the defendant after the defendant received a discharge in his chapter 7 bankruptcy case. The state court allowed the plaintiff to collect those fees, and the debtor-defendant filed a motion with the bankruptcy court to hold the plaintiff in civil contempt for violation of the discharge injunction.