I have quasi advocating for sometime that for many if not
most individuals who are filing a re-organization bankruptcy would be better
served by Chapter 11 as opposed to the conventional wisdom of filing for
Chapter 13. This is a two part
post. The first part talks about some
drawbacks of Chapter 13.
Yesterday, I watched the video of the oral argument of Danielson
v. Flores in front of the Ninth Circuit sitting en banc. I could tell the
panel was largely uneducated in things Chapter 13. I realized this when Judge Kozinski asked
Elizabeth whether she represented the Debtor.
Not really.
During the trustee’s oral argument, Judge Kozinski asked
counsel multiple times if a Debtor has zero disposable income what is the
Debtor is committing to? And counsel did
an excellent job of explaining why a Debtor might do this, owing the IRS,
mortgage arrears, and the ubiquitous lien strip. However, her best argument was what she didn’t
say.
The panel was not told by any party what really happens on
the ground in Chapter 13. The way it
works is the Debtor completes form 22C.
If the Debtor is below median, then the “means test” doesn’t apply. If the Debtor is above median, then form 22C
is completed. If the number is positive,
then you multiply 60 times the number and that equals the amount general
unsecured creditors must be paid over the life of the plan. Further, the plan must be 60 months in
duration.
However, if the
Debtor is negative on projected disposable income then technically the Debtor
does not have to pay anything to unsecured creditors. The panel seemed to think that when a debtor
was negative on projected disposable income, it would be obvious, unsecured
creditors would get paid nothing and that would be that.
However, while not at issue, the panel was not told what
really happens when a negative projected disposable income debtor files for
Chapter 13 for whatever reason. What
really happens, is the trustee will proceed to nickel and dime the Debtor on
every expense on Schedules I and J. This
is done under the auspices of “good faith”.
Anyone who can run a query on westlaw (or google scholar) would find out
that good
faith is not defined by some measure of the reasonableness of
expenses nor is Directv NFL Package per se unreasonable(if to watch Seahawks very reasonable, to watch 49ers unreasonable) Rather, it is a combination of
many factors of which expenses is just one area.
The reason the nickel and diming is an effective strategy is
that the trustee owns an immense tactical advantage over Debtors for many
reasons. First, Debtor’s counsel are
underpaid like no tomorrow. In order for
a Chapter 13 to be profitable for counsel it really needs to be confirmed
quickly with few hearings, or cases must be filed in large groups. Forcing the Debtor’s counsel to attend
multiple hearings simply wears down the Debtor counsel.
Second, and this is perhaps the trustee’s most potent
weapon, is that the trustee can make an oral motion to dismiss at any hearing
and on virtually any grounds. Often
these motions are based on technical aspects involving plan payments, mortgage
payments, tax returns, credit counseling certificates, and a myriad of local
concerns. Very few Chapter 13s are
dismissed on the merits i.e. failure to confirm a plan because of some missing
1325(a) element.
Third is some judges just don’t
like Chapter 13. I can’t blame them. The calendars are long and half the
cases
have zero chance of working. Here is one
judge
who really doesn’t like Chapter 13s.
There are many more and those are
just the three that came to mind. I am
not even going to get into all the
post-confirmation problems like tax refunds,
motions to modify / dismiss and the hurdles of actually getting
the discharge
order in hand.
Nor am I going to get into the limitations
on bifurcation of secured claims, the 60-month limit (no more,
no less) on
repayments and general inflexibility.
The next installment will get to
why in fact Chapter 11 is superior in many cases.
Finally, I am not begrudging or
criticizing any trustee or their counsel for doing the above things. I
respect the trustee’s business judgment, if
they believe doing the above helps them further their
responsibilities and duties,
then I respect that and won’t question it at all.
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