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Changes in the works for Chapter 13 bankruptcy filings
SHERRY KARABIN
Legal News Reporter
Published: November 15, 2013
As states continue to adopt the Common Core State Standards in an effort to provide consistent education guidelines for students, parents and educators, bankruptcy attorneys and judges are being asked to consider a similar idea for Chapter 13 filings.
For the past two years, the Judicial Conference Advisory Committees on Bankruptcy and Civil Rules have been discussing the creation of a national plan form for Chapter 13 cases in an effort to bring uniformity to the practice and simplify the review process for debtors, courts, trustees and creditors. The idea is among the top Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure unveiled for public comment on Aug. 15.
Brennan, Manna & Diamond Bankruptcy Department Chair Michael Steel explained the proposal is a direct result of the U.S. Supreme Court’s decision in United Student Aid Funds Inc. v. Espinosa.
“The Supreme Court indicated that even though a confirmed Chapter 13 plan may be procedurally improper it would still have a ‘preclusive effect’ if challenged later on by someone who did not object to the submitted plan,” said Steel.
“The end result was a directive to bankruptcy judges to independently review Chapter 13 plans. The move toward a national standardization of Chapter 13 plans is designed to make it easier on bankruptcy judges, creditors and other interested parties to review the contents of a plan.”
As a result, Steel said he expects to see a more “check-the-box” type of approach for Chapter 13 filings, rather than “a creative approach to dealing with debtor problems.”
As part of the proposed change to Rule 3012, he said debtors would be able to seek a determination of the amount of a secured claim through the proposed bankruptcy plan, subject to objection at the confirmation hearing, whereas previously this may have been done by motion in some jurisdictions.
“Further proposed changes to Rule 4003, would allow a debtor to do lien avoidance through the plan.
“I believe the move toward uniformity will result in more disputes between the debtor and creditors earlier in the process since the issues will have to be addressed in the first few months of the case rather than later on.”
Steel said this could be a good thing for those who practice in the area since making a determination about the plan’s feasibility and amounts of certain claims earlier will move things along better as opposed to finding out six months into the process that there are significant problems that cause a dismissal or conversion of the case.
Secured creditors would also be required to file a claim if the proposal takes effect. “Up to now, the current rules suggest that only unsecured creditors had to file a claim,” said Steel. “The claims deadline is being changed from 90 to 60 days after the petition for bankruptcy is filed. The change will impose additional burdens on creditors to quickly review the petitions.”
He said the Chapter 13 process could be more akin to Chapter 11 business bankruptcy filings where discussions are held with secured lenders well in advance of filing because times frames are shorter and more importance is placed on the confirmation document.
“I would expect debtors and attorneys to be paying more attention to what they are trying to accomplish in the bankruptcy plan,” Steel said.
Current restrictions on Chapter 13 filings generally result in more high-income, high net-worth individuals filing Chapter 11 cases, Steel said, since Chapter 13 restricts how much unsecured debt a person can owe.
“While the new changes may create a change in what can be done through a Chapter 13 plan document, it is likely not going to change who may eligible to file a Chapter 13 type of bankruptcy case,” said Steel.
Changes to bankruptcy schedules and forms are part of the package as well.
“There will be stylistic and substantive changes to the schedules and the forms will have a whole new look,” said Robert S. Thomas II, a partner at Thomas Trattner & Malone, who specializes in bankruptcy and commercial law. “There will be big changes on how they are reviewed and prepared.”
Thomas said the goal is to make the forms more user friendly and less error prone.
“The proposed forms have a new modern style and there are a lot of drop-down boxes that require a yes or no answer or further information,” said Thomas. “The proposed forms and schedules resemble modern tax forms with lots of instructions and explanations. From the trustee perspective I think the ones we have now are easy to read and the new ones will take some getting used to. Attorneys will need to make sure all the boxes are answered correctly.”
Although explanations will be part of the new forms, he said the length and multiple questions would still prove complicated for the average person.
On the other hand, he said the modernized forms would make it easier “to capture the information for electronic filing and should reduce errors in providing accurate information.
“It has been over 20 years since the last forms update,” said Thomas. “The industry has moved from paper to electronic files. The revisions produced forms with a more intuitive layout and a uniform feel with clearer instructions that explain the process, with prompts and checklists, and with separate more extensive instruction sheets.”
The Chapter 7 U.S. Bankruptcy trustee said a lot of the United States Bankruptcy Code has been updated and amended since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The Act made it more difficult for certain consumers to file bankruptcy under Chapter 7, causing some to opt for Chapter 13 instead.
“There is now a requirement for pre-petition credit counseling and a post-filing financial management course before a bankruptcy can be discharged. Individual debtors who file under Chapter 7 will have to pass a means test which is dependent on income. If they cannot do so, the case can be dismissed or converted to Chapter 13.
“In Ohio there have been changes to the Ohio exemption laws that have increased the value of the exemptions that debtors can claim,” said Thomas. For example, he said this year the homestead exemption for personal residences was raised to $132,900 per individual, which allows people who could not file before to potentially look at bankruptcy as a viable insolvency plan.
He said all the changes make it more difficult for the individual to go it alone and he does not recommend that individuals file without the assistance of an experienced bankruptcy attorney.
“Bankruptcy law is complex and the new forms make clear at the outset what information will be needed for completion,” said Thomas. “The complexities of filing for bankruptcy are underscored. As a consequence, more unrepresented debtors may seek representation rather than file pro se.”
The public comment period on the proposed amendments ends on Feb. 15, 2014.
With or without revisions, the proposed amendments will take effect on Dec. 1, 2015, assuming they are approved by the relevant advisory committee, the Committee on Rules of Practice and Procedure, the Judicial Conference and the Supreme Court, and if Congress does not act to defer, modify or reject them. The revisions to the Official Bankruptcy Forms would become effective on Dec. 1, 2014 if the rules committees and the Judicial Conference approve them.