Cases of Note: Harris v. Vieglahn

Last week, the U.S. Supreme Court handed down a decision in Harris v. Viegelahn.


Question: Whether funds held by the Trustee at the time of conversion from Chapter 13 to Chapter 7 were to be returned to the Debtor or, alternatively, distributed to creditors.

Held: Funds go back to the Debtor.

You can read the full decision here and listen to oral arguments here.



By convention, most trustees make disbursements on a monthly basis.  As a result, between the time the Trustee receives payments from the Debtor and when the Trustee makes disbursements to creditors, there are funds held by the Trustee.
In this particular case, the majority of funds were to go to Chase Bank to cure arrears on a defaulted mortgage.  At some point in the Plan, the debtor defaulted again with Chase Bank, which sought and was awarded relief from stay to proceed with foreclosure.  Under the terms of the Plan (and statutory law), funds received after secured claims were satisfied were then to go to unsecured creditors.  Rather than immediately pay unsecured creditors, the Trustee held funds for a few months while the Debtor attempted a loan modification with Chase outside of the bankruptcy process.  That loan modification ultimately failed and the Debtor then converted his case to Chapter 7, as his purpose for filing Chapter 13 had been defeated.  At the time of conversion, the Trustee had accumulated roughly three months’ worth of wages and subsequently made a disbursement to unsecured creditors.
Much of the debate centered around three questions: what was property of the bankruptcy estate in Chapter 13 vs property of the bankruptcy estate in Chapter 7, whether the Trustee had any continued duty to make disbursements upon conversion, and whether the right to the funds vested in the creditors upon receipt of funds.
The justices lamented the fact that the statutes provided no clear guidance.  At one point, Justice Scalia wondered why Congress would “adopt a rule that depends so much on happenstance?”  In other words, why should this question hinge on whether the Trustee makes disbursements at the end of each day or holds funds for several months?

(To which I respond – Congress doesn’t think these things out.  It boggles my mind that we continue to endow Congress with an intelligence and thoughtfulness that it simply does not have.  And as we continue to elect officials who campaign on being the “common man” and bash the “ivy elites” the problem of poorly-written laws will continue to get worse.)

Another point made was that the Chapter 13 Trustee’s duties do not terminate completely upon conversion.  No one argued that the Chapter 13 Trustee ought to keep the money.  No matter what – a check was going to have to be written – a duty of disbursement had to be fulfilled.  The question was whose name goes on the check – the debtor or the creditors?
Ultimately the Court chose to have funds returned to the Debtor.
One thing that bothered me about oral arguments was the discussion re: Congress’ intent to encourage people to try Chapter 13 instead of Chapter 7, and that if they adopted a rule that funds are to be distributed to creditors, that such an action would “punish debtors” and make them more likely to proceed under Chapter 7 initially.
This argument is specious and it only fosters a commonly held misconception that Chapter 13 is something that needs to be incentivized, because it’s not as good for the Debtor.  On the contrary – Chapter 13 confers benefits upon Debtors that Chapter 7 does not.  For many people, Chapter 13 saves more money in the long run.  Yes, there is a monthly payment to the Trustee in Chapter 13 whereas there is not a monthly payment to a Chapter 7 Trustee.  However, even Chapter 7 Debtors may have monthly payments after they file bankruptcy – but instead of a Trustee, those payments are made to their mortgage lenders, auto lien holders, and student loan creditors (to name the most common post-filing payments).  In Chapter 13, there are powers we have that may make those payments cheaper.
Is Chapter 13 better for everyone?  Of course not.
But it’s better for more people than most people realize.  Read here for more information.

Can I Lower My Chapter 13 Plan Payments?

So, you’ve filed Chapter 13 Bankruptcy, made a few payments, but now you feel that your payment is too high.  You want to know if your payment can be lowered.
Generally speaking, plan payments are not set in stone.  Just because you filed a 5 year plan at $xxx per month, that doesn’t mean that the payment will or must remain constant for the entire 5 years.  HOWEVER, the circumstances in which a payment can be altered are limited, and the extent to which the payment can be changed is also limited.  In short – there is nothing arbitrary about your plan payment.  And the answer to your question – “Can my plan payment be decreased?” – is a complex question with no easy answer and depends on several different factors.
Let’s start with how your payment was determined.  Some people pay only a few dollars a month.  Others pay several thousand a month.  While that may seem unfair, plan payments are determined by the specific circumstances of the case.  In some cases, very little is required to be paid and the debtor has very little income.  In other cases, debtors may have a great deal of income and/or have certain debts that – because of what kind of debts they are – must be paid in full.  Your attorney, when calculating your plan payment, must determine what debts must be paid and at what rate they must be paid, given statutes, case law, local rules, and the considerations of your individual case.  Any good attorney will find every possible avenue to set your monthly payment as low as possible right from the start.
The ability to reduce hinges on a few things.  First of all, your budget must justify a lowering of the plan payment.  Presumably, when your bankruptcy case is filed, you presented a budget that showed that you could afford the proposed plan payment – no more and no less.  Let’s say that your plan payment was $500/mo, and your budget then showed approximately $500/mo in disposable income.  To justify lowering the plan payment, say to $400/mo, your budget must change.
And to do that, you can’t just say that you would like to spend an extra $100/mo going out to eat at restaurants.  Here are the criteria for allowable budget changes:
ACTUAL:  You cannot justify lowering your plan payment because you THINK you’re going to be laid off or have your hours reduced at work.  The lay-off or reduction in hours actually has to happen.
NECESSARY:  If claiming an increase in expenses, such expenses must be necessary.  If you’ve been living without premium cable television all this time, you’re not gonna be able to lower your payments to pay for that.
LONG-TERM:  Although there may be options to address short-term issues (like an auto repair or medical expenses), short-term issues do not justify a permanent change in plan payments.  It’s also not the subject of this blog post, so I’m not going to discuss what those other options might be.
SUBSTANTIAL:  A slight change in gas prices or grocery bills doesn’t justify a change.  Presumably, your income will also be increasing slightly, from year to year.
ADVERSE:  Hopefully this goes without saying, but either your income should go down or your expenses should go up.  If your new budget has more disposable income, you’re not going to be able to lower your plan payments.
The next question is: how much can the plan payment be lowered.  The first step is to simply look at the new budget.  If your disposable income dropped by $100/mo, then the most you’ll be able to lower your plan payment is $100/mo.
But that’s still not the end of the analysis.
Some plan payments simply cannot be lowered.  As I said at the beginning – certain debts must be paid in full.  For example – let’s say you owe $5k in child support arrears.  Except for rare cases, those arrears have to be paid in full over the life of the Plan.  Let’s say that the DSO arrears are the only thing your plan is paying.  If you can’t afford to make that payment, there may be no room for you to lower your plan payment.
In other cases, there are debts that have to be paid, but they can be scrapped – but with consequences.  Let’s say that you have $10k in mortgage arrears and filed Chapter 13 to save your home from foreclosure.  So long as you intend to retain the house, the arrears have to be paid.  You can refuse to pay the arrears in order to lower your plan payment, but you’d have to amend the plan to surrender the real estate.
By far, the people who have the greatest flexibility to lower their plan payments are the people who, when they filed bankruptcy, were paying a percentage of their unsecured creditors based on disposable income.  There is no obligation to pay unsecured creditors if a change in disposable income justifies lowering the dividend to them, and that can be accomplished without losing homes, vehicles, or anything else that might be an issue in the case.
Even people who are paying nothing to unsecured creditors MIGHT be able to lower their plan payment without losing things, IF there is some cushion in their plan.  The longer a Chapter 13 Plan has been active, the more likely a cushion will have developed as a result of administrative considerations.  For instance, attorneys must estimate the Trustee’s administrative fee, which is variable throughout the life of the Plan.  Since the fee is capped at 10%, most attorneys calculate the fee at 10% knowing full well that it will never actually get that high.  The extra money coming in would go to unsecured creditors, but can also create wiggle room if the plan needs to be lowered.  Cushions can also develop when the Trustee pays interest-bearing secured debts by front-loading them at the beginning of the Plan.  Less interest will be paid out (compared to how much would be paid if the loan were paid over the full term of the plan).  Again, that extra money can either go to unsecured creditors or offer wiggle room in the Plan.
If your plan payment cannot be lowered to something you can afford, you may have other options, such as conversion to Chapter 7.  People who filed Chapter 13 because they were disqualified from Chapter 7 due to a prior bankruptcy discharge will be unable to convert.  Others who are eligible to convert may not like the consequences of converting if they filed Chapter 13 for any reason other than their income.
In short, the answer to this question is intensely fact-specific.  If something has happened to your financial circumstances such that you cannot afford your plan payment, talk to your attorney about what options might be available for you.

Capital Credit Union and Cross-Collateralized Loans

Cross-collateralized loans have been a subject of discussion in the past, but I felt it was worth revisiting.  About a year ago, Pioneer Credit Union merged with Capital Credit Union and ever since then, many Chapter 7 clients have reported being bullied by Capital CU into reaffirming cross-collateralized loans, with strong emphasis that their policies on reaffirmation are “all or nothing”.
This isn’t exactly new.  Credit unions are famous for cross-collateralized loans and they’ve always had the ability to insist on an all-or-nothing approach to reaffirmation agreements.  But Capital CU’s hard sell on this makes this topic worth mentioning again.
The situation of cross-collateralized loans arises when a debtor has multiple loan accounts with the same financial institution (almost always a credit union in these cases).  If one of the loans is secured by collateral, then other loans, which might otherwise have been unsecured, are secured to the same collateral.  For example, you might have a $10k auto loan secured by your vehicle (PMSI) and two signature loans for $2k each.  By virtue of cross-collateralization, the two signature loans also become secured by the vehicle as well (but non-PMSI in this case).
Credit unions can theoretically force you to reaffirm on all three loans instead of just the one PMSI loan or force you to surrender the vehicle (this is the “all or nothing” approach that Capital CU has been insisting upon lately).
Although they have the right, the likelihood of them actually enforcing it is nihl.  When faced with the choice of being paid on a single reaffirmation (in the example above, $10k and losing out on the $4k in non-PMSI loans) or repossessing the vehicle and selling it (where they are unlikely to get much money at all and unable to enforce any of the loans after the bankruptcy discharge is issued), they usually settle and take the one reaffirmation agreement.  However, by insisting that their policy is “all or nothing”, they frighten borrowers who don’t want to lose their vehicle and bully them into signing all of the reaffirmation agreements.
A smart debtor needs to have the courage to call the credit union’s bluff.  Be willing to walk away from the vehicle.  When you think the outcome all the way through to its logical end, the credit union will almost always fold and allow the one reaffirmation agreement.

Bankruptcy & CCAP

Many people avoid filing for bankruptcy based on the fear that if they do, everyone will find out about it.  Many of them believe that if they file bankruptcy, it will be listed on Wisconsin’s Circuit Court Access (aka CCAP).  This is not the case because CCAP is a portal for state court cases.  Bankruptcy is a matter of federal law.
There is an analogous website to CCAP that does show bankruptcy cases.  This is known as PACER.  Unlike CCAP, which is free and open to the public, PACER requires registration and a paid account, and is primarily used only by legal and financial professionals.
Recently, I had a client call in because she was disappointed to discover that it was not listed on CCAP.  Presumably she was hoping to access information about her bankruptcy case quickly and easily.
So, whether you want it listed on CCAP or are petrified that it will be – the answer is the same.  Federal bankruptcy cases do not show up as cases on CCAP.