Missed Debts, New Debts, and Conversion

You filed for bankruptcy.  A year later, you’re sitting at your dining room table staring at a billing statement for medical services.  Do you have to pay it?
Step 1 – Gather the Relevant Data

  1. When exactly (i.e. what date) was your bankruptcy case filed?
  2. What chapter of bankruptcy did you file under?  Chapter 7?  Chapter 13?
  3. Was this bill listed on your bankruptcy schedules?
  4. When was the debt incurred (in this example – what was the date of service)?
  5. What is the billing address and the statement date?
Step 2 – Determine What Kind of Debt This Is
  1. If the debt was incurred before your bankruptcy filing date, then it is a pre-petition debt.
  2. If the debt was incurred after your bankruptcy filing date, then it is a post-petition debt.
Pre-Petition Debts
  1. If the debt was listed on your bankruptcy schedules, then check the address to determine if notice was sent out to the right place.  Also check the statement date.  If within a few days of your bankruptcy filing date, then this may be a harmless “letters crossed in the mail” situation.  If the statement date is substantially after your bankruptcy filing date, then you are likely looking at a stay or discharge violation.
  2. If the debt was not listed on your bankruptcy schedules and you filed a Chapter 7 case that had no distributions (the trustee did not sell any non-exempt assets, recover any preferences, or void any transfers) and the debt was otherwise dischargeable, then the debt is discharged.  (This is a result of case law called “Guseck” in the Eastern District of Wisconsin.  If you filed bankruptcy in another district, a different result may occur.)
  3. If the debt was not listed on your bankruptcy schedules and you filed a Chapter 13 case or a Chapter 7 case that had distributions, then the debt is non-dischargeable under 11 U.S.C. sec. 523(a)(3).
Post-Petition Debts
  1. Post-petition debts are generally non-dischargeable with one exception.
  2. If you file Chapter 13, then later convert to Chapter 7, debts incurred between the filing and conversion dates may be dischargeable under 11 U.S.C. sec. 348(d).

Post-filing changes to your mortgage payment.

If you’re a Chapter 13 debtor with a mortgage, you have probably been noticing the occasional letter in the mail from your mortgage company with a form captioned either as “Notice of Mortgage Payment Change” and/or “Notice of Post-Petition Mortgage Fees, Expenses, and Charges”.

Debtors who have been in Chapter 13 for more than a year and a half might be a little more puzzled about these notices than newer Chapter 13 clients.  That’s because, before December 2011, these notices didn’t exist.  They are part of Fed. R. Bankr. P. 3002.1(b) and (c).

Apart from curing mortgage arrears, bankruptcy law doesn’t allow for the modification of the terms of a mortgage secured solely by a principal residence (11 U.S.C. § 1322(b)(2)).  That means that if you have an adjustable rate mortgage, a balloon provision, a high mortgage interest rate, or any other unfavorable term – you’re still stuck with those terms in a Chapter 13 bankruptcy.

So, when your interest rate adjusts periodically per the terms of the mortgage, your mortgage has and will continue to change throughout the life of your mortgage.  However, while in bankruptcy, and effective 12/1/2011, the mortgage company is required to file a Notice of Mortgage Payment Change” with the bankruptcy court.  These notices are also very commonly filed each year in cases where there is an escrow for property taxes.

Really, the notice of mortgage payment change doesn’t have a material impact on a bankruptcy case, other than it affords your attorney and other interested parties a chance to be aware of the change.  But, aware or not, you are responsible for making the new mortgage payment as reflected on the notice, unless you have grounds for objecting to that change (and successfully contest that change).

The second notice is for post-petition fees, expenses, and other charges.  I see these most often filed some time after a motion for relief from stay (which happens when a debtor defaults on post-petition mortgage payments) for late fees, penalties, and legal fees associated with the motion for relief.  I also see these for periodic property inspections.

Now, these fees are above and beyond your ordinary mortgage payment, and they will need to be paid separately – either soon after the charge is incurred, or at the end of your bankruptcy plan.  FRBP 3002.1(f-h) outlines the procedure for the mortgage company to make a statement concerning any remaining arrears that exist prior to you receiving your Chapter 13 discharge.  These post-petition charges are not paid by the trustee unless they are filed as supplemental proofs of claim.

So – it’s something to be careful of and watch out for, especially as you near the end of your Chapter 13 Plan.  Again, there’s nothing new about post-petition charges, but at least now you are receiving notices about them through the bankruptcy court – which is more notice than debtors got before December 2011.

Note:  The way we have constructed our new conduit mortgage provision does allow for the trustee to automatically make adjustments to plan payments to accommodate both a change to mortgage payments and a for additional charges.

Creditor Superpowers

Not all creditors are created equal.
Some debts are “secured” which means the lender can exercise security rights in collateral you own if you default under the terms of the note.  For example, if you stop making payments on a secured loan, a mortgage lender can foreclose your home, and an auto lender can repossess your car.
Other debts are non-dischargeable in bankruptcy.  A full list of these can be found at 11 U.S.C. § 523(a), but it includes items such as taxes, student loans, debts incurred by misrepresentation and fraud, domestic support, and certain governmental debts, among other things.
Secured debts and non-dischargeable debts are the two most common distinctive classes of debts that people going through bankruptcy are made aware of.  But there are a number of superpowers that certain creditors have over other creditors, and we’re going to go over some of the most pertinent ones here.
Utility Companies – are given special status under 11 U.S.C. § 366, and may discontinue utility services if the debtor does not provide adequate assurance of payment, such as a deposit.  In my experience, requests for deposits have been relatively rare, but they do occur from time to time.
Internal Revenue Service and State Taxing Authorities – in addition to the non-dischargeable and priority status that many tax debts enjoy, taxing authorities are also allowed to file claims in a debtor’s Chapter 13 case for tax debts that arise after the bankruptcy case is filed under 11 U.S.C. § 1305.  For example, John Doe files a Chapter 13 Bankruptcy in 2011 with a 5 year term.  In 2013, John Doe finds that he owes taxes to the IRS for the 2012 tax year.  The IRS can file a claim in John’s existing bankruptcy case and force the debt to be paid in the plan.  On the one hand, this is a good thing, because the tax won’t incur interest while it’s paid in the plan.  On the other hand, it may be difficult for John to fund his plan when it is saddled with the new debt, particularly if John is nearing the end of this plan (no plan can go longer than 60 months, so the later in the plan that this happens, the less time you have to spread the payments out).
Student Loan Creditors – filing bankruptcy can trigger higher default interest rates, which is particularly a problem for Chapter 13 debtors who are not paying off their student loans in full during the Chapter 13 Plan.  Since student loans are currently non-dischargeable (there has been a lot of buzz in Washington lately about possibly amending the bankruptcy code to allow certain types of student loans to be discharged under certain conditions), those post-petition rates continue to be incurred throughout the life of the bankruptcy plan.  Bruning v. United States, 376 U.S. 358 (U.S. 1964).