AN INTRODUCTION TO EPAY AND ISSUES OF IMPORTANCE IN CHAPTER 13 CASES

AN INTRODUCTION TO EPAY AND ISSUES OF IMPORTANCE IN CHAPTER 13 CASES Jeffrey P. Norman Standing Chapter 13 Trustee Southern District of Ohio Eastern Division One Columbus 10 West Broad Street Suite 900 Columbus, Ohio 43215 jeff.norman@ch13columbus.com 614 420 2555 Telephone 614 420 2550 Fax PRE 2012 BENCH BAR OCTOBER 10, 2011 MASON

Jeffrey P. Norman Mr. Norman was appointed as a Standing Chapter 13 Trustee in the Southern District of Ohio, Eastern Division on May 19, 2011. He had for the twenty six years prior been a practicing bankruptcy attorney in the Southern District of Texas. He has bankruptcy experience representing a variety of debtors and occasionally, creditors in all aspects of bankruptcy matters. He is Board Certified in Consumer Bankruptcy by the Texas Board of Legal Specialization and the American Board of Certification. He is AV rated by Martindale Hubble and is a chapter author of Bankruptcy Road Map, published by State Bar Books in 2010. Prior to moving to Ohio he was named a Texas Monthly Super Lawyer in bankruptcy for 5 consecutive years. He is licensed in the Southern District of Texas, Fifth Circuit Court of Appeals, Sixth Circuit Court of Appeals and the Southern District of Ohio. He obtained his Bachelor of Science in accounting and finance from Houston Baptist University in 1982 and his Doctor of Jurisprudence from South Texas College of Law in 1985. SEARCHING FOR GENERAL INFORMATION ABOUT THE CHAPTER 13 TRUSTEE? When all else fails visit the Chapter 13 Trustee web site. www.ch13columbus.com 1

TABLE OF CONTENTS I. TRUSTEE POSITION STATEMENT ON CHAPTER 13 PLAN PROVISIONS FOR DEBTOR(S) WITH PENDING LOAN MODIFICATIONS... 3 II. TREATMENT OF STUDENT LOANS IN CHAPTER 13 PLAN BY JOHN W. KENNEDY, STAFF ATTORNEY... 4 III. IV. CHAPTER 13 TRUSTEE POSITION ON PLAN TREATMENT OF STUDENT LOAN CLAIMS... 6 CHAPTER 13 TRUSTEE S POSITION STATEMENT ON LATE FEES, COLLECTION FEES AND PENALTIES ON STUDENT LOANS DURING A CHAPTER 13 PLAN... 7 V. GENERAL REQUIREMENTS FOR CHAPTER 13 BUSINESS CASES... 8 VI. CHAPTER 13 TRUSTEE BUSINESS MEETING LETTER... 10 VII. EPAY INTRODUCTION... 12 2

I. TRUSTEE POSITION STATEMENT ON CHAPTER 13 PLAN PROVISIONS FOR DEBTOR(S) WITH PENDING LOAN MODIFICATIONS Background 11 USC 1322(b)(5) is commonly called the cure and maintain option for secured debts. As stated in the legislative history Paragraph 5 concerns long term debt, such as mortgage debt. It permits the plan to provide for the curing [sic] any default within a reasonable time, and maintenance of payments which the case is pending House Report No. 95-595, 95 th Cong., 1 st Sess. 429 (1977). In a percentage of cases however the mortgage arrears claim is so large and a Debtor(s) budget so restrictive that cure and maintain is not a feasible Chapter 13 plan option. Occasionally in these pending Chapter 13 cases where cure and maintain is outside of a debtor s ability to pay, Debtor/Debtor s counsel has sought a loan modification (or been offered a trial modification by the mortgage company) that cures the arrears outside of the provisions of 11 USC 1322(b)(5). These modifications have different terms however they often re-amortize the loan, bring it current and in some instances reduce the mortgage payment. In these loan modification cases the Trustee has adopted the following language as an aid for plan confirmation. It allows the loan modification process to complete and for a large arrears claim to not render a Chapter 13 plan unfeasible. Permitted Language Debtor(s) have completed and submitted paperwork for a mortgage modification to Creditor (Insert name of Creditor) regarding the real property located at: (insert address or description of property). Trustee will not pay on any mortgage arrearage claim to this Creditor until or unless an amended plan or Motion to Modify plan is filed with the Court directing the Trustee to do so. The Trustee shall make the monthly mortgage payment to Creditor through the plan beginning with the month of, 20. Debtor(s) will file a Status Report, Agreed Order and/or submit an Application to Incur Debt to Trustee and file a Motion to Modify Plan no later than six months from date of confirmation to indicate the status of the pending loan modification. If the loan modification is successful - the plan continues as confirmed. If the loan modification is still in process six months after confirmation, the Status Report shall indicate the status and Trustee will maintain status quo of confirmed plan until or unless a motion to modify plan is filed or other agreed order is entered into between the parties. The status report should indicate a date certain for a follow up status report. If the loan modification is not successful, then Debtor must indicate such in the filed Status Report and either file a Motion to Modify plan to incorporate funding for the mortgage arrears directing the Trustee to commence payment on such arrears OR provide for surrender of the real property. Creditor shall have 270 days from the date of the filed Status Report to file any deficiency claim which will be paid as a general unsecured claim, if timely filed. If the deficiency claim is not timely filed, then the claim shall be deemed disallowed and discharged upon completion of Chapter 13 Plan and entry of Discharge Order. Failure to abide by this special provision constitutes a material default under 11 USC 1307(c)(6). 3

II. TREATMENT OF STUDENT LOANS IN CHAPTER 13 PLAN BY JOHN W. KENNEDY, STAFF ATTORNEY The case law regarding the treatment of student loans in Chapter 13 plans is diverse and often confusing. As one court noted, [i]t is possible to find case law support for just about any proposition. In re Sullivan, 195 B.R. 649, 653 (Bankr. W.D. Tex. 1996) (on the many opinions regarding student loans in Chapter 13). Educational loans are exceptions to discharge pursuant to 11 U.S.C. 523(a)(8). In 1990, Congress amended 1328(a)(2) to make educational loan obligations non-dischargeable in Chapter 13 cases. As a result, Chapter 13 debtors propose plans which pay student loans substantially or in full, while paying other unsecured claims far less. The question is whether such plans comply with the unfair discrimination rule of 11 U.S.C. 1322(b)(1). Section 1322(b)(1) provides that a Chapter 13 plan may separately classify classes of unsecured claims but may not discriminate unfairly against any class so designated. A strong majority of cases hold that nondischargeability alone is an insufficient basis to discriminate in favor of student loan claims. [T]he nondischargeability of student loan claims, by itself, does not justify substantial discrimination against other, dischargeable unsecured claims in a Chapter 13 plan. Groves v. LaBarge (In re Groves), 39 F.3d 212, 216 (8th Cir. 1994). See also, In re Bentley, 266 B.R. 229, 241-242 (BAP 1 st Cir. 2001); In re Sperna, 173 B.R. 654, 658 (BAP 9 th Cir. 1994). To determine whether a plan discriminates unfairly between classes, the primary consideration is the total amounts of payments to each class during the term of the plan. For example, a plan that proposes to pay student loan claims in full while paying 40% to other unsecured creditors violates the unfair discrimination provision. Groves v. LaBarge (In re Groves), 39 F.3d 212 (8 th Cir. 1994). See, also, McCullough v. Brown (In re Brown), 162 B.R. 506 (N.D. Ill. 1993) (paying student loans 100% vs. 10% to others was unfair); Marshall v. Belda (In re Belda), 315 B.R. 477 (N.D. Ill. 2004)(paying student loans 62% as long-term claims vs. 10% to others was unfair). The debtor has the burden to prove plan does not discriminate unfairly. Groves v. LaBarge (In re Groves), 39 F.3d 212, 214 (8 th Cir. 1994). Section 1322(b)(5) permits the plan to provided for the curing of any default and maintenance of payments on long-term claims. The question is whether such long-term treatment creates an exception to the unfair discrimination rule. There are cases going both ways on this question, but an apparent majority finds that the two sections must be read together, so 1322(b)(5) does not trump 1322(b)(1). Labib-Kiyarash v. McDonald (In re Labib-Kiyarash), 271 B.R. 189 (BAP 9th Cir. 2001); Marshall v. Belda (In re Belda), 315 B.R. 477, 486 (N.D. Ill 2004)( Although the matter is not free from doubt, this court concludes that student loans constituting long-term debt under 1322(b)(5) must comply with 1322(b)(1)'s prohibition against unfair discrimination. ); In re Coonce, 213 B.R. 344, 347 (Bankr. S.D. Ill. 1997)( A careful examination of 1322(b) reveals that its provisions are cumulative unless otherwise provided. An interpretation allowing preferential treatment of student loan debts so long as they are classified as long-term indebtedness under 1322(b)(5) would render subsection (b)(1) superfluous. ); In re Thibodeau, 248 B.R. 699, 704 (Bankr. D. Mass. 2000)( Subsections 1322(b)(1) and (b)(5) should both be given effect. ). 4

Similarly, there is also disagreement over the effect of the second clause of 1322(b)(1) which provides, however, such plan may treat [co-signed] claims for a consumer debt of the debtor differently than other unsecured claims. Some courts hold that this however clause creates an exception to the unfair discrimination rule. See, In re Riggel, 142 B.R. 199, 204 (Bankr. S.D. Ohio 1992)(Sellers, J.). A majority of courts conclude that the however clause in 1322(b)(1) does not create an exception to the unfair discrimination rule, or that a student loan benefitting a non-debtor is not a consumer debt of the debtor. In re Gonzales, 172 B.R. 320, 330 (E.D. Wash. 1994)(finding that 1322(b)(1) is limited to co-signed debt acquired for the benefit of the debtor, not the co-signer. ); In re Easley, 72 B.R. 948, 956 (Bankr. M.D. Tenn. 1987). In re Lewman, 157 B.R. 134, 136-137 (Bankr. S.D. Ind. 1992). In re Battista, 180 B.R. 355, 357 (Bankr. D.N.H. 1995)(noting the split of authority, court concludes the better view is that the unfair discrimination standard applies to plans that separately classify cosigned consumer debts. Had Congress intended otherwise it could plainly have said so. ). Generally, post-petition interest on student loan claims continues to accrue, and is not discharged. Leeper v. PHEAA, 49 F.3d 98, 104-105 (3rd Cir. 1995). This lead one court to note that [E]ven a 100% plan cannot pay off a nondischargeable interest bearing student loan. In re Sprolito, 359 B.R. 423, 428 (Bankr. D.P.R. 2006). See, In re Shelbayah, 165 B.R. 332, 337 (Bankr. N.D. Ga. 1994)(portion of student loan claim representing post-petition interest was disallowed, because it is not allowable claim against estate pursuant to 11 U.S.C. 502(b)(2). Interest continues to accrue, is not discharged.); In re Uber, 443 B.R. 500, 505-506 (Bankr. S.D. Ohio 2011)(Humprey, J.)( It is well settled that if interest and collection costs are provided by contract, these amounts will continue to accrue post-petition on the unpaid balance of a nondischargeable student loan obligation during the course of a debtor's Chapter 13 case and while payments are being made under a debtor's confirmed plan. Court lacked jurisdiction to determine amount or propriety of post-petition interest.). A few courts, however, have been willing to stay the imposition of penalties while a debtor is in Chapter 13. In re Harding, 423 B.R. 568, 576-577 (Bankr. S.D. Fla. 2010)( But while regular interest may accrue, a penalty may not be imposed unless specifically exempted from the automatic stay. Section 1328 discharges such assessments [for fees and penalties] because the student loan debt is not being provided for under section 1322(b)(5) and only the principal and regular interest is debt of a kind specified in section 523(a). ) 5

III. CHAPTER 13 TRUSTEE POSITION ON PLAN TREATMENT OF STUDENT LOAN CLAIMS The Chapter 13 Trustee takes the position that a Chapter 13 plan may separately classify student loan claims apart from other general, unsecured claims, provided the plan does not discriminate unfairly against any class. 11 U.S.C. 1322(b)(1). In addition, the plan may cure and maintain payments on a student loan as long-term debt pursuant to 1322(b)(5), as long as this treatment does not violate the unfair discrimination rule of 1322(b)(1). The plan may not provide for the direct payment of student loan claims by debtors; however, the plan may designate a per-monthly disbursement amount to be made by the Trustee to the student loan claim, as part of a cure and maintain treatment. To determine whether a plan discriminates unfairly, the primary consideration is the total amounts of payments to each class during the term of the plan. For example, a plan that proposes to pay student loan claims in full while paying 40% to other unsecured creditors violates the unfair discrimination provision. Groves v. LaBarge (In re Groves), 39 F.3d 212 (8 th Cir. 1994); see, also, In re Williams, 253 B.R. 220 (Bankr. W.D. Tenn. 2000) (confirmation denied when plan would pay student loans at 100%, other unsecured creditors 70%). 6

IV. CHAPTER 13 TRUSTEE S POSITION STATEMENT ON LATE FEES, COLLECTION FEES AND PENALTIES ON STUDENT LOANS DURING A CHAPTER 13 PLAN Background In September of 2012, Judge Hoffman following the lead of Judge Caldwell confirmed cases containing the following special plan provision to limit the collection of late fees, collection fees and penalties on student loans in a Chapter 13. Both Judges followed the rational of In re Harding, 423 B.R. 568; 2010 Bankr. LEXIS 274; 22 Fla. L. Weekly Fed. B 322. As such the Chapter 13 Trustee will now permit without objection the language below as a special provision in all cases that contain student loans. Permitted Language Student Loans - any student loan creditor shall be permanently enjoined from charging late fees, collection fees, or any other penalties based solely upon its pro rata Chapter 13 Plan distributions being less than the minimum monthly payments it would otherwise be contractually entitled to during the life of the plan. 7

V. GENERAL REQUIREMENTS FOR CHAPTER 13 BUSINESS CASES 1. Make an entry on your books and records to indicate clearly the date of your bankruptcy filing. All business transactions conducted after your bankruptcy filing must be documented on your books and records. You may be asked to produce your books and records for inspection by the Trustee at any time during the course of your Chapter 13 case. 2. You should not combine your personal and business finances. If you haven t already done so, you should open a separate business checking account. All receipts and disbursements relating to the business should be made through your business checking account. 3. It is your responsibility to get and maintain comprehensive liability insurance and/or any other insurance that may be required in the ordinary course of such business. Failure to obtain and maintain such insurance may result in the dismissal of the case. 4. You must have Court approval to use cash collateral in which any creditor has a security interest. You will need to speak with your attorney immediately about obtaining court permission for its use. 5. You should review your plan carefully. Payments which are to be made by you directly to your creditors should start at once. 6. Plan payments to the Trustee s office should also start on schedule. Your first plan payment is due 30 days after the Petition is filed. Payment should be as scheduled in the plan and sent to the lock box address. Paying a lesser amount than is called for is improper. 7. All tax returns and reports should be filed on time with the appropriate tax authority. No extensions are permitted. 8. All tax payments - income, sales, property, etc - should be made on time and in full. If you have employees, you should be sure that all employee withholding taxes incurred after your filing date are paid regularly to the proper tax authorities. 9. Quarterly estimated income tax payments to the federal government should be made each January, April, June and September so as not of incur any unpaid income tax obligation when your returns are filed each April. 10. You should send complete copies of all federal and business income tax returns to the trustee each year by April 15th. 11. You must obtain Court approval for any sale or other disposition of business property or any business borrowing which is outside the ordinary course of your business. When in doubt, ask your attorney. 12. You should submit monthly reports to the trustee regarding the cash flow of your business until confirmation. A form report is available on our web site. Your monthly report should reflect all business activity (on a cash basis ) for each calendar month. Reports are due at the trustee s office by the 20th of 8

each month, reflecting your business activity for the preceding month. If you operate more than one business, separate monthly reports for each business should be submitted. If you own or operate a small corporation or partnership, separate monthly reports for each corporation or partnership should be submitted. 13. You must insure that all entities which you know to be holding money or property subject to withdrawal or your order, including every bank, savings or building and loan association, public utility company and landlord with whom you have a deposit, and every insurance company which has issued a policy having a cash surrender value payable to you is listed on your schedules. 14. The trustee cannot and will not act as your attorney. Your lawyer works for you and is your advocate. Keep in touch with your attorney at all times. 9

VI. CHAPTER 13 TRUSTEE BUSINESS MEETING LETTER JEFFREY P. NORMAN Chapter 13 Trustee Southern District of Ohio Eastern Division One Columbus 10 West Broad Street, Suite 900 Columbus, Ohio 43215-3449 Telephone (614) 420-2555 Facsimile (614) 420-2550 www.ch13columbus.com ATTORNEY NAME ATTORNET ADDRESS DEBTOR(S) NAME DEBTOR(S) ADDRESS RE: DEBTOR NAME, CASE NUMBER The debtor(s) in the case above have been coded by the Chapter 13 Trustee as business debtor(s) and/or self-employed. The debtor(s) or their accountant designee will need to meet to discuss the debtor(s) business, business assets, and business budget with Cindy Steele, the comptroller of the Trustee. Our office is located at 10 West Broad Street (corner of Broad and High), Suite 900, Columbus, Ohio 43215. The Trustee and/or staff attorney will not be present at this meeting, counsel for the debtor(s) are welcome to attend but the Trustee does not require counsel s attendance. The debtor will not be under oath at this meeting. The debtor(s) may send a comptroller, accountant, or CPA in his/her place and not appear, but that designee must have complete knowledge of the business affairs of the debtor(s). Debtor(s) are also welcome to bring an accountant or CPA to that meeting for assistance. Your appointment is scheduled for DATE/TIME. The purpose of the meeting is as follows: 1. The Chapter 13 Trustee s office must examine the debtor(s) financial condition to determine that the Chapter 13 plan is feasible. 2. The Chapter 13 Trustee s office must also examine the debtor(s) financial condition to determine the debtor(s) are meeting the disposable income test. 3. The Chapter 13 Trustee s office must confirm that the debtor(s) are, and will, file all necessary tax returns including, but not limited to, income tax, sales tax, employee taxes and make any required estimated tax payments. 4. The Chapter 13 Trustee s office must make an inquiry as to the debtor(s) business assets to determine the liquidation value of these assets and determine if the Chapter 13 plan meets the liquidation test/best interest test. 5. The Chapter 13 Trustee will want to confirm that debtor(s) are not paying any pre-petition unsecured debts without Court permission. 10

The debtor(s) or accountant designee must bring the following records with them to this meeting. 1. Complete copies of the debtor(s) personal federal tax returns for the last two years (state and local returns are not required). 2. Complete copies of any federal tax return for the last two years for any business entity in which the debtor(s) are a general partner and/or more than a thirty percent (30%) owner, including but not limited to tax forms 1120 or 1165 (if applicable). 3. Any federal tax form 940 and 941 tax returns for the last twelve months, filed by the debtor(s) or any business in which the debtor(s) are a general partner and/or more than thirty percent (30%) owner (if applicable). 4. The debtor(s) personal and business bank statements (any business in which the debtor(s) are a general partner or more than thirty percent (30%) owner) and cancelled checks for the last twelve months. 5. Any financial statement issued by any business in which the debtor(s) are a general partner and/or more than thirty percent (30%) owner in the last twelve months. 6. A current balance sheet, a year to date profit and loss statement and last calendar year profit and loss statement for any business in which the debtor(s) are a general partner and/or more than a thirty percent (30%) owner. Please be punctual to your scheduled meeting, if you are more than 10 minutes late you may be asked to reschedule. Failure to attend the meeting will lead to the Chapter 13 Trustee seeking dismissal of your case. Should you have questions or concerns please contact Cindy Steel at cindy.steel@ch13columbus.com. Sincerely, Jeffrey P. Norman 11

WELCOME TO EPAY A DEBTOR PORTAL FOR ONLINE CHAPTER 13 PAYMENTS AVAILABLE 10/15/2012 AT WWW.CH13COLUMBUS.COM

Click Yes to make a payment