City of Chicago Crushes Security Interest: Northern District Bankruptcy Court Reclassifies Secured Claim as Unsecured in Second Chapter 13. Debtor and Creditor Fail to Pay for Parking Tickets…and the Collateral is Pulverized.
(In re: Tiara Hill, N.D. Illinois, Eastern Division, 17 BK 27598) (2-22-18).
After filing a Chapter 13 Bankruptcy, a debtor lost their car to the City of Chicago due to post-petition parking tickets. The vehicle was subject to a security interest. The lien holder was told by the debtor after repossession that their claim would be treated as secured despite the repossession. Both received notice of the impound, but neither the debtor or the lien-holder acted to recover the vehicle. The 2008 Chevrolet Impala was promptly crushed by the City. The destruction of vehicles in this manner is specifically permitted with 15 days’ notice by the Chicago Municipal Code. The Chapter 13 plan was later dismissed for failure to make plan payments.
The Debtor (after vehicular obliteration) filed a second Chapter 13 Petition and treated the lien-holder as an unsecured creditor. The Court agreed with this classification.
First, the Court held that any promise in the first Chapter 13 case to treat the claim as secured would not require the debtor to recover the vehicle. Further, that agreement would not extend to subsequent bankruptcy filings.
The Court also found that the debtor did not act in bad faith where the failure to recover the vehicle was solely due to the debtor’s financial situation. Given the superior financial means of the creditor, the creditor’s inaction was held to be the primary cause for the loss of collateral. The Court also summarily rejected any claim by the lender that it was entitled to “special classification,” and would be given equal treatment to other unsecured claims.
Given the ruling, creditors would be wise to recover any collateral facing destruction. If the City of Chicago is involved, sooner rather than later.
Chapter 13 Bankruptcy Allows Payment of Delinquent Taxes After Redemption Period Expires (In re: Robinson, Eastern Division, 577 B.R. 294 (December 2017)).
When considering redemption/repayment of property taxes, the Northern District has split twice in the last six months. Both involve debtors trying to pay delinquent taxes through a Chapter 13 Bankruptcy plan. The Debtor in need? A bankrupt on the verge of losing their property to a tax sale.
The first and larger split is whether a Debtor can save the property after the redemption period has run, but before a tax deed issues. The second (and hopefully less frequent) issue is whether the Debtor can file bankruptcy after 5:00 P.M. on the last day redemption and save the property. Obviously, if the redemption period running is irrelevant for purposes of paying the debt through the plan, the second issue is moot.
The Northern District Bankruptcy Court (Eastern Division) ruled in the Robinson case that a debtor can prevent the issuance of a tax deed, even when the redemption period has run when the Chapter 13 is filed. The Robinson Court cited the 7th Circuit case In re Lemont as authority for this holding.[i] Essentially, Robinson held that if a tax purchaser is to be treated as a secured claim (as stated in Lamont), there is no reason to treat the running of redemption as a watershed moment. The Debtor still owns the property, and the claim of the tax purchaser can be modified as any other secured claim. The Court concluded that because the tax purchaser could recoup his initial investment under state law, there was little prejudice to the purchaser.
In May (Jerklin) and September (Adger) of 2017 two Northern District Courts reached the opposite conclusion.[ii] Both also cited the Seventh Circuit Lemont Decision. The Jerklin and Adger Courts seemed to accept without debate that a debtor’s ability to pay the taxes through the Chapter 13 plan ends the day the redemption period expires. The language from Lemont is below, and the reader is encouraged to reach their own conclusion.
But what time of day you ask? The agreement of the Jerklin and Adger Courts ended there. The Judge in Adger seized upon the language in Lemont, which distinguishes between a debtor redeeming and a debtor treating the delinquent taxes as debt in a bankruptcy filing. Because the debtor is not redeeming, the Court held that the rules and standards governing electronic filing prevail over the state statute regarding timely redemption. For that reason, any time before midnight would be sufficient. The Judge in Jerklin simply relied upon the state statute, drawing the line at the time the county office closed.
Central point? The case should be filed before redemption expires (and before 5:00 P.M.) to avoid any argument. But it does seem that based upon the language in Lamont, debtors have a strong argument to save the property until the deed is signed.
[i] Lemont stated:
“His assertion (creditor seeking a deed) that the full redemption amount must be paid in a lump sum before the redemption deadline—i.e., that a proper redemption must be made—is mistaken. The plan is treating his secured claim, not formally redeeming the property… The expiration of the redemption period did not affect the plan's treatment of (the creditor’s) secured claim except that, if the debtors had failed to comply with the plan, then his equitable remedy would have survived and he could have sought an order to issue a deed. Accordingly, the expiration of the redemption period does not affect the validity of the plan or necessitate a modification of the automatic stay so long as the debtors comply with the plan. In Re Lemont, 740 F.3d 397 (7th Cir. 2014)
[ii] In re Demetrius Adger, 17-20163 (September 20, 2017); In re Harold L. Jerklin, 17-07999 (May 19, 2017).
Chapter 13 Student Loan Exception: Northern District Bankruptcy Court Allows Chapter 13 Student Loan DEBT to Exceed Limitations (In Re: Christopher v. Pratola, N.D. Illinois, Eastern Division, 578 B.R. 414 (2017)).
A debtor in the Northern District with $568,671 in unsecured debt was given a green light for his Chapter 13 plan, despite the Chapter 13 statutory limit of $394,725. The Oski’s share of the debt? Student loans to attend college and post-graduate school. The claim from the U.S. Department of Education for the loans totaled $447,103.99.[i]
The Court first considered whether the student loan debt was contingent or non-contingent. The debtor was participating in an “Income Based Repayment Plan,” or "IBR." This type of plan is offered by the Department of Education and allows debt forgiveness if 10% of a graduate’s discretionary income is paid for 25 years.[ii] The court found that because the debt existed when the plan was filed it was non-contingent. “It is the possibility of forgiveness that is contingent, not the debt itself.”
The Court then moved on to the larger question of whether the case must be dismissed because of the excessive unsecured debt. The Court acknowledged that the debtor was ineligible to file under Chapter 13 because of his towering unsecured debt, but then moved on to ask whether ineligibility is always cause for dismissal. The Court answered in the negative and declined to dismiss for several reasons.
First, the debt limit was intended by congress as a check on sole proprietors with large businesses. Congress wanted to stop commercial actors from evading a more creditor friendly Chapter 11 filing. Secondly, because the debtor’s Chapter 13 plan would give creditors at least partial payment and leave the student loans intact, it appears dismissal would not benefit the debtor, the creditors, or the estate. Finally, the court examined the dramatic rise in education costs compared to the relatively small increase in the debt limits since they were established. As a practical matter many students will now find themselves in excess of debt limits, and unable to afford the rigors of a Chapter 11. For that reason, the Court declined to dismiss as a matter of public policy.
The bottom line? If the only reason a debtor doesn’t qualify for a Chapter 13 filing is student loan debt, he might find himself in a domain between “eligible” and “dismissed.”
[i] The author feels it appropriate to thank his alma mater Northern Illinois University for providing such quality at an affordable price.
[ii] For more information, and for alternative debt forgiveness plans: https://studentloans.gov/myDirectLoan/index.action
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