CHAPTER 13 PLAN CONFIRMATION

THE TRUSTEE’S ROLE

The Chapter 13 Trustee’s role in the confirmation procedure is to recommend confirmation of debtor’s plans where the debtors and their plan comply with all the applicable code provisions; or to seek dismissal in those cases where the debtors are not in compliance. In most cases the Trustee first advises the debtor and their counsel of his (or her) objections to the plan at the §341 meeting; the trustee may also request amendments to schedules and forms at that time as well. In routine cases, where the debtor has not made the required plan payments or the debtor has failed to amend their plan and or schedules the Trustee will simply seek dismissal for failure to pay or amend rather than file an objection to confirmation. In cases where the disagreement is over interpretation of the statute the Trustee will write a formal objection leading to a written opinion resolving the issue. COMMON CONFIRMATION ISSUES Best Interest of Creditors Test. Section 1325(a)(4) requires the debtor to propose a plan that pays unsecured creditors at least the amount they would be paid in a Chapter 7 liquidation. The most common assets that trigger this code provision are real estate and automobiles. The Chapter 13 Trustee always reviews the debtor’s schedules for assets and performs this calculation prior to the §341 meeting. If the best interest test applies the Trustee will look to section H of the debtor’s plan to see if the debtor’s is in compliance. To be in compliance the debtor must pay an amount equal to the net (of transaction costs and Chapter 7 Trustee fees) non exempt equity in their property to the unsecured creditors. If the result of this test is that all unsecured creditors must be paid in full then the plan must pay interest to those creditors to compensate them for waiting up to sixty months to receive that payment. Secured Creditors Object. Section 1325(a)(5) and the unnumbered paragraph after §1325(a)(9), (along with §1322(b)(2)(3)(5) and §1322(c)) govern what the debtor’s plan must provide to secured creditors for the plan to be confirmed. Because the model plan controls as the amount and timing of payments to secured creditors they frequently object to confirmation. Mortgage Company Objections: If the mortgage company asserts a claim for arrears higher than the amount in the plan they must object to confirmation or be bound by the terms of the confirmed plan. If the lender objects, the debtor has two options. One, agree with the mortgage company and amend their plan to resolve the objection. Two,

file a response to the objection as a means to contest the claimed arrears amount. Mortgage companies often fail to properly document and itemize their calculation of the arrears amount on their proof of claim providing debtor attorneys an opportunity to attack the claim. Automobile Lender Objections: See the materials on “The Hanging Paragraph”. Automobile lenders must object if they disagree with their treatment in section E 3 or section G of the plan. The binding effect of §1327 force them to accept the treatment provided under the confirmed plan so objections are routine, at least by those creditors that pay attention; the burden is on the creditor to read all of section E 3 and section G before confirmation. §1325(a)(5)(B)(iii)(I)and (II) require that payments through the plan for creditors secured by personal property must be paid in equal monthly installments and those equal monthly installments must adequately protect the creditor. This doesn’t mean you have to spread their payments our over 60 months. A 60 month term inflates the interest expense and paying secured and unsecured creditors simultaneously can cause the trustee administrative problems. Adequate protection has been defined many different ways. Judge Goldgar, in the matter of Thompson v. GMAC 08 A 182 (08 B 02560) defined adequate protection as the amount the value of the vehicle declines in value the first month post petition and used NADA as the source for the change in value. Domestic support obligations: §1325(a)(8) requires a debtor with a DSO obligation to document that they have made all post petition payments as a condition of confirmation. This documentation can take the form of a letter or fax from the DSO recipient or copies of post petition pay advices showing the periodic deductions. The Means Test: Pursuant to §1325(b)(3) disposable income is determined under §707(b)(2)(A)&(B) for debtors whose annualized current monthly income is above the applicable median income level. Above median income Debtor’s plans must pay general unsecured creditors a minimum of the monthly disposable income on Form B22C line 59 multiplied by 60. This requirement is independent of the §1325(a)(4) best interests tests and may require debtors with no net non exempt equity in property to pay their creditors in full. If the means test alone results in a 100% plan there is no requirement that the debtor pay interest to the unsecured creditors. Applicable Commitment Period: Pursuant to §1325(b)(4)(A)(ii) debtors with income above the applicable median income level are required to propose a 60 month plan unless all creditors are paid in full over a shorter period.

Plan Payments: Of course, the debtors must be current or very close to current with plan payments at the time of the confirmation hearing for the trustee to recommend confirmation. This is where payroll deduction come in handy, if the debtor is not current the trustee is much more likely to recommend confirmation if payments are coming in via payroll deduction than directly from the debtor.

PLAN DEVELOPMENT AND DRAFTING CONSIDERATIONS The most important thing to keep in mind when drafting a plan is it’s all about the

money. The real function of the plan is to dictate how the money flows. It is the job of the attorney to manage the flow of money to (1) keep the auto creditors happy (or at least avoid their objections); (2) make sure their own fees get paid; (3) try not to let any money flow to the GUC’s until the secured creditors have been paid. The trustee disburses once a month, the dates are posted on their web sites. Before confirmation, adequate protection payments are made to secured creditors with PMSI claims provided for in Section E 3. After confirmation, at the disbursement date all money on hand is used to satisfy each level in order. If money is left over after satisfying the first level the remainder is applied to the next level. If that level is satisfied the remainder is applied to the next level, and so on. You don’t have any control over the amount of the monthly payment to E 2 (continuing mortgage payments) creditors but you do have control over the fixed payments to secured creditors provided for in Section E 3. It is important to use that control to manage how much money is available each month to pay attorney fees and, after attorney fees are paid, mortgage arrears. Section E 3.1 Secured Claims Claims other than mortgage claims will be paid as secured only if the plan provides for them as secured. The amount a creditor will be paid as secured is determined by the amount provided in Section E 3.1. Secured claims filed for amounts greater than the amount provided for in Section E 3.1 will be bifurcated. Secured claims filed for amounts less than the amount provided for in the plan will be paid the lower amount. Claims filed as unsecured will be paid as unsecured even if provided for as secured in the plan. The plan must provide interest on automobile loans as required under Till (Supreme Court, May 17, 2004). Fixed payments must adequately protect the creditor after confirmation to satisfy §1325(a)(5)(B)(iii)(II). Creditors that did not finance the purchase of the asset are not entitled to pre confirmation adequate protection payments so the non-PMSI box must be checked for those creditors only.

Section E 3.1 Calculating Fixed payments on secured claims In the good old days you could pay all the secured creditors pro rata, this would guarantee that the secured creditors were all paid in full before any money went to the unsecured creditors and debtor attorneys didn’t have to do as much math. An easy way to simulate this is to calculate what the pro rata payments would be if all the E 3 and E 5 creditors were to paid at the same level and use those numbers to determine the E 3 fixed payments. If you want to pay the car off faster and reduce your client’s interest expense just increase the fixed payment. Increasing the E 3 fixed payment won’t cause administrative problems like reducing the fixed payment will. Don’t make the mistake of calculating a 60 month payoff for the E 3 creditor and using that amount for the fixed payment. Your client will pay more interest and money will flow to the GUC’s before the secured are paid off; it can result in the case staying open longer than required if the plan could otherwise complete in fewer than 60 months. Section E3.2 Secured claims treated as unsecured Any creditor, typically a junior mortgage, that is to be paid as unsecured because they are secured by collateral that either has no value or that is fully encumbered by liens with higher priority must be provided for in Plan Section E 3.2. To the extent their claim (filed as secured or unsecured) is allowed, the claim will be paid as unsecured pursuant to Paragraphs E 6 and E 8. Making sure money is available for E 4 (attorney fees) It is very important that the attorney be paid; you may be required to do a little math to make this happen. Because there is no fixed payment feature in E 4 the attorney fees will be paid in full before any money is paid toward mortgage arrears or any lower level claims. If there are no E 3 creditors you don’t have to do any gymnastics at all. If E 3 fixed payments aren’t large relative to the plan payment you can hit the easy button again. If E 3 fixed payments are large you have to do some more work to get paid early in the case. It is generally accepted that adequate protection payments can be less than the post confirmation fixed payments. You can use sections E 3 and G together to provide for a low initial adequate protection payment, followed by a higher fixed monthly payment beginning at some future date certain. The higher fixed payment can be effective upon confirmation or some specific future date. Another method is to use Section G to change the priority level assigned to attorney fees. Calculate the set payments for E 3 creditors as discussed above and use Section G to specify the priority level (E 2 or E 3) for attorney fees. You may also provide for payment of attorney fees in a fixed monthly amount in Section G. If you change the priority level for payment of attorney fees from E 4 to E 2 or E 3 you must provide for a

fixed payment for attorney fees and the payment must be low enough to allow the E 3 creditors to be adequately protected as required by §1325(a)(5)(B)(iii)(II). Other Plan Drafting Considerations Section C Section C is for mortgages only. All other debts that will be paid directly by the debtor are to be provided for in Section G and or Schedule J. Don’t forget to include the monthly payment amount. Current homeowner’s association dues don’t belong in the plan, only in Schedule J. Automobile lease payments do not belong in this section either. If the lease is listed in Schedule G and provided for in Schedule J it is assumed by operation of Plan Section B 1 and need not appear anywhere else in the plan. Section D 1 The initial plan term should be 36 months for debtors with below median income and 60 months for debtors with above median income. The term of a plan can never be less than 36 months unless all creditors are paid in full within the initial plan term. Sections E 8 and G should be used to provide minimum percent or dollar amount dividends to unsecured creditors for below median income debtors. Keep in mind that no matter what happens after confirmation the minimum amount that must be paid into the plan is the amount in the last field in section D 1. If the plan payment will change more than one time during the term of the plan then the plan term must be detailed in Section G. The amount to be paid during the initial plan term is entered in D 1 and H 1; the terms are set out in Section G using the format set out in D 1. Section E 2 The school of thought that supports including current mortgage payments in E 2 is generally based on: (1) Payroll Order entered on day one; (2) Debtor has at least a half a plan payment to mail to the Trustee on day one; (3) All the debtor has to do for the plan to succeed is stay employed; (4) Trustee keeps perfect records regarding post petition payments; (5) Fewer Motions to Lift Stay; (6) Trustee fees on current payments are ultimately paid by unsecured creditors and are probably less than late charges and creditor attorney fees on stay lift motions.

The school of thought that opposes paying current mortgage payments in E 2 is generally based on: (1) The debtor says they’re really going to make the payments this time; (2) It is fun defending Motions to Modify the Stay every six months. The creditor name in E 2 should match the creditor name in Schedule D. Section E 3.1 Considerations not addressed above include: The infamous §1325(a)(9) ”hanging paragraph”; PMSI v. non-PMSI and delinquent property taxes. §1325(a)(9) “hanging” requires that a creditor with a PMSI claim secured by a motor vehicle purchased within the 910 days pre-petition, or a creditor with a PMSI claim secured by other personal property purchased within one year pre-petition be paid the full balance owed them at the petition date. For motor vehicle loans, Till still controls as to the interest rate paid on these claims, prime rate plus a risk factor of up to 3%. Unless an E 3 creditor is specifically identified as “non-PMSI” they will receive pre confirmation adequate protection payments. Not all secured creditors are entitled to adequate protection, if the lender did not finance the purchase of the property they aren’t entitled to pre-confirmation adequate protection payments. Some creditors, notably Best Buy and Home Depot, that may well have financed the purchase of the property do not file secured claims, they usually file as unsecured. If there is no escrow there is likely to be delinquent property taxes. Be sure to give the county notice by listing them on Schedule D, they will hold the property taxes out of sale if they have notice of the Chapter 13. You can quickly and easily check the amount owed via the county’s web site. Section E 6 Of course the most common priority creditor is IRS. §1322(a)(2) requires that the plan must provide for full payment of all claims entitled to priority under section 507 unless the creditor agrees to a different treatment. In my experience the IRS will not agree to any other treatment. The IRS generally files claims before the original confirmation hearing so getting the number correct should not be a problem. The most common error here is the misclassification of student loan debt as a priority debt. Student loans are non dischargeable but they are not entitled to priority under section 507.

Section E 8 A percentage dividend in E 8 is a minimum, if the initial term in section D 1 is less than 60 months, sections D2 and E 8 work together to extend the term of the plan until the minimum dividend is reached, or up to 60 months. Section E 9 If §1325(a)(4) requires that all unsecured creditors be paid in full then they must be provided interest on their claims. Calculate the amount of interest to be paid to unsecured creditors from the date of confirmation. There is no requirement that interest be paid to unsecured creditors when the means test alone requires payment in full. Section G None of the text anywhere in the model plan can be altered, but special, non standard provisions may be made using plan Section G. Common section G provisions and suggested language include the following: Regarding direct payment of loans secured by personal property The debtor will make current monthly payments, as listed in debtor’s Schedule J directly to the following creditors holding claims secured by a perfected lien on debtor’s personal property:

Creditor:

Collateral: Final payment due date:

Regarding direct payment of student loans The debtor will make current monthly payments, as listed in debtor’s Schedule J directly to the following creditors for student loans that mature after 60 months from the date of filing:

Creditor:

Final payment due date:

Regarding direct redemption of Property Taxes The debtor will redeem sold real estate taxes by reserving the amount listed in debtor’s Schedule J each month for the plans first ________ months. Debtor’s plan payment increases as shown in section D 1 upon redemption. Redemption amount: The debtor will pay past due real estate taxes directly by reserving the amount listed in debtor’s Schedule J each month for the plans first ________ months. Debtor’s plan payment increases as shown in section D 1 upon payment. Past due amount: Increasing E 3 set payments after attorney fees have been paid Beginning with the Month, Year disbursement, the set payment to Creditor Name E3(a) in Section E 3 (a) shall increase to $xxx per month and the set payment to Creditor Name E3(b) in Section E 3 (b) shall increase to $xxx per month. Paying attorney fees at level E 2 or E 3. Allowed Debtor’s attorney fees will be paid at an E__ disbursement level; $______ on the first disbursement after confirmation and $_____ monthly thereafter until paid in full. Changing the priority level of payment of attorney fees through the plan Debtor attorney fees allowed by court order shall be paid at a priority level equal to creditors provided for in section E X in fixed monthly payments of $XXX. Regarding surrender of personal property that secures a debt Debtor hereby surrenders Description of Asset to Creditor Name. The trustee shall make no payment on any secured claim filed by Creditor Name secured by Description of Asset.

Regarding multiple step payments, increasing the plan payments when 401(k) and (or) other direct pay obligations complete 1. Initial plan term. The debtor will pay to the trustee $ monthly for ___months

and $___________monthly for an additional ______months, and $___________monthly for an additional ______months, and $___________monthly for an additional ______months, for total payments, during the initial plan term, of $___________. [Enter this amount on Line 1 of Section H.]

Section H Section H is used to verify that the plan is mathematically feasible. All the lines must be completed. If the initial term is less than 60 months the number in H(5)(c) must equal or exceed the number in H(4)(g). If the initial term is 60 the number in H(4)(g) must be zero or negative. Section I A check in this box indicates that the debtor consents to entry of a payroll deduction order and the Trustee will immediately prepare an order, forward it to Chambers for entry and send it to the employer for execution. The attorney need not prepare a payroll order if Section I is used. General Statement about Secured Creditors All secured creditors must be provided for in the plan. This may mean they are paid through the plan, paid direct or the property is surrendered, but they all must be provided for.

TREATMENT OF REAL ESTATE TAXES IN A CHAPTER 13 PLAN All of the courts in this district as well as the United States Supreme Court believe that an amount owed for county real estate taxes constitutes a bankruptcy claim and therefore is subject to the bankruptcy laws and to the jurisdiction of the bankruptcy court. As such, the state law rights of the county can be affected, modified, reduced, or eliminated under the federal bankruptcy laws. The bankruptcy laws are generally applied in the broadest sense to try to protect the orderly distribution of the debtor’s property once a bankruptcy case is filed. In deciding federal bankruptcy law, the bankruptcy courts, while using state law for guidance on some issues, hold that federal law supersedes state law. Unpaid Real Estate Taxes are a claim in Bankruptcy. In section 101(5) of the Bankruptcy Code, a claim is defined as a “right to payment”. The United States Supreme Court, in Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 111L.Ed.2d 66 (1991), decided that the right to payment can be can be solely against the debtor’s property, even if it can’t be enforced against the debtor personally. So even though a real estate tax can’t be collected against the debtor personally, the ability of the county to collect the tax against the real property is sufficient to bring that amount under the bankruptcy laws. Under the case law from this district, a real estate tax claim is generally said to be a secured claim since the county asserts its claim against the debtor’s real estate.

There are limitations what a county can do after a bankruptcy filing. First, it can no longer assess interest and penalties as to all outstanding taxes that are due and owing at the time the bankruptcy case is filed. Second, it cannot conduct a tax sale for any due and owing taxes as of the filing date.

Sold Real Estate Taxes. The 7th Circuit’s LaMont decision likely eliminates the controversy over treatment of sold taxes in Chapter 13 Plans.

Key points in LaMont:

1. The tax purchaser's interest is a secured claim that is modifiable in a debtor's Chapter 13 plan. 2. The bankruptcy code definition of "claim" is very broad, it is a right to payment or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment. 3. The Supreme Court of Illinois has explained, in the context of Illinois' Uniform Fraudulent Transfer Act, that a tax purchaser has no direct right to payment from the taxpayer, but rather the property tax code sets up an indirect right to payment mediated by the county. The procedure set forth in the code establishes a debtor / creditor relationship between the county and the landowner.

Therefore it is proper to redeem sold taxes by paying the County Clerk through the plan. Sold taxes may be redeemed by payment to the County Clerk through a Chapter 13 plan as long as the case is filed before the end of the state law redemption period.

It is important to give notice to the tax buyer and include a provision in Section G stating that sold taxes are redeemed by payments to the County Clerk in Section E 3.1 and that no payment shall be made to Tax Buyer Inc. related to any claim for sold taxes related to Parcel Number xx-xx-xxx-xxx. In Cook and Du Page Counties I believe the County and their State’s attorney will cling to the paragraph titled "Other Considerations" in which the court writes: ... if the county clerk is unable to receive installment payments, he should inform the bankruptcy court, which may adopt another solution... I don't think this line is in any way binding, two key words are unable and may. I agree that it is inconvenient for the clerk to accept installment payments, and I understand that the clerk does not want to accept installment payments, but bankruptcy is always inconvenient for creditors, and they never like the treatment the plan gives them. Bankruptcy gives debtors the ability to modify the treatment of a creditor's claim. I think the Court is saying that if the clerk does not like the treatment the plan provides, then the clerk can object to confirmation of the plan and the Bankruptcy Court will rule on the objection. Confirmed Plan is binding on the County. Section 1327 of the bankruptcy code states that upon confirmation, the plan becomes binding upon the debtor, the creditors, and the trustee. As long as the County was given proper notice they are bound by the treatment under the confirmed plan.

Contact information for all Collar County Treasurers and County Clerks including links to web sites with tax payment status can be found at www.lisle13.com under the link: Real Estate Taxes in Chapter 13. TOP TEN KEYS TO DEALING WITH PROPERTY TAXES IN CHAPTER 13.

1. The Treasurer’s office deals with property taxes until they have been sold. After the sale date the Clerk’s office is responsible.

2. Always ask the debtor if there is an escrow for property taxes. 3. Always assume the taxes are in default if there is no escrow and give notice to the

County Treasurer on Schedule D if there is no escrow. The taxes won’t be sold if the county has notice.

4. Always give notice to the Treasurer, the Clerk and the Tax Buyer on Schedule D if there are sold taxes. The Clerk can give you the name and address of the Tax Buyer in less than a minute.

5. Check the status your self if there is no escrow. It takes one minute via internet or

phone.

6. Specify the tax year(s) and the PIN on Schedule D and in the Plan.

7. Delinquent taxes must be provided for in the Plan. If the taxes are to be paid through the plan, do so in Section E 3.1, be sure to reference the tax year and the PIN. If direct by the debtor do so in both Plan section G and Schedule J.

8. Whether the taxes are paid through Plan Section E 3.1 or G, give them a high fixed

payment and get them paid as soon as practical.

9. If the plan provides for payment of taxes that have been sold as well as taxes that have not been sold, provide for them separately in Plan section E 3.1 and make sure they are each clearly labeled.

10. If you don’t have a tax bill you can search the Treasurer’s web site by address.

NDIL Decisions of interest regarding property taxes: Lyubomir Alexandrow v. Todd LaMont, et al; 7th Circuit Court of Appeals 13-1187, decided January 7, 2014. Sold taxes may be redeemed by payment to the appropriate taxing authority through the Chapter 13 plan. In Re Kasco 378 B.R. 207, 211, 212-213 (2007) Tax purchaser is a creditor and its claim may be modified without regard to redemption under state law. In Re Commings 02 B 42477 Judge Goldgar. Tax purchaser is a creditor and is bound by the terms of the confirmed plan that pays them as a secured creditor. In Re Barton, 359 B.R. 681 (Bankr. N.D.Ill 2006) Automatic stay applies to a county, specifically in the assessment of interest and scheduling a tax sale. County is bound by the terms of the confirmed plan. County is subject to sanctions under section 362(k). CDIL Decision of interest regarding property taxes: Salta Group, Inc. v. McKinney, 380 B.R. 515 (C.D.Ill. 2008) Tax purchaser’s claim may be paid over the life of the plan.

SOME CASES ARE TROUBLED BEFORE THEY ARE FILED.

PROBLEM: REPEAT FILERS

You should run a national PACER search on the debtor as part of your intake procedure. If the debtor

has had one or more case dismissed in the one year before filing the stay is limited or nonexistent.

Pursuant to § 362(c)(3) if the debtor has had one case dismissed [other than a Chapter 7 dismissed

under § 707(b)] within the one year prior to filing, the automatic stay terminates after 30 days. The

court may extend the stay pursuant to § 362(c)(3)(B) after notice and with a hearing completed within

30 days of filing. The debtor must demonstrate that the new case was filed in good faith as to the

creditors to be stayed.

Pursuant to § 362(c)(4) if the debtor has had two or more cases dismissed [other than a Chapter 7

dismissed under § 707(b)] within the one year prior to filing the stay under § 362(a) shall not go into

effect. Pursuant to § 362(c)(4)(B) if, within 30 days after the filing of the later case, a party in interest

requests, the court may order the stay to take effect in the case as to any or all creditors (subject to such

conditions or limitations as the court may impose), after notice and a hearing, only if the party in

interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed.

For purposes of §362(c)(4)(B), a case is presumptively filed not in good faith

File all schedules, statements and the plan before filing the motion to extend or impose the stay. Make

sure that every flaw in the prior case(s) is corrected in the new filing.

Present the first post-petition mortgage payment and the first plan payment with the motion.

File the motion as soon as possible. You only have 30 days to have the hearing concluded if you seek

to extend the stay and you only have 30 days to have the initial hearing on a motion to impose the stay.

Your motion must clearly describe the changes in the debtor’s circumstances. The motion and the

schedules must be internally consistent.

Serial filers (three or more consecutive cases) are likely to face a request for dismissal with a bar to

refiling if they cannot get their plan confirmed.

PROBLEM: DEBTOR IS SELF EMPLOYED

Level One – Debtor is a “1099 employee”, he usually works for the same company or person

but the employer does not withhold taxes and issues the debtor a 1099 instead of a W-2. These debtors

are not responsible for generating their own business.

If the debtor has no out of pocket expenses associated with generating this income:

Schedule I – Name the employer in Part 1, state that the debtor receives a 1099. Report the gross

income on Line 2.

Schedule J – Report estimated average monthly tax liability on Line 16. Use the debtor’s tax returns

as a resource if possible.

SOFA #1 – Report gross income as if debtor was employed.

Form B22C – Report gross income on Line 2 as if debtor was employed.

If the debtor does incur out of pocket expenses associated with generating this income:

Schedule I – Name the employer in Part 1, state that the debtor receives a 1099. Report the net income

on Line 8a and attach a statement showing gross receipts, ordinary and necessary business expenses,

and the total monthly net income.

Schedule J – Report estimated average monthly tax liability on Line 16. Use the debtor’s tax returns

as a resource if possible.

SOFA #1 – Report gross income as if debtor was employed.

Form B22C – Report gross receipts (income) on Line 5, report ordinary and necessary business

expenses on Line 5 and report the net business income on Line 5 Column A.

If the debtor is paid by check:

Provide the trustee with copies of checks and a year to date print out summarizing payments from the

employer to the debtor.

Before the 341 Meeting: Submit the best available proof of income with a YTD statement of income

and expenses to payadvices@lisle13.com. Review the documents before you send them, they should

support the income disclosed on Schedule I.

Be sure to submit the debtor’s complete tax return including Schedule C.

Submitting a statement that the debtor is self-employed and therefore has no pay advices is useless and

patently wrong. You must make a reasonable inquiry into the debtor’s circumstances; you must be

able to show how the debtor’s income was calculated.

Level Two – Debtor is a sole proprietor. Debtor may be a carpenter, a painter a

manufacturer’s representative, an accountant, an insurance agent, a realtor……...

Schedule B – If the debtor maintains a bank account for business use only, disclose it on Line 2;

interest in an unincorporated business must be disclosed on Line 13, accounts receivable and other

liquidated debts owed to the debtor are to be disclosed on Lines 16 and 18; vehicles used in the

business that are titled to the debtor must be disclosed on Line 25; equipment, supplies and inventory

must be disclosed on Lines 28, 29 and 30.

Schedule E – Any unpaid income taxes, withholding taxes or sales taxes are personal liabilities of the

debtor and must be disclosed and paid through the plan as priority debts.

Schedule G – Disclose any property leases or equipment leases.

Schedule I – State that the debtor is self-employed in Part 1. Disclose the address the debtor uses for

the business in Part 1. Report the net income on Line 8a and attach a statement showing gross

receipts, ordinary and necessary business expenses, and the total monthly net income.

Schedule J – Report estimated average monthly tax liability on Line 16. Use the debtor’s tax returns

as a resource if possible. Do not report any business related expenses on Schedule J, see Schedule I,

Line 8a.

SOFA #1 – Report gross income.

SOFA #18 – List the name and nature of the debtor’s business, list the beginning and if appropriate,

ending dates of all businesses the debtor was involved in during the six years preceding the

commencement of the case.

SOFA #19 and 20, complete as appropriate.

Form B22C – Report gross income on Line 5a, report ordinary and necessary business expenses on

Line 5b and report the net business income on Line 5 Column A.

Before the 341 Meeting: Submit the best available proof of income with a YTD statement of income

and expenses to payadvices@lisle13.com. Review the documents before you send them, they should

support the income disclosed on Schedule I. Make sure that the expense side of the income statements

shows only business expenses. Be prepared to tender supporting documents such as invoices, ledgers

and bank statements. Be sure to submit the debtor’s complete tax return with Schedule C.

If the debtor maintains separate business and personal bank accounts be prepared to submit statements

for both. Identify any funds taken out of the business for personal use.

Debtors engages in a retail business must submit sales tax returns.

Level Three – Debtor is Self Employed and has employees or employs

subcontractors.

In addition to the foregoing, submit records regarding payments to employees or subcontractors such

as: check ledgers, 1099 forms, 941 returns (payroll tax returns).

Level Four – Debtor is the sole shareholder of a Subchapter S Corporation.

Schedule B – Ownership of the shares of stock in the corporation must be disclosed on Line 13.

Schedule D – Any debts of the business secured by assets of the debtor are disclosed here.

Schedule E – Any unpaid income taxes, withholding taxes or sales taxes are personal liabilities of the

debtor and must be disclosed and paid through the plan as priority debts.

Schedules F and H – Most lenders and wholesale suppliers require personal guarantees to extend credit

to small businesses. Any debts of the business secured by assets of the business have almost certainly

been personally guaranteed by the debtor; if the debtor does not own the collateral the debt is

unsecured as to the debtor.

Schedule G – Disclose any property or equipment leases the debtor has signed or guaranteed.

The debtor’s method of compensating himself determines how his income is disclosed.

If the debtor writes checks to himself from his business account from time to time:

Schedule I – Disclose his average monthly gross income on Line 2.

Schedule J - Report estimated average monthly tax liability on Line 16.

Provide copies of all such checks and banks statements.

If the debtor pays himself a salary and withholds taxes:

Schedule I – The debtor’s income will be reported largely as if he were an employee.

Net profit over and above salary would be disclosed on Schedule I Line 8a or 8h and B22C Line 3.

In all cases:

SOFA – Complete #1, 18, 19 and 20.

Form B22C – Report gross income on Line 2, profits over and above periodic payments on Line 3.

Before the 341 Meeting: Provide detailed profit and loss statement and balance sheet. Be sure to

disclose all assets owned by or titled to the business. Provide at least two years Corporate tax returns

(Form 1120S). If the S Corp has any employees the debtor must provide detailed payroll records and

payroll tax returns. Debtors engages in a retail business must submit sales tax returns.

Level Five – Debtor is a shareholder of a corporation, there are other shareholders.

In addition to the foregoing, provide copies of any shareholder agreements, particularly if insolvency

of one of the shareholders triggers any provisions of the shareholder agreement (Liberty Tattoo).

In all cases:

1. Does the debtor incur trade credit in the production of income? In other words, at the time of

filing the case does the debtor have open accounts with trade suppliers? Will these trade

suppliers allow the debtor to maintain open account privileges going forward? If the answers

to all these questions are Yes, then the debtor is engaged in business as defined by §1304, see

below.

2. A debtor who incurs trade credit in the production of income must provide the Chapter 13

Trustee quarterly income statements, balance sheets, detailed payroll records, detailed accounts

receivable records and detailed accounts payable records.

3. Review documents before submitting them to the trustee.

4. Make sure income and expense documents provided can be reconciled with entries on

Schedules I and J and Form B22C and the Statement of Financial Affairs.

5. If you send a mountain of bank statements and check registers without reviewing them, be

prepared to be surprised when the trustee says they paint a very different picture than your

Schedules I and J do.

6. Know if your debtor has employees, incurs trade debt, owes income taxes or sales taxes, has

guaranteed any business debts or leases or owns business space,

7. Remember, the amount of a debt is never “unknown”, the trustee will not believe this.

8. The trustee will not believe that debts are truly contingent or unliquidated.

§1304 Debtor engaged in business.

(a) A debtor that is self-employed and incurs trade credit in the production of income from such

employment is engaged in business.

(b) Unless the court orders otherwise, a debtor engaged in business may operate the business of the

debtor and, subject to any limitations on a trustee under sections 363 (c) and 364 of this title and to

such limitations or conditions as the court prescribes, shall have, exclusive of the trustee, the rights and

powers of the trustee under such sections.

(c) A debtor engaged in business shall perform the duties of the trustee specified in section 704 (a)(8)

of this title.

If the debtor incurs trade credit in the production of income then the debtor must perform all

the duties required under § 704(a)(8)

(8) if the business of the debtor is authorized to be operated, file with the court, with the United

States trustee, and with any governmental unit charged with responsibility for collection or

determination of any tax arising out of such operation, periodic reports and summaries of the

operation of such business, including a statement of receipts and disbursements, and such other

information as the United States trustee or the court requires;

PROBLEM: DEBTOR MAY HAVE TOO MUCH DEBT TO FILE CHAPTER

13, DEBT LIMITS AND ELIGIBILITY UNDER §109(e)

Secured Debt Limit $1,149,525

Unsecured Debt Limit $ 383,175

These amounts will change on April 1, 2016 and every three years thereafter.

Total unsecured debt is calculated by combining the unsecured amount from Schedule D with the total debt

scheduled on Schedules E and F.

The unsecured amount on Schedule D is comprised of the amount shown as under secured on the first mortgage

plus the entire amount owed on any wholly unsecured junior mortgage plus the under secured portion of any

debt secured by personal property of the debtor.

If the debtor is keeping their home it may be advisable to list the unsecured portion as zero if the balance owed

is greater than the value of the real property.

While eligibility is generally based on the amounts in the debtors’ schedules, the court may look at claims or

other evidence. For example, if a debt is scheduled as “unknown” or “$1.00” and a claim is filed, the court may

look to the claim.

Information provided in the debtors’ schedules constitutes an admission by the debtors. In re Bohrer, 266 B.R.

200 (Bankr. N.D. Cal 2001)

Disputed debts are counted towards eligibility. In re Knight, 55 F.3d 231 (7th Cir. 1995), In re Waller, 2001 WL

197844 (N.D.Ill.), In re McGovern, 122 B.R. 712 (Bkrtcy N.D.Ind. 1989), In re Sylvester, 19 B.R. 671 (B.A.P.

9th Cir. 1982).

Eligibility can be determined by the amounts listed in the debtor’s schedules. In re Hansen, 316 B.R. 505, 508

(Bankr. N.D.Ill 2004), citing In re Scovis, 249 F.3d. 975, 982 (9th Cir. 2001).

PROBLEM: DEBTOR HAS NOT FILED TAX RETURNS

Give proper notice to the IRS and the Illinois Department of Revenue.

Internal Revenue Service Illinois Department of Revenue

PO Box 7346 PO Box 64338

Philadelphia, PA 19101-7346 Chicago, IL 60664-0338

If the debtor files the missing returns at an IRS Service Center they can receive a copy of their return

that is stamped by the IRS as filed. This will satisfy the Trustee that the return was filed and can be

provided to the IRS Insolvency Department to speed the process of an amended return.

The Trustee cannot recommend confirmation of the debtor’s plan if the IRS claim on file does not

show that all returns are filed.

IRS Service Centers

City Street Address Days/Hours of Service Telephone*

Chicago 230 S. Dearborn St.

Chicago, IL 60604

Monday-Friday - 8:30 a.m.-4:30 p.m.

(312) 566-4912

Downers

Grove

2001 Butterfield Rd.

Downers Grove, IL

60515

Monday-Friday - 8:30 a.m.-4:30 p.m.

(630) 493-5291

Orland Park 14479 S. John Humphrey

Drive,

Orland Park, IL 60462

Monday-Friday - 8:30 a.m. - 4:30 p.m.

(708) 873-8310

Schiller Park 5100 River Road

Schiller Park, IL 60176

Monday-Friday - 8:30 a.m.-4:30 p.m.

(847) 671-7541

PROBLEM: THE DEBTOR CANNOT COMPEL THE MORTGAGE

COMPANY TO FORECLOSE OR TAKE TITLE TO THE PROPERTY

THE DEBTOR WISHES TO SURRENDER.

The debtor continues to be liable for homeowners’ association fees, taxes, utilities, municipal

fines for failure to maintain the property and so on.

The debtor may provide in their plan that the property shall be vested in the first

mortgagee at confirmation.

§1322 (b) Subject to subsections (a) and (c) of this section, the plan may—

(9) provide for the vesting of property of the estate, on confirmation of the plan or

at a later time, in the debtor or in any other entity;

See in re Rosa.

Ms. Rosa’s plan included the following nonstandard provision:

All collateral surrendered for Class 3 claims is surrendered in full satisfaction of the underlying

claim. Pursuant to §§ 1322(b)(8) and (9), title to the property located at 91-1849 Luahoana

Street, Ewa Beach, Hawaii 96707, shall vest in City National Bank/ OCWEN Loan Service upon

confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property

when recorded at the Bureau of Conveyances. All secured claims secured by the Debtor’s

property in Ewa Beach will be paid by surrender of the collateral and foreclosure of the security

interests.

The creditors did not object and the plan was confirmed over the objection of the trustee.

The debtor can move to sell the property subject to the lien of the mortgage lender.

§1303 Rights and powers of debtor

Subject to any limitations on a trustee under this chapter, the debtor shall have, exclusive of the

trustee, the rights and powers of a trustee under sections 363 (b), 363 (d), 363 (e), 363 (f), and

363 (l), of this title.

§363 (b)

(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the

ordinary course of business, property of the estate,