§ 9.2     Prefiling Eligibility Planning
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 9.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Debtor’s counsel can legitimately do many things to maximize the probability that a debtor is eligible for Chapter 13. As in exemption planning,1 the limits on eligibility planning can be broadly described as “good faith,” and caution must be used to avoid the appearance that the debtor has defrauded creditors or preferred creditors in an effort to shoehorn into Chapter 13. Lying and cheating are obviously not legitimate eligibility planning. Intentionally misrepresenting the existence, amount or character of debts to fabricate an eligible debtor exposes the debtor and counsel to sanctions and even criminal prosecution.2

[2]

The simplest form of eligibility planning may be timing the filing of the case to coincide with conditions most favorable to the debtor. For example, it is not unusual for debtor’s counsel to be consulted by an individual who is not presently employed. If the debtor is looking for a job and if the filing of the case can be timed so that the debtor is employed, proving that the debtor has regular income is much simplified.3

[3]

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)4 substantially increased the importance of timing the petition as a prefiling consideration. Detailed elsewhere,5 after BAPCPA, one of the basic determinants of the entitlement of unsecured creditors in Chapter 13 cases is the debtor’s “current monthly income” (CMI). Under § 101(10A)(A), the calculation of CMI is based on the debtor’s average income during the six months before the month in which the petition is filed.6 A debtor with income that is up or down during the months immediate to consultation with counsel can increase or decrease average income over the six-month period relevant to CMI by timing the filing of the petition. For potential debtors with the luxury of being able to delay or accelerate filing the petition, movement of the six-month period for calculating CMI can dramatically affect the amount that must be paid unsecured creditors to confirm a plan.7

[4]

Another area for prefiling eligibility planning is the structuring of debt to fit the strict debt limitations on Chapter 13 eligibility. In cases filed on or after April 1, 2016, the debt limits for Chapter 13 are noncontingent, liquidated, unsecured debts of less than $394,725 and noncontingent, liquidated, secured debts of less than $1,184,200.8 Sometimes the characterization of a debt as noncontingent or liquidated and the categorization of the debt as unsecured or secured depend on events over which debtor’s counsel has some control.

[5]

For example, many courts have held that tort claims not reduced to judgment are unliquidated for § 109(e) purposes and are not counted toward the unsecured debt limitation.9 If the debtor has been involved in an automobile accident and is or is likely to become a defendant in a tort action, filing the Chapter 13 case before judgment avoids counting the claim toward eligibility.

[6]

Debtors’ counsel have attempted to recharacterize debt as secured or unsecured in an effort to meet the eligibility limitations. Imagine a debtor pushed up against the secured debt ceiling who could reduce secured debt, or convert secured debt to unsecured debt by selectively surrendering collateral to lenders. Especially on the eve of a bankruptcy filing, it is often possible to negotiate a “surrender in full satisfaction” where even the unsecured deficiency disappears. If the debtor is on the borderline for Chapter 13 eligibility and a strategic surrender of collateral renders the debtor eligible, it is difficult to fault the debtor or question counsel’s good advice.

[7]

Aggressive eligibility planning includes the dissolving of a corporation or partnership to create an entity that is eligible for Chapter 13. Corporations and partnerships clearly are not eligible for Chapter 13.10 Under state law, upon the dissolution of a corporation or partnership, it is often provided that the assets and liabilities must be administered for the benefit of creditors by the individual shareholders, directors, officers or partners. Those individuals typically are eligible for Chapter 13, and dissolution of the corporation before filing for the individual may bring corporate or partnership assets into the protection of the Chapter 13 estate.11 If individuals have done business as a partnership and if separate Chapter 13 filings by the partners might be interpreted as a prohibited partnership filing,12 prefiling dissolution of the partnership may be a legitimate strategy for ensuring eligibility of the individual partners.

[8]

Although rarely seen, foreign nationals who want to qualify for Chapter 13 relief may have especially tricky work to do before filing. Under 11 U.S.C. § 109(a), an individual must reside or have a domicile, a place of business or property in the United States to be a debtor in a bankruptcy case. In one case, Canadian residents sought to manage their liabilities as “names” under Lloyd’s of London insurance contracts by filing Chapter 13 cases in New York. Before filing, the debtors obtained U.S. mailing addresses and opened small accounts in U.S. banks to appear to be doing business or owning property for § 109(a) purposes. The bankruptcy court found these prefiling efforts to be “a facade of eligibility” insufficient to support Chapter 13 relief.13


 

1  See § 27.3  Exemption Planning.

 

2  In re Moix-McNutt, 220 B.R. 631 (Bankr. E.D. Ark. Apr. 29, 1998) (Mixon) (Attorney who intentionally omitted large unsecured claim to make debtor eligible is fined $5,000 and suspended from practice before bankruptcy court for four years. Debtor scheduled unsecured claims of $233,358.80 and secured claims of $660,527.17. Debtor and her husband told attorney about additional unsecured claim of $208,000, and attorney instructed debtor not to list the claim.).

 

3  See § 11.2  When Must Debtor Have Regular Income?.

 

4  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

5  See § 36.19  Form 122C-1: Statement of Current Monthly Income and § 92.3  Current Monthly Income: The Baseline.

 

6  11 U.S.C. § 101(10A)(A), discussed in § 92.3  Current Monthly Income: The Baseline.

 

7  See § 92.3  Current Monthly Income: The Baseline.

 

8  11 U.S.C. § 109(e). The Bankruptcy Reform Act of 1994 fixed the eligibility limits for Chapter 13 cases filed between October 22, 1994, and March 31, 1998, as noncontingent, liquidated, unsecured debts totaling less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000. 11 U.S.C. § 109(e), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 108, 108 Stat. 4106 (1994). Between April 1, 1998, and March 31, 2001, the numbers were $269,250 unsecured and $807,750 secured. Between April 1, 2001, and March 31, 2004, the eligibility limits were $290,525 unsecured and $871,550 secured. Between April 1, 2004, and March 31, 2007, the eligibility limits were $307,675 unsecured and $922,975 secured. Between April 1, 2007, and March 31, 2010, the eligibility limits were $336,900 unsecured and $1,010,650 secured. Between April 1, 2010, and March 31, 2013, the eligibility limits were 383,175 unsecured and $1,149,525 secured. and In cases filed prior to October 22, 1994, to be eligible for Chapter 13, an individual had to have noncontingent, liquidated, unsecured debts of less than $100,000 and noncontingent, liquidated, secured debts of less than $350,000. See § 14.1  Dollar Amounts, § 14.2  Time for Determining Debt, § 14.3  Use of Statements and Schedules in Eligibility Calculations, § 14.4  Are Claims Split under 11 U.S.C. § 506(a)?, § 15.1  What Is Noncontingent Debt?, § 15.2  Is Partnership Debt Contingent?, § 15.3  Are Guaranties Contingent?, § 15.4  Are Contract Debts Contingent?, § 15.5  Is Tort Liability Contingent?, § 15.6  Are Claims through and against Debtor’s Corporation Contingent?, § 15.7  Are Prebankruptcy Judgments Contingent?, § 16.1  What Is a Liquidated Debt?, § 16.2  Effect of Defenses and Counterclaims, § 17.1  Disputed Debts, § 17.2  Taxes and Other Priority Claims and § 17.3  Joint Obligations of Spouses and Codebtors; Collateral That Is Not Property of the Estate.

 

9  See § 15.5  Is Tort Liability Contingent? and § 16.1  What Is a Liquidated Debt?.

 

10  See § 10.3  Corporations Are Not Eligible and § 10.4  Partnerships Are Not Eligible.

 

11  See § 10.6  Partnership and Corporate Debts and Assets May Impact Eligibility.

 

12  Though the logic is not always clear, several courts have concluded that separate Chapter 13 filings by individual partners are a disguised partnership filing and have denied eligibility to the individual partners. See § 10.5  Partners and Corporate Owners May Be Eligible.

 

13  In re Head, 223 B.R. 648, 651 (Bankr. W.D.N.Y. July 17, 1998) (Kaplan).