Cite as: Keith M. Lundin, Lundin On Chapter 13, § 9.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
The Bankruptcy Code and Rules do not prescribe any particular timing or procedure for challenging eligibility.1 However, because so many courts have held that eligibility for Chapter 13 is not a jurisdictional question,2 it is imperative that an objection to eligibility be raised before confirmation, else the order of confirmation may be conclusive of the debtor’s eligibility.3
Challenging eligibility is best accomplished as motion practice governed by Bankruptcy Rules 9013 and 9014. Typically, the challenging party will file a motion to convert or dismiss on the ground that the debtor is not eligible for Chapter 13. A motion to convert or dismiss filed in advance of confirmation on the ground that the debtor is not eligible for Chapter 13 is the safest procedure for creditors to preserve an attack on eligibility.
Consider joining the motion to convert or dismiss with a motion for relief from the stay, asserting that ineligibility constitutes cause for relief from the stay. Combining the motion to convert or dismiss with a request for relief from the stay may get a quicker hearing because of expedited procedures in many jurisdictions for the handling of stay relief requests. Also, the filing of a request for relief from the stay establishes the predicate necessary to bar the debtor from refiling a bankruptcy case within 180 days if the debtor chooses to dismiss voluntarily rather than risk conversion or dismissal by the court.4
Although some reported eligibility decisions arise in the context of challenges to confirmation of a plan, it is preferable to attack eligibility in advance of confirmation. Arguably, a debtor who is ineligible for Chapter 13 cannot satisfy the condition for confirmation in § 1325(a)(1) that the “plan complies with the provisions of this chapter and with other applicable provisions of this title.”5 That § 1325 is intended to test the plan rather than the debtor is some cause for concern about using an objection to confirmation as the vehicle for challenging the debtor’s eligibility. It probably does not hurt to join the eligibility challenge with an objection to confirmation, but especially in jurisdictions that delay the confirmation hearing,6 it may be to the creditor’s advantage to file a separate motion to convert or dismiss. Creditors must beware that many courts have local rules imposing special deadlines and procedures for objections to confirmation of Chapter 13 plans that can complicate or preclude a last-minute objection to eligibility.7 Combining an eligibility challenge with an objection to confirmation may accomplish some advantage for the creditor in the allocation of burden of proof.8
A creditor with an eligibility challenge should not wait to raise ineligibility as a defense to some action by the debtor. For example, in In re White,9 the IRS challenged a Chapter 13 debtor’s eligibility in its written response to the debtor’s objection to the IRS’s proof of claim. Although the scheduled debts appeared to exceed the debt limitations in § 109(e), the bankruptcy court rejected the IRS’s eligibility “defense” on the ground that an eligibility challenge must be raised by motion to convert or dismiss. The court observed that a motion to convert or dismiss has different notice and hearing requirements than a claims objection, thus the “defense” of ineligibility could not be decided in the context of a claims objection.
The proof appropriate at an eligibility hearing may be complicated. When the challenge is based on the lack of regular income10 or on the debt limitations,11 it may be necessary to develop the debtor’s work history, income and expense profile, and family situation as well as the characterization of specific debts as contingent or noncontingent, liquidated or unliquidated, secured or unsecured.
Discovery of the debtor in advance of an eligibility hearing can be difficult. Counsel must move quickly to schedule Bankruptcy Rule 2004 examinations or to reduce the time periods for responding to other forms of discovery in order to ensure adequate preparation. Courts are reluctant to allow use of an eligibility hearing as a test of the validity, priority or extent of liens or the contest of claims. However, especially when the debt limitations are at issue,12 it may be necessary to make at least prima facie findings concerning the validity of security interests, the value of collateral and the characterization of claims.13 Counsel for the challenging creditor must be prepared to go well beyond the statements and schedules filed by the debtor.14 This can only be accomplished by some prehearing discovery.
1 See In re Setelin, 218 B.R. 818, 820 (Bankr. E.D. Va. Feb. 19, 1998) (Tice) (“[T]he bankruptcy code and rules do not place time limits on filing a motion to dismiss based on eligibility. . . . The court finds no authority for holding that a creditor must file a motion to dismiss pursuant to § 109(e) and § 1307(c) within the 45 days allowed for objections to confirmation under Local Rule 3015-2(D)(1).” Attempts to distinguish cases holding that motion to dismiss on eligibility grounds is barred by confirmation of a plan.).
2 See § 9.5 Consequences of Ineligibility: Jurisdiction; Automatic Stay; Strike, Dismiss or Excuse?. See, e.g., In re Bilter, No. 05-37702-DOT, 2007 WL 2109884, at *1 (Bankr. E.D. Va. July 16, 2007) (unpublished) (Tice) (Citing Wenberg v. FDIC (In re Wenberg), 902 F.2d 768 (9th Cir. May 7, 1990) (Nelson, Norris, O’Scannlain), Rudd v. Laughlin, 866 F.2d 1040 (8th Cir. Jan. 31, 1989) (Arnold, Fagg, Wollman), and Shaw v. Ehrlich, 294 B.R. 260 (W.D. Va. June 20, 2003) (Turk), debt limits under § 109(e) “do not impact the bankruptcy court’s subject matter jurisdiction but instead determine only the debtor’s eligibility for relief.”).
3 See § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors. See, e.g., Vicenty v. Sandoval (In re Sandoval), 327 B.R. 493 (B.A.P. 1st Cir. June 16, 2005) (Feeney, Boroff, Kornreich) (Confirmation of Chapter 13 plan is res judicata with respect to debtor’s eligibility under § 109(e); creditors cannot challenge eligibility after confirmation by motion to dismiss.).
4 See 11 U.S.C. § 109(g), discussed in § 25.1 180-Day Bar to Eligibility in 11 U.S.C. § 109(g)—In General, § 25.2 11 U.S.C. § 109(g)(1)—Willful Failure to Abide by Court Order or to Appear in Proper Prosecution and § 25.3 11 U.S.C. § 109(g)(2)—Voluntary Dismissal after Request for Relief from Stay.
5 11 U.S.C. § 1325(a)(1). See, e.g., Nicholes v. Johnny Appleseed of Wash. (In re Nicholes), 184 B.R. 82 (B.A.P. 9th Cir. June 23, 1995) (Russell, Meyers, Jones) (Bankruptcy court properly considered the issue of the debtor’s eligibility for Chapter 13 raised as an objection to confirmation under 11 U.S.C. § 1325(a)(1).).
6 See § 115.1 Timing of Hearing on Confirmation before BAPCPA. After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005), delay in reaching confirmation is less likely because of the mandatory timing for the hearing on confirmation now found in 11 U.S.C. § 1324(b). See § 115.2 Timing of Hearing on Confirmation after BAPCPA.
7 See, e.g., In re Setelin, 218 B.R. 818 (Bankr. E.D. Feb. 19, 1998) (Tice) (Court permits challenge to eligibility by motion four months after the petition and three months prior to confirmation notwithstanding conflicting local rule requiring written objections to confirmation not later than 45 days after filing of plan.).
9 168 B.R. 825 (Bankr. D. Conn. June 23, 1994) (Shiff).
10 See § 11.1 What Is Regular Income?.
11 See § 14.1 Dollar Amounts.
12 Challenging eligibility based on the debt limitations in § 109(e) is discussed in detail in § 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.
13 There is some dispute whether bankruptcy courts should engage in the splitting of claims under § 506 and the recharacterization of debt at the threshold of a Chapter 13 case. See § 14.4 Are Claims Split under 11 U.S.C. § 506(a)?.
14 See § 14.3 Use of Statements and Schedules in Eligibility Calculations for discussion of the use of statements and schedules to determine eligibility. See, e.g., In re Star, No. 07-13440DWS, 2008 WL 324125, at *4–*5 (Bankr. E.D. Pa. Feb. 1, 2008) (unpublished) (Sigmund) (Although court should look primarily to debtor’s schedules to determine eligibility, “the court should neither place total reliance upon a debtor’s characterization of a debt nor rely unquestionably on a creditor’s proof of claim. . . . At a hearing on eligibility, the court should thus, canvass and review the debtor’s schedules and proofs of claim, as well as other evidence offered by a debtor or the creditor to decide only whether the good faith, facial amount of the debtor’s liquidated and non-contingent debts exceed [sic] statutory limits.”).