The U.S. Court of Appeals for the Sixth Circuit recently ruled in a case involving a Chapter 13 debtors’ attempt to shield contributions to a 401(k) retirement account from “projected disposable income,” therefore making such amounts inaccessible to the debtors’ creditors.[1] For the reasons explained below, the Sixth Circuit rejected the debtors’ arguments.
Case Background
A statute must be interpreted and enforced as written, regardless, according to the U.S. Court of Appeals for the Sixth Circuit, “of whether a court likes the results of that application in a particular case.” That legal maxim guided the Sixth Circuit’s reasoning in a recent decision[1] in a case involving a Chapter 13 debtor’s repeated filings and requests for dismissal of his bankruptcy cases in order to avoid foreclosure of his home.
Last March, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made several changes to the Bankruptcy Code, including those changes discussed in more detail here.
As we cross the one-year anniversary of the COVID-19 pandemic, we reflect on the multiple amendments to the Bankruptcy Code that have been implemented to help curb the effects of various economic shutdowns and financial hardships caused by the coronavirus. These Bankruptcy Code amendments are only temporary, but Congress is considering extending them to facilitate the continued recovery from the COVID-19 pandemic. Below are five significant, though temporary, amendments to the Bankruptcy Code resulting from the COVID-19 pandemic.
Chapter 13 bankruptcy provides relief only to individuals with regular income. This Chapter is most frequently used by debtors who have sufficient disposable monthly income to make some payments over time to their creditors. Chapter 13 debtors frequently have enough equity in their residence that, if they were to file for Chapter 7, the residence would likely be sold for payment to creditors.
On January 14, 2021, the U.S. Supreme Court decided City of Chicago, Illinois v. Fulton (Case No. 19-357, Jan. 14, 2021), a case which examined whether merely retaining estate property after a bankruptcy filing violates the automatic stay provided for by §362(a) of the Bankruptcy Code. The Court overruled the bankruptcy court and U.S. Court of Appeals for the Seventh Circuit in deciding that mere retention of property does not violate the automatic stay.
Case Background
When an individual files a Chapter 7 bankruptcy case, the debtor’s non-exempt assets become property of the estate that is used to pay creditors. “Property of the estate” is a defined term under the Bankruptcy Code, so a disputed question in many cases is: What assets are, in fact, available to creditors?
Frequently, borrowers file for bankruptcy at the 11th hour to halt foreclosure sales. Once a petition for bankruptcy relief has been filed, secured creditors must cease their collection efforts to avoid violating the automatic stay. However, the automatic stay terminates upon a debtor’s dismissal and closure of the bankruptcy case. A Pennsylvania bankruptcy court recently ruled that if a foreclosure sale occurs between the time when a bankruptcy case is dismissed and when it is reinstated, the foreclosure sale is not void and does not violate the automatic stay.
In a notable decision interpreting the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Bankruptcy Court for the Middle District of Alabama held that Chapter 13 debtors behind on their payments before March 2020 may seek modification of their plan if they suffered from COVID-19 related financial distress.
Once a Chapter 7 debtor receives a discharge of personal debts, creditors are enjoined from taking action to collect, recover, or offset such debts. However, unlike personal debts, liens held by secured creditors “ride through” bankruptcy. The underlying debt secured by the lien may be extinguished, but as long as the lien is valid it survives the bankruptcy.