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For Massachusetts bankruptcy lawyers, a good example of how not to get paid cropped up recently with a bankruptcy appellate panel at the First Circuit Court of Appeals in Boston.

In the Stone case, an attorney sought over $9,000 in attorney fees for representing married debtors in a Chapter 13 proceeding. The appeals court whacked that back to $3,500, plus some expenses.

Its interesting to note that the attorney filed for the couple an initial 60 month Chapter 13 plan that called for payments of only $35, despite the fact that the couple’s combined income was estimated at $111,000.

The trustee’s response was perhaps predictable: she attacked the claimed living expenses on Schedule J, especially the figures for entertainment. In response, the debtors filed two amended plans upping the monthly payments to $860 per month.

It seems most of the attorney’s fee application was for dickering over the amount of living expenses. In all, $2,500 was a retainer, $4,000 was for these “additional expenses,” and $1,700 was for preparing the fee application itself.

However, the court characterized much of the lawyer’s work as “meritless.” In its view, had Stone appropriately limited the debtor’s expenses to those which above median income debtors could lawfully claim, then a plan calling for devotion of the proper projected disposable income could have been prosecuted to confirmation straightforwardly, at far more modest cost.

Since this is a binding opinion in both Massachusetts and New Hampshire, attorney’s handling bankruptcy cases in these states should avoid repeating the same mistakes!

By Doug Beaton

From the debtor’s point of view, what would be the worst possible experience to have in a chapter 7 bankruptcy case?

Well, how about having the trustee file a lawsuit against the debtor, move (successfully) for an injunction to prevent them from spending except for daily essentials, and then press the court to deny the debtor a discharge, effectively stripping them of any bankruptcy relief?

It happened recently in the Desai case, a chapter 7 case in the central division of the bankruptcy court in Massachusetts. In the waning days of 2012, the trustee’s motion for an “expedited” preliminary injunction was granted by US Bankruptcy Judge Melvin Hoffman. The issue concerning the debtor’s discharge is still before the court.

In a nutshell, the case involves a debtor who appears to have omitted her involvement in several business ventures (principally real estate trusts) on her initial schedules, but then testified to having been in business at the meeting of creditors. The trustee’s extremely aggressive action seems to have been triggered by the family nature of the businesses — the trusts involved several of the debtor’s relatives — and the potential for spending down assets.

For Massachusetts bankruptcy lawyers, the lesson from this case is to try to make sure that the debtor’s business operations (including closed ventures) are fully disclosed on the Statement of Financial Affairs. In the heat of battle, it’s easy to overlook the business questions (numbers 18 and beyond); I’ve done it several times, because bankruptcy filing software often hides them from view.

Better safe than sorry, though, as no attorney would relish trying to dig out from a “chapter 7 train wreck!”

By Doug Beaton

Bankruptcy lawyers representing debtors with active Chapter 13 cases that might not be doing so well should keep in mind one fundamental truth to Chapter 13 practice: upon conversion of the case to Chapter 7, the debtor (and not the trustee, court, or creditors) is entitled to a return of any funds held by the Chapter 13 trustee that have not yet been distributed.

This can be a useful nugget for bankruptcy cases in Massachusetts, where getting a Chapter 13 plan confirmed sometimes takes forever.

Until the plan is confirmed, the Chapter 13 trustee will stockpile all plan payments, minus, of course, her own 10% commission.

If the case is converted to a Chapter 7, all of these funds, except the trustee’s commission, should be returned to the debtor.

The debtor is allowed to exempt the funds is he has unused state or federal wild card exemptions available.

This can be a sizeable amount of cash to a debtor struggling and unable to complete a full Chapter 13 payment plan.

And even if the plan has been confirmed, the debtor is untitled to any undistributed funds. Bankruptcy lawyers should always check to see if plan payments that have been made have been actually distributed. Recently the Third Circuit ruled in the Michael case that a Chapter 13 trustee was not allowed to distribute anything beyond their own commission when a debtor converted a case with a confirmed plan.

The ruling was based in part on the rationale that it would be an excessive dis-incentive to file under Chapter 13 if debtors ran a high risk of losing post-petition property (including undistributed plan payments).

So if you run in to a debtor needing to convert a case to Chapter 7, and who is eligible to do so, you might be able to put a smile on his face and some cash in his pocket in the process!

By Doug Beaton

Massachusetts bankruptcy lawyers should take a close look at a recent case decided in Worcester by bankruptcy judge Melvin Hoffman as an example of what will not fly when proposing Chapter 13 plans in this district.

The case involved a married couple who owned a Disney timeshare in Orlando (pictured). Their schedules indicated about $6K in equity in the timeshare, meaning it was probably exempt under the federal exemption scheme.

Schedules I and J indicated that payments on this vacation property totaled $480 per month, but that rental income offset this by $166 per month. So the timeshare cost the debtors on balance $314 per month in net expenses.

The debtors’ plan proposed a zero dividend to unsecured creditors, and also attempted to cure a first mortgage arrearage and strip off a $40K second mortgage.

But the judge denied confirmation, ruling that the $314 could have been used to pay a monthly dividend to the unsecured creditors over the life of the plan.

The judge also left a clue as to the amount of the dividend he would like to see — at least 5% of the unsecured debts.

The case is In re Klaven, decided in July of 2012.

Note that this case does not stand for the proposition that Chapter 13 debtors can never vacation in timeshares. Instead, it is an indication that the debtors should not expect to have their cake and eat it too — in this case, by stiffing the unsecureds while obtaining $40K in mortgage relief and spending over $3,000 per year in vacation expenses.

Doctrinally, the case stands for the proposition that attorneys for Massachusetts bankruptcy debtors need to be prepared to show that their Chapter 13 plans meet both the good faith requirement of bankruptcy code section 1325(a)(3), as well as the mathematical liquidation test of section 1325(a)(4).

And, if you’re going to Disney, pay all your creditors at least 5% on the dollar.

By Doug Beaton