Now here’s an interesting situation, a U.S. Court of Appeals upheld the bankruptcy filing of a woman who was just existing on social security benefits and food stamps. The woman originally filed a chapter 13 bankruptcy after trying and failing to negotiate a repayment plan she could afford with her creditors.
The filer, Patricia Crager, put forward a chapter 13 bankruptcy plan instead of a chapter 7 bankruptcy plan because, with looming medical expenses she may need to file bankruptcy again in the near future and a chapter 7 bankruptcy would prevent her from doing that within the timeframe she might need.
This case has implications for both others in the same situation and potentially for those seeking credit counseling protection, who struggle to meet the minimum required payments.
The case is also interesting because Crager was current on her debts and already attempted to take proactive steps to deal with her debt directly with her unsecured creditors. The stimulus for her to take action was the realization that it was going to take her a couple of decades to pay off the debt with minimum payments only.
The issued opinion said:
“The debtor, Patricia Ann Crager, is unemployed, and her main source of income is $1,060 per month in Social Security benefits plus $16 per month in food stamps. Her main asset is her primary residence, which is valued at $55,000 and encumbered by a $40,662 mortgage. Her mortgage payments are $327.10 per month. She also has $7,855.27 in credit card debt; her minimum monthly payments total $197. Prior to filing her Chapter 13 petition, Crager was current on all mortgage and credit card payments. However, in early 2010, Crager learned that if she continued making the minimum payments on her credit cards, it would take her 17 to 20 years to pay off her balances. She contacted the loss mitigation departments of her credit card companies to seek an interest rate or monthly payment reduction but did not receive either.
Crager decided that her best course was to file for bankruptcy under Chapter 13 because it would have taken her over a year to save enough money to pay the up-front costs for a Chapter 7 bankruptcy and to do so she would have needed to stop making her minimum monthly credit card payments. She also was concerned that filing Chapter 7 would prevent her from declaring bankruptcy again for a longer period than would Chapter 13, and she believed that a Chapter 7 bankruptcy would stay on her credit report longer. Crager filed Chapter 13, with her attorney advancing the court costs of $274.
A few months after Crager filed her Chapter 13 petition and plan, the Trustee objected to confirmation of the plan. The objection asserted that Crager’s petition and plan were not filed in good faith pursuant to 11 U.S.C. § 1325(a)(3) and (7) and that the amount of attorney’s fees sought by Crager’s attorney was unreasonable. After a contested hearing, the bankruptcy court overruled the Trustee’s objection and approved Crager’s Chapter 13 petition and plan and the requested legal fees and advanced legal costs.”
The Court of Appeals found that Crager’s chapter 13 bankruptcy filing was in good faith and the bankruptcy court was right to approve the plan.
The bankruptcy court focused on the rising cost of medical care and suggested that Crager had a legitimate fear that a future medical problem might leave her in a situation in which she had to take on more debt and might need to file another Chapter 13 petition. The court found that it would “border on malpractice” for Crager’s attorney to advise her to file a Chapter 7.
Moreover, the bankruptcy court had the opportunity to judge Crager’s credibility as a witness and found credible her proffered reasons for filing a Chapter 13 petition. It was not clearly erroneous for the bankruptcy court to find that Crager’s plan was not an attempt to abuse Chapter 13, but rather a responsible decision given her particular circumstances. – Source
For those consumers that one would automatically consider as low balance chapter 7 candidates, this case certainly makes you rethink the strategy and consider a fee-only chapter 13 bankruptcy.
An interesting development.