Requirements and Procedures in Individual Debtor Chapter 11 Cases before Judge Jacobvitz

The following discusses requirements in cases under chapter 11 where the debtor is an individual, and establishes procedures in such cases pending before Judge Jacobvitz.  References to section numbers refer to sections of the United States Bankruptcy Code, 11 U.S.C.§ 101 et. seq.  References to rules refers to the Federal Rules of Bankruptcy Procedure.

Substantive Law

A.    Financial Management Course

An individual chapter 11 debtor is required to complete a financial management course when the plan provides for the liquidation of all or substantially all of the property of the estate and the debtor does not engage in business after consummation of the plan.  This is because § 1141(d)(3)(C) provides that “[t]he confirmation of a plan does not discharge a debtor if the debtor would be denied a discharge under 727(a).” Under § 727(a)(11), the discharge is denied if the course requirement is not satisfied.  Bankruptcy Rule 1007(b)(7) requires an individual debtor in a chapter 11 case to file a statement of completion of the financial management course if the post-petition financial management course is required.

B.    Domestic Support Obligations

A requirement for plan confirmation is that the individual debtor has paid all domestic support obligations that first become payable after the petition date.  § 1129(a)(14).  There is no requirement that domestic support obligations have been paid as a condition to discharge.  However, an individual debtor who has not paid all domestic support obligations that first become payable after the petition date risks dismissal or conversion of the case pursuant to § 1112(b)(4)(P).

C.    Discharge.

  1. Three Grounds for Obtaining a Discharge.  There are three ways in which a discharge is granted in individual chapter 11 cases:

    1. Discharge Upon Completion of Plan Payments.  Ordinarily, the discharge will be entered after completion of all plan payments. § 1141(d)(5)(A).

    2. Early Discharge For Cause.  A discharge may be granted prior to completion of all plan payments "for cause." § 1141(d)(5)(A).  For example, if there are sufficient assurances that claims will be paid the full amount provided by the plan, such as from the grant of lien rights or protection under a letter of credit, an early discharge for cause may be warranted under § 1141(d)(5)(A).

    3. Early Discharge Under Modified Best Interests Test and Impracticability of Plan Modification.  A discharge may be granted prior to completion of plan payments if (i) unsecured creditors holding allowed claims have actually received under the plan at least as much as they would have received in a hypothetical chapter 7 case in which the estate assets were liquidated on the plan effective date; and (ii) modification of the plan under section § 1127 is not practicable.  § 1141(d)(5)(B).

      For example, if a plan provides for payment in full of all claims within five years after the plan effective date, and further provides for payment without impairment of obligations under a note secured by a mortgage against the debtor's principal residence that under § 1123(b)(5) cannot be modified, a discharge after completion of the payments to be made within five years may be warranted under § 1141(d)(5)(B).

  2. Rule 1007(b)(8) Statement.  If a debtor is required to file a statement under Rule 1007(b)(8), then § 1141(d)(5)(c) may affect the debtor's right to a discharge.  Rule 1007(b)(8) provides:
    If an individual debtor in a chapter 11, 12, or 13 case has claimed an exemption under § 522(b)(3)(A) in property of the kind described in § 522(p)(1)1 with a value in excess of the amount set out in § 522(q)(1),2 the debtor shall file a statement as to whether there is any proceeding pending in which the debtor may be found guilty of a felony of a kind described in § 522(q)(1)(A) or found liable for a debt of the kind described in § 522(q)(1)(B).
    Under Rule 1007(c), the Rule 1007(b)(8) statement, if required, must be filed "no earlier than the date of the last payment made under the plan or the date of the filing of a motion for a discharge under §§ 1141(d)(5)(B) . . . of the Code."  In most cases, this should not be an issue.  If a Rule 1007((b)(8) statement is required, counsel should familiarize themselves with that Rule, and with §§ 552(p)(1) and 522(q)(1).

Procedures

A.    Procedure for Seeking An Order Granting Discharge.  Unlike in chapter 11 cases in which the debtor is not an individual, in individual debtor chapter 11 cases the grant of a discharge requires a court order.  To seek such an order the debtor should file a motion requesting entry of the discharge as follows:

  1. Completion of Plan Payments under § 1141(d)(5)(A).  To seek a discharge upon completion of plan payments under § 1141(d)(5)(A), the debtor should file a Certificate of Completion of Plan Payments and a Motion for Entry of Discharge, and serve notice of the motion on all parties in interest specifying a 21-day period to object.  If no objections are filed timely, the Court may grant the discharge without a hearing.

  2. Early Discharge under § 1141(d)(5)(A) or § 1141(d)(5)(B).  If an early discharge is sought under § 1141(d)(5)(A) or § 1141(d)(5)(B) based on the treatment of claims under the plan, on or before the date the debtor serves the plan on parties in interest the debtor should file a separate motion seeking an early discharge that recites the supporting grounds, and should serve adequate notice thereof specifying an objection deadline that coincides with the expiration of the deadline to object to the plan.  The notice should also state that the motion for early discharge will be heard at the confirmation hearing.  The motion and notice should be served on parties in interest in the same package in which the plan is served. 

    If a motion for an early discharge is filed after plan confirmation, the debtor should serve adequate notice thereof on all parties in interest specifying a 21-day period to object.  The debtor should contact chambers to obtain a date and time for a preliminary hearing on the motion and include the hearing date and time in the notice.  The Court may require a hearing even if no objections are filed.

1Section 522(p)(1) provides in general terms that if a debtor elects to exempt property under state or local law, the aggregate exemption for certain property (including the homestead) acquired within 1215 days prior to the petition date is limited to $136,875.

2Section 522(q)(1) provides in general terms that if a debtor elects to exempt property under state or local law, the aggregate exemption for certain property (including the homestead) is limited to $136,875 if (a) the debtor has been convicted of a felony such that the filing of the case was an abuse of the provisions of this title; or (b) the debtor owes a debt arising from (i) violation of the Federal or State securities laws, (ii) certain types of securities fraud, (iii) a civil remedy under 11 U.S. C. 1964 (which relates to a pattern of racketeering activity), or (iv) certain criminal or intention torts or other specified misconduct that caused certain serious personal injuries or death to another individual in the preceding five years.

Posted December 8, 2009