Debtor Could Not Manipulate Debt Limits for Chapter 13 Eligibility by Making Preferential Pre-petition Payments

Debtor Could Not Manipulate Debt Limits for Chapter 13 Eligibility by Making Preferential Pre-petition Payments

The Debtor filed a petition for relief under chapter 13 of the Bankruptcy Code on April 20, 2016. The Debtor is an attorney with the the “Law Firm”. Cleland is the Debtor’s former spouse. The Debtor and Cleland were married on October 22, 1994, and divorced on September 8, 2014. The divorce proceedings were ongoing as of the petition date, with several orders impacting the issues before the court. First, on February 22, 2016, the Forsyth County District Court entered an Equitable Distribution Judgment and Order (the “ED Order”), which provided for the Debtor to deed the marital home to Cleland, and further provided for certain payments to be made by the Debtor to  Cleland. He made a payment of $116,000 under the ED Order on March 22, 2016, leaving $356,364.07 due to his ex-wife, Cleland, as of the petition date.

On September 15, 2016, Cleland filed her Motion to Dismiss, contending that the Debtor is ineligible for chapter 13 relief because his noncontingent, liquidated debts exceed the $394,725 limit set forth in 11 U.S.C. §109(e).  Cleland maintained that her claim should properly be listed as “disputed,” not “unliquidated,” and thus should be considered in its full amount in calculating whether the Debtor’s debts exceed the statutory limit.

Thereafter, the Debtor amended his Schedule D on October 5, 2016 to reduce the amount owed to  Cleland to $356,364.07 (still denoted “unliquidated”), and reclassifying Wells Fargo as an unsecured creditor for “potential liability” on the loan secured by the former marital residence in an unknown amount. The Debtor also added First Bank as a contingent, unliquidated claim in an unknown amount for “potential personal guarantee” on Law Firm debt that is not in default. The total amount of unsecured debt remained at $389,834.16 in the amended schedules.

Cleland amended her motion to dismiss on January 25, 2017, contending that the Debtor omitted several obligations on his schedules and amended schedules and that the proper calculation of his debts still results in unsecured debts in excess of the debt limits. Specifically, Cleland noted that because the Debtor deeded the former marital residence to her, the Wells Fargo debt is now unsecured as to the Debtor, but he is still obligated on the loan such that the full balance of that debt should be included in the calculation of the unsecured debt limits. Cleland also noted that the Debtor failed to list other unsecured debts.

Further, according to a Complaint filed by the chapter 13 trustee against Vermont Student Assistance Corporation (“VSAC”), the Debtor paid the balance owed to VSAC approximately one month prior to filing his bankruptcy petition. See Logan vVermont Student Assistance Corp., Adv. Pro. No. 16-00179-5-SWH. The complaint sought to avoid that payment as a preferential transfer pursuant to 11 U.S.C. § 547. The trustee obtained a default judgment against VSAC on April 13, 2017, after which VSAC filed an unsecured proof of claim in the amount of $20,804.61, the amount of the avoided payment. Cleland contends that the unsecured debt created by the prepetition preferential payment should also be counted toward the debt limit.

The Debtor denies that he owed any debt to VSAC as of the petition date, and asserts that his debts are listed correctly as shown in his Amended Schedules, the Debtor further contends that Cleland’s claim under the ED Order in the amount of $356,364.07 and the Wells Fargo mortgage loan claim should be characterized as “contingent” or “unliquidated,” such that they do not count toward the debt limits of § 109(e). Finally, the Debtor contends that in reviewing the § 109(e) debt limits, the court should consider only the debtor’s schedules, not the claims filed in the case.

In sumary, as of the petition date, the Debtor contends that his noncontingent, liquidated, unsecured debts included only the claims of American Express ($11,018.36) and Barclay Card ($22,739.23), for a total of $33,757.59. He contends that  Cleland’s claim is unliquidated except in the amount of $38,076.57; that the Wells Fargo debt is secured, contingent, and unliquidated; that the First Bank debt is both unliquidated and contingent; and that the VSAC debt was not owed on the petition date. If the court finds that almost any combination of the debts excluded by the Debtor constitute noncontingent, liquidated, unsecured debts, then the Debtor’s obligations exceed the debt limits, rendering him ineligible for chapter 13 relief under § 109(e).

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