Sunday, November 4, 2012

The 7-Year-Old Bankruptcy Debtor

I was doing some bankruptcy research and I came across a case involving a 7-year-old bankruptcy debtor.  I could just stop right there because that is all I really wanted to tell you, but I guess I will give some further explanation.

The case involved a minor child who inherited a house from her father.  During her father's illness, the family fell behind on the mortgage.  After the death of her father, she also began receiving social security survivor's benefits.  Although she was not personally liable on the mortgage, the debtor and her mother wanted to save the house.  

The mother filed a Chapter 13 case as "next friend and mother" of the debtor.  The lender was the only creditor.  The Chapter 13 plan proposed cure the arrearage and make current  mortgage payments with the social security benefits.  The lender did not object to the confirmation of the plan.  The trustee objected, however, on the grounds that the debtor was not eligible for Chapter 13 relief because a parent lacks authority to file bankruptcy on behalf of a minor, absent state court approval.  

The Court first examined whether minors can file bankruptcy.  The Court found no provision of the Bankruptcy Code that requires a Chapter 13 debtor be an adult.  The only requirement is that a Chapter 13 debtor must be an "individual with regular income" pursuant to Section 109(e).  The Court then analyzed the Federal Rules of Bankruptcy Procedure.  For instance, Rule 1016 authorizes the continuation of a case when the debtor becomes incompetent during the administration of a case.  The Court could not infer from the rules that the drafters intended any opinion with respect to the eligibility of an incompetent to file bankruptcy in the first place.  

The final question was whether the mother was required to comply with any appointment or qualification procedures under state law before filing the petition as "next friend" of the minor.  The Court pointed out that  Federal Rule of Civil Procedure 17 (Capacity to sue or be sued) would normally control this issue.  However, Fed.R.Civ.Pro. 17 is not specifically made applicable to bankruptcy cases by the Bankruptcy Rules.  So, the Court turned to the "gap filling" function of Bankruptcy Rule 9029(b).  Rule 9029(b) provides flexibility to the court in regulating practice when there is no controlling law.  That Rule states: "Procedure When There is No Controlling Law.  A judge may regulate practice in any manner consistent with federal law."  

After determining that it could apply Fed.R.Civ.Pro. 17, the Court used that Rule to hold that a minor who lacks a general guardian may sue by next friend and that no special appointment process for the next friend is required.  

HERE is a link to the case.

10 comments:

Grace Johnson said...

An arkansas lawyer I think told me something about it and he said they are really encountering a lot of bankruptcy-related issue including the maturity of the filer. He said that the provisions were really strict when it comes to bankruptcy cases.

Bernard Simpson said...

Bankruptcy will always be a sad thing, unless of course it is used as an excuse for a different reason. However, I think if my business seems to going nowhere, I'd rather do a voluntary liquidation.

Stacy Young said...

Yes it is indeed very hard when facing bankruptcy but Bernard, if you think your business is kind of going down, you can always go for risk management services. That's we we did with ours.

Rhonda J. Stearns said...

This is a case of reference via signage where the consignees are liable for the said situation. People often exploit these loopholes by conveniently using a child for solicited gains.

Owen Peters said...

Poor child! Being in such burden at a young age. I hope that relatives would help him with this case. The kid should be playing and not be in this kind of situation.

Sophie McEncroe said...

This is a kind of case that definitely needs a court reporter, because there are some points that need to be reviewed in the future. It would also help in every procedure this would go through.

Charlotte Brazier said...

Age, or rather, maturity is a major factor when it comes to banking - more importantly, a bankruptcy case. If dealing with this takes a complex process, it is recommended to seek help from a lawyer.

Leon Robertson said...

To make sure that you are dealing with the right person in a situation like this, it's important that you as a client perform a background review on the person. This way it could serve as your assurance for you to hire them.

Nelly Oswald said...

Pretty roundabout case you've shown here. At least the kid managed to get off with it; otherwise, it would've spelled a lot of problems for both of them, especially since the house is involved.

Lina Jarich said...

It really saddens me when I hear these types of stories. I've heard stories about friendship braking up because of bankruptcy.