In Re: Inette D. Heredia

Background

Inette D. Heredia filed a voluntary Chapter 13 bankruptcy case in 2018. Chapter 13 allows an individual with regular income to keep property while making payments under a court-approved plan. Heredia’s confirmed plan required 60 monthly payments of $134.24 and required her to pay the trustee tax refunds exceeding $1,500 during the plan.

Krista M. Preuss, the Chapter 13 standing trustee assigned to the case, moved to modify the plan or, alternatively, to dismiss the case for cause under 11 U.S.C. § 1307(c). Preuss relied on Heredia’s 2018 through 2021 tax returns and asserted that Heredia’s adjusted gross household income for 2021 was $155,520, substantially higher than in prior years. Preuss argued that Heredia should have paid approximately $73,542.24 in disposable income under the plan.

Heredia opposed the motion. She argued that she had complied with the plan, had made the required payments, and had provided her tax returns annually. She also argued that any increase in income was accompanied by increased expenses, including expenses related to moving to Manhattan, a new job, and caring for another family member. She submitted updated income-and-expense schedules.

Bankruptcy Court Proceedings

At a December 7, 2022 hearing, the Bankruptcy Court questioned the timing of Heredia’s tax-return submissions and the expenses listed in her updated schedules. The Bankruptcy Court initially stated that Heredia had to pay $73,542.24 or the case would be dismissed. It then stated that it would dismiss the case because Heredia had not amended her schedules earlier to show increased expenses.

The Bankruptcy Court’s December 30, 2022 order dismissed the Chapter 13 case for cause under § 1307(c), incorporating the reasons stated at the hearing. Section 1307(c) permits dismissal for cause after notice and a hearing, including for unreasonable delay prejudicial to creditors or a material default under a confirmed plan.

District Court’s Analysis

The District Court reviewed the dismissal order under the abuse-of-discretion standard. That standard asks whether the Bankruptcy Court applied an incorrect legal principle, made a clearly erroneous factual finding, or reached a decision outside the range of permissible choices.

Judge Karas concluded that the Bankruptcy Court had not adequately explained its ruling. The hearing transcript appeared to shift from a possible plan modification to dismissal, and the record did not clearly identify the reason for dismissal. The record also lacked evidence—apart from Preuss’s statements—showing when the 2021 tax returns were received. Although Preuss argued on appeal that dismissal was justified by delay in providing those returns, the District Court found that argument to be an inadequate post hoc attempt to supply reasoning that the Bankruptcy Court had not provided.

The District Court also noted that Heredia’s appellate arguments focused mainly on plan modification under 11 U.S.C. § 1329, while the order under review dismissed the case under § 1307(c). The court did not decide whether dismissal would ultimately be proper. Instead, it held that the existing record did not permit it to determine whether the Bankruptcy Court had abused its discretion.

Disposition

The appeal was dismissed without prejudice. The District Court vacated the Bankruptcy Court’s December 30, 2022 dismissal order and remanded the case for further proceedings, if necessary, and further explanation of the reasoning supporting any dismissal for cause under § 1307(c). The District Court Clerk was directed to close the appeal.