Best Practices in Bankruptcy: Power of Attorney or Guardian

Best Practices in Bankruptcy: Power of Attorney or Guardian

It is always troublesome when an individual bankruptcy petition is filed by power of attorney.  It may be less of a concern in a chapter 7 case when the debtor is in the military, incarcerated, or temporarily disabled.  More worrisome is the incompetent or advanced aged debtor who has been placed in a chapter 13 by someone holding a power of attorney (POA).  What sort of inquiry is necessary and proper in those cases? See generally Keith M. Lundin, Lundin on Chapter 13, Section 10.9 “Petitions on Behalf of Others: Incompetents, Next Friends, Powers of Attorney, and the Like.”

The threshold question is whether a bankruptcy court should be involved in making decisions about competency.  When did the debtor become incompetent? Was the debtor competent at the time the POA was executed? What is the extent or nature of the incompetency?  Does the debtor know about the bankruptcy case? Did the debtor ratify the filing? Who retained the debtor’s bankruptcy lawyer? Has the bankruptcy lawyer met with the debtor?

Federal Rule of Bankr. Proc. 1004.1 “Petition for an Infant or Incompetent Person” permits a fiduciary to file a case for an infant or incompetent person.  Further the rule provides that the court may appoint a guardian ad litem for a debtor not otherwise represented. What happens after that?  Does the debtor or the POA need to submit the pre-petition credit counseling certificate? Who takes the debtor education prior to discharge? Who attends and testifies at the Section 341 meeting? Who files personal tax returns for the debtor?

Clearly, lots of questions arise in these cases. If the debtor is of advanced age and incompetent, is the debtor subject to undue influence and loss of income and property? What is the nature of the relationship of the debtor and the person holding the power?  How far should a bankruptcy court delve into the debtor’s capacity when considering a motion on eligibility to proceed by way of a POA,?

The typical chapter 13 case involving a POA is usually for an advanced age or incapacitated debtor. Many times, the debtor is living in a full care nursing facility.  An adult child may be living in the debtor’s house.  A bankruptcy filing is deemed necessary to stop a foreclosure on the house. The adult child holds a durable power of attorney for the debtor and files a bankruptcy petition on behalf of the debtor. How should the case proceed?

Chapter 13 cases do not function easily or well using powers of attorney. These cases are pending for 3 to 5 years (and some longer if under a CARES act extension). The questions that arise at the filing of these cases, will continue over the term of any confirmed plan.

For example, in the case of In re: Maes616 B.R. 784 (Bankr. D. Col. 2020) the daughter of the debtor suffering from severe dementia filed a chapter 13 case with a defective POA.  The bankruptcy court extensively reviewed the debtor’s competency and the daughter’s willingness and ability to act. In the end the court appointed the daughter as guardian ad litem for the purpose of acting only in the bankruptcy for the debtor. In another case the debtor who apparently was competent executed a durable POA in favor of her adult daughter. The debtor had not checked her daughter’s activities and discovered 3 bankruptcies had been commenced by the daughter in her name. The debtor wanted the court to expunge or seal the records of these cases and the court refused.  It held the Durable POA was valid and enforceable. See In re: Chapman No. 19-26731 Bankr. Court E.D Wis 2021.  Finally, another case involved an elderly debtor residing in a nursing home and her niece filed the bankruptcy petition.  The court had numerous questions including whether the debtor had the capacity to sign the POA. The court concluded it needed additional information and would be more inclined if appropriate to appoint a guardian ad litem solely to act in the bankruptcy case.  See In re: Matthews 516 B.R. 99 (Bankr. N.D. Tex 2014).

Most if not all states have provisions for the appointment and regulation of guardians over persons and property. Many state courts are experienced in this specialized area. There are experienced professionals that handle these matters.  Someone in a position to act as guardian must meet certain minimum standards to get appointed. There are basic legal requirements for a court to order the imposition of a guardianship.  While the guardianship is pending, the state courts have ongoing supervisory jurisdiction. If the bankruptcy court has concerns about a particular case, one approach may be to require the family member or person holding the debtor’s POA to go to state court. The state court would then issue an order for the appointment of a guardian over the debtor.

Referencing Delaware law, a Guardian Petition must be filed in the Court of Chancery and served on all next of kin.  See 12 Del. C. Section 3901 et seq. The petition may be challenged. A bond must be posted. The Court of Chancery appoints an independent Attorney ad litem (the “AAL”) to investigate the person with the alleged disability.  The AAL is required to visit the person, ask questions and discuss the guardianship with the person (assuming that is possible).  The AAL also must review the physician’s affidavit that is required to be filed, contact Adult Protective Services to determine if any outstanding cases involving the person, interview the prospective guardian, and file a report with the court stating whether the guardianship is in the best interests of the person. If the court appoints a guardian there are annual accounting and reporting requirements.

Obviously, this approach assists the bankruptcy court in the determination that the debtor needs a fiduciary to act in the case, that the fiduciary is a responsible and appropriate person, and the case is free from fraud. The ongoing duties imposed by the state court gives assurances to the bankruptcy court that the ongoing financial affairs and well-being of the debtor will be properly handled.  One of the requirements is immediate notice if a successor guardian is necessary: this is very important and may not be apparent if just the bankruptcy court is monitoring an ongoing case by a POA.  Guardians monitored and regulated by state law provide the most efficient and best method for personal bankruptcies needing such relief.

Published on Michael B. Joseph, Esq. is the former Chapter 13 Trustee for the District of Delaware.