Every year, more than 1,000,000 Americans file for protection under Federal bankruptcy laws. Many hardworking individuals and businesses can succumb to financial difficulty, and face irreparable economic crisis. Bankruptcy is designed as a legal option to help resolve such a crisis, and act as a financial life preserver for those drowning in debt. To discuss your bankruptcy options, or other areas of recourse that might be available to you, contact me for sound advice.
New Bankruptcy Laws:
Bankruptcy is a federal court process designed to help individuals and businesses eliminate their debts or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as liquidation or reorganization. Under a liquidation bankruptcy (Chapter 7), a person files to eliminate debt through the bankruptcy court. Under a reorganization bankruptcy (Chapter 13), a person files a plan with the bankruptcy court proposing how to repay creditors.
As of October 17, 2005, the requirements under which a person may file bankruptcy changes with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. It has been my experience that, while the procedure is more complicated, most people continue to be eligible for Bankruptcy relief. However, because the new law is more difficult to comply with, an experienced Bankruptcy Attorney is essential to a successful case.
The Automatic Stay:
This is the legal term for one of the most important parts of Bankruptcy protection. It means that, with certain exceptions, the moment your case is filed with the Court, your creditors must stop pursuing you. They can’t call you, harass you, sue you, garnish your wages, levy your bank account, foreclose on your home, repossess your car, or do anything else to collect money or property. Your creditors are stopped! If a creditor knowingly violates the Automatic Stay, he can be penalized. This is one of the most powerful sections of the Bankruptcy Code.
Chapter 7:
Chapter 7 cases are commonly referred to as straight bankruptcy or liquidation cases, and may be filed by an individual, corporation, or a partnership. A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in a Chapter 13. Instead, the Bankruptcy Code will allow most debts to be “discharged” or wiped out. In most cases, the debtor is permitted to keep all of his or her assets as long as the equity in those assets is within certain limits. Those limits are called exemptions.
The purpose of a Chapter 7 is to give people a financial “fresh start”. Credit card and medical debts are commonly eliminated in a Chapter 7, and then people can get rid of some of their stress, and begin to reestablish their credit.
Chapter 13:
A Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts over three to five years. Chapter 13 permits individuals to keep their property by repaying creditors out of their future income. It is not available to corporations or partnerships. After completion of payments under the plan, Chapter 13 debtors receive a discharge of most debts.
Chapter 13 is generally used to stop foreclosures and to allow people to keep their home or other assets, while stopping creditor lawsuits and harassment and reducing other debts.
It can also be used to remove second mortgages in some instances.
Foreclosure:
Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property due to the owner’s failure to comply with an agreement between the lender and borrower called a “mortgage”. Commonly, the violation of the mortgage is a default in payment. When the process is complete, it is typically said that “the lender has foreclosed its mortgage or lien”.
A foreclosure ends when a Sheriff conducts an auction of your home. This auction is called a Sheriff’s Sale. The filing of a Chapter 13 stops the foreclosure and/or Sheriff’s Sale immediately and allows you to propose a payment plan to keep your home or sell your home at a fair price.
Debt Consolidation:
Contrary to popular belief, debt consolidation is not a loan. Debt consolidation is an out of Court process in which debt is restructured into one monthly payment. Unfortunately, there can be many unscrupulous individuals in the debt consolidation business. You need to be concerned about the cost of such services because some companies take their entire fee from your monthly payments before paying your creditors anything. Also, lawsuits are not automatically stopped. A creditor must agree to stop its lawsuit, something which many creditors will not do. Additionally, a Bankruptcy may allow a faster rehabilitation of your credit than a debt consolidation.
Chapter 11:
Chapter 11 is typically for business bankruptcies and restructuring. It is not commonly used by individual consumers since it is far more complex and expensive to pursue. However, certain individuals with very substantial debts may benefit from filing a Chapter 11. It allows businesses and individuals to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11, although it does so under the supervision of the Bankruptcy Court and its appointees.
Subchapter V of Chapter 11: The Small Business Reorganization Act:
The purpose of the Small Business Reorganization Act (the “SBRA”), is “To streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.”
One of the sponsors of the legislation stated that the SBRA allows small business debtors “To file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business,” which “not only benefits the owners, but employees, suppliers, customers and others who rely on that business.” Thus far, I would say that the courts have taken this legislative purpose into account in their application of this new law.
Keep in mind, while Subchapter V (“Sub V”) is different from small business chapter 11 in a number of significant ways, it does not repeal the existing provisions of small business chapter 11. Those provisions continue to apply to small business debtors who do not elect to proceed under Sub V.
Are you Eligible to File a Sub V?
As originally enacted, to be eligible to file a Sub V case, the debtor, a person or entity, must be engaged in commercial or business activity with secured and unsecured debts in the aggregate of $2,725,625. In response to the economic distress caused by the COVID-19 coronavirus pandemic however, Congress expanded this debt ceiling to $7,500,000. Absent further extension, this debt ceiling will expire in one year. In addition, a debtor must be able to show that at least 50% of its pre-petition debts arose in connection with its commercial or business activity. Note, that “Single asset real estate” cases are not eligible for Sub V relief. This is the only excluded activity for Sub V. A “single asset real estate” is a defined by 11 U.S.C. § 101(51B) of the Bankruptcy Code and includes a debtor who derives “substantially all of [its] gross income” from the operation of a single real property. This definition does not exclude a debtor however, whose primary activity is to own or operate more than one property and does not include residential real property with less that 4 residential units. Finally, Sub V is not automatic. A debtor must elect to be a Sub V debtor on its petition.
So, you Believe that you may be Eligible to File a Sub V. Great! Let’s Move on:
Sub V contains several changes to administrative and procedural Rules. Sub V also provides for the participation of a Trustee in all cases; modifies confirmation requirements; alters rules for the debtor’s discharge; and changes the definition of “property of the estate.”
Some of the Procedural Changes:
1) There is no means test. While this is no different than other chapter 11 cases, it is an important distinction from chapters 7 and 13. This can be an important advantage for debtors whose income is above the median.
2) No unsecured Creditors Committees are appointed in Sub V cases unless a court orders otherwise for cause. This is a huge savings.
3) There are no quarterly fees in Sub V cases. Another cost savings.
4) The deadline to file a plan is only 90 days from the date the case is filed; as opposed to 300 days in small business cases. This change is also calculated to save costs.
5) Only the debtor can file a plan and only the debtor can file a modified plan. This permits the debtor to remain in control of the case.
6) A status conference is mandatory and must be held within 60 days of the filing of the case. This will allow the court to move the case along and address possible problems more quickly.
7) A status report must be filed no later than 14 days preceding the status conference. Among other things, it must report the debtor’s efforts to attain a consensual plan. A consensual plan is always encouraged.
8) There is no disclosure statement in a Sub V case. Much of the information contained in the current Small Business Chapter 11 Disclosure Statement is however, required to be provided for in the Sub V plan.
Some Important Substantive Changes:
Confirmation
Probably the most important characteristic of Sub V is the debtor’s ability to confirm a plan in two different ways: consensually and non-consensually. Here, I will use the terms “non-consensual” and “cramdown” interchangeably. A plan is consensual when all impaired classes vote in favor of the plan. This is nothing new. In Sub V plans however, no impaired class needs to accept the plan for it to be confirmed. That is what is new about Sub V! No other chapter 11 cases can be confirmed without the agreement of at least one impaired class. The normal confirmation requirements do apply in consensual confirmations. In cramdowns however, an accepting, impaired class is not required. Additionally, the “Absolute Priority Rule” has been removed.
The Absolute Priority Rule essentially requires that, absent consent, a senior class of creditor must be paid in full before junior classes can receive any money, and that all creditors must be paid in full before equity holders can receive any money or property under a chapter 11 plan.
This rule means that an individual or business owner cannot keep their assets or business unless deals are negotiated with all the creditors.
These changes will allow Sub V debtors to confirm plans that pay very small dividends to general, unsecured creditors because they cannot invoke the Absolute Priority Rule. Further, undersecured creditors with large deficiency claims will no longer be able to “veto” a plan by controlling a class because an accepting class is no longer needed!
Hopefully, this will result in the confirmation of many more plans and the survival of more small businesses.
Other Substantive Changes of Note:
First, a Sub V plan may now modify a claim secured only by a security interest in the debtor’s principal residence IF: 1) the new value received in connection with the granting of the security interest was not used primarily to acquire the property and 2) the residence was used primarily in connection with the small business of the debtor. Mortgages on a debtor’s principal residence have always had special protection in bankruptcy. No other chapter in the Bankruptcy Code permits this type of modification of that type of secured creditor’s claim.
Second, payments of administrative expenses have been made easier. In cramdown plans, administrative expenses can be paid through the plan (over a period of up to 5 years) without the consent of the administrative creditor.
For consensual plans, administrative expenses must still be paid upon confirmation. BUT, I would guess that those expenses would be subject to some agreement. Otherwise, it obviously would not be a consensual plan!
Getting a Cramdown Plan Confirmed Under Sub V:
To confirm a cramdown plan, with respect to each impaired class that does not accept it, the plan may not “discriminate unfairly” and it must be “fair and equitable.” The unfair discrimination requirement is the same one contained in 11 U.S.C. § 1129(b). The “fair and equitable” standard does not change the cramdown treatment as contained in 11 U.S.C. § 1129(b)(2)(A) for secured claims.
Unsecured claims are not specifically included in the definition of “fair and equitable.” Rather, the definition requires the debtor to pay all of its “projected disposable income” for a period of at least 3 years, or up to 5 years if the court so orders; or pay the value of the property to be distributed under the plan for the same 3-to-5-year period.
“Disposable Income” is defined in the Bankruptcy Code as essentially, the income received by the debtor minus expenses for the debtor’s family’s maintenance or support AND minus the cost of operating the business.
Additionally, “fair and equitable” contains a feasibility requirement which is: that there is a reasonable likelihood that the debtor will be able to make all the payments.
Discharge under Sub V:
The SBRA encourages consensual plans by making the discharge provisions more favorable than non-consensual plans. So, for consensual plans, all debtors (individuals and entities), obtain their discharge immediately upon plan confirmation, unless it is a liquidating plan.
For cramdown plans, debtors must wait to receive their discharge until they complete their first 3 years of payments—or longer—up to 5 years as the court may fix. The time period presumably matches the length of the plan (although that is not specified in the Bankruptcy Code).
Benefits of Immediate Discharge:
• After a discharge, credit can be reestablished more easily; and
• The SBRA defines property of the estate for cramdown plans to include all property acquired and earnings received from the commencement of the case until the case is closed, dismissed, or converted. This applies to both individuals and entities.
This definition of “property of the estate” is nothing new for chapter 13 debtors who always wait until successful completion of their plans to receive their discharge. This distinction however, must be kept in mind. For example, an inheritance received during the plan, if non-consensual, will become property of the estate and may go to creditors.
Consequently, Sub V is all about planning. Planning could save a debtor (You) a lot of money and it may be reason to try to confirm a consensual plan even if it may require a compromise with creditors.
Mortgage Modification:
Banks and other mortgagees may agree to modify a mortgage under certain circumstances. They are not required to do so and the modification process can be lengthy and frustrating. However, if successful, the interest rate can be reduced significantly, the term of the loan can be extended, and the arrearages can be deferred to the end of the loan or reamortized into the new payment amount. Very occasionally, a lender will forgive some of the amount due, but this is not common.
I encourage people to try to obtain a mortgage modification without the assistance of an attorney. But because the process can be lengthy, frustrating and intimidating, some people are more comfortable hiring counsel to deal with the bank, and I will be pleased to assist you to do so.
Court Programs to Encourage Mortgage Modifications:
The State and Bankruptcy Courts in New Jersey each have programs in place to assist people. They both involve a sort of mediation process which, hopefully, encourages banks to modify loans more quickly and fairly. Again, that process can be confusing and hiring an experienced attorney would be wise. I am please to offer representation in these Courts.
Second Mortgages:
Today many homes are now worth less than the amount owed on the first mortgage. That can be discouraging, but when there is also a second mortgage, that can be devastating.
Most people don’t realize that their second mortgage lender may not foreclose if they are not being paid because there is a large first mortgage on the property. However, that doesn’t mean the second mortgage debt is forgotten. The mortgage will continue to be a lieu on the property and that lender will try to collect the debt in other ways.
In these cases, Chapter 13 may be utilized to remove the lien of the second mortgage while the amount required to pay the debt can be reduced substantially and paid out over a three to five year period.
This type of reorganization can help people keep their homes. This is especially true when combined with a modification of the first mortgage and a restructuring of other debts.
Summary of the Bankruptcy Law
Most people who file for bankruptcy utilize either Chapter 7 or Chapter 13 of the Bankruptcy Law.
Under both Chapters, you get immediate protection from your creditors. This means that once you file your Petition, your creditors must stop their collection efforts, including foreclosures, law suits and harassment.
The basic idea of a Chapter 7 is to wipe out your debts and get a fresh financial start. As long as the values of your assets do not exceed certain amounts (called exemptions), you will not lose any of your things.
Some debts cannot be eliminated in a Chapter 7. For example, child support, alimony, debts resulting from fraud, most student loans and most taxes, are among the types of debts which are not dischargeable.
Also, mortgage holders and car lenders generally keep their liens on property. As a result, those creditors must continue to be paid to avoid foreclosure or repossession.
The typical Chapter 7 case is completed within several months after the Petition is filed. You will then be in a position to re-establish your credit.
My job is to assist you by analyzing your financial situation and advise you whether you should file a bankruptcy case. Then I will prepare and file your petition and all other required documents, and represent you at your required meeting of creditors (creditors almost never attend those meetings.)
A Chapter 13 case is generally filed when Chapter 7 is not available, or when a person has assets which they would lose in a Chapter 7.
Chapter 13 may allow you to stop a foreclosure and keep your home. It may also allow you to keep your valuable assets and get relief from creditor collection efforts.
In a Chapter 13, you file a Plan with the Court which proposes to reorganize your debts and make a payment to a Trustee.
The amount of your payment and the type of Plan will depend on your unique situation.
My job is to prepare your Plan, guide you through the process and represent you in Court against your creditors.
Chapter 13 Plans can last up to 5 years and I will be your attorney for that entire time. If something unforeseen happens during that time, I will be there to assist you.