Bankruptcy - Chapter 13

In furtherance of my recent article concerning Chapter 7, today I will discuss Chapter 13 of the bankruptcy code. Now, these articles are designed to give the reader a general understanding of bankruptcy law and how these laws may affect real property of the debtor. The topics that can spin off of a general bankruptcy article are endless.

Author Note: At its creation I had named this blog site 'Title Town'. My intention was to post writings dealing with specific title issues. It was to be informative and instructional, as best seen through the eyes of an examiner. Well, what has happened is that I have strayed a bit off course. I have written many informative articles, but have not given much instruction to the examiner who may be viewing this site. As I displayed in my writing on 'fundamentals', I think it is time I get back to the fundamentals and consider these articles through the eyes of the title examiner. So, from this point forward, when applicable, I will conclude each writing with a section labeled The Examiner's Perspective. Please understand, the advice I give you in the perspective section should be addressed with your particular underwriter, as your underwriter may direct you differently. Nonetheless, this section will give you, the examiner, a solid basis for attacking a particular issue affecting your commitment. These articles are based on my knowledge and opinions. A workplace can strip you of many things, but don't ever let it strip you of your opinions and common sense. Opinions lead to ideas, ideas lead to creation, creation leads to knowledge. In the words of Geoffrey Fieger, "If you don't stand for something, you end up standing for nothing at all."

Writing this blog has been a great experience for me. I never quite understood how difficult it is to write, especially in the area of technical writing. In reviewing my past articles, I can see some gaping holes; topics I should have covered, or connections I should have made for the reader. I write these blogs quickly, usually allotting myself one or two hours.

Dan Nichols is a very good friend. He is a business expert and runs a company specializing in helping individuals create and maintain their own entities. If you, the reader, have designs of creating your own business, it is well worth your time to contact Dan. He can be reached at: dan@businesslaunchexpert.com. Dan was actually the creator of this site. He knew I had a lot of information stored in my head, and he wanted me to share this information with others. He walked me through the blog process, step by step. I did not even know what a blog was. I have consulted with Dan frequently regarding these writings. He has helped me to avoid writer's block. He let me know that there is no such thing as a perfect writing. The writer will always find holes or fault in their own work. They will continually change and amend an otherwise competent article. His advice: It isn't perfect, and it won't be perfect, so just write it and move on. It is the imperfection that actually makes the writing perfect. Imperfection leads to questions, questions lead to discussion, discussion to answers. Welcome to my maddening mind!!

O.K. Chapter 13 - -

Chapter 13 is a bankruptcy proceeding that is designed to enable a debtor to pay its creditors over a three to five year span. Chapter 13 is in contrast to Chapter 7. As discussed previously, Chapter 7 is pure liquidation, while Chapter 13 allows the debtor to reorganize its financial relations with its various creditors. This is why Chapter 13, as well as Chapter 11, are termed reorganizations.

Qualifications: Chapter 13 may only be sought by individual wage earners; business entities are not eligible for Chapter 13 and must seek their reorganization via Chapter 11. Additionally, there is a cap on the amount of debt, both secured and unsecured, that a debtor may not exceed. If the debt limit is exceeded, the wage earner will have to seek reorganizational relief via Chapter 11. These debt limits frequently change, so I will not disclose exact figures. Suffice it to say, the combined secured and unsecured limit is roughly one million dollars, so 99.99% of normal wage earners will qualify under Chapter 13.

Chapter 13 may only be filed voluntarily by a debtor. Involuntary filings do not exist under Chapter 13 of the code. This is in response to a comment left by a reader of my last article. There, he/she indicated that bankruptcy filings may be voluntary, by the debtor, or involuntary, by a qualified group of creditors. This is true under Chapter 7, not Chapter 13.

Chapter 13 is typically filed by a normal wage earner who owns a home and simply wants some breathing space to deal with its creditors. It often is filed by the homeowner who is in arrears on its mortgage payments. Reason: the owner fears foreclosure, so they beat the bank to the punch by filing a petition for relief under Chapter 13. The filing of a Chapter 13 petition is extremely useful to a homeowner in arrears. First off, the filing grants the debtor the benefit of the 'automatic stay'. The automatic stay will prevent, at least initially, the foreclosure of the home. The filing will also allow the homeowner to cure its loan. What is cure? Let's say the homeowner is three months in arrears. They can catch up on the delinquent three months through the course of the Chapter 13 administration; generally 3 to 5 years. Note: The homeowner must be careful at this stage in dealing with the bank. If it appears that the debtor is simply playing games and stalling for time, the bank may move for 'relief from stay' and proceed to foreclose on its security. Remember, the bank is secured, which means it gets 100 cents on the dollar. Bankruptcy will not remove a secured lien, save for unique circumstances. A secured lien holder stands unaffected by the bankruptcy filing. The secured party, usually the bank, waits for the dust to settle, and then determines if it should move for relief from stay. The debtor and the debtor's attorney should play nice at this stage, or the bank may drop the hammer and move for such relief.

Shortly after the petition for relief under Chapter 13 is filed, the debtor must propose a reorganization plan. Simply, this plan shows how the debtor plans on paying its creditors. Proper funding is at the heart of a Chapter 13 plan. This funding must be realistic; usually the debtor's steady income. However, funding may also come from sources other than income, such as the sale of property. In any case, the judge wants to see that the debtor has the necessary funding to support the plan and that it is likely to succeed. If the judge sees the proverbial 'pie in the sky', the plan will not be confirmed.

Next, a 341 meeting is scheduled. This is the same as in Chapter 7. All creditors will be afforded a chance to review the reorganization plan and file any relevant objections. If all goes well, the plan will be confirmed by the court.

Following confirmation, payments pursuant to the plan will be made to the trustee, who then distributes payments to the various creditors until the plan is completed. The trustee administers the estate. All the debtor has to do is furnish the money to the trustee at the scheduled time. Note: The debtor will not receive the Chapter 13 discharge until the plan is fully completed.

Why is Chapter 13 sought by a debtor? I have already mentioned one reason, to avoid foreclosure. At the heart of the determination is this: How many non-exempt assets does the debtor have? If there are numerous non-exempt assets, or non-exempt assets that are special to the debtor, Chapter 13 can be utilized, as long as the unsecured creditors are paid adequately. Another reason is non-dischargeable claims. A debtor cannot file under Chapter 7 to avoid non-dischargeable claims, such as federal tax liens. Chapter 13 will typically allow the debtor to pay such claims throughout the administration of the Chapter 13 plan, with the benefit of reduced or eliminated interest regarding such non-dischargeable claims. These are all issues that a debtor's attorney will discuss with the debtor when selecting a chapter.

Why is Chapter 13 better for unsecured creditors, as compared to Chapter 7? Well, the answer should strike the reader as obvious. A creditor is typically paid more via Chapter 13 than they would receive via Chapter 7. Many times, the debtor's creditors are paid 100% through the administration of the plan. Even if the creditors are paid 10% or 20%, it beats a goose egg, which is exactly what they will receive in a typical Chapter 7 case. Interestingly, a creditor does not have grounds to object to a Chapter 13 plan, as long as that creditor receives as much as it would have received through Chapter 7. Considering most Chapter 7 filings are 'no asset' filings, this is not a very tough standard. However, as discussed in the previous paragraph, if the debtor has significant non-exempt assets, the chances of the creditor being paid in full will increase substantially. Ultimately, the judge will look to the debtor's debts, its assets, and the proposed funding of the plan to determine if all creditors are being paid adequately. This determination, coupled with the 341 meeting, afford the creditor ample protection.

Conversion: As discussed in my previous article, a debtor may convert from Chapter 13 to Chapter 7 if the confirmed plan runs amuck. This conversion can be devastating if the debtor has completed most of its plan. I will save conversion for the topic of a later article. Remember, approximately 2/3 of Chapter 13 plans will fail.

The Examiner's Perspective:

You are sitting with your file. A search of the records discloses that the property owner is bound up in a Chapter 13. What do you do? Well, let's look at two of the most probable circumstances. First, the homeowner is attempting to refinance, which means the lender will be the proposed insured. Second, the homeowner is attempting to sell, which means the purchaser will be the proposed insured. Mental gymnastics.

PROCEDURE FOR REFINANCE:

1) First off, confirm that the homeowner is, in fact, the debtor. Social security numbers are the best confirmation. Do not guess at this stage. If you erroneously show a homeowner in bankruptcy on Schedule A, you risk an enraged party.

2) Show the bankruptcy estate as vesting on Schedule A. Example of vesting line: Dave Spender, Chapter 13 debtor, being United States Bankruptcy Court Case No. 08-1234. Note: Individual debtors are not to be termed "debtor in possession". A debtor in possession is found when you have a business entity involved in Chapter 11.

3) As your first requirement, ask for an order from the bankruptcy court approving the proposed refinance transaction. You may hear a lot of title people say that you need either the order of abandonment, or proof that the home is exempt from the Chapter 13 case. The trustee may, during the confirmation of the proposed reorganization plan, determine that the home has no equity. The bankruptcy lingo is "no equity, not necessary for an effective reorganization." If this is found, the trustee will have no use for the home and may simply abandon it, similar to Chapter 7. Additionally, if the homeowner claims the home as exempt, and there is not a timely objection to the claimed exemption, the home may be considered exempt from the Chapter 13 case. It is also possible that the homeowner will attempt to refinance after confirmation of the Chapter 13 plan. If the home was not previously removed from the bankruptcy case, the rules would require notice to all existing creditors and an opportunity for each creditor to be heard regarding such refinancing. So you see, this can cause a tangled mess. Remember that the bankruptcy court controls the bankruptcy case. As such, it is not necessary to guess here or rely on taking a risk. Simply ask the court or the trustee for approval of the refinance as planned. The end result is sound: 1) you have court confirmation that there will not be a creditor attack, and 2) the lender, your insured, will be able to safely foreclose in the case of default. It has always been my position that many gray areas exist during the ongoing administration of a bankruptcy estate. The bankruptcy court has the authority to control all assets of the case. The court is also in the best position to understand the financial position of the debtor. Title companies are not positioned nor empowered to police the bankruptcy court. As such, you can cut out risk and time by simply asking for bankruptcy court approval of your transaction. I have read countless reorganization plans, especially plans filed by entities under Chapter 11. The plan usually discloses conditions upon conditions. The plan under Chapter 11 and Chapter 13 may change. Remember, Chapter 13 is a 3 to 5 year process. The financial condition, or the assets of the debtor, may change periodically. I have studied underwriter positions on various bankruptcy issues. Most underwriters seem to share my view that an ongoing bankruptcy estate can be dangerous. After offering numerous requirements and exceptions, and forcing the examiner to overwrite a commitment, most underwriters want the same thing: The order from the bankruptcy court.

PROCEDURE FOR SALE:

Note: It is not likely that a Chapter 13 debtor will be attempting to sell its property, as most Chapter 13 filings are designed to enable the debtor to keep his home. That being said, if the debtor owns additional property, say non-homestead, he may be attempting to sell the property as a means of funding his Chapter 13 plan. You are most likely to see this scenario at the onset of the Chapter 13 case, before confirmation of the plan.

1) As your first requirement, ask for an order from the bankruptcy court approving the proposed sale transaction.

2) Next, ask for an order confirming sale. This order will demonstrate that the court has looked at the sale price and is on board.

All reasoning is the same as discussed above.

FINALLY: Whether you are preparing a refinance or sale commitment, make sure you ascertain how the home is to be titled. This will be determined by the court. In other words, if the home is properly abandoned or exempt, the home will re-vest in the individual. However, if the home is to remain in the jurisdiction of the bankruptcy court, the bankruptcy estate will remain in title and the trustee will sign all necessary documents.

All property of a debtor becomes property of the bankruptcy estate at the moment a petition for relief if filed. Whether that asset will be exempt or abandoned is a matter of bankruptcy procedure. Property must go into the estate before it can come out. So, if a debtor fails to disclose real property on its list of assets, it is possible that the bankruptcy estate, although closed, will be reopened to administer that undisclosed asset. So, again, be very careful when dealing with a current or recent bankruptcy. Do not let a third party tell you that the property was exempt or abandoned. Confirm that the property was properly administered. This will require due diligence on the part of the examiner; the good examiner.

Bankruptcy brings all interests to the table. It is the intent of the bankruptcy court to offer equal distribution to all unsecured creditors. Many things can go wrong along the way and many lines can become blurred, so it is my advice to let the bankruptcy court guide your transaction. Don't let the tail wag the dog.

Later on dude -

dave