Workshop 4: Bankruptcy Law Overview

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Workshop 4 Bankruptcy Law Overview

• May 3, 2009Patricia Antonelli, Partridge Snow
  Hahn LLPLance E. Olsen, Routh Crabtree Olsen, P.S

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Overview

• Fresh start
• Bankruptcy Code, Bankruptcy Rules, Local Rules
• Bankruptcy Reform Act of 1978
• Amendments to Code in 1984, 1986, 1994
• BAPCPA (Bankruptcy Abuse Prevention and Consumer
  Protection Act of 2005)

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Bankruptcy Principles

• Bankruptcy estate
• Debtor vs. debtor-in-possession
• U.S. Trustee vs. Chapter 7 Trustee, Standing
  Chapter 13 Trustee, Chapter 11 Trustee

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Bankruptcy Principles

• Chapter 7 liquidation for individuals or
  businesses
• Chapter 13 wage earners or sole proprietor
  plan case
• Chapter 11 reorganization generally business or
  individuals (also small business debtors and
  single asset real estate cases)

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Bankruptcy Principles

• Discharge only persons can get discharge
• Automatic stay
• Section 341 creditors meetings
• Schedules and statements of affairs

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Chapter 7 Cases

• Chapter 7 trustee
• Automatic stay upon filing
• Means test test of whether debtor has means
  to be in Chapter 13 to pay back some dividend to
  unsecured creditors
• Deadline for objections to discharge (60 days
  after 341 meeting)

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Chapter 7 Cases

• Reaffirmation agreements (for secured debts)
• Creditors moving for relief from stay
• Trustees final report and closure of case
• Discharge of debtor does NOT remove protection of
  automatic stay
• Proof of claims filed 90 days after first 341
  meeting in no asset cases, no claims can be
  filed until Trustee finds assets

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Chapter 13 Cases

• Individuals with regular income may file Chapter
  13
• Debt limits 1,010,650 secured debt 336,900
  unsecured debt
• Chapter 13 co-debtor stayGood faith requirement
  and In re Marrama US Supreme Court case
• Chapter 13 plan 3 to 5-year maximum plan term

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Chapter 13 Cases

• Secured creditors paid outside of plan or
  directly by Trustee
• Differs from jurisdiction to jurisdiction
• 341 creditors meetings and confirmation
  hearings
• Proofs of claim filed 90 days after 341 meeting
• Confirmation of plan objections to confirmation
• Amendments to plan suspension of plan payments

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Chapter 13 Cases

• Common defaults in postpetition payments to
  mortgage creditor
• Motions for relief from stay
• Affidavits of non-compliance
• Notices of sale motions to sell
• Motions to refinance
• Chapter 13 discharge (no longer a
  superdischarge)

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Chapter 11 Cases

• First day motions and hearing
• Use of secured creditors cash collateral
• Proof of claim deadlines
• Greater expense than Chapters 7 or 13
• More professionals creditors committees

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Chapter 11 Cases

• Executory contracts and leases
• Disclosure statements and plan confirmation
• Cram down in plan voting
• Bifurcation/loan modification

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Chapter 11 Single Asset Real Estate Cases

• Single property or project (not residential real
  property 3 or less units)
• Generates substantially all of debtors income
• Limited automatic stay scope
• Plan within 90 days or interest payments to
  mortgage creditor

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Miscellaneous Traps for Mortgage Creditors

• Who really owns the mortgage?
• New Bankruptcy Rules Chapter 13 Best Practices
• Bankruptcy Form R Worksheet
• Claims register filing requirements for
  professional fees, notice of contractual change
  amounts and notice of other fees owed

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Chapter 7 and What it Means for the Compliance
Officer

• Documentation must be in order
• Know the location of the Original Note
• Insure imaged copies include endorsement
• Avoid inconsistency among Assignments of Deed and
  Indorsement of Note
• Insure recordings are timely and that erroneous
  releases are promptly remedied
• Review policies concerning execution of
  Affidavits and Declarations

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Chapter 13 and What it Means for the Compliance
Officer

• Documentation Must be in Order
• Claims and Motions must be filed in the name of
  the Real Party in Interest
• Funds must be applied in a manner consistent with
  the terms of a confirmed chapter 13 plan
• Systems must be in place to recognize relevant
  legal processes

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TILA Claims and Bankruptcy

• TILA Claims may be asserted within the Bankruptcy
• Claims asserted owned by the Trustee and can be
  asserted by the Trustee
• Trustee has full authority to settle and
  compromise
• Bankruptcy can present unique results and
  consequences to TILA Claims

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New Legislation?

• HR 1106 to amend Bankruptcy Code and, among other
  things, allow limited modification of first
  position liens has passed House and is currently
  held up in Senate
• Depending on who you talk to, Dead or Alive

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Possible Amendments to Bankruptcy Code

• Requires the court to disallow a claim that is
  subject to any remedy for rescission under the
  Truth in Lending Act, notwithstanding the prior
  entry of a foreclosure judgment
• Permits under limited circumstances a Chapter 13
  bankruptcy plan to modify the rights of claim
  holders, including a reduction in principal, with
  respect to a claim for a loan originated before
  the effective date of this Act and secured by a
  security interest in the debtor's principal
  residence that is the subject of a foreclosure
  notice.

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Possible Amendments to Bankruptcy Code

• Permits a Chapter 13 bankruptcy plan to deny
  debtor liability for certain fees and charges
  incurred while the bankruptcy case is pending and
  arising from a debt secured by the debtor's
  principal residence, unless the claim holder
  observes specified requirements.

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Possible Amendments to Bankruptcy Code

• Authorizes the court, upon request, to confirm a
  plan proposing a reduction in the interest rate
  on the loan secured by such security interest and
  that does not reduce the principal, provided the
  total monthly mortgage payment is reduced to a
  percentage of the debtor's income in accordance
  with the guidelines of the Obama Administration's
  Homeowner Affordability and Stability Plan, and
  the debtor, thereafter, would be able to prevent
  foreclosure and pay a fully amortizing 30-year
  loan at such reduced interest rate without such
  reduction in principal.
• Potentially effective immediately and applicable
  to all pending cases.

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Current Mortgage Modifications

• Known as cramdown or lienstripping
• Look for cramdowns in Chapter 13 plans
• Commercial loans, income-producing residential
  property and second homes

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• Questions