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Consumer Bankruptcy Part II—What Happens After Confirmation in Chapter 13 Proceedings

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Consumer Bankruptcy Part II—What Happens After Confirmation in Chapter 13 Proceedings

Many Chapter 13 cases go from confirmation to discharge with nary a wrinkle. Then there are the problem cases. This course will go into some of the issues that can arise after the confirmation of a Chapter 13 case that will require intervention from counsel. It will cover stay relief, motions to dismiss, modification of plans and, most importantly, how to get paid for handling this.

Transcript

- [Scott Goldstein] Hello, everyone, my name is Scott Goldstein and we are continuing a series of presentations on representing clients in Chapter 7 and Chapter 13 cases in consumer bankruptcy. Today is the second installment, the first one was getting a case to conversion in Chapter 13, and today, we move to the exciting world of getting into post-confirmation. So, what happens after your Plan is confirmed in a Chapter 13 case? So, first thing I think we should review however, is how do you get a Plan confirmed? So, obviously, the first thing you have to do is show up at the confirmation hearing, though, in various districts, you may not even need to appear, depending on how your court is scheduling things, sometimes, they'll just mark it on the papers. But, here's what you need to do in order to get your Plan to the point of being able to be confirmed, and this is mostly a drafting issue and making sure that your Plan has certain provisions. And this is all set out in 11 U.S.C. Section 1325, which says what you need to do in order to have your Plan be confirmed. First things first, let's deal with secured creditors, and just to review, secured creditors are those creditors who have a security interest in property by whatever means that might be, that could be a mortgage, it could be a car loan, it could be a judgment, it could be a U.C.C., whatever that priority... Sorry, that security claim is, that secured creditor has to be treated appropriately. So, what do you do with them in your Chapter 13 Plan? Option one, cure the creditor, pay them, pay them directly, and the creditor will keep their lien until you have paid them off. If you have fallen behind on a particular secured claim prior to the petition, like your client is, like most of my clients, about to be foreclosed upon, about to have their house sold in foreclosure, their car has been repossessed, any of these secured arrearage situations, you can cure the arrears, meaning pay 'em back, and maintain your regular payments. That is a very common thing in Chapter 13 and we call it cure and maintain. You can surrender the relevant property. So, let's say your client has a $15,000 loan on a 2002 Toyota Camry, with 195,000 miles on it, that barely runs in the warm weather when they try to turn it on, if the gods are kind. That car might be better to just surrender in full and final satisfaction of the claim because quite frankly, the car's not worth it unless it's the only way they're ever gonna get a car. At that point, you could surrender the car or you could do a cure and maintain, it depends on what your client needs best. You can pay off the entirety of that claim, of that secure claim, in your Chapter 13 Plan. If you're gonna do that, remember that you must pay interest on that payoff, and that payoff should generally be at what's called the till rating, which is the current prime plus a few points for the creditor's risk and inconvenience. That happens especially if you've got a lower claim and maybe you've got somebody who's paying 25, 30% on a car loan, so some obscene rate, and you're paying that down at a much lower rate. The other option you can sometimes do, just to remind people, it's not on the list but it is important, is if you have judgment liens that are either under-secured or impair the exemptions, meaning that once you subtract out your exemptions and your secured... And your other liens on the property against that judgment, you're left with a value of zero as opposed to the equity, you can strip away those liens and avoid the judgment value and therefore, treat that creditor as a total unsecured claim. Next, you've gotta pay your priority creditors in full. So, what's priority? The big priority claims you're gonna be dealing with in Chapter 13 land, are going to be taxes that are still classified as priority, which are taxes that are from return years, that are less than three years old, filed... Sorry, due less than two years, and assessed less than a year ago. Those are your major issues when it comes to priority and taxes, if you have priority tax claims, which you will know because the IRS and your local state authorities will file proofs of claim and they will tell you whether or not their claim is priority or secured, or unsecured, as the case may be. Domestic support obligations, another biggie, those have gotta get paid. Those are your big priority claims. Another one that you might see, not as common, but this may be if your client has had a prior Chapter 13 and your attorney number 2, 3, 5, whatever it may be, those prior attorneys, to the extent they were awarded fees in the prior cases, they are priority claimants pursuant to 11 U.S.C. 507 . They are definitely priority claims, but some districts don't necessarily think as much, but I generally consider them to be a priority unless somebody tells me different. Your unsecured creditors must receive the liquidation value of the case over the life of your Plan, and as a reminder, the liquidation value is the value of all assets minus all secured claims against the assets, minus your exemptions. That gives you your liquidation value. You also need to accommodate in that calculation, the cost of administration of the case, so that's about 10%. Once you have that number, and most bankruptcy softwares will calculate that for you so you don't have to get the calculator out and do it yourself, your liquidation value has to be paid out over the life of the case, that's also sometimes called the base Plan, but that's gotta get taken care of. Hopefully, your client does not have excess liquidation value, but that is sometimes a reason to file a Chapter 13, to protect equity in certain property. Next thing, your client must have paid all their post-petition domestic support obligations. That means if your client owes child support and/or alimony to a former spouse or a former anybody, they must pay those obligations. If it's not paid, your client cannot confirm their Plan. I've had several cases where I've been on the other side of the street representing the ex-spouse, where the client, the Chapter 13 debtor, could not pay those domestic support obligations because my client had a truly obscene amount of child support that was owed, and alimony. That case was absolutely impossible to confirm without my client's cooperation, and my client had no desire to cooperate, so that case cratered. So, if your client's got a post-petition domestic support obligation, it's gotta get paid. Most courts have some sort of certification that you must file in order to certify that that has been done, otherwise your Plan cannot be confirmed and your case will be dismissed. Next, your client must have filed all pre-petition tax returns where at least four years before the case was filed. Now, here's an interesting point, the code says at Section 1308, the last four years, however, most bankruptcy trustees will not confirm a case if you haven't filed all of the tax returns that need to be filed up to the date of filing of the bankruptcy case, because the IRS, it doesn't matter how old that unfiled return is, if they haven't received it, they're gonna file what's called an estimated claim for the taxes. And my experience has been that a trustee will not confirm a case with an estimated claim by the IRS or a state court, or a state taxing authority. Next, your Plan must be feasible, that means you have to show, usually by way of Schedules I and J as well as having provided the trustee with pay stubs, that your client has the monetary means by which to make good on their payment. Obviously, a good payment history pre-confirmation is a really strong argument in favor of this case being confirmable, but you also need to back it up with paper. In addition, if you're planning to sell property or resolve other issues in the Plan, you have to convince the trustee that you actually can do what you're planning on doing, and usually, with that sort of thing, actions speak louder than word. If you say you're gonna modify the loan, file your loss mitigation applications. If you say you're going to sell property, retain the realtor. Things like that. Next, your Plan has to be filed in good faith. This is tricky. Good faith is usually defined as the absence of bad faith. Some indicia that your case may not be in good faith is also indicia that your client needed to be in Chapter 13, filing on the eve of share of sale. I can't tell you how many number of cases I've done that and how many cases are filed every month in my districts that are the day before share of sale. Heck, the day of share of sale. Another indicia of bad faith might be a long history of litigation in state court where your client has lost at every single turn and now you're filing for bankruptcy. That could also be 'cause it was your last resort. Filing 2, 3, times, that could be an indication of bad faith. It could also be an indication that you've finally just figured out what the heck you're supposed to do and now you're gonna make it work. There are things that can be considered easily, bad faith. If your client files while they have an active bar against filing, that's a pretty good indicator of bad faith. If your client has provable fraud, that could be an indicator of bad faith. It really is fact specific, but if your case isn't filed in good faith, you're not getting confirmed. All right, the last thing that's really important, your client has to be paying all their disposable income into the Plan unless you are doing a 100% Plan. Recap on what's disposable income. Disposable income is either your leftovers on the means test, so if the means test shows there's leftover money, if your client's over median, you're gonna look at that. If your client is... If the means test shows zero disposable income for whatever reason, or your client's under median income, you're gonna look to your Schedule's I and J. An issue of feasibility is going to be if you have no surplus on your I and J without any hope to generate surplus, then you're gonna have an issue because that goes to feasibility, it goes to good faith, it doesn't... You have to have money. That's the short version. So, if your Schedule I and J shows negative income, you need to figure out before you file your case, and figure it out really quickly, where your client's going to get a surplus because they're going to need that surplus in order to confirm their Plan. So, what happens when your Plan is confirmed? Legally, that means that the provisions bind the client and the creditors, whether or not they actually are provided for and whether or not they have objected to, accepted the Plan, or reject the Plan. All property vests back in your client unless you have ticked the box that says that it re-vests on discharge, and the property vests free and clear of claims. It's very important. So, important to note in Chapter 13, objecting creditors will tend to be secured creditors, so your mortgage lender may object to your claim, your Plan, your car lender may object that they're not getting paid, but those are the people that generally object. I think I have had an unsecured creditor... In the last 12 years and hundreds of cases, I have had one unsecured creditor try to object, it got thrown out, but they tried to object. Generally, unsecured creditors don't get much of a voice unless they're gonna be filing something under Section 523, indication of non-dischargeability for some bad behavior of your clients. But generally, unsecured creditors don't get a say. Tax creditors, they won't object because they know that their claim, if it's not met, precludes confirmation of the Plan. But, secured creditors will object based on their treatment, are they being crammed down? Are they being lien stripped? What are you doing to them? They're gonna object. That being said, if your Plan is confirmed, their objection is overruled and they don't get a say any further. So, what does this mean? Does that mean that once your Plan is confirmed, it's completely final? Or, is it? What can happen to change the way things happen and to change the effect and plan of the Plan, as it were? Most important, what does your client have to do after the Plan is confirmed? What are their obligations? First, you must perform all the obligations under that Plan. What are those obligations? First and foremost, and you'll see, I put that in all capital letters with a whole lot of exclamation points, pay the trustee. That is your client's first and most significant obligation in Chapter 13. It is the entire way that it works. If your client doesn't pay the trustee, there's gonna be a very quick motion to dismiss. Next, you must pay all your secured claims that are being paid outside of the Plan directly to that relevant lender. So, if your client is paying their mortgage directly, they must in fact, pay that mortgage payment, they must pay their car payment. If there's another secured claim that is being paid outside the Plan, maybe a payment on a vacation home, maybe it's a payment towards something else secured against their house, so like a solar panel secured interest, something like that, they've gotta pay it. If you don't own your house and you file for another reason and you rent, you must pay your rent, because if you don't, your landlord's gonna move for stay relief and try to evict you. You gotta file your tax returns and that is an obligation. Some districts are more or less stringent about checking it, but several jurisdictions also require you to turn over your refund to your trustee, or a portion of your refund to the trustee. It's gonna depend. So, for instance, in the northern vicinage of New Jersey, so the northern third of our state, the Plan order says, "Pay X number of dollars out of your tax refund to the trustee every year," and you have to give the trustee the tax return. In the central vicinage, we don't have to do that. In the southern vicinage, they want the entire tax refund. In the southern district of New York, the Plan specifically provides that you get to keep $1,500 of any tax refunds combined, so state and federal, and the rest goes to the trustee. In the eastern district of New York, you have to turn over the whole thing. Your mileage may vary depending on where you are. You also need to, if you're gonna sell something and you say you're gonna sell it, you've gotta sell the property. It doesn't have to be done the day after confirmation, but you have to get those wheels in motion and do it within a reasonable time. Next, if you say you're gonna modify your mortgage, you better get that process started because if you don't do it in a reasonable period of time, you're gonna face another motion to dismiss. So, basically, if your Plan says you're gonna do something, do it. What is supposed to happen after the Plan is confirmed? This is what happens if your client is doing what they're supposed to do and your case is going to go smoothly. Hopefully, if you're filing Chapter 13's, this is the majority of your caseload. First and foremost, your client must make all payments required under the Plan, and do what their Plan says they're going to do. Your client has to take the required financial management class, so the debtor education course, and you're gonna have to file the form 423. Your debtor must provide all tax returns and refunds to the trustee, if they are required to do so under the terms of your Plan. Your client's gonna need to certify, at some point, that they have paid all their support obligations, and this is usually done by way of a certification form. In the district of New Jersey, we do that at two different points. We have a pre-confirmation certification that says, "I have paid all my support obligations up to the point of confirmation," and then at the time of discharge, we file a second certification that says, "I have paid all my child support obligations or alimony obligations at this time." In the southern district of New York, you have to file.. If your client doesn't have a support obligation, they file the certification about that at the outset of the case, so shortly before confirmation, and if they do have a support obligation, they file it at the end. If these things all happen and nothing weird else happens, your case will go from confirmation to discharge with minimal work on your part post-confirmation, you will get your fee from your Plan distributions, and you are done. Now, if that was the case in every single bankruptcy case, this would be a very, very short presentation and you'd get about a half a credit. That's not what happens every time though, so... What happens if you mess up in your Chapter 13 case after your Plan is confirmed? Let's start off with what happens if you don't pay? We'll go to 11 U.S.C. 1307 , that provides for the dismissal of a Chapter 13 case for material defaults with respect to a term of a confirmed Plan. Usually, that's gonna be brought by motion to dismiss by your trustee, and these are handled in accordance with local motion practice. Your mileage may vary widely across different jurisdictions and different districts, and different areas in the same state may treat things differently. So, a motion to dismiss is formatted differently sometimes, depending on where you are. And the way a different district... Different sections of your state, depending on your districting, deals with it, may vary by local rule and practice. So again, and this is something that is a very common refrain in bankruptcy, check your local rules, check your local forms, because every court's different. So, first and foremost, what are some reasons to dismiss, besides non-payment? A Plan can become non-feasible. What would do this? Sometimes, your cases get confirmed early, early on, before the claims are required to be paid. Sorry, before the claims are required to be filed. So, as you're probably aware, government entities have a extended time within which they can file proofs of claim. Sometimes, you have to get a claim in from a taxing authority that shows a higher tax claim than you thought. Sometimes, the mortgage arrears that you thought you had are higher than you initially thought. And sometimes, when you've got a case where you're paying a certain percentage of your claims, the percentage is higher because the claims that you are counting against, come in higher. Those can all be reasons for your Plan to suddenly be non-feasible, and that will occasion a motion to dismiss. Next, your debtor doesn't do something they said they're gonna do. Perhaps you can't sell the property or your sale price is less than what you need to pay off the mortgage. That's gonna cause your Plan to be non-feasible, 'cause if you're supposed to pay off the mortgage by selling the house, house's mortgage is 250,000, you can only sell the house for 200,000, you're gonna have a problem. In jurisdictions where you're allowed to have loan modification, if your loan mod fails, you're gonna have a problem and you're gonna have to redo your Plan. But meanwhile, your trustee may well file a motion to dismiss your case. So, assuming one of these bad things happens, what do you do? First things first, don't ignore the motion. I repeat that. Don't ignore the motion, file an opposition. In many jurisdictions, if you don't oppose, you don't get a say and the case is gonna get dismissed unopposed, they're not even gonna hear you. So again, file your opposition. That also means get ahold of your client and tell them to give you a solution as to how they're going to fix this, because your grounds for opposition on a motion to dismiss are very limited. Most motions to dismiss relate to payment. Your primary opposition to this, for a real opposition, which is, "This motion should be utterly denied and here's why..." Your opposition is gonna be, "I did what I was supposed to do," or, most importantly, "The money has been paid." If you haven't paid, you cannot truly oppose a motion to dismiss for a payment default. What you're really looking to do when you are opposing a motion to dismiss is to get yourself a little bit of time to work out a solution to the problem you have found. So, how do you resolve the trustee's motion to dismiss? Best way to do that is to cure the arrears on whatever default it is. Pay your arrears, fix the default, pay your arrears. How does that work? Sometimes, you can do what's called a roll-in where the trustee will take those payments over a series of payments, or just bump up your Plan payment if possible. That's really what you do for paying arrears, is either pay it all in one shot or pay it over time, but it's gotta get paid. Every so often, you can do what's called a recap where you take the payments made so far and then make a new payment going forward. Again, this depends on your trustee's preferences. And then you'll have to show... If you're looking to reduce the overall percentage that's being given to unsecured creditors or to other people, you're gonna wanna justify that by showing some sort of reduction in income. Another reason to get a motion to dismiss, you haven't sent in your tax returns. Send them in. Just get the tax returns. If the client is complaining about getting you the tax returns, ask them if they really wanna pay another bankruptcy for you to file a new case and fix it. Send in the tax returns if requested. If you're supposed to apply for a loan mod and you haven't done so, apply for the loan mod. If your Plan has become not feasible because of higher claims or something, move to modify your Plan. Sometimes, you can resolve these things the easy way, which I consider to be consent order, that's really the easiest way, working out the problem. Sometimes, you're gonna have to file a secondary motion in order to deal with the issue. So, let's say you've got some claims that came in that are just completely wrong but they throw off your feasibility, you're gonna have to move to object to those claims. So, your mileage may vary, it's gonna depend on your local practice, but that's kind of the best thing that you can do for any motion to dismiss, is just fix the problem. If the trustee says you didn't do something, do it, or show her that you did it. So, we've now talked about not paying the trustee and things that go wrong, what happens when you don't pay your secured creditor? Secured creditors don't usually move to dismiss. Secured creditors who aren't paid, file motions for relief from stay in order to be able to do what they want to do under state law, and proceed as to their right. So, in the case of real property, the lender doesn't wanna dismiss your bankruptcy case, they don't care about your bankruptcy case, they want stay relief so they can go ahead and foreclose on the real property. If you already had a share of sale scheduled before your petition was filed, and you get stay relief rendered against you, they can go right onto a foreclosure sale, the share of sale option, as long as there's a pre-judgment and your rent hasn't expired. Personal property, you get stay relief granted as to a car, the lender can come and repossess it, it doesn't matter if they've made payments. There is a certain car lender that firmly believes in their corporate heart that bankruptcy is evil and they, as a policy, are not very lenient with bankruptcy debtors. If you don't reaffirm, they'll repo your car. In Chapter 13, if you get stay relief, they will repo your car even if you're current. So, I would be careful and avoid stay relief. Stay relief also needs to be granted with respect to tenants who don't pay the rent. Landlords can only evict them after stay relief has been granted. So, what are the grounds? 11 U.S.C. Section 362 , on notice in a hearing, stay relief can be granted for cause, including lack of adequate protection if the debtor doesn't have equity or it's not necessary to an effective reorganization. What does this actually mean? That sounds really fancy, but what does it actually mean in real life, in your practice? The reason that stay relief motion is sought is that your client has not paid a post-petition continuing obligation, like the mortgage payment or the car payment. So, if your client hasn't paid, the lender's interest in the property is diminished and that is cause to file for stay relief. And another reason is that if you've got a state court liability action going along, so let's say your client was the liable party in a motor vehicle accident, stay relief may be sought to determine your client's liability so that the lender can proceed as against your client's insurance carrier. I filed quite a few of these cases in various bankruptcy courts, and the reason we filed them is the lender doesn't care about... Sorry, the insurance... Sorry, the plaintiff doesn't care about your client, the defendant, what the plaintiff wants is a crack at your client's insurance policy to get them to pay for your client's bad driving or negligent behaviors. So, that's when you're gonna go if the creditor really seeks that relief. Either the debtor or creditor may seek relief in order to get a comfort order to proceed in an action that hasn't been stayed in order to reassure a state court judge that they can move forward. What does that mean? So, stay relief doesn't apply... The automatic stay doesn't apply to every single action in state court. For instance, so this is the most common one, debtors and creditors may very well seek to get limited stay relief to allow them to get divorced. Matrimonial matters are stayed with respect to property division and determination of support obligations sometimes, but what is not stayed is the actual dissolution of a marriage. The problem is is most state court judges don't get that nuance and they hear bankruptcy, throw up their hands in the air and say, "I'm out. Come back to me when you're done in bankruptcy court and we'll deal with it then." I have filed several motions for limited relief from the automatic stay, to allow clients to terminate their marriages and move on with their lives. You may have to do this too. All right. So, then... Well, how do you defend? So, let's say there's a reason to defend this motion. How do you defend it? If a relief motion is based on non-payment, the best defense is a good offense, figure out what your client has actually paid and reconcile it with your movements claim. Most districts have a worksheet that they have to fill out that says how many months have been missed, what the payment is every month, and what the totals are. They make the lenders... You know, in mortgage cases, they make the lender recite whatever's still sitting in suspense, they have to go through and give a complete payment history. If they don't, stay relief usually won't be granted because it's a local rule requirement. If your client insists they made their payments, make them prove it, have them gather up their canceled checks, have them gather up their bank records if they paid another way. They have to actually show you so that you can show the court that they have done what they're supposed to do and stay relief is inappropriate. If your client turns out to have not actually paid or there's some other issue there that precludes a quick resolution by showing a payment history, your best bet is gonna be to get an agreement with the lender to cure the arrears, fix it. A lot of what I'm gonna say today is, fix the problem. So, what happens if stay relief is granted for non-payment? This is gonna depend on your Plan, on your what your Plan says. If your Plan payment, if that payment is contemplated in the Plan, your trustee's gonna dismiss your case, or try to dismiss, because you can't make all payments under your Plan. In some cases, however, the trustees are gonna let the case move forward. So, by way of an example, if you have a bankruptcy plan that requires you to pay your mortgage and the stay relief is granted because you weren't doing it, in the district of New Jersey, they'll move to dismiss that case immediately. Cross the river into New York, southern district, you may just continue a long pay of the arrears, and no one's gonna say anything unless you make a motion to modify the claim, or make a motion to modify the Plan. But in New York, if stay relief gets granted on a piece of property, they may do nothing. It depends on how active your trustee is, too. Some trustees will let the case keep going. Now, what do you do if stay relief is granted? So, first things first, you can still refile if your case gets dismissed because you got stay relief granted against you. Be aware however, of 11 U.S.C. 362 , that says that if you have a second filing within one year of a case being pending, your case only has a 30 day stay unless you move to extend, and that motion to extend under 362 says that you must have that motion heard within 30 days of the filing of your case, unless the court orders otherwise. So, some of my courts, rather than make me make motions under shortened time because the regular hearing dates don't match up with the timing, some of my judges will file what's called a bridge order, which simply says the motion was made, we can't hear it now, we'll hear it on our next available date, but the stay is extended. Some courts will make you do it on shortened time, which means a whole lot more hoops you have to jump through. Now, let's say your client just can't get it together and has a third filing within a one year rolling period. That means you have had three pending cases within the last 12 months. In that case, you have zero automatic stay, none at all, and you need to impose one. How you do that is subject to a bit of debate. Technically, under rule 7001, it's an injunctive order that needs to be sought by adversary proceeding, which means you would need to go ahead and file an order to show cause with temporary restraints, and then have this thing imposed, and then have a final hearing. Some courts allow you to do it by motion, but you have a very, very, very heavy burden, no matter what, to prove that your client is not filing in bad faith. So, if you're on round three of filings within a rolling 12 month period, consider very carefully, whether or not your client's got a very good excuse. One of the most common ones I see is that my client was working with a shady loan modification company which told them to file for bankruptcy on their own. They do, it stops the share of sale briefly, then the case gets dismissed. Wait a little bit, rinse and repeat, now you're on case number two, and then you're on case number three. They've gotten no assistance, they've got no help, and they've finally smartened up and got an attorney and realized that they had been scammed out of a lot of money and a lot of time, now they have bankruptcy number three on their record and now they're finally fixing things, that's a good reason to get a case... That's a good case to have the automatic stay imposed. So, what are some other reasons for stay relief? You wanna go back to court, in state court, for something else. The defense is gonna be based on the bankruptcy court being the proper, or at least a proper, venue for it. So, what are cases that are sent back? Car accident cases, to allow for liability determination so you can go against insurance. Matrimonial matters to allow for divorce and custody. And sometimes, you've got something that's been sitting in state court for years and they need to figure out whether or not there's fraud or something else. The state court's been dealing with this for years, it's far better for the state court in the interest of efficiency and understanding to deal with the matter and then send it back up. Very often, these state court cases where it's not a car insurance or matrimonial, it's gonna be an issue of dischargeability and the bankruptcy court's gonna look into what the state court finds as a matter of fact to determine whether or not, as a matter of law, 11 U.S.C. Section 523's bars on discharge apply. Remembering also, that Chapter 13 has a much narrower definition of what is non-dischargeable than Chapter 7. So, when you have a case that they wanna send back to state court for a stay relief motion, what happens? We look at what are called the Sonnax Industries factors, the Sonnax factors. These are not exclusive, but these are the major ones that the courts have generally cited to. One, will relief result in a partial or complete resolution of the issues? Two, does this case that you want to have adjudicated in state court lack any connection with or will not interfere with the bankruptcy case? Three, does the other proceeding involve your debtor defaulting as a fiduciary, or acting as a fiduciary? Four, is there a different tribunal, a specialized tribunal, that has better expertise to hear the cause of action? Five, and this is the car insurance issue, does the debtor's insurer assume full responsibility to defend? Car accident cases, this is a major factor. It's the insurance company's problem for the most part, your debtor is not an issue. Six, does this action really involve third parties and outside parties if it's a bankruptcy case? If so, it's a good one to go back. Seven, will litigation in another forum prejudice the interest of other people? Eight, is the judgment that would come out subject to equitable subordination? Nine, if the movement succeeds in the other matter, could that result in a judicial lien that you could avoid? 10, everyone's favorite, nice, broad, amorphous subject, in the interest of judicial economy and for expeditious and economical reason of resolution, would it be better to send this back to state court or keep it in bankruptcy? 11, were you ready for trial before this bankruptcy case was filed? If you filed your bankruptcy on the eve of a civil trial, you might get sent back to state court to finish that trial. And finally, impact of the stay on the party's imbalance of the harms. This is pretty loosey-goosey, but you have to analyze, ultimately, is this gonna hurt somebody? You know, who's it gonna hurt more? The court does a balancing act, and if the court feels in it's infinite wisdom that the balancing act goes... Better to go state court, down it goes. So, the next question I wanna do is, well, we said the Plan can be changed. Why would you change your Plan? You've gone through all this effort of developing this brilliant Plan for your client to cure their arrears, fix their problems, move on with their their lives, why would you change it? So, you can modify the Plan for many, many reasons. One, your clients had a house for however long, they come to you, they wanna save this house, they wanna save the house, they wanna save the house. Midway through your Plan, the oldest kid graduates college, finds a partner and moves out. The youngest kid goes off to college and has said point blank, "I'm in college in Hawaii and I'm never coming home." The dog dies and your clients decide that it is now time to sell the house. Or, your clients realize that property taxes are just insane and they're done, maybe they're getting older and they don't wanna do maintenance, whatever the reason is, they wanna sell the real property and get out. That means you may need to modify your Plan. Your clients could have a financial collapse and their Plan... Their income goes down and they can't pay $2,000 a month to the trustee anymore, 'cause they don't have it. Next, loss mitigation or loan modification fails. It happens. It may be happening more now than previously, because the interest rates have now gone up, so loan modification is not as attractive, but loan modification may fail. And another thing is, if your client needs more time to finish it, remember that if you filed a case that was under 60 months, you can modify your Plan to extend that Plan up to 60 months if your initial term was lower. So, maybe your client had more money, more cash on hand, but could pay their mortgage arrears over 36 months, so they need to adjust it, you could extend the Plan and reduce the payment amount. Next, remember we talked about the debtor providing the trustee with their tax returns? If the trustee sees an increase in income beyond a certain point, under Section 1329 of the bankruptcy code, they may request the Plan be modified. Another reason you could see the Plan modified is that tax claims come in late and you need to address them. So, if a tax claim comes in towards the end of the bar date, or even late sometimes, you've gotta pay it and that may require modifying that Plan. So, how do you modify a Plan? It's gonna depend on where you are, it's gonna depend on local practice. In some courts, you are required to file a motion to modify a confirmed Plan, and in some courts, you just file your Plan and the court schedules it. Remember that all the provisions of Section 1322 and Section 1325 become applicable to your modified Plan. What does that mean? You gotta treat creditors fairly, you have to treat the secured and priority creditors as we discussed originally. And most importantly, your Plan must be feasible. You have to have the money or the assets to do what you want to do. So, we talked about what happens if your client doesn't want the house anymore. So, if you wanna sell property in bankruptcy, sometimes you gotta do it, even if you originally wanted to save the house. Technically, getting rid of property, selling property, applies to anything, your car, your lawnmower, and so on. However, it is very rare for a debtor to have to deal with this sort of issue in anything other than a real estate case. So, you're mostly gonna deal with real estate, it's rare that you're gonna see a debtor in Chapter 13, let's say for instance, sell their business. So, if your client was in the regular world, they'd hire a realtor, depending on your jurisdiction, they'd hire a real estate attorney, list the house, and sell it. I live in one of the few states, along with New York, that provides for a absolute requirement for an attorney- Well, it's not an absolute requirement, but a pretty significant requirement. And in New York, it's almost always... You always have a lawyer. I know in a lot of other jurisdictions, it's just the realtor, but you almost always have an attorney up north, to sell property. So, what do you have to do? Under Section 327, that governs the relationship between debtors and professionals, including lawyers and realtors, Section 363 governs the use and sale of assets, and Section 330 deals with payment. So, what do you have to do? This is a step-by-step process. It's pretty simple to do. Your local practice may vary, but it's what you've gotta do if you're gonna sell real property in Chapter 13. Step one, after your client says, "I wanna sell my house," hire the professionals. What does that mean? Do you personally have to write him a check or fill out the forms? No. Your client hires the professionals, usually a realtor and a real estate attorney, and you could be that real estate attorney, which is a great way to make a little extra money in your bankruptcy case. You file retentions for application pursuant to 11 U.S.C. Section 327. This is also true if you are the real estate attorney. So, you must still file an application to retain yourself, and that's also a billable event as a bankruptcy counsel, so you can get paid, technically, to hire yourself to represent your client. And then, when your property is ready to close, you must file a motion to approve the sale under 11 U.S.C. Section 363. So, what do you have to look at when you sell property? So, it's important to note that selling property, you have to be doing it for the benefit of all the creditors in the estate, it's not just for the debtor's desire to get rid of a house, though that is important. So, the Chapter 13 debtor is authorized, pursuant to 11 U.S.C. Section 1304, to do what a trustee could do in Chapter 7, including selling a property under 11 U.S.C. 363 or Section 363 . You must be making a sale in good faith. What does that mean? First and foremost, the sale must be to a third party in general, that is, unless the property to be sold is so unique that only an insider could use it for sale. So, my example here, is the sale of an underlying property interest to the holder of a life estate. For example, I had a client whose family had the family farm and one sibling had a life estate, and the other siblings all had... And everyone had their... In addition to his whatever percentage of the property. And we had to sell the debtor's interest in that property, but we're selling it to their sibling. That required some very careful explanation to the court as to why this technical insider sale was the best possible value, because since the property was so broken up in terms of property interest and you had a life estate for someone who was not about to die, you could not get an external third party to pay a reasonable price for it. The only person that was gonna be interested was the life estate holder. You have to sell the property as best as possible, at fair market value. How do you do that? List the property on the MLS or appraise it. There can't be collusion between the parties to the sale, and you gotta sell the property to the highest bidder. And what happens if you don't? If you don't sell the property pursuant to approval... Sorry, if you sell the property without approval pursuant to 11 U.S.C. 363, it's a void transaction. You as the attorney, letting it happen, can get sanctioned, or your client can get sanctioned. And if your client sells a property to somebody who expects to take clear title, and they can't, then your client can be in very serious litigation issues. So, you gotta make sure to jump through the proper hoops, but it can be done and it's usually a good idea. If your client can't afford the property or they need the cash value that's locked up in this property, selling it might be in the best interest. We've had several cases recently, because of the run up in prices due to the pandemic, where quite a few clients decided that, you know what? It's time to cash out of the property, take their money, pay off what little bit of their Plan was left, and call it a day. So, there are a couple of issues that you have to address with the sale that are really interesting. So, under Bankruptcy Rule 6004, you need to do what's called a notice of proposed sale, and that's a separate form that simply says to the world, "We are gonna sell this property at X number of dollars. Please speak up before Y date. And if there is an objection, the court will have a hearing on the sale." And at that point, you'll need to explain to the court why your sale is at the highest and best price. You'll have to explain whatever procedures you did to get the highest and best offers. Very often, if you're doing a traditional real estate sale, the answer to that is, "Your Honor, we exposed the property to sale through multiple listing service, we had X number of open houses, this was the best offer that came in." Or, "This may not have been the highest offer, but it came with the best possible terms for the debtor." Any order authorizing sale is automatically stayed for 14 days unless the court, in granting the application to sell, waives the stay. For my part, whenever I draft a proposed order, I always include a rule 6004 waiver in that order, and I make sure to ask for it if I'm actually gonna have a hearing on it, because I wanna make sure that my client can go from hearing... Hopefully, the order is granted that same day and entered, and they can close the next day, or even that afternoon, because usually, my clients don't tell me they wanna sell their house unless I'm the one handling the sale. I get told three days before sale and then I have to, you know, scramble. One of the ways you can avoid that particular level of stress is to make sure that your clients understand that if they plan to do anything in their bankruptcy case with their property, they need to call you first. Now, as to payment of the professionals, sometimes your sale order will include payment terms, if not, when you prepare your motion for sale, also prepare applications for compensation for the realtor and real estate attorney to be heard at the same time. Another thing that could happen in your post-confirmation world are non-bankruptcy lawsuits. Your client may have a PI case, your client may have a fraud case, your client could have been harmed by something, or someone, or somehow, in their previous life, and they had a lawyer. Great. First and foremost, if you have a non-bankruptcy attorney working on a case in your bankruptcy, make sure you retain them pursuant to 11 U.S.C. Section 327 if they want to get paid. Next, if you settle a case, Federal Bankruptcy Rule 9019 requires that a compromise of a claim B approved by the bankruptcy court. There may be a form called a notice of proposed settlement that needs to be published, so you can tell the world that you're gonna settle out this lawsuit. Remember, these lawsuits are property of the bankruptcy estate under Section 541 and 1306. It's very important to note that in Chapter 13, any property acquired by the debtor during the course of the case is subject to the bankruptcy court and it is considered part of the bankruptcy estate. So, that means if your client is in bankruptcy and is perfectly fine, and has a slip and fall a year later, that's gotta be dealt with through the bankruptcy estate. And like I said, your outside counsel, your special counsel, whatever you call them, cannot be paid unless the bankruptcy court says it's okay, because in Chapter 13, they are being paid from estate funds, even if your client is paying 'em directly, that belongs to the bankruptcy estate. So, how do you actually approve these settlements? In some districts, you're gonna have to file what's called a notice of proposed compromise or notice of proposed settlement. Your mileage may vary. Check the rules. Under rule 9019, you have to file a motion to approve settlement. Sometimes, this is heard as an application with no actual court hearing, but you have to file this motion. You need an affidavit from special counsel as to the nature of litigation, their experience, the reasonableness of settlement, and the benefit to the estate. Generally, a court's gonna defer to the expert in terms of the reasonableness of the settlement numbers and things like that. I have not... I don't think I've ever seen a bankruptcy court disallow a settlement in Chapter 13. I know it happens in Chapter 11 sometimes, but it doesn't happen in Chapter 13 all that often. Now, next, you wanna think about all this extra work you may have just done for your clients in your Chapter 13 case post-petition. Now, I don't know about you all, but I don't work for free, so money makes the bankruptcy go round. First things first, don't send your client a bill and expect a check. That's a bad thing, okay? You cannot just send your client a bill. 11 U.S.C. Section 330 governs payments by the debtor to an attorney. If you take money from a client without getting leave of court, you can be forced to discord your fees. If you do it repeatedly, you're gonna get sanctioned. That sanction could actually include referral to the disciplinary authorities, so I would strongly suggest, that if you wanna get paid by your client, you comply with Section 330. Some courts do have fee schedules that they enforce unless you're billing hourly, and you can always file a fee application, and you actually should file a fee application. When doing your fee application, the court's gonna consider the following factors, the time spent, the rates charged, whether the services were necessary to the administration of or beneficial at the time, to the estate or the case. Whether you were reasonably efficient with your time in light of the complexity, importance, and nature of the issue. If you're board certified, that might be important. And whether compensation is reasonable based on the normal compensation rates for people of your skill level and experience in other cases. If you are a second year attorney charging $1,000 an hour, it is unlikely the court is going to let you do that. So, remember the age-old saying, "Pigs get fat, hogs get slaughtered." When you're doing your fee application, be careful. Section 330 , you cannot, you are not permitted, to churn the file. Duplicative and/or unnecessary services are not compensable. The courts know darn well that some attorneys churn files like butter, and they guard against it because they are there to not just, you know, make payments to attorneys, but they are there to help the debtor and help the debtor get a fresh start. If your fee application contemplates increasing your fees in the Plan, depending on your local jurisdiction, the court may just reduce the dividend to unsecured creditors, or the court may force you to modify your Plan and increase the Plan payment in order to allow you to get paid. So, be aware of what the court's gonna do in the event you have to increase your fees. So, finally, when your case is about to be closed out, what happens? All right? At the end of the case, there are a few administrative issues you have to get cleaned up. Some courts have closing certifications or affidavits that need to be filed. If your client hasn't done their second financial management course, gotta make sure to get them done with that. Some courts have a motion to actually enter the discharge, so they actually have to file a motion to do that. Some courts just do it automatically. For example, in the districts of New Jersey, in my districts, the district of New Jersey and the southern and eastern districts of New York, as long as you have ticked all the boxes and done what you're supposed to do, the courts just enter the order of discharge. Sometimes, if you stripped a lien with a junior mortgage, you need to get an exemplified copy of that order to have it filed with the county clerk to strip off that junior mortgage. In the district of New Jersey, there is a motion to avoid to... There's a motion to confirm the avoidance of the junior mortgage lien, so you may have to file that just to get the final order. And again, make sure your client takes the financial management course. And then, if all these things happen, and all this stuff is done, and all those stay relief motions and motions to dismiss have been successfully dealt with, or even better, your client has never had a problem and just does what they're supposed to do throughout the life of the case, the court issues the discharge, and you, my friend, are done with your Chapter 13 case. Thank you, everyone, for listening. My name is Scott Goldstein, and I hope this was formative.

Presenter(s)

SG
Scott Goldstein
Founder and Principal Attorney
Law Offices of Scott J. Goldstein, LLC

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