Chapter 13: Mortgage Defaults & Payments to Creditors, Study Guides, Projects, Research of Commercial Law

Download Chapter 13: Mortgage Defaults & Payments to Creditors and more Study Guides, Projects, Research Commercial Law in PDF only on Docsity! Bankruptcy Outline – Professor Davis us.docsity.com i. Defaults on Mortgage payments must be cured within a reasonable time 1. A reasonable time depends on the judge 2. 14.5, p. 312 a. Under § 1322(b)(5) any default on mortgage payments must be cured within a reasonable time à What is a reasonable time? i. 1 year ii. If we make him cure in 6 months, then we are doubling his mortgage payments. b. The home mortgage is exempted lien stripping. § 1322(b)(2). c. Thus, the only relief in Ch 13 as to a home mortgage is to “cure and maintain” – to catch up on the past due arrearage while making current payments on the mortgage as they come due. § 1322(b)(5). ii. Multiple Mortgages on a single home 1. Ct says: you cannot lien strip a home mortgage that is wholly or partially secured. 2. What about a wholly unsecured home mortgage? a. The SCt has not determined whether a home mortgage that is wholly unsecured may be stripped b. Tanner – held that a wholly unsecured mortgage can be stripped. b. Payments to Unsecured Creditors i. Overview: 1. The Plan Must be: a. Proposed in good faith. § 1325(a)(3) b. In the Best interest of creditors. § 1325(a)(4) i. Requires that each creditor receive at least as much as that creditor would have received if the debtor had gone into Ch 7. ii. You have to do a hypothetical Ch 7 and must pay to the unsecured creditors the PV of their unsecured claim in Ch 7. 2. All priority claimants under § 507 are entitled to payment in full § 1322(2). 3. Unsecured creditors enhance their position by arguing that the debtor should be required to make larger payment under the plan. ii. Disposable Income Test - § 1325(b) 1. The Median Income Test a. (1) Calculate the debtor’s current monthly income. § 1325(b) b. (2) Multiply Debtor’s CMI by 12 to get the debtor’s income, if: i. Debtors Income ≤ median income of the state à then the court will take a totality-of-the-circumstances approach to determine what expenses are reasonably necessary. ii. Debtors Income > median income of the state à then the debtor will have to use § 707(b)(2) to determine the amounts reasonably necessary to be expended. 2. Below-Median Debtors a. Courts apply a totality-of-the circumstances approach to determine what expenses are reasonably necessary. Bankruptcy Outline – Professor Davis us.docsity.com i. The IRS standards may be used to argue that their own actual expenses are reasonable b. The plan must be reasonable & proposed in good faith. c. There is a concern that people with income below the median could live better than people above the median because their reasonably necessary expenses are determined by a judge i. However, they don’t actually end up living better because usually the IRS standards are higher than are the debtors actual expenses. d. There are more below median debtors in Ch 13 than above median debtors: This is because you get to keep your house & your stuff. e. 15.1, p. 326 i. This debtors income is clearly below the median 1. Thus, she is not stuck with the IRS guidelines. 2. The debtor can propose any plan that is reasonable. ii. § 1325(b)(2)(A)(ii) – Charitable contributions may be made in an amount not to exceed 15% of gross income. iii. § 1325(b)(2)(A)(i) – Piano lessons and orthodontic work is probably not reasonable. 1. Idea à send the kid to the orthodontist today. Because the continuation of orthodontics is more reasonable than the commencement. 2. Piano lessons are hard to justify. 3. Above-Median Debtors a. Debtors who have income in excess of the applicable median suffer 2 adverse consequences: i. (1) They must propose a 5 year plan. § 1325(b)(4). ii. (2) Because the Ch 7 means test applies here too, if the debtors would have been barred from Ch 7 b/c of a surplus of income over expenses, the amount of that surplus is what they are required to pay to unsecured non-priority creditors in a Ch 13 plan. §1325(b)(2)-(3) b. Above-Median Debtors with A Surplus i. Surplus is calculated according to the presumptive abuse test of § 707(b)(2)(A)-(B). ii. If debtors have a surplus of income under the means test, § 1325(b)(3) requires that they pay unsecured non- priority creditors an amount equal to that surplus over the 60 months of their plan. c. Above-Median Debtors without a Surplus i. Treated like below median debtors for determining how much to pay. ii. They must pay over 5 years whatever is required by application of the disposable income test. 4. Ch 13 requires you build a plan around Projected Disposable Income a. This is different from regular disposable income. b. Problem 15.4 i. Here, you would project that she doesn’t make over- time Bankruptcy Outline – Professor Davis us.docsity.com b. Although it meets the best interests of creditors test, it can be argued that the expenses he has are not reasonably necessary. c. Like Leone, its probably not proposed in good faith. d. B/c his income is above the state mean, he must pay over 5 years. e. This is definitely better than Ch 7 for the creditors, but he should have to pay either over 5 years and he should not get the benefit of keeping his big house. 2. 15.2(B) a. This is a clear conflict of interest à each creditor want something else. The secured creditors here will get everything and the unsecureds will get very little in Ch 13. 3. 15.3 a. His life is better in Ch 7, b/c all his debt will go away. This debt is all dischargeable. b. The biggest issue is will he be able to qualify for Ch 7 under the means test? c. If his disposable income is below $182.50, he qualifies for Ch 7. 4. 15.6 a. A TIB or any of the unsecured creditors could request to have the Ch 13 repayment plan modified based on her new income. II. Threshold Eligibility for Chapter 13 a. § 109(e) limits access to Ch 13 to i. natural persons with ii. limited debts and iii. regular income. b. Regular Income: i. § 101(30) individual with regular income means that it’s sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13. ii. In re Murphy, p. 329 1. This is one judge’s approach to “regular income” 2. M lived with her boyfriend over 11 yrs & he regularly deposited money into her account. 3. Ct: regularity & stability is all that’s required to have regular income. § 101(30). 4. Allowance from her boyfriend counted as “regular income” 5. Some courts have gone the opposite way of Murphy. iii. Under old rules you had to be ‘wage earners’, now you just need ‘regular income’ iv. Income can be welfare, or unemployment (problem 16.3, p. 337à you would advise this debtor to sign up for unemployment.) c. The debts must be Non-contingent, Liquidated Debts i. The Debt Caps § 109(e): 1. unsecured limit = $336,900 2. secured limit = $1,010,650 3. 16.2, p. 337 a. Facts: Secured Debt = $250k; Unsecured Debt = $150k; Assets = $50k; She has $775 debt that is contingent on the default of the law firm. b. Advice: Bankruptcy Outline – Professor Davis us.docsity.com i. Make sure that the firm does not default, she should make the payments if she has to. ii. If he does default, she should file & get the A/S. Then she would wait fro the property increase in value and then surrender it to Lorraine. iii. The problem of getting her into Ch 13 assuming a default: 1. The bldg: $600k secured & $175 unsecured. 2. Her total secured debt = $850k; this does not exceed the limit. 3. Her total unsecured debt = $295k; which also is below the cap. 4. The problem here is that debt is not a debt secured by the property in her estate because she does not own this building!!! a. Therefore, she actually has unsecured debt of $775k + $120k = $895k, which exceeds the cap and she cannot be a Ch 13 debtor. b. As her lawyer, you would argue subrogation. She is paying the firm’s debt, so she gets Lorraine’s claims against John and John’s rights against Lorraine. So its actually her building. If she has to pay, then the building goes to her. So, via subrogation, she is secured. ii. Non-contingent Debts 1. If all events giving rise to liability occurred prior to the filing of the b- petition, the debt is not contingent. 2. Contingent Debt: the obligation is contingent on the occurrence of a future event that brings the liability into being (e.g a bet, a promissory note, a warranty obligation.) iii. Liquidated Debts 1. Liquidated Debt a. Typically means uncertain in liability or amount b. But, in bankruptcy, a debt is liquidated if it can be easily calculated in a straightforward way. 2. Un-liquidated Claims: liability may have been admitted, but the amount of the debt is in dispute. 3. Huelbig, p. 332: Allstate claimed $350K against debtor; Debtor denied liability, but Court concluded that this is liquidated claim. The debtor had too much debt and didn’t qualify for Ch13. The court declined to take into account the issue of liability to determine whether a claim is liquidated. Here the debt was clearly not contingent b/c all event giving rise to the claim has already occurred. Liquidated Debts (know the amount) Un-Liquidated Debts (don’t know the amount) Contingent Debts (liability has not been established) à Don’t know if you will have to pay à Know the amount it would be àDon’t know if you will have to pay àdon’t know how much. Eg. Breach of warranty before Bankruptcy Outline – Professor Davis us.docsity.com Eg. An endorsement on a note. liability attaches or the amount of damage can be calculated. Non-Contingent Debts (liability has been established) à You will definitely have to pay à You know how much These are the debts that count toward the Ch 13 eligibility cap à You will definitely have to pay à Don’t know how much. Eg. A yet-undetermined amount of money due for an established antitrust violation. 4. Appeal Bonds a. Problem 16.1, p. 337 b. Here, the debtor has a $360k judgment against him and he wants to appeal, but he has no money for an appeal bond. c. This is a noncontingent liquidated debt, so it will count toward the Ch 13 cap. This exceeds the cap, so he can’t be a Ch 13 debtor. d. § 1328(a)(4) this debt is damages awarded from debtor’s willful injury that caused personal injury to another and will not be discharged in bankruptcy anyway. e. But, a consequence of the A/S is that it stays execution on the judgment. Therefore, if you are in bankruptcy, you don’t have to put up a bond and you can immediately appeal. f. If he has a good basis for the appeal, then the claim is unliquidated & he won’t exceed the cap. g. Does he have regular income? Maybe i. His argument: income doesn’t have to be monthly, but over the duration of a plan, his income is regular. ii. Lawyer should advise him to get a job (even at McDonalds) to get regular income. iii. There is no requirement that the payments of the plan be all completely equal. III. Individual Chapter 11 a. Chapter 11 does not require a debtor to be a business b. Individuals must conform to payment plans like in Ch 13. c. Approval of the plan i. Ch 13: plan is confirmed or not depending on whether you meet all the statutory requirements ii. Ch 11: plan is confirmed depending on whether you get the votes from your creditors. d. Under Ch 11, i. if an individual files, then the value of the property distributed is not less than the disposable income over 5 yrs. § 1129(a)(15). ii. There is no difference between the chapters in terms of standard of living. § 1129(a)(15). iii. All property you acquire during the 5 year plan is property of the estate. § 1115. 1. Problem 16.4, p. 338, if he invents a patent, it will become property of the estate. a. Should this debtor file Ch 7 because of this? b. Ch 7 applies the means test and he probably won’t pass it. c. However, the means test applies only to debtors with primarily consumer debts à and this debtor has a lot of business debts. If Bankruptcy Outline – Professor Davis us.docsity.com iii. (3) Attorneys fees and costs (and sometimes punitive damages if bad faith) are granted against an unsuccessful involuntary petitioner. § 303(i) c. The Test for IB: i. (1) Ct must determine whether the Debtor has generally not been paying its debts as they come due. ii. (2) If the debtor has more than 12 creditors, then there must be 3 creditors who are not the subject of a bona fide dispute or holders of contingent claims who join in the petition for IB. d. What Type of Debtor May be Put Into IB § 303(a). 2 Types debtors may be put into IB: i. A person, except not a farmer or family farmer 1. Definition of “family farmer” from § 101(18) is a corp conducts a farming operation and that more than 80% of its earnings comes from farming. 2. Problem 18.7, p. 392 1) This is likely a farming operation b/c they are raising animals for profit. 2) You will need to determine whether more than 80% of the earnings comes from the farming. The problem will be getting a hold of that information. i. Could sue them and get it in discovery. ii. Could use state law remedies. ii. A corporation that is not a moneyed, business, or commercial corporation. 1. Problem 18.6, p. 392 2. You cannot put not for profit entity into IB. 3. You will have to think of a state remedy: 1) Bring a suit & get a judgment or 2) Ask the court to appoint a receiver. e. Debtor must fail the “Generally not Paying” Test to be put into IB. § 303(h)(1) i. Debts in bona fide dispute 1. These are excluded from the generally not paying test. § 303(h) 2. Debts in dispute may be either about liability or the amount owed. 3. Creditors that are owed these debts are ineligible to join in an IB petition. § 303(b) ii. What are the kinds of facts a creditor would have to uncover to prove that a debtor is “generally not paying” its debts? Problem 18.1, p. 390 1. Order a credit report 1) This will tell you who the debtors creditors are and how many it has 2) Then you must contact these creditors directly 3) The creditor report itself is hearsay à there may be errors on it. 2. Get a Dunn & Bradstreet Report 3. Search Public Records 4. Gossip 5. Hire a private investigator 6. Buy information online 7. As an attorney for a creditor trying to put a debtor in IB, you must tell the client how much the whole thing will cost and explain the risks under § 303(i) iii. Problem 18.2, p. 391 1. If GB has less than 12 creditors, then just 1 can push him into IB. To increase his number of creditors, he could have 1 creditor sell some of the debt to someone else. 2. The main problem: he is generally not paying his debts. Bankruptcy Outline – Professor Davis us.docsity.com 1) However, he is balance sheet solvent, so he really shouldn’t even be in bankruptcy. 2) If the other creditors all grant him an extension, then he is not “generally not paying” 3. The nature of his assets are highly illiquid. His p/ship interest in non- transferable without the consent of all the partners. If his assets were liquid, he could pay off SSB. 4. You need to figure out a way to convince SSB, that waiting is in SSB’s interest. 1) Could give them a priority! Negotiate. Offer them something. There is nothing wrong with treating one of your creditors better than the others outside of bankruptcy.