Category Archives: Chapter 13 Bankruptcy Information

The Latest About American Chopper’s Paul Teutul, Sr. Chapter 13 Bankruptcy Case

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This article was updated as of December 13, 2018. I wrote a previous article about American Chopper and Orange County Chopper’s Paul Teutul Sr.’s chapter 13 bankruptcy filing. There are various updates below as things have played out. You may have read that Paul Teutul, Jr. filed bankruptcy and I can confirm that it is technically true. Unfortunately the mass media does almost no research anymore and just spits out half-truths as fact. I have reviewed the bankruptcy documents filed and can tell you firsthand the filing is by who we all know as Paul Teutul, Sr., aka “Senior” but senior is actually legally a junior. The voluntary petition for bankruptcy protection under Chapter 13 of the Bankruptcy Code does not contain a scribers error and says Jr. because Paul Teutul, Sr. is actually a Jr. This is Bankruptcy Case No. 18-35310 filed in the Bankruptcy Court for the Southern District of New York on February 27, 2018. This case as it has progressed turned into a sale case and creditors will receive 100% of their allowed claims. This means Mr. Paul Teutul Sr. is paying all his debts according to bankruptcy code and applicable non-bankruptcy law through the sale of his real property.

December 13, 2018 and Summary of Ongoing Issues

Here Comes Leonite Capital, LLC

A new development is Leonite Capital, LLC, storming onto the scene alleging an equity stake in Orange County Choppers. Uh oh, this could be trouble. It is kind of like plugging leaking holes, one with your left hand, another with your right hand, another with your right foot and then bam, Leonite comes in and you are standing on your left foot trying to plug the next leak. So Leonite provides it sued Orange County Choppers Holdings, Inc. for at least $500,000.00 plus interest in damages. Leonite alleges it was not given proper notice of Paul Teutul, Sr.’s bankruptcy proceeding and was not listed as a creditor. This is technically true given Leonite did business with OCC, a separate legal entity from the individual, Paul Teutul, Sr. Leonite alleges it has a senior secured promissory note on OCC with right to equity in OCC. Leonite is objecting to confirmation/approval of Paul Teutul Sr.’s amended chapter 13 plan as it may negatively effect their claim. Paul Teutul Jr. filed an opposition to the allowance of Leonite’s claim with many great arguments. The most compelling I think is that Leonite filed its objection to confirmation on May 14, 2018, but failed to file a proof of claim until five months later. Also, the claim of Leonite is unliquidated, contingent and disputed and unlisted. Paul Teutul, Jr. argues the disallowance or not allowing Leonite’s late filed claim does nothing since the claim cannot be discharged given it was unlisted or scheduled in the petition. We shall see what happens…..

The next hearing date for all continued matters is now December 20, 2018.

JTM Motor Sport, Inc.’s Alleged Secured Claim and Pending Mediation of Controversy
Paul Teutul’s chapter 13 bankruptcy is still progressing albeit with some issues not being resolved yet. The issues with JTM Motorsport, Inc’s alleged secured claim is still not resolved. As provided in more detail below JTM Motorsports, Inc. performed work in Mr. Teutul’s 2009 Corvette. The 2009 Corvette is being held hostage for payment for the work performed resulting in the alleged secured claim of JTM Motorsport’s Inc. The only thing that has changed is on October 30, 2018, a hearing was held on Mr. Teutul’s objection the JTM’s alleged secured claim and JTM requested mediation. Paul Teutul, Jr.’s attorneys objected to mediation, but the Court overruled their objection ordered mediation. On November 2, 2018, JTM Motorsports, Inc. filed a motion for an order of approval for this matter to be mediated. On November 12, 2018, Paul Teutul, Jr. filed a limited opposition to the motion for mediation and proposed order providing that despite Paul Teutul Jr.’s repeated requests to inspect the 2009 Corvette to evaluate the parts used and worked performed JTM has not made the 2009 Corvette available. Paul Teutul Jr. is just requesting as part of the mediation he be able actually inspect the 2009 Corvette. A very reasonable and essential request so why is JTM not making the 2009 Corvette available? I will let you speculate. Also, why did JTM want mediation at all when the bankruptcy judge could have ruled on Paul Teutul Jr.’s objection to their claim? Again I will let you speculate. On December 3, 2018, the Court entered the order approving the mediator and procedures for the mediation. We shall see what happens.

October 18, 2018 Update

There has not been a lot of movement in Mr. Paul Teutul Sr.’s chapter 13 bankruptcy case. All the issues listed below still remain. The objection to JTM Motor Sports, Inc. has a scheduling order but nothing else has happened. Any objections to approval or confirmation of Mr. Teutul Sr’s chapter 13 plan of reorganization have been continued to a new confirmation hearing date of October 30, 2018. Mr. Teutul Sr. still needs to find a buyer and sell his primary residence to fund the chapter 13 plan of reorganization. The October 30, 2018, hearing may provide some additional information as to how long Mr. Teutul Sr. will have to sell the house. Some jurisdictions will only allow 12 months to complete a sale to fund a chapter 13 plan of reorganization.

July 8, 2018 Update

Mr. Paul Teutul Sr.’s bankruptcy case is progressing for the most part normally at this point and the issues that remain involve the following:

1. Sale of Mr. Paul Teutul Sr.’s real property to fund the chapter 13 plan;
2. Objection to JTM Motorsport, Inc.’s alleged secured claim; and
3. The unknown value of filed Claim No. 9 given the claim is subject to ongoing litigation; more to come on this given the litigation is ongoing…… see below.

JTM Motor Sports, Inc.

As discussed and detailed below JTM Motor Sports, Inc. filed a motion for relief from stay and filed a claim for payment in Mr. Paul Teutul Sr.’s case alleging a secured claim and the claim was secured by Mr. Paul Teutul Sr.’s 2009 Chevrolet Corvette ZR1. Mr. Paul Teutul Sr. opposed the motion for relief from stay and objected to the claim of JTM. The hearing on the objection to JTM’s alleged secured claim is July 30, 2018.

In bankruptcy cases with assets for creditors to share, whether a Chapter 7, Chapter 13 or Chapter 11/12, creditors are required to file proof of claims with evidence detailing how much they are owed and why they are entitled to receive payment or a distribution of the bankruptcy filers assets. That is what JTM Motor Sports, Inc. did. They filed a claim alleging an estimated secured claim totaling $51,000, Claim No. 8, filed on May 7, 2018. The problems is there is no documentation attached to the claim evidencing the amount owed or basis for perfection of the alleged secured claim. See Federal Rule of Bankruptcy Procedure 3001 and specifically 3001(d) if you really want to do some reading. A secured claim filed with absolutely no documentation for the basis of the secured claim is troubling. This is exactly why Mr. Paul Teutul Sr. is objecting to JTM’s alleged secured claim and requesting the Court expunge the claim entirely. Mr. Paul Teutul Sr. is also alleging he owes no money to JTM at all. See below for more details in a prior update about why JTM is alleging it has a secured claim in this case and why Mr. Paul Teutul, Sr. argues he owes them no money at all.

A larger overreaching issue and even more troubling aspect of what is going on here is what FRBP 3001(f) provides: Evidentiary Effect. A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim. Why should any bankruptcy filer and their counsel have to spend valuable time and money objecting to a claim that clearly has failed to meet the rules? If a filed proof of claim alleging a secured claim has no documentation attached, a barebones claim, how could the claim be given evidentiary effect and be prima facie evidence of validity of a claim? The barebones claim is of no evidentiary effect period……..

Filed Claims for Payment

So far the following claims filed in Mr. Paul Teutul Sr.’s Chapter 13 Bankruptcy:

Claim No. 1: Ally Bank; $15,283.50 secured by a 2011 Dodge Ram Pickup
Claim No. 2: Nationstar Mortgage LLC dba Mr. Cooper; $56,859.62 secured by real property
Claim No. 3: American Express c/o Becket and Lee LLP; $39,716.95 general unsecured claim
Claim No. 4: American Express c/o Becket and Lee LLP; $10,285.65 general unsecured claim
Claim No. 5: Midland Funding, LLC; $9,390.67 general unsecured claim
Claim No. 6: County of Orange c/o McCabe & Mark, LLP; $55,408.31 secured by real property
Claim No. 7: M&T Bank c/o Schiller Knapp Lefkowitz Hertzel LLP; $911,097.23 secured by real property
Claim No. 8: JTM Motorsports, Inc.; $51,000 secured claim allegedly secured by 2009 Corvette
Claim No. 9: Thomas Derbyshire c/o Bayard, P.A. Peter Ladig; NO AMOUNT LISTED GIVEN THIS CLAIM IS SUBJECT TO ONGOING LITIGATION ….. MORE TO COME REGARDING WHAT TAKES PLACE REGARDING THIS CLAIM
Claim No. 10: Cortland County; $8,363.59 secured by real property
Claim No. 11: New York Dept. of Taxation and Finance; $25,832.99 with $20,780.78 as priority claim and the remainder of $5,052.21 a general unsecured claim

June 13, 2018 Update

Things have generally died down in Mr. Paul Teutul, Sr.’s chapter 13 bankruptcy case. Mr. Teutul will sell his house, pay off all his debts and walk away with hopefully a boat load of money. Hopefully you are reading this and will know Mr. Paul Teutul, Jr. aka Paul Teutul, Sr. paid his debts in full.

The Current Drama

What is still going on is a fight picked by JTM Motor Sports, Inc. and Paul Teutul’s 2009 Chevrolet Corvette ZR1 in the possession of JTM Motor Sports, Inc. JTM is requesting the Bankruptcy Court give JTM the right to sell the Chevrolet Corvette ZR1 to satisfy JTM’s alleged garageman’s lien. Allegedly the deal was JTM would beef up the Corvette so Mr. Teutul Jr. could race it in an episode of “Street Outlaws” against “Farm Truck” and JTM would have their banners prominently displayed to get media attention. If you are not familiar with “Street Outlaws” Oklahoma City “Farm Truck” is a Chevrolet truck that has a camper shell and serious horsepower and set up to race, a sleeper truck or car. Both “Street Outlaws” and “American Chopper” are produced by Pilgrim Studios and are on the Discovery Channel. According to Paul Teutul the relationship with an associate of JTM, a Mr. Franco, that was helping to put the appearance together on “Street Outlaws” soured. To date Mr. Paul Teutul, Jr. has not appeared on “Street Outlaws” and raced “Farm Truck.” So now JTM is alleging they have a garageman’s lien in the vehicle for the parts and labor expended on the Corvette. They also asked for Mr. Teutul’s case to be dismissed which is ridiculous. From reading the declaration of Paul Teutul, Jr. and the attached emails it would seem JTM is going to have a tough time proving a garageman’s lien.

As of May 29, 2018

There have been many significant developments in Paul Teutul’s Sr. chapter 13 bankruptcy filing. There are a couple truly significant events that happened in May 2018. I was hoping American Chopper’s Paul Teutul, Sr. would save his home from foreclosure and work things out with M &T Bank, but his Third Amended Chapter 13 Plan no longer seeks loss mitigation to try and save his home. The Third Amended Chapter 13 Plan reduced the monthly plan payment to $750 a month for 60 months. That is a total pot of $45,000. The first chapter 13 plan filed proposed a pot of $146,928.60 to be paid at $2,448.81 for 60 months. This is a significant reduction.

Paul Teutul Sr.’s Third Amended Chapter 13 plan no longer requests loss mitigation regarding his home, but instead provides sell language as follows: “Debtor intends to sell Real Property having an address of 95 Judson Road, Montgomery, New York sold pursuant to 11 U.S.C. § 363(b). The Real Property is subject to a secured claim held by M&T Bank. Debtor has entered into an Exclusive Right to Sell Agreement with Ellis Sotheby’s International Realty to market the sale of Real Property. Once a Contract of Sale is entered into, the Debtor will amend this Plan accordingly. The net proceeds of the sale will be used to fund this Chapter 13 Plan and to pay all creditors in full. Debtor shall attach an affidavit containing all facts necessary for Court to approve the sale and should be prepared to address the requirements of 11 U.S.C. § 363 at the confirmation hearing. The Debtor shall submit an order approving sale upon confirmation of the Plan or the Court’s separate determination of the request, whichever is earlier.” This means the house we all saw on American Chopper is going to be sold and hopefully Paul Teutul, Sr. will walk away with some money from the sale after paying back property tax and M & T Bank missed mortgage payments. The Third Amended Chapter 13 Plan also provides all creditors will be paid in full. So those of you out there that are haters Paul Teutul Sr. is paying his creditors in full via the sale of his real property. This is not uncommon and what the Bankruptcy Code requires under Orange County Chopper Paul Teutul Sr.’s circumstances. It happens quite a bit actually, but all people seem to focus on is the person filed bankruptcy and do not take the time or educate themselves about what actually took place in the bankruptcy. I have no doubt Paul Teutul Sr. will continue to make good money and live a good life. He will also be 100% debt free upon completion of his Chapter 13 Plan.

Some History

If you do not know the huge building built as OCC’s headquarters was lost years ago and OCC leases a portion for the chopper business and restaurant OCC operates at the building. So you should have known then that things were not great. Unfortunately things did not improve for Paul Teutul, Sr. Not a whole lot has happened in the Chapter 13 bankruptcy filing. The original meeting of creditors was scheduled for March 28, 2018, was continued to April 11, 2018, at 12:30 p.m. Even in Chapter 13 cases few creditors show up to ask the debtor, Paul Teutul, Sr., questions. The meeting of creditors is a very limited forum and there is not a lot of time for creditors to ask questions after the trustee and/or their attorney asks their questions. If a creditor would like more time and request documents they may file an application for an order pursuant to FRBP 2004. I am sure there will be a couple creditors that show up because Paul Teutul, Sr. is the debtor and no other reason than that. I am a bankruptcy attorney and worked for a Chapter 13 Trustee. I would be the one questioning Paul Teutul, Sr. at this meeting of creditors. That was part of the job. Generally even under Paul Teutul, Sr.’s circumstances the meeting of creditors should not be too eventful.

Hearing Regarding Objection To Request For Loss Mitigation

A hearing that truly could be eventful and is the keystone for the entire Chapter 13 case is the hearing regarding Paul Teutul Sr.’s request for loss mitigation regarding his house pursuant to the terms of the Amended Chapter 13 Plan Paul Teutul, Sr. Please note for later Paul Teutul Sr.’s Chapter 13 petition starting this bankruptcy case was filed on February, 27, 2018. Paul Teutul, Sr. has checked the box for loss mitigation regarding his primary residence. Once creditors are served with the Chapter 13 Plan that may object to how the plan is treating them as a creditor.

On March 15, 2018, bankruptcy attorney Lisa Milas, on behalf of M&T Bank, the servicer of the loan and the owner Manufactures & Traders Trust Company, filed an objection to Paul Teutul’s Sr.’s request for loss mitigation. Loss mitigation is a fancy way of saying modification of the terms of the loan that can no longer be followed or have not been followed, deed in lieu of foreclosure with agreed upon terms or consensual sale. Paul Teutul, Sr. originally was loaned $1,500,000 from M&T Mortgage Corporation, another name used for the secured lender that I assume is Manufactures & Traders Trust Company since M&T Bank is the servicer, on September 27, 2005, secured by Paul Teutul Sr.’s primary residence. The mortgage was first modified October 10, 2013, and modified again on January 14, 2016. M&T Bank is objecting to Paul Teutul, Sr.’s request for loss mitigation given M&T Bank recently reviewed the loan and denied Paul Teutul, Sr.’s request for modification. There is a denial letter attached to the objection to Paul Teutul, Sr.’s request for loss mitigation as an exhibit and the rejection letter is dated December 18, 2017. This bankruptcy case was filed on February 27, 2018. M&T Bank’s objection says the loan was reviewed in January though. M&T Bank denied Paul Teutul, Sr.’s request for loss mitigation or modification given the monthly loan payment would increase significantly and the modification would not result in the requisite surplus income even if the interest rate was reduced and the term extended.

So yes, that is how most modifications work. The total owed with missed mortgage payments added in is spread out over an extended term with a reduced interest rate to make the monthly loan payment affordable again. Apparently after two prior modifications M&T Bank does not believe Paul Teutul, Sr. will be able to make the modified payment given his current income and expenses. M&T Bank is owed $905,448.00 and the property securing the debt is allegedly worth $1,800,000.00. So after applying the NYCPLR Section 5206 exemption of $137,950.00, Paul Teutul, Sr. has $756,602.00 without deduction the cost of sale or potential capital gains tax.

So unfortunately the Bankruptcy Court denied loss mitigation and the Third Amended Chapter 13 Plan seeks to sell Mr. Teutul Sr.’s real property to pay off all creditors in full.

Income and Debts

I am going to hold off on sharing any sharp bankruptcy attorney opinions other that what is provided in the filed schedules of Paul Teutul, Sr. Income of about $13,000 from Orange County Choppers, $5,500 from family support and about $2,600 from Social Security without deduction taxes and various other deductions before net income. One of the deductions that jumped out at me was the $1,034.45 a month for paying back retirement account loans. I am working on another article that discusses why to never take a loan from a retirement account. I hate to see retirement account loans and then a bankruptcy petition is filed anyway. Retirement account loans are the gateway drug to bankruptcy. Another monthly expense that jumped out at me was the monthly property tax of $4,166.00 and monthly insurance of $566.00. I am not familiar with property tax in New York but this seems extremely high. Paul Teutul, Sr. lists the value of the property as $1,800,000.00. One of the largest debts listed is for property taxes of $51,230.98. The Amended Chapter 13 Plan also provides that about $80,000.00 in mortgage payments were not paid prior to Paul Teutul, Sr. filing for bankruptcy. As it stands Pau Teutul, Sr. is seeking loss mitigation regarding the mortgage with M&T Bank and paying into the Chapter 13 Plan from monthly income $2,448.00 for 60 months for a total of $146,880.00 total pot. [Update: Since this was originally written Mr. Teutul, Sr. has significantly amended his schedules of assets to include value and many more assets.]

How Can A Chapter 13 Case Be Involuntarily Dismissed?

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When an individual files a chapter 13 bankruptcy case to reorganize their debts involuntary dismissal of the case was most likely not the outcome desired. The entire reason for filing bankruptcy is to obtain relief from creditors. The case being involuntarily dismissed does not help. Involuntary dismissal does happen though. There are actually many ways a Chapter 13 Reorganization can be dismissed involuntarily or without the consent of the person filing the case. This article will focus on the most common reasons a Chapter 13 bankruptcy reorganization is dismissed by the filing of a motion to dismiss by the standing Chapter 13 Trustee assigned to administer the bankruptcy estate. Each jurisdiction has a standing Chapter 13 trustee assigned to administer all of the chapter 13 cases filed in that region. In the Bankruptcy Court for the Northern District of California we have three different standing Chapter 13 Trustees.

1. Failure to Pay or Failure to Timely Pay the Monthly Chapter 13 Plan Payment

This is the single most common reason a Chapter 13 case is dismissed. The reason is not because creditors will stop getting paid through the Chapter 13 plan when the debtor stops making the plan payments. Some bankruptcy attorneys will say the reason a motion to dismiss the case is filed is because the confirmed chapter 13 plan is violated when a debtor stops making the plan payments. While this is true, the real world reason is the Chapter 13 trustee gets a percentage of the monthly Chapter 13 plan payment to administer the Chapter 13 bankruptcy estate. Chapter 13 trustees cannot continue to administer cases they are not getting paid for. A Chapter 13 trustee could in theory go bankrupt themselves if they operate like that. Really there are many issues surrounding failure to make the monthly Chapter 13 plan payment any of the foregoing reasons are valid. At any point in the three to five year Chapter 13 plans if the monthly chapter 13 plan payments are not paid to the Chapter 13 trustee can file a motion to seek dismissal of the case. Some trustees are more aggressive than others and different offices handle nonpayment quite differently. Some Chapter 13 trustees will send a letter informing the chapter 13 debtor the amount not paid and when it must be paid by or a motion to dismiss the case will be filed. Others go straight to filing a motion to dismiss the case and set it for hearing. There is no mercy at all. Either pay or the case will be dismissed.

2. Failure to Confirm a Chapter 13 Plan of Reorganization

The requirements to confirm or approve a Chapter 13 Plan of reorganization are set forth in 11 U.S.C. Section 1325(a) and there are many requirements. Almost all jurisdictions use some version of a model chapter 13 plan that helps meet the requirements for confirmation or approval of the plan of reorganization by the court. Unfortunately model plans also hurt debtors in limiting their options to reorganize their debts. It cuts both ways. The goal is to try and make the reorganization more streamlined and less work for the court. Objections to confirmation of the chapter 13 plan are routinely filed by the chapter 13 trustee or secured creditors. Rarely do creditors holding general unsecured claims do anything in chapter 13 cases. Why? It is not worth their time or money to do anything but file a proof of claim and be done with it. For secured creditors or creditors with priority unsecured debts the law is different. Depending upon the circumstances secured creditors and creditors with priority unsecured debts will mostly be paid through the Chapter 13 plan of reorganization and the debt owed to them could be reorganized or changed for the benefit of the bankruptcy filer. Chapter 13 trustees also have to file objections to confirmation given they are the gatekeeper making sure the requirements for confirmation, as they determine, are met. In almost all circumstances if the Chapter 13 trustee recommends a Chapter 13 plan be confirmed the court will confirm the plan. It is when the objections to confirmation are not resolved or withdrawn a debtor and their bankruptcy attorney can run into problems and the case could be dismissed for undue delay in confirming or resolving the objections to confirmation. At some point a hearing will have to be held regarding confirmation of the Chapter 13 plan and the judged assigned to the case can weigh in on what should happen. If there is an issue that requires additional evidence to make a determination an evidentiary hearing or mini-trial will have to be conducted. If the court denies confirmation the debtor will usually be given additional time to amend the plan or the case will be converted to Chapter 7 or involuntarily dismissed.

3. Bad Faith of the Bankruptcy Filer is Case for Involuntary Dismissal

11 U.S.C. Section 1307(c) allows for the dismissal of a Chapter 13 case for cause on a finding of bad faith based upon the totality of the circumstances. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1222-23 (9th Cir. 1999). There are four factors to take into consideration: (1) whether the debtor misrepresented facts in his; petition or plan, unfairly manipulated the Code, or otherwise filed his petition or plan in an inequitable manner; (2) the debtor’s history of filings and dismissals; (3) whether the debtor intended to defeat state court litigation; and (4) whether egregious behavior is present. There is a lot of gray in these factors when determining whether a Chapter 13 case was filed in bad faith.

4. Sua Sponte Dismissal of a Chapter 13 Case

This is extremely rare but possible. Sua Sponte means the court on its own accord chooses to dismiss the Chapter 13 case given the court made the determination the case is not proper. Section 105(a) explicitly provides the bankruptcy court with this authority. In relevant part, § 105(a) states: “No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” See also Tennant v. Rojas (In re Tennant), 318 B.R. 860, 869 (9th Cir. BAP 2004) (holding that bankruptcy court may sua sponte dismiss a chapter 13 case under §§ 1307 and 105(a)).

Chapter 13 Bankruptcy and Whether HOA Dues are Discharged Post-Petiton

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The Ninth Circuit Bankruptcy Appellate Panel issued an unpublished opinion that analyzes the Bankruptcy Code through history as it applies to homeowner’s association dues. See Batali v. Mira Owners Association; BAP No. WW-14-1557-KiFJu. Ms. Lin and I have both written articles about HOA dues and this article does not discuss pre-petition homeowners association dues and their dischargeability. But please note, bankruptcy attorneys need also to be aware of whether or not the HOA has recorded a lien for the pre-filing unpaid dues.

In the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act the treatment of HOA dues was forever changed in Homeowner Association’s favor. There is a lot of confusion with homeowners associations and their nonbankruptcy attorneys regarding this issue. Many please say if you stay you pay. If you do not stay you do not pay.

1994 Changes to Bankruptcy Code

The push to not be able to discharge homeowner’s association dues post-petition began really in 1994. In 1994 Congress added Section 523(a)(16) to the Code. In 1994 Section 523(a)(16) excepted from discharge under §§ 727, 1141, 1228(a), 1228(b) or 1328(b):

A fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a dwelling unit that has condominium ownership or in a share of a cooperative housing corporation, but only if such fee or assessment is payable for a period during which — (A) the debtor physically occupied a dwelling unit in the condominium or cooperative project; or (B) the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.

2005 BAPCPA Changes to Section 523(a)(16)

Section 523(a)(16) was not changed again until the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Section 523(a)(16) was modified to include homeowners’ associations and delete the language that required debtors to actually physically reside in or collect rents rom the units.

There are a number of cases that discuss the post-petition treatment of HOA dues and whether they are discharged or not. A court in 1997 discussed whether HOA dues were a debt, and if so, did the Chapter 13 Plan provide for the debt? In that case since the time-share was surrendered through the plan the court reasoned the HOA dues were provided for and therefore discharged. The post-petition dues are a claim as defined by Section 101(5) of the Code. The Ninth Circuit Bankruptcy Appellate Panel addressed this issue in Foster v. Double R Ranch Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010). The 9th Circuit BAP concluded that concluded that the “ongoing ownership of property with a running covenant creates a postpetition claim even if the debtor does not use the property.”

The issue is whether post-petition homeowner’s associations are discharged upon completion of a Chapter 13 Plan?

To begin the discussion the binding effect of confirmation of a Chapter 13 Plan pursuant to Section 1327 needs to be addressed. Section 1327(a) provides: The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan. While this is true the language of the plan needs to be reviewed. The main problem here is that model Chapter 13 Plans are difference from jurisdiction to jurisdiction and what Chapter 13 Trustee will object to is different from jurisdiction to jurisdiction. Also, a debtor can add language to a Chapter 13 Plan that is not part of a model Chapter 13 Plan. In this case, Batali v. Mira Owners Association, Batali’s Chapter 13 Plan made no mention of discharging the post-petition dues owed to Mira Owners Association. So how can the binding effect of the Chapter 13 Plan discharge the dues owed if no mention of the dues is made? The 9th Cir. BAP concluded the Chapter 13 Plan cannot discharge post-petition dues if they are not mentioned in the Chapter 13 Plan pursuant to Section 1327. Also in the Batali case Mira Owner’s Association requested relief from stay to pursue Batali for the post-petition dues owed and was granted that relief without any opposition from Batali.
Going back to the In re Foster case decided by the 9th Cir. BAP the panel looked at Washington State Law and concluded that are recorded condominium declaration, like that of Mira Owner’s Association, runs with the land and is a property right that cannot be extinguished in a bankruptcy. As long as the debtor continues to have an interest in the property at issue, a debtor cannot discharge the post-petition assessments that arise from the covenant that runs with the property.

We are therefore back to “you stay you pay” argument many bankruptcy attorneys will recite. The argument goes that the debtor provided in the Chapter 13 Plan that they are surrendering the property pursuant to the terms of the confirmed Chapter 13 Plan. The Ninth Circuit Appellate Panel again refers to the reasoning in the Foster case they decided previously. A debtor cannot extinguish a homeowners association’s recorded declaration and may therefore not discharge the debtor’s post-petition assessments even if a debtor does not reside in the property. The 9th Cir. BAP does not believe Section 523(a)(16) provides generally that post-petition HOA dues are claims or debts that can be discharged pursuant to Section 1328(a) of the Code.

The Ninth Circuit Bankruptcy Appellate Panel holds that Section 523(a)(16) is not applicable to discharge under Section 1328(a) and that state law governs the substance of claims. So if the state you are in is different than Washington State Law or more specifically that the HOA declaration is not a covenant that runs with the land then the decision in this case may have been difference. The next issue is about what effect a debtor providing a piece of property is to be surrendered in a Chapter 13 Plan. Just because the Chapter 13 Plan says a property is to be surrendered that fact does not actually transfer the property out of the debtor’s name. The debtor still maintains their legal, equitable and possessory interest in the property until foreclosure or some other form of transfer of title out of the debtor’s name. Just giving up possession does not transfer title. Notice of intent to surrender only gives a creditor notice that a debtor will make the collateral available to the secured creditor to use their state law rights to take back the collateral securing the debt. Under most state laws the transfer of real property can only take place by deed.

In the Ninth Circuit and in the state of Washington, based upon Washington state law, homeowner’s association dues that come due after a Chapter 13 Bankruptcy case is filed and when the property titled is transferred out of the debtor’s name are not discharged. Like many things in law this analysis and conclusion may not be an absolute for other debtors in other states and with different Chapter 13 Plan language.

Can A Third Party Help Make A Chapter 13 Plan Payment?

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There are a number of requirements that must be met for proposed chapter 13 plans to be confirmed or approved by the bankruptcy court. See Section 1325 of the Bankruptcy Code for all of the requirements. The focus of this article is Section 1325(a)(6) which provides the court shall confirm a plan if, “the debtor will be able to make all payments under the plan and to comply with the plan.” The proposed chapter 13 plan must be feasible or possible. More or less the bankruptcy filer must be able to make the payments proposed in the chapter 13 plan for the entire life of the plan. Usually the plan will last three to five years depending upon the circumstances. So can a third party help make a chapter 13 plan payment each month for the entirety of the plan? The answer is yes under most circumstances.

Yes, A Third Party Can Help Make A Chapter 13 Plan Payment

This issue does not really come up too often for most bankruptcy lawyers. Most courts generally allow third party help, but it is disfavored for a number of reasons. See In re: Schwalb, 347 B.R. 726, 759 (Bankr. D. Nev. 2006. In Schwalb the court held that a debtor may rely on contributions from family and is not prohibited, but disfavored. Of course if the bankruptcy filer can get it done themselves that is much more favorable than having to rely on a third party for money each month. There has to be a firm commitment from the third party to make the contribution each month into the chapter 13 plan. If a third party contribution seems like it is speculative or will only be occasional then the chapter 13 plan can be considered not possible or feasible. The amount of the monthly contribution must be certain too. How can a court confirm or trustee recommend confirmation if the amount of the monthly contribution by the third party is not listed or known? There are a number of factors to consider: (1) the contributor’s relationship to the debtor and motivation in making the contributions; (2) the contributor’s long and undisputed history of making the contributions otherwise providing support for the debtor; (3) the commitment of the contributor to make the contribution in a specific amount for the duration of the chapter 13 plan; and (4) the financial stability of the contributor to make the proposed contribution. The bankruptcy filer and their bankruptcy attorney have the burden of proof in providing evidence to support confirmation of the proposed chapter 13 plan.

Why Would Someone Need Help With Their Monthly Chapter 13 Plan Payment?

The basic problem is the debtor or person filing bankruptcy does not have enough income after paying normal living expenses to meet their obligation under the bankruptcy code to creditors when filing chapter 13 bankruptcy. The bankruptcy filer may only have $100.00 left over each month, but they have taxes that must be paid back in the chapter 13 plan or mortgage arrears that must be paid back in the chapter 13 plan. To pay the unpaid taxes or mortgage arrears the bankruptcy filer, for example, would have to pay $300.00 each month to fund the plan and make it feasible. Again, the bankruptcy filer cannot afford the plan payment, so they obtain third party assistance from a friend or family member. The friend or family member pays the additional $200 a month to make the plan possible or feasible and meet the requirements of Section 1325(a)(6).

Are There Limits To Third Party Help In Chapter 13?

How these issues are dealt with is different from circuit to circuit, district to district and division to division. But generally speaking most jurisdictions allow third party help under most circumstances. In a recent case with third party help proposed, In re Carolyn Deutsh, 2015 Bankr. Lexis, 1368, the Bankruptcy Court actually denied confirmation of the debtor’s chapter 13 plan for not being feasible. What went wrong here? In this case the third party contributor was the debtor’s boyfriend. So, they are not married and the boyfriend is a new boyfriend who says he “intends to contribute only for so long as he is financially able” according to the declaration filed in the case. Okay, can that be relied upon? The bankruptcy court said no. The third party needs to have some sort of tie to the debtor that is not so new it cannot be depended upon. Also the language of the declaration leaves a lot to be said. Why the declaration in Deutsh or less says “I think or guess I will help” instead of “I will contribute $700 a month toward the chapter 13 monthly plan payment for the entire duration of the chapter 13 plan.” There still could have been an issue with the third party contributor being a new boyfriend, but if the language of the declaration had been more concise about the boyfriend’s willingness to help things in the Deutsh may have been different.

The moral of the story is make sure the third party contributor to the monthly chapter 13 plan payment is committed to help, you have known them for some time and the amount they will contribute each months is listed specifically in the declaration prepared and filed with the court.

Can a Lien be Stripped if Only One Spouse Files for Bankruptcy?

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In California, as part of the Ninth Circuit, the answer should be yes. The main distinction here is that California is a community property state. There are decisions from of circuits that contradict the decision discussed below. California is a community property state and both spouses are assumed to have command and control of community property assets. So why can a wholly unsecured or underwater lien be stripped if only one spouse files for bankruptcy?

The scenario is that a couple buys a house during marriage and therefore the presumption is the house is a community property asset. To be clear, there is no evidence to rebut this community property presumption because there is no evidence the funds used to purchase the house, pay the mortgage, insurance or property tax came from any separate property source. If there is any question as to whether the house is not community property be careful. So in this discussion the house is clearly a community property asset when filing for bankruptcy protection. Pursuant to Section 541(a)(2)(A) or (B) of the Bankruptcy Code all interests of the debtor and debtor’s spouse in community property as of the commencement of the case that is under the sole, equal, or joint management and control of the debtor; or liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

If the provisions of Section 541(a)(2)(A) or (B) are met then the community property of both spouses becomes property of the estate when one spouse files a bankruptcy petition. See In re Miller, 167 B.R. 202, 205 (Bankr.C.D.Cal. 1994). This issue was addressed in In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001). In Maynard, Lillian B. Maynard filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code and sought to strip off a wholly underwater mortgage from her real property. Her spouse did not file with her. Maynard’s bankruptcy attorneys filed a motion to value the property and eventually an order was entered ordering that the creditor’s claim is stripped as an encumbrance against Maynard’s real property and shall hereinafter be treated as a general unsecured claim pursuant to Maynard’s Chapter 13 Plan.

The creditor appealed various rulings of the lower bankruptcy court including whether the lien could be stripped given Maynard’s husband did not file for bankruptcy as well. The 9th Circuit Bankruptcy Appellate Panel held that under California law each spouse has an equal right to manage community property. Lawrence P. King et al., COLLIER FAMILY LAW 4.03[3][c] (Rev. 2000). Therefore, the real property of the nondebtor or non-filing spouse is included in the filing spouses or debtor’s estate and a creditor’s entire lien is subject to valuation and avoidance pursuant to Section 506(d) of the Bankruptcy Code.

If a fractional interest becomes property of the bankruptcy estate be careful. Bankruptcy lawyers should research how the property was purchased and how title of the property was taken at the time of purchase. The whole interest in the property the lien is trying to be stripped from must be part of the bankruptcy estate.

Can My Mortgage Company Foreclose on My House If I Have a Confirmed Chapter 13 Plan?

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There are a number of issues regarding your home and filing a Chapter 13 bankruptcy case. Were you current on the mortgage payments at the time of filing of the bankruptcy case? Did you miss payments after the bankruptcy case was filed? For arguments sake we will assume for this article that: (1) You missed 10 months of mortgage payments before the case was filed (2) you intend to save the house and make up the missed mortgage payments in the Chapter 13 Plan. You are filing the Chapter 13 to payback the 10 missed mortgage payments and make all of your normal mortgage payments as they come due after the bankruptcy case is filed.

After you filed your Chapter 13 case your mortgage holder filed a motion for relief from stay and the bankruptcy court for whatever reason granted them relief. The mortgage company now has permission to continue the foreclosure process. The issues here is whether a mortgage company that has already received relief from the automatic stay can initiate foreclosure proceedings against you to foreclosure on your home while you are making payments in a confirmed/approved Chapter 13 Plan? The quick answer is no. The first issue is that the mortgage company has already obtained relief from stay. That means the mortgage companies bankruptcy lawyer has obtained permission from the bankruptcy court to continue to foreclose on your home even though you have filed for bankruptcy. You then proceeded with the Chapter 13 case and included the mortgage company in the Chapter 13 Plan to pay back the 10 missed mortgage payments in the Chapter 13 Plan. The mortgage company’s bankruptcy lawyers did not object to the Chapter 13 Plan when they had a chance to. The bankruptcy court then approves/confirms your Chapter 13 Plan. So can the mortgage company continue with foreclosure now that the confirmed/approved Chapter 13 Plan is paying them back the missed mortgage payments? The answer is again no.

The mortgage company is bound by the terms of the confirmed/approved Chapter 13 Plan. In In re Hilemand, 451 B.R. 522 (Bkrtcy C.C. CA. June 2011) Judge Tighe held that the mortgage company should have objected to confirmation of the Chapter 13 Plan or if there is a post-confirmation default by the bankruptcy filer then obtain a decision that the Chapter 13 Plan is no longer binding and therefore a foreclosure can proceeds. The mortgage company needs to file a motion to dismiss the case or modify the confirmed chapter 13 plan. What we normally see is the mortgage company files another motion for relief from stay after the Chapter 13 plan is confirmed if any mortgage payments are missed after bankruptcy case is filed.

What Happens if I Cannot Afford to Continue Making My Chapter 13 Plan Payments?

By Kitty J. Lin, Attorney at Law

Let’s face it – the economy is unstable.  If you’re one of the lucky few people that are 100% certain that your job is secure, then you are in the minority.  Most people don’t know if they will still have a job a month from now.  Therefore, it’s not surprising that even if you file a Chapter 13 bankruptcy case, that doesn’t mean your income will be the same throughout the term of your plan.  The basic concept behind the Chapter 13 “Wage Earner” bankruptcy plan is that, taking into account the income that you earn, minus all the allowable deductions, you have some money left over at the end of the month to pay your creditors.  To be considered a good faith filing you need to make sure that all your disposable income is being paid into the Chapter 13 plan. That may be easy to do in the beginning of your Chapter 13 bankruptcy term, but what happens when you receive a pay cut, or worse, lose your job?  Your expenses don’t decrease just because your income does.  Most expenses, like utilities, food and car insurance remain constant.  If there is a loss of income, you may not have sufficient funds each month for your Chapter 13 plan payment.  Therefore, what are some of the options that are available for you?

Converting Your Chapter 13 Bankruptcy into a Chapter 7 Bankruptcy Case

One of the first things to be determined is whether you would otherwise qualify for a Chapter 7 based on your current circumstances.  If you do qualify for a Chapter 7, then you can file a motion with the court to convert your case to a Chapter 7, and have your case be treated like it was a Chapter 7.   This means that you would receive a discharge of all your allowable unsecured debt within three to four months after the conversion to a Chapter 7, and then your case will be closed.

This option is good if you have no arrears for secured debt that you were paying through the Chapter 13 plan.  If there were arrears (for example, if you owed money to your first mortgage lender), then those arrears would need to be paid off.  If you cannot afford to pay back the remainder of the arrears, your collateral may be repossessed or foreclosed.

Essentially, all benefits that you enjoy in a Chapter 13 would no longer be applicable if your case is converted to Chapter 7, such as the lien stripping of a junior mortgage.  Even if the judge granted the motion to strip your junior mortgage, the lien is not taken off your property unless there is a successful completion of your Chapter 13 plan.  Converting your Chapter 13 case into a Chapter 7 case means that your Chapter 13 plan was not successfully completed, and therefore, no lien stripping.

Modifying Your Chapter 13 Plan

If you cannot qualify for a Chapter 7 or it is not in your best financial interest to convert to Chapter 7, the next option is to try to modify your Chapter 13 plan payments to a lower amount.  The judge may allow you to modify your Chapter 13 plan if you can show that there are changed circumstances which make it hard for you to continue making your plan payments.  The amount lowered depends on your specific case.  In some cases the Chapter 13 plan payments are already the lowest possible, and therefore a lower payment will not be feasible in the case.  If that were to occur, then the other possible option is to have your Chapter 13 case be dismissed.

Dismissal of Your Chapter 13 Case

Your Chapter 13 bankruptcy case may be dismissed either voluntarily or involuntarily (by the request of the trustee or creditors) due to non-payment.  If your case is dismissed, then your debts are not discharged, and you are back in the same position as before you filed your bankruptcy case.  Any amounts that were paid to creditors through the Chapter 13 plan will be credited towards your accounts with these creditors, but you will still owe the remaining balance.  If you were behind on your mortgage or car payments at the time the Chapter 13 case was filed, then your house may be foreclosed on and your car can be repossessed after dismissal and loss the protection from the bankruptcy court.

If you are facing some difficulties in your current Chapter 13 case, and you need to seek the advice of an experienced Fremont bankruptcy lawyer or San Jose bankruptcy lawyer, please contact us at 877-9NEW-LIFE or 877-963-9543 for a free consultation.