Bankruptcy is one of those mystical creatures that we’ve all heard about but hope we never encounter it. If your association hasn’t yet dealt with an owner who filed or is in an active bankruptcy, there’s a very good chance that you will! In fact, bankruptcies are frequently used by owners to prevent further collection actions, stop foreclosures, or otherwise restructure or assist with ongoing financial obligations that are no longer affordable.
Following is a brief question and answer segment containing the questions we hear the most. The important thing to remember is to notify legal counsel as soon as possible if your association receives notice that an owner has filed bankruptcy.
1. What types of bankruptcy are there?
- There are two primary consumer bankruptcy chapters, Chapter 7 and Chapter 13. A Chapter 7 is also known as a “liquidation” wherein the trustee administers the case and returns or sells the individual’s non-exempt assets.
- A Chapter 13 bankruptcy is also known as a reorganization or repayment plan, wherein the debtor can “catch up” on past due payments through the repayment plan.
2. How many times can a person file bankruptcy?
- The Bankruptcy code does not specify or limit the amount of times a person may file bankruptcy. However, the code does limit a debtor’s ability to file a bankruptcy based on the time that has passed since the prior bankruptcy was filed. For example, one may only file a Chapter 7 bankruptcy if it has been at least eight years since filing the last Chapter 7 bankruptcy.
3. Why does filing bankruptcy prohibit us from continuing to collect or sue the debtor?
- Pursuant to the U.S. Bankruptcy Code, an “automatic stay” applies once the bankruptcy petition is filed. An automatic stay is a hold or suspension on further collection proceedings, including lawsuits, garnishments, and even telephone calls demanding payment. Continued attempts to collect or pursue collection in any fashion can be considered a violation of the automatic stay, which could result in liability for violating the automatic stay, meaning an association could be held liable for damages, attorney fees and costs if it continues to pursue delinquent owners while they are in bankruptcy.
4. What is a Motion to Dismiss?
- A Motion to Dismiss is a request that the court dismiss the bankruptcy case for sufficient cause and grounds. For example, a motion to dismiss may be filed alleging material default of the debtor to comply with the Chapter 13 Plan by failing to make post-petition assessment payments directly to the association as required by the Plan. The debtor has the opportunity to respond to this motion and request a hearing, and the court may choose to grant or deny the motion.
5. What is a Motion for Relief from Stay?
- A Motion for Relief from Stay is a request that the court lift the automatic stay so the association may proceed with continued collection or foreclosure efforts. A motion for relief from stay is often filed when the debtor has failed to pay assessments that become due after filing a bankruptcy or the association believes the collateral (the property) is not adequately protected. The debtor has the opportunity to respond to this motion and request a hearing, and the court may choose to grant or deny the motion.
6. What is the difference between pre-petition and post-petition balances and payments?
- Pre-petition balances are the amounts due up to the day the bankruptcy is filed. The pre-petition balance is the amount that would be reflected on the proof of claim when filed in the bankruptcy case.
- Post-petition balances are the amounts due from the date the bankruptcy is filed on. Post-petition balances may be used as a basis for filing a Motion to Dismiss or Motion for Relief from Stay.
7. Why do we need to split ledgers?
- Dividing or “splitting” the ledgers into pre-petition and post-petition ledgers is best practice for a few reasons:
- It provides for cleaner pre-petition and post-petition balances for filing the proof of claim and filing post-petition actions such as motions to dismiss;
- Interest and late fees cannot be charged on the pre-petition balance. The balance as of the date of filing remains firm. No further charges, interest, or fees may be added to that balance while the debtor is in bankruptcy.
- The post-petition ledger must begin at $0.00. Any late fees, costs, or interest must be calculated based upon the post-petition amounts only.
8. What is a proof of claim and why is it important?
- A proof of claim is a document filed by the creditor (i.e. association) specifically acknowledging the individual owes money to such creditor. In order for a creditor to be paid by the trustee through the Chapter 13 Plan, the creditor must file a proof of claim on or before the proof of claim deadline.
9. What is a Chapter 13 Plan? Why is it important?
- A Chapter 13 Plan is the debtor’s plan to repay all or part of his/her debt. The Plan can propose repayment to creditors over a period of five years. The Chapter 13 Plan also dictates the treatment of the creditor, i.e. whether the creditor’s debt is secured or unsecured, whether a lien may be avoided or whether the debtor’s interest in property is being surrendered.
10. What is the §341 Meeting of Creditors?
- The § 341 Meeting of Creditors is a hearing wherein the debtor testifies under oath as to his bankruptcy petition. Creditors are not required to appear at the § 341 Meeting but may choose to appear to ask the debtor what he plans to do with secured property, like his residence or vehicle.
Please do not hesitate to contact any one of our attorneys at 303.432.9999 if you have additional questions about bankruptcies.