Since Chapter 11 is typically used by small businesses we’ll start off by comparing Chapter 7 and 13 proceedings. The key difference between Chapter 7 and Chapter 13 is the repayment of debt. Chapter 7 is bankruptcy liquidation, meaning your assets are liquidated to pay lenders, with certain exceptions. Chapter 13 allows consumers with a regular income to establish a payment plan to pay back all or some of their debts to creditors, over a period of time.

To qualify for a Chapter 7 bankruptcy a consumer must obtain mandatory credit counseling within 180 days before filing bankruptcy, meet the means test and then file a petition and related schedules with the bankruptcy court. Upon filing, the automatic stay is put in place, which limits the actions of creditors and other pending legal actions. The court will appoint a Trustee to oversee the case. In a Chapter 7 a consumer’s assets (valued as of the date of the filing), with certain exceptions, will be liquidated and the proceeds will be used to pay creditors. At the termination of the matter the consumer will receive a discharge.

In this Chapter, a consumer’s home may be saved only if payments are kept current. Therefore, a lender should closely monitor the payments. If they are not made, the lender should refer the account to Bankruptcy Counsel who can then apply for relief from the automatic stay.

As a less costly alternative the lender can wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the foreclosure process (this is not recommended since the foreclosure process may take several months and the sooner one starts the process the more likely that a greater recovery will be achieved). Time almost never favors the lender in the current market and in the foreclosure process.

In this Chapter a loan secured by a vehicle must be kept current. A lender should closely monitor the payments and insurance for the collateral. If they are not timely made nor kept in place the lender should refer this to Bankruptcy Counsel who can then apply for relief from the automatic stay. The lender can also wait until the trustee has abandoned his interest and the debtor has been discharged in Bankruptcy and then start the repossession/replevin process but this is not recommended. This collateral is subject to vast depreciation and loss.

The consumer has one of four options:

1. He can keep the payments current
2. Redeem the vehicle for its value (usually NADA wholesale or its equivalent)
3. surrender the vehicle, or
4. reaffirm the debt

While reaffirmation achieves the ultimate protection for a creditor, the amendments to the bankruptcy code have made this path so arduous that it is seldom achieved and the time and energy spent make this an impractical choice in most instances. If reaffirmed and approved by the Court, the consumer is bound by the original contract and may be sued for a deficiency if he were to default.

Bari Gambacorta is a Shareholder in Stark & Stark’s Bankruptcy & Creditors' Rights Group in the Lawrenceville, New Jersey office. For questions, please contact Mr. Gambacorta.

Recently, the Unsecured Creditor Agent appointed by the Court in the Orleans Homebuilders bankruptcy case sent demand letters to select creditors of Orleans seeking to compel the creditors to return money they received during the 90 days before the filing of the bankruptcy case. In the end, many contractors and suppliers will be searching far and wide to understand why they have to return money to a company who stiffed them by filing for bankruptcy. This seemingly unfair consequence is the result of Congress’ inclusion of the preference laws in the United States Bankruptcy Code.

What Was Congress Thinking? One of the fundamental objectives of the bankruptcy law is to make certain that similarly situated creditors are treated equally and share in the distribution of the debtor’s assets on a pro-rata basis. To meet those objectives (and others) and avoid the pillaging of weak debtors during the slide into bankruptcy, Congress targeted certain types of pre-bankruptcy transactions, which result from the debtor providing preferential treatment to one or more creditors in the period leading up to the filing for bankruptcy. These transfers are known as “preferential transfers” and result in the debtor or trustee filing “preference actions” to attack the transactions and recover payments.

Policies and theories are often times hard to stomach, especially when you are a creditor subject to a preference action. Nevertheless, it is the law and many creditors involved in the Orleans Homebuilders bankruptcy case are about to feel the pain of being sued by a bankruptcy company.

What is a Preference Payment? The 90 days prior to the filing for any bankruptcy case is referred to as the “preference period.” The United States Bankruptcy Code allows a trustee to recover payments made to unsecured creditors during the preference period if certain conditions are met. To recover a preferential transfer, a trustee must prove the following five (5) factors:

1. A transfer of an interest in the debtor’s property;
2. Made within 90 days of the date of the bankruptcy filing;
3. Made on account of an antecedent debt (past due);
4. Made while the debtor was insolvent; and
5. Enables the creditor to receive more than it would receive if the debtor was liquidated in a Chapter 7 case (i.e. the assets sold).

The trustee must prove all five (5) elements. However, the trustee gets the advantage of a statutory presumption, which provides that for preference purposes, that the debtor is presumed to be insolvent during the 90 days before the bankruptcy is filed. Also, note that “transfer” does not just cover payments, but any transfer, including the granting of certain liens.

How Do I Defend a Preference Lawsuit? If you are a supplier to a company who has filed for bankruptcy protection and you receive a preference complaint, there are several practical tips for defending a preference action.

1. Defend The Case, Do Not Ignore It. It is very important to seek an attorney with bankruptcy experience immediately in order to avoid allowing the trustee to win by default. Under the rules governing bankruptcy cases, you have 30 days from the issuance of the summons to file an answer. Do not delay - get an answer filed or contact the plaintiff’s lawyer to obtain an extension of the deadline to file an answer.
2. Do Not Confuse a Preference Claim With a Fraud or Breach of Contract Case. Do not confuse a preference claim with any other type of litigation you have experienced - it is a world unto itself. It does not matter that you fully performed under the contract or delivered conforming goods or services. It also does not matter that your intentions were noble and your good graces allowed the debtor to string out your payments. Preference claims are very rigid and once the five (5) elements described above are satisfied, a preference claim has been established, subject to certain defenses. You need to focus your attack on the five (5) elements the trustee needs to prove and the statutory defenses set forth in the Bankruptcy Code.
3. The Facts. The facts, and nothing but the facts, are what may save the day. It is very important to explain to your attorney all of the facts surrounding the transfers. In terms of general facts, you need to explain to your attorney the nature of your business, how transactions are generally performed within your business, and how you generally bill and collect invoices. In terms of specific facts, you need to prepare a complete payment history of your relationship with the debtor, assemble all invoices and shipping documents, verify payments, assemble all letters, emails and faxes relating to any billing and collection activities, and any other appropriate documents.
4. Chart the Invoice and Payment Dates. To evaluate defenses to a preference action and to be prepared to meet with your attorney, you need to organize the most important information. The best way to do this is to prepare a payment history chart. The chart should have at least five (5) columns, showing the invoice number, invoice date, date check was received, date check cleared, amount of check and time between invoice date and payment date (measured in days). The last column which shows how many days after the invoice date the payment was made is crucial information in evaluating the ordinary course of business defense and new value defense. A properly prepared chart with supporting documentation will save you time and money when meeting with your attorney.
5. Think About Potential Expert Witnesses Within Your Industry. You may need an expert witness to give you a report that the payments made during the 90-day preference period fall within ordinary business terms. Your attorney will explain that one of the main defenses to a preference action is that the payments were made in the ordinary course of business. You may want to look to competitors or local trade groups to find an expert in your particular industry. Not all cases require experts, but some do. Get a jump on the selection of an expert by reviewing your files and identifying capable experts in your industry.
6. Retain Experienced Bankruptcy Counsel. Preference cases are very unique and outside the experience of many lawyers. Bankruptcy lawyers are a somewhat tight group and is helpful to have an attorney who has litigated cases with the trustee in other matters. Also, you want to make certain that the trustee is forced to prove his entire case and all affirmative defenses are analyzed.
7. Reality Check - Some Cases Are Hard to Defend. Sometimes the trustee has a strong case and there are no affirmative defenses available. In this situation, your attorney needs to attempt to settle the case early at a favorable number. If you let emotion get in the way of sound business judgment, the end result may be unpleasant. An experienced lawyer can give you an honest opinion of your case and if it is very weak, find a way to gain some leverage to settle the case before you incur substantial legal and expert fees.

Preference claims often times result in unfair results. However, the fact remains that most large Chapter 11 cases end with a slew of preference actions. If you receive a preference complaint, immediately start working on your defense and get to an experience lawyer who can help you go on the offensive.

In In re Brown, Bankruptcy Judge Donald Steckroth held that a debtor remained liable for post-petition association assessments in a Chapter 7 proceeding. This liability remained, even after the unit was abandoned by the Trustee and the debtor did not live at the unit, so long as the debtor held legal title. 
 

The matter was brought before the Court on the debtor’s motion to compel the Association to release monies levied in a bank account, post-petition, after the bankruptcy case was closed. As background, the Association had received a state court judgment for only post-petition amounts, and subsequently levied on the debtor’s bank account. Prior to filing the motion, the debtor requested the bankruptcy case be reopened so that she could list the Association as a creditor, since she had failed to provide initial notice to the Association. After the bankruptcy case was reopened, the debtor then filed the motion against the Association, claiming that the subsequent levy was improper.

2005 Amendments to the Bankruptcy Code
After extensive oral argument, the Court found that the 2005 Amendments to the Bankruptcy Code clearly widened the scope of non-dischargeability under § 523(a)(16). The statute provides that a chapter 7 discharge:                       

“...does not discharge an individual debtor from any debt...for 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 unit that has condominium ownership...for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot...” (Emph. added).

As such, the Court ruled that the debtor remained liable for post-petition assessments.

Know Your Collection Rights in a Bankruptcy Case
Unit owners often feel that once they file a chapter 7 bankruptcy case and vacate the unit that they are free from the duty to pay their assessments to the Association. This decision validates and supports an Association’s efforts to ensure owner payment of these assessments.

Associations should not “give up” when bankruptcy is filed. When an Association knows its rights, and has counsel experienced in representing Associations vis-à-vis bankrupt owners, it can successfully navigate an owner’s bankruptcy and recover unpaid assessments.

Mr. Onder will join the Honorable Kathryn C. Ferguson, U.S.B.J., and Graig P. Corveleyn, Esq. as they guide the non‐bankruptcy attorney through the twists and turns of the bankruptcy process. For registration information, please contact the Mercer County Bar Association.

Under the Rules of Court, an objection to confirmation of a Chapter 13 plan must be filed with the court and served within a defined time period. A properly filed proof of claim that asserts a claim that is greater than the scheduled amount of the claim or the amount of the claim designated in the plan by the unit owner, serves as an objection to confirmation as to the amount of the claim. The trustee will confirm the plan based upon the higher amount set forth in the proof of claim, but that is not the end of the matter. The unit owner has sixty days to challenge the amount of the Association’s claim by filing a motion with the court. Thus, the Association must take affirmative action to secure its rights at the time notice of a Chapter 13 petition is received and during the confirmation proceedings. The Association must also monitor the case for sixty days following confirmation of the plan in case the unit owner decides to challenge the Association’s claim.
 

Stark & Stark’s Bankruptcy Group has filed numerous proof of claims in Chapter 13 matters and has monitored the claims process from start to finish. To ensure that your Association is protected, contact us as soon as notice of the filing of a Chapter 13 case is received.
 

In In Re Todd R. Roth, 10-13287 (JHW), the largest unsecured creditor of the debtor, a law firm, filed a motion to dismiss the debtor’s Chapter 13 case and objected to the confirmation of the Plan. The Court scheduled an evidentiary hearing to decide the motion to dismiss, but addressed the movant’s objection to the confirmation of the Plan.

As to confirmation of the Plan, the moving creditor argued that 401(k) contributions and repayments of a loan from a 401(k) account constitute disposable income that should be dedicated to pay unsecured creditors under the Plan. In opposition, the debtor submitted that post-BAPCPA, regular 401(k) contributions and repayment of a loan from a 401(k) account do not qualify as disposable income. The Court rejected the creditor’s arguments because, under BAPCPA, money being contributed to a 401(k) plan and money being used to repay a 401 (k) loan are not deemed disposable income.

However, the Court recognized that money utilized towards the repayment of a 401(k) loan should be reduced as the loan is repaid. As such, a creditor may inquire about the repayment terms of the loan. Consequently, the debtor may be required to propose a plan that steps up payment at a later date. For example, if the bankruptcy plan is for five years, but the loan will be repaid in two years, payments to creditors must increase at the beginning of the third year. In support, Court relied upon an unpublished bankruptcy court opinion that held that a step up plan may be required to include amounts presently being used to service a 401 (k) loan.

The Bankruptcy Court’s letter opinion highlights the need for a creditor objecting to a Chapter 13 Plan to request information and documentation pertaining to the length and repayment terms of a voluntary pension loan. The debtor may be required to pay additional money under the Plan, but without diligent investigation by creditor’s counsel, the terms of repayment of the loan may not be disclosed.

In the article, Mr. Posta states that there is uncertainty in the law about whether a transaction is a sale or a true lease, and stresses that this distinction is especially important when and if the owner/lessee of an asset files for bankruptcy. Mr. Posta advises lessors desiring true lease treatment to carefully document their transactions in order to protect their interests.

You can read the full article online here.

RESIDENTIAL UNITS WITH TENANTS
A person who takes title to a residential property containing tenants by way of a sheriff’s sale or deed in lieu of foreclosure, must provide notice no later than ten (10) business days after the sale, to any tenants of the property informing them that ownership has changed hands and that the tenants are not required to vacate the premises. 

This notice must be served by the new owner on the tenants by regular and certified mail, must be in both English and Spanish, must contain contact information to whom future rent is due and include a basic explanation of the tenant’s rights under the “Anti-Eviction Act”.  There is a particular form of notice required that the Department of Community Affairs will make  available on its website in a printable English and Spanish format that may be used.  (see www.state.nj.us/dca/ search Foreclosure Fairness Act)

The notice must also be posted prominently on the front door of each tenant’s unit. If the property contains ten (10) or more units, the new owner must post the notice in a common area of each residential building or structure on the property.

A similar notice with some additional information is also required if a summons and complaint or initial communication by a foreclosing creditor who seeks the tenant to vacate prior to the transfer of the property.

There must be no communication meant to persuade the tenant to vacate the premises except by way of a bona fide monetary offer, which must be in a made in a specific manner, and from which the tenant would have five (5) business days from receipt of the offer to accept and vacate or reject the offer.  Acceptance must be in writing.  No person or person’s agent may (1) make any misrepresentations of the rights of the tenant under the “Anti-Eviction Act” in order to induce the tenant to vacate the property; (2) state actions the owner may take against the tenant or imply the tenant is obligated to accept the offer; or, (3) any other form of harassment, such as failure to maintain the premises or rent increase in violation of municipal rent control or rent increase in violation of the Anti-Eviction Act or any other State, Federal or Municipal ordinance.

Any violation of the notice requirements or treatment of the tenants may result in triple damages or damages in the amount of $2,000.00 per violation plus attorney’s fees and costs.  Further civil or criminal actions may also be commenced against the creditor who violates this Act.

NOTICE REQUIREMENTS EFFECTIVE JANUARY 27, 2010
This Act requires that creditors serving foreclosures summons and complaints on residential property must within ten (10) days of service of the summons and complaint, notify the municipal clerk where the property is located. This will also affect any foreclosures filed  30 days before  February 16, 2010 which must also be reported to the respective municipal clerks.  The creditor must also notify the municipality if the owner of a residential property vacates or abandons a property on which a foreclosure action has been initiated. There is also a requirement to specify in the Foreclosure Complaint and notify the municipal Clerk with specified Act defined details if the property being foreclosed is an “Affordable Housing” unit. This notice must also be supplied to the municipal clerk within 10 days of the summons and complaint’s service.

After such notice if such property is found to be a nuisance or in violation of any applicable State or local code, the municipality must notify the creditor, whose responsibility it will be to correct the nuisance or violation. If the municipality expends public funds to abate a nuisance or correct a violation the municipality shall have the same recourse against the creditor as it would have against the “title owner”.

FORECLOSURE REPORTING REQUIREMENTS
Any creditor that initiates a mortgage foreclosure action in the Superior Court of New Jersey must report to the Department of Banking and Insurance, on a quarterly basis and in a specific format (organized by municipality), information about the number of mortgage foreclosures initiated by the creditor.

FORBEARANCE PERIOD FOR HIGH RISK MORTGAGE FORCLOSURES
If a foreclosure action is filed subject to the Fair Foreclosure Act, on a “high risk” mortgage loan, must grant the borrower a six (6) month forbearance upon request of the borrower to permit the borrower  to pursue a work out, loan modification or refinance. 

A “high risk loan” includes those loans that are interest only with a future reset rate; has a reset mortgage interest rate that increases the interest rate; contains payment option plan or “pick a payment” plan; contains a negative amortization schedule; is a subprime loan; contains an enforceable prepayment penalty; or, is a high cost home loan as defined by the New Jersey Home Ownership Security Act A subprime loan would include a consumer transaction secured by the consumer’s principal dwelling if it carries a rate of interest that exceeds the average prime offer rate as of the date the interest is set by 1.5 or more percentage points for loans secured by a first lien or 3.5 percentage points for loans secured by a subordinate lien. .

During this six (6) month period, the interest rate on the subject mortgage can not increase and the creditor may take no further action to pursue foreclosure. Notice of the forbearance right must be served with the summons and complaint.  If the borrow requests such a forbearance, it shall begin upon receipt of the borrower’s request. 

The forbearance notice must be include whether the loan is eligible to receive forbearance, that the borrower has the right to request forbearance no later than thirty (30) days after receipt of the summons and complaint; contact information as to where to send the request and that upon receipt of the request, the creditor shall inform the court to place a six (6) month stay on the foreclosure action. Once the forbearance period begins the borrower and creditor must participate in the foreclosure mediation process.

Should the borrower vacate the property anytime during the forbearance period, the forbearance period shall end. The forbearance right will only be effective until February 16, 2012 at which time this right shall expire.

The article discusses the recent increase in consumer bankruptcy filings and how a bankruptcy filing can impact a personal injury lawsuit.  Mr. Duggan offers several “Do’s & Don’ts” in order to assist personal injury lawyers through the United States Bankruptcy Code after their clients have been forced to file for bankruptcy.

You can read the full article online here. (PDF)

Mr. Duggan states, “Advisors should find counsel as soon as they begin to consider bankruptcy as an option. All too often, in an effort to keep their business afloat, small business owners deplete resources that could otherwise be protected in a bankruptcy case.”

You can read the full article online here.

For Associations, such a scenario often means that the debtor stops paying their post-petition assessments.  But what happens to all the money that the debtor paid the Chapter 13 Trustee during the  bankruptcy? Does this money get distributed to creditors, the debtor or does the Chapter 13 Trustee keep it?  And importantly, can the Associations get any of those funds back?

 

Opportunity to Recoup Post-Petition Assessments
During the life of a Chapter 13 case, the Chapter 13 Trustee has a duty to hold onto all plan payments made by the debtor.  Upon conversion to a Chapter 7 case, the Chapter 13 Trustee is required to account for these funds and notice creditors that these funds will be returned to the debtor. When this occurs, Associations have one last chance to get some or all of this money back, rather than letting the debtor get a windfall.
 

Questions for Associations to Ask Bankruptcy Counsel
It is imperative that the Associations take quick action and file opposition to the Chapter 13 trustee’s notice so it can possibly recoup these funds. Sometimes there may be a few thousand dollars held by the Chapter 13 Trustee. The Associations should talk with their bankruptcy attorney immediately.  Following are some questions to ask:

1. How much is owed post-petition?  It is advisable for the Association to provide its attorney an account history for the post-petition fees due and owing.  For instance, if it will cost $500 to file an objection and make an appearance, but there is only $100 held by the Chapter 13 Trustee for a $200 post-petition claim, it may not be worth pursuing.                      
2. Is there a consent order providing for an administrative claim?  There may be a consent order with the debtor providing for an administrative claim.  Bankruptcy Code §1326(a), specifically provides that the Chapter 13 Trustee is to pay all allowed administrative claims by such a consent order. 
3.  Will an objection automatically mean allowance of the administrative claim?  The short answer is no.  The Associations still needs to prove the validity of the post-petition claim.  The debtor may assert a defense to the claim.  As such, sometimes the Associations may wish to negotiate with the debtor to avoid unnecessary litigation expenses.

These and many other issues should be addressed by your bankruptcy attorney as soon as possible.  Although the bankruptcy process is complex, thoughtful and sound legal advice throughout the bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding and, hopefully, not leave money on the table.

The article discusses the Credit Card Accountability, Responsibility and Disclosure Act which was signed by President Barack Obama in May of 2009. The Act mandates specific reforms to the credit card industry in an attempt to curb the abuse by certain credit card companies while at the same time allowing financial institutions the ability to price credit against risk. You can read the full article online here. (PDF)

In addition, this Order makes it clear that in Chapter 13 cases, the debtor is obligated to continue to make regular monthly mortgage payments as well as required payments to the Chapter 13 trustee during the time the mediation process is pending.

This Order further makes clear that if the automatic stay was in place during participation in the program, it remains in place.  If the mortgagee wishes to continue with any foreclosure proceeding, relief from stay must be granted by the Bankruptcy Court.

Finally, this Order directs that any resolution or settlement, including any modification to the mortgage, must be approved by the Bankruptcy Court.  If any settlement impacts a provision of a Chapter 13 Plan, a modified plan must be filed.

Mr. Duggan discusses the effects the Kara Homes bankruptcy is still having on contractors throughout New Jersey over two years after the company initially filed for bankruptcy. Contractors who were paid by Kara Homes within 90-days of the bankruptcy filing are now being told they have to pay back any money they received from the builder. You can read the full article here. (PDF)

• Who’s liable for the post-petition assessments?
• Will we be paid all secured pre-petition assessments?
• How does the debtor’s discharge effect the Association?
• Can we proceed with foreclosure efforts?

   
Following is a brief overview on the Associations’ rights and remedies when a unit owner files for Chapter 7 bankruptcy protection.

The Chapter 7 Discharge
When a debtor files for Chapter 7 bankruptcy protection, they are seeking a discharge of all pre-petition obligations. Generally, the Chapter 7 discharge releases a debtor from personal liability for pre-petition debts and prevents the creditors from pursuit of those debts against the individual debtor. For Associations, this means that it cannot pursue the individual debtor for the any of its pre-petition claims.  Associations can, however, pursue claims secured by collateral, such as Association lien claims. Valid Association liens pass through bankruptcy unaffected, while unsecured pre-petition Association claims are discharged and only paid pro rata if the Trustee finds assets to sell.

Unit Is Property of the Estate at Beginning of Chapter 7 Proceeding
Like a Chapter 13 bankruptcy proceeding, all of the debtor’s property, including interest in the unit, is placed into the bankruptcy estate (the “Estate”). Bankruptcy Code Section 541 defines property (“Property”) very broadly as all legal and equitable interests of the debtor. Included as Property of the Estate is the unit. Acts against the Property of the Estate are prohibited by Section 362 of the Bankruptcy Code (the “Automatic Stay”) and sanctionable.  For Associations, just like in a Chapter 13 bankruptcy proceeding, this means all actions, including collection efforts, such as filing lien claims, foreclosure, seeking judgment and/or wage executions, must cease until otherwise allowed by the court.

Chapter 7 Trustee Determines Whether to Abandon or Sell the Unit 
Overseeing this Estate, in a Chapter 7 Bankruptcy, is a Chapter 7 trustee (the “Trustee”).  It is the Trustee’s job to liquidate the non-exempt Property of the Estate for the benefit of creditors, including the Association.  However, in this economy, many units have little or no equity because either the value of the unit fell or the debtors leveraged all the equity.

To determine if equity exists, the Trustee will perform an equity analysis of the unit. Generally, the Trustee takes the value of the unit and subtracts all mortgages, liens, exemptions and costs of sale.  As a rule of thumb, if there is less than $10,000 in equity remaining after the equity analysis, then the Trustee will abandon the unit.  If there is equity in the unit, the Trustee can sell it to pay secured creditors in-full and make a pro rata distribution to unsecured creditors.

More often, the Trustee will abandon the unit because little or no equity exists. When abandonment occurs, the unit is removed from the Estate and placed back in control of the debtor.  Any mortgages or liens, such as an Association lien, that were valid prior to the bankruptcy filing remain intact.  By abandoning the unit, the protections of the Bankruptcy Code cease and the unit may be pursued by the Association.

Mere Ownership in Unit Obligates Debtor to Pay Post-Petition Assessments
A statutory exception to discharge is the debtor’s obligations to pay post-petition assessments.  So long as the debtor has a mere ownership interest in the unit, the debtor is liable for post-petition assessments. The debtor’s liability was clarified by statute in October 2005 when Congress amended Bankruptcy Code Section 523(a)(16):  

(a)     A discharge under section 727,...does not discharge an individual debt for any debt -

(16)     for 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 unit that has condominium ownership, in a share of a cooperative corporation, or in a homeowners association, for as long as the debtor or the trustee has a legal, equitable or possessory ownership interest in such unit, such corporation or lot.
 

(See 11 USC 523(a)(16), Emph added).

Prior to the 2005 amendments, post-petition assessments due to an association were non-dischargeable, so long as the debtor physically occupied the unit or rented the unit. See prior 11 USC § 523(a)(16), pursuant to the Bankruptcy Reform Act of 1994.  See also, Matter of Mattera, 203 B.R. 565, 572 (Bankr.D.N.J. 1997) (chapter 13 debtor’s non-occupancy of an association unit permitted her to discharge post-petition obligations due to the association). The 2005 amendments eliminated these two provisions entirely and added language that mere ownership creates the non-dischargeability of the post-petition assessments.
 

Association’s Rights to Enforce its Obligations
Until the unit is either sold or abandoned, it remains under the protections of the Automatic Stay.  Bankruptcy Courts in New Jersey will permit an Association relief from the Automatic Stay to pursue its interest in the unit, only (i.e lien claim and or foreclosure), if the debtor has not paid approximately three months of post-petition assessments. 

From a strategic and cost standpoint, the Association must make the decision to either expend money and file a motion for relief from the Automatic Stay or wait for the Trustee to abandon the unit.  Although the motion will provide certainty and allow the Association to pursue the unit, the costs may be prohibitive and may not be collectible within the foreclosure action.  Further, Trustees rarely abandon the unit within 90 days of the filing.  Often, the Trustee must confirm the reasonableness of the value of the unit through an appraisal.  This could take six months or more.  With all these factors, it is vital to have effective communications between the Association’s bankruptcy attorney and the Trustee.  These communications can provide the Association information that needs to make the best decision to enforce its rights. 
 

With the increase in Chapter 7 filings, Associations must not only be vigilant to protect their interests, but also strategic in how to protect themselves. Although the bankruptcy process is complex, thoughtful and sound legal advice at the beginning of a bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding.  

For more information on an Association’s rights in bankruptcy, please contact Thomas Onder at Stark & Stark in the Creditor’ Rights Group at (609) 219-7458 or tonder@Stark-Stark.com.

Mr. Duggan discusses the fact that the recent increase in retail bankruptcies has caused the bankruptcy courts and litigants to revisit a variety of legal issues, including the debtor’s obligation to pay post-bankruptcy rent while it decides which leases to assume or reject. You can read the full article online here.

The State of New Jersey has released the list of CDR (Complimentary Dispute Resolution) point persons, who will be creating mediation calendars and coordinating the foreclosure mediation program in county courthouses. You can access the list here. (PDF)

You can download the full interview here. (15.5 MB)