Taylor J. King is a bankruptcy attorney in Jacksonville, Florida.

Taylor King named Super Lawyers Rising Star 2017

Taylor King has been selected to the 2017 Florida Rising Stars list. Each year, no more than 2.5 percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor.

Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys.

The Super Lawyers lists are published nationwide in Super Lawyers Magazines and in leading city and regional magazines and newspapers across the country. Super Lawyers Magazines also feature editorial profiles of attorneys who embody excellence in the practice of law. For more information about Super Lawyers, visit http://www.superlawyers.com/ 

Good News! Fannie Mae Lowers Waiting Period After Bankruptcy

Good news for people who filed bankruptcy and are back on their feet and hoping to obtain a mortgage. Fannie Mae recently reduced the mandatory waiting period after a bankruptcy from 4 years to 2 years. The FHA mandatory waiting period remains the same at 1 year.

To read more, click on the link below:

http://themortgagereports.com/16750/fannie-mae-waiting-period-bankruptcy-short-sale-foreclosure

Landlord-Tenant Law: Commercial Eviction and Chapter 11

A commercial tenant facing eviction may find relief under Chapter 11 of the Bankruptcy Code, particularly if the tenant fell behind on payments as the result of a temporary decline in income. While a Chapter 11 debtor cannot compel its landlord to reduce the monthly rent or eliminate past due rent, the filing of a Chapter 11 Petition will stop an eviction action and allow the debtor time to formulate a plan of action.

Absent abandonment or consent by the tenant, the landlord must file an eviction lawsuit in order to take possession of the business premises.[i] Once the landlord files a lawsuit to evict the commercial tenant, the tenant can stop the eviction action by filing of a Chapter 11 Reorganization.[ii] This allows the tenant time to remain in possession while it determines the best course of action. Bankruptcy Code Section 365 gives the tenant a deadline of 120 days to assume or reject the lease.[iii] The tenant may request that the bankruptcy court extend this deadline by 90 days, allowing up to 210 days for the tenant to assume or reject the lease.[iv]

Once the deadline arrives, in order to assume the lease and remain in the property, the tenant will need to provide a plan for promptly curing the pre-petition arrears.[v] The bankruptcy court’s interpretation of “prompt” cure will depend on the unique facts of each case, such as the remaining term of the lease.[vi] For instance, twelve months to cure arrears should be considered sufficiently “prompt” when the tenant has three years remaining on a five year lease. [vii] In contrast, curing pre-petition arrears over the remaining life of the lease will almost certainly be deemed inadequate by the bankruptcy court.[viii]

Should the tenant’s income prove insufficient to maintain the regular lease payment and cure the arrears within a reasonable period of time, Chapter 11 still offers the benefit of additional time to negotiate a reduced rent with the landlord. If the tenant cannot cure the arrears or reach an agreement with the landlord, the tenant must find an alternative location or close the business. If closure proves the only viable option, the tenant can file a Chapter 11 Plan of Liquidation or convert the case to a Chapter 7 in order to efficiently wind down the business and address any corporate liability for future rent or liquidated damages under the lease.

In summary, Chapter 11 may be a viable for a commercial tenant wishing to defend an eviction action and remain in possession of its business premises. For further information, contact an experienced professional to know your legal rights.

 

[i] Florida Statutes § 83.05.

[ii] 11 U.S.C. § 362(a).

[iii] 11 U.S.C. § 365(d)(4)(A).

[iv] 11 U.S.C. § 365(d)(4)(B).

[v] 11 U.S.C. § 365(b)(1)(A).

[vi] In re Embers 86th Street, Inc., 184 B.R. 892, 900 (Bankr. S.D.N.Y. 1995).

[vii] In re Citrus Blvd Imaging Ctr., LLC, 2012 Bankr. LEXIS 2208, at *11-12 (Bankr. N.D. Ga. 2012).

[viii] In re Gold Standard at Penn, Inc., 75 B.R. 669, 673 (Bankr. E.D. Pa. 1987).

The Chapter 11 Plan of Reorganization and Voting Process

The goal of Chapter 11 generally is to restructure a Chapter 11 debtor’s monthly debt service and thereby improve cash flow to maintain a viable business. This can be accomplished by reducing principal owed, extending the length of a loan, and reducing the interest rate. The Chapter 11 Plan of Reorganization outlines these new terms that will form the basis for the new contractual rights between the debtor and creditors.

The debtor, a creditor, or another party in interest may file a Chapter 11 Plan. However, only the Debtor is permitted to file a Plan during the first 120 days after the Chapter 11 case is filed, or 180 days in a small business case.  After this exclusivity period expires, a creditor or party in interest may propose a Plan. Practically speaking a creditor rarely proposes a Plan, and therefore the Debtor is typically the “plan proponent”.

The Plan outlines the substantive rights of the debtor and creditors. In conjunction with the Plan, depending on the complexity of the case, the debtor must also prepare and file a Disclosure Statement to give more information to creditors regarding the debtor and the proposed Plan. After notice and a hearing the Bankruptcy Court determines whether or not to approve the Disclosure Statement as containing adequate information under 11 U.S.C. § 1125.

Once the court approves the Disclosure Statement, the Debtor provides the Plan and Disclosure Statement to each creditor in the case along with a ballot for voting to accept or reject the Plan. In order to successfully obtain confirmation of a Plan of Reorganization, Section 1129(a)(10) of the Bankruptcy Code requires that the plan proponent obtain the acceptance of at least one impaired class. This is assuming at least one class of claims under the Plan is impaired, which is virtually certain to be the case in most any Chapter 11 Plan.

Although one class in the Plan may contain multiple claims, typically, most classes in a Plan will contain the claim of a single creditor. Therefore, to meet this requirement outlined in Section 1129(a)(10) only one creditor must vote to accept the Plan in order to reach confirmation.  Although a Plan accepted by one creditor may technically meet the confirmation requirements, in practice a court may not confirm a Plan that merely meets the minimum requirements.

Where a class in the Plan contains only one creditor, calculating the acceptance or rejection of that class is straightforward. This will be the case for most secured claims, which are loans secured by collateral such as a house, car, building, equipment, or inventory. Unlike secured claims which are each placed in their own respective class, the class of general unsecured claims will contain many unsecured claims. Thus, the calculation of class acceptance or rejection may require a calculation consistent with 11 U.S.C. § 1126. This Code Section provides that a class has accepted the Plan if at least two-thirds (2/3) the dollar amount and greater than one-half (1/2) in number have accepted the Plan.

As an example, assume the Debtor owes four unsecured debts, Creditor A – $10,000, Creditor B – $15,000, and Creditor C – $25,000, and Creditor D – $50,000. If Creditor A & B accept and Creditor C & D reject the Plan, the unsecured class has rejected the Plan as only 1/2 the number of claims has accepted and the number must be greater than 1/2 the number of claims. If Creditor A, B, and C accept and Creditor D rejects then more than 1/2 the number has accepted, but less than 2/3 the dollar amount has rejected and therefore the unsecured class has rejected.

If Creditor A, B, and D accepts and Creditor C rejects then the conjunctive requirements for class acceptance have been met, 3/4 of the dollar amount has accepted and 3/4 of the number of claims has accepted, and therefore the unsecured class has accepted. As a final illustration, if three of the creditors were to abstain from voting, and Creditor A were to accept, the unsecured class would therefore accept the Plan under Section 1126 as only those claims that accept or reject are counted when calculating the class acceptance or rejection. Even though Creditor A held the small claim of $10,000, since the other creditors failed to vote, this creditor dictates the outcome of the voting.

This voting process is only one of the many aspects of a Chapter 11 case. At Mickler & Mickler, we deal with these issues in Chapter 11 cases on a daily basis. We hold the knowledge to guide an individual or business through this complicated process. Contact us at 904.725.0822 or tjking@planlaw.com should you need counsel regarding your financial situation. The consultation is free.

The Telephone Consumer Protection Act – Money Damages for Unwanted Telemarketer Calls

The Telephone Consumer Protection Act or “TCPA” is a federal law designed to protect consumers from telemarketer harassment. Violations are not limited to persons on the “do not call” registry. In 2012, the Federal Communications Commissions adopted new rules that offer greater protection to consumers. Pursuant to the new rules, violations also include unauthorized phone calls to a cellular telephone or residential landline. Telemarketers must obtain the consumer’s express written consent prior to directing automated phone calls to the consumer. If you have received an unauthorized automated phone call to your cell phone or residential landline, you could be entitled to compensation of $500 to $1,500 per phone call.

Telemarketing schemes often prey on the elderly and uninformed. Telemarketers often sell services such as home security services, life alert services, magazine subscriptions, or other products intended for persons age 65 or over. If you have received unauthorized telemarketing calls, please contact our office for a free consultation to find out more about your consumer rights. We are attorneys in Jacksonville, Florida, that practice exclusively in the areas of bankruptcy and consumer rights law.

The Applicability of the Absolute-Priority Rule to Nonprofit Debtors

The absolute-priority rule was a judicial invention intended to prevent equityholders and secured creditors from colluding to the detriment of unsecured creditors.[1] The Bankruptcy Reform Act of 1978 codified the absolute-priority rule at 11 U.S.C. § 1129(b)(2)(B)(ii), which requires for dissenting unsecured creditors to be paid in full before equityholders may retain property under a reorganization plan.

The absolute-priority rule is “generally applied to for-profit corporations facing bankruptcy, where an equityowner seeks to retain property, often represented by stock.”[2] The applicability of the absolute-priority rule to a nonprofit debtor presents an uncommon question. The only two circuit courts of Appeal to decide the issue have found the absolute-priority rule does not apply to nonprofit debtors.

Seventh Circuit: Absolute-Priority Rule Does Not Apply to a Nonprofit Electric Utility     The Seventh Circuit analyzed the absolute-priority rule in the context of an electric utility cooperative.[3] The Seventh Circuit ruled that members (equityholders) of a nonprofit debtor did not hold “interests” in the debtor and therefore the debtor’s reorganization plan did not violate the absolute-priority rule. The dissenting unsecured creditor in Wabash objected on the grounds that the member cooperatives retained control of the reorganized debtor and received some economic benefit from the reorganized debtor. The Seventh Circuit found the “member cooperatives…do not improperly retain property ‘on account of’ either their patronage capital accounts (which are mere refunds of overpayments) or their control over [the Debtor].”[4] Identifying three indicia of ownership (control, profit share and ownership of corporate assets), the Wabash court determined that retention of managerial control was insufficient to trigger the absolute-priority rule in the context of an electric utility.

In concluding that the member cooperatives did not retain an interest in the reorganized debtor, the Seventh Circuit relied on Indiana state law as it pertains to nonprofits in general as well as regulation on Indiana utility companies. Generally, Indiana law prohibits nonprofit companies from paying dividends to its members and provides that, upon dissolution, any equity in assets escheats to the state.[5] As to utility regulations, the Seventh Circuit found it important that Indiana law prohibited the debtor from charging customers more than the cost of electricity provided.[6]

Thus, the Seventh Circuit’s decision is limited to some extent as the debtor was an electric utility. However, the decision still may generally apply to any nonprofit chapter 11 debtor. Provisions similar to the Indiana statutes noted in Wabash may exist in the law of one’s jurisdiction. For example, under Florida law, nonprofit corporations are prohibited from making distributions to its members, subject to limited exceptions.[7]

Ninth Circuit Expands on the Wabash Decision     Ninth Circuit relied on Wabash in ruling that an international labor union was not an owner of its local branches for purposes of the absolute-priority rule.[8] In the Teamsters case and unlike the circumstances in Wabash, the debtor held a contingent future interest in the assets of any dissolved local union. The Ninth Circuit found this insufficient to establish ownership without any other indicia of ownership. The Ninth Circuit noted the rationale behind the absolute-priority rule as it pertains to for-profit chapter 11 debtors. The concern of an equityholder is purely an economic one, focused on the profitability of the corporation.

Other courts have applied slightly different rationale in reaching the same conclusion as the Seventh and Ninth Circuits.Rather than focusing on the interest retained by equityholders, the court in In re Save Our Springs Alliance Inc.[9] found that a nonprofit corporation simply has no equityholders. The debtor in that case existed to promote water conservation in west Texas. The court did not find it necessary to examine the indicia of ownership or other factors, but cited the circuit court decisions that the proposition that the equityholders did not retain an interest in the reorganized debtor.

Conclusion     The applicability of these decisions to other types of nonprofit organization will largely hinge on the stated purpose of a given debtor and the existence of monetary incentives for the equity holders provided in a proposed plan of reorganization. As explained by the Ninth Circuit, the absolute-priority rule exists to prevent abuse by debtors with solely pecuniary motivation, which is the motivation of most business ventures. The same rationale behind the absolute-priority rule fails where the debtor exists to serve a community function, such as in the context of a labor union, electric cooperative, historical society, environmental protection group or religious organization.

1. See In re Wabash Valley Power Ass’n, 72 F.3d 1305, 1314 (7th Cir. 1996).

2. Sec. Farms v. Gen. Teamsters (In re Gen. Teamsters), 265 F.3d 869, 873 (9th Cir. 2001).

3. See In re Wabash Valley Power Ass’n, 72 F.3d 1305.

4. See In re Wabash, 72 F.3d at 1320.

5. Id. at 1309.

6. Id. at 1313-1314.

7. See Florida Statutes § 617.1301.

8. Sec. Farms v. Gen. Teamsters (In re General Teamsters), 265 F.3d 869, 874 (9th Cir. 2001).

9. 3388 B.R. 202, 245 (Bankr. W.D. Tex. 2008), aff’d, 2009 WL 8637183 (W.D. Tex. Sept. 29, 2009), aff’d, 632 F.3d 168 (5th Cir. 2011).

This posting was originally published as an article in the American Bankruptcy Institute (ABI) Young and New Members Journal, Volume 10, Number 3 / September 2012, which can be accessed at:http://www.abiworld.org/committees/newsletters/Young/vol10num5/king.html.

Bankruptcy and the Fair Debt Collection Practices Act: Understanding Your Consumer Rights

What if you filed bankruptcy to stop debt collector harassment, but you continue to receive letters or phone calls after you filed? What do you do now?

Once you file for bankruptcy, all collector harassment must cease IMMEDIATELY! After filing, a debt collector that contacts you by phone or mail is violating federal bankruptcy law and federal consumer protection law known as the Fair Debt Collection Practices Act (“FDCPA”). Even a simple letter after you file for bankruptcy could entitle you to statutory damages of up to $1,000. Our firm understands the financial difficulty you are experiencing and will offer you a free consultation. We may even file your case for free! Debt collectors that violate the FDCPA must pay your attorney fees and costs. The FDCPA also requires debt collectors to pay for any emotional distress they have caused you.

As an example, suppose you filed for a Chapter 7 bankruptcy. You list the telephone company as a creditor on your bankruptcy schedules. You obtained a discharge of your debts, including the debt owed to the telephone company. After receiving your discharge, you receive a letter in the mail from a debt collector seeking payment of your old phone bill. Didn’t you file bankruptcy to stop debt collection letters? You should not be receiving a collection letter. The debt collector has violated the FDCPA by trying to collect a discharged debt.

You should contact us for a free consultation in order to evaluate your potential cause of action and determine whether to seek statutory and/or actual damages. Even if the debt collector was not aware of the bankruptcy, the FDCPA is a strict liability statute and the debt collector’s knowledge or intent is irrelevant. By sending the collection notice to collect on an uncollectible debt, the debt collector mis-stated the character and legal status of the debt, and violated the FDCPA, specifically 15 U.S.C. § 1692e(2). Upon filing of a lawsuit, the debt collector will likely attempt to prove it had procedures in place to avoid the error at issue. A good defense by the debt collector might show that the debt collector conducted a PACER search for possible bankruptcies prior to sending collection notices. If you received a collection letter post-discharge it is likely the debt collector did not have proper procedures in place. Upon bringing a successful lawsuit, you could recover up to $1,000 in statutory damages and have your attorney fees and costs paid for by the debt collector. If you lose, our firm doesn’t charge you anything. We fight for your rights and don’t win unless you do.

Congress enacted the FDCPA in 1978 to curb abusive and unconscionable debt collection practices. The FDCPA is a very broad law that prohibits debt collectors from using unfair, harassing, abusive, invasive or deceptive collection practices. As a federal law, the FDCPA applies to you regardless of the state in which you live. Many states, including Florida, have enacted laws substantially similar to the FDCPA. The Florida Consumer Collection Practices Act (“FCCPA”), contains many provisions similar to the FDCPA, however the FDCPA is more extensive than the FCCPA.

The FDCPA creates a private right of action, meaning individual consumers may file a lawsuit to enforce the provisions of the FDCPA. Persons victimized by debt collection abuse often do not possess the financial resources to pay an attorney to protect their rights. Likely recognizing this fact, the FDCPA provides that a debt collector that violates the FDCPA must pay the Plaintiff’s attorney fees, costs, as well as any actual damages. Emotional distress and related medical bills would be a common example of actual damages.

There are four basic requirements necessary to determine if you have a cause of action under the FDCPA.

(1) You must be a consumer.

(2) The debt must be a consumer debt.

(3) The communication must be from a debt collector.

(4) There must be a violation of the FDCPA.

First, to qualify as a consumer you must be an individual, not a corporation.  If your company is being harassed by debt collectors, you cannot seek relief under the FDCPA.

Second, the debt must be for a consumer debt. That means the debt must relate to funds used for family or household use. If you borrowed money or used a credit card for your small business or sole proprietorship, any efforts to collect that debt are not be regulated by the FDCPA. In the event you used a credit card for both personal and business purposes, as long as the majority of the debt resulted from family, household or personal use, the FDCPA applies. As an example, if you have a debt collector seeking to collect on a credit card debt of $1,000, and $501 of the debt stems from household use then the FDCPA applies. The relevant transaction date may also affect the analysis of what constitutes a consumer debt. What if the consumer purchases a home and later moves out and converts the property to business use as a rental? The Seventh Circuit reviewed these facts and determined the debt was a consumer debt as the transaction was originally for personal use.

Third, the communication must be from a debt collector. The FDCPA does not apply to the original creditor. For instance, if you obtained a mortgage and defaulted on the mortgage, any communication from the original mortgage lender attempting to collect a debt would not be covered by the FDCPA, even if the mortgage lender’s communication is abusive. The situation changes in the event you default on your mortgage and servicing transfers while in default. The FDCPA may apply to a servicer that obtains a loan in default. A law firm may also qualify as a debt collector under the FDCPA . Many debt collectors may be readily identified as such by going to the website of the Florida Office of Financial Regulation. If a debt collector is not registered and is actively collecting debt in the State of Florida, the debt collector is likely violating both the FDCPA and the FCCPA.

Fourth and finally and somewhat intuitively, there must be a violation of the FDCPA. Obvious violations include harassment by a debt collector who constantly contacts you at home and work, verbally abuse, improper threats or behavior that otherwise causes you emotional distress. Such actions would likely entitle you to receive actual damages in order to compensate you for emotional pain and suffering. Even in the absence of actual damages such as emotional distress, a debt collector is liable under the FDCPA for merely a technical violation. In this regard, the FDCPA is considered a strict liability statute. The debt collector must provide certain information to the consumer, including the name of the creditor, the consumer’s right to dispute the debt, and the identity of the debt collector as such. Failure to include the required information would constitute a technical violation of the FDCPA, making the debt collector liable to the consumer for statutory damages, attorney fees, and costs of bringing a successful action. If you are contacted by a debt collector via phone or mail, you should contact an attorney to assess your situation.

The FDCPA is extremely broad so as to cover a number of potential violations. The FDCPA prohibits any false or misleading communication from a debt collector. For instance, threatening to file a law suit to collect a debt of $20.00 likely violates 15 U.S.C. § 1692e(5) because the debt collector is threatening to take an action it has no intention of taking. A debt collector cannot use letterhead or symbols that imply the notice is from a government agency. The FDCPA also prohibits threats of imprisonment or garnishment of wages. The express violations are not exclusive, meaning certain actions don’t have to be specifically listed to be violations. For example, the FDCPA prohibits any “unfair” attempts to collect a debt, which could cover a multitude of actions.

Once the four requirements have been established, the debt collector may raise the bona fide error defense. This defense is only available in cases concerning unintentional violations. To succeed in the defense, the debt collector must prove that it had procedures in place reasonably adapted to avoid the error at issue. The bona fide error defense is mainly a factual question determined by looking at the specific policies and procedures put in place by a debt collector.

Since the FDCPA was passed, debt collection abuse has been substantially reduced; however the FDCPA remains a very demanding statutory scheme for debt collectors and provides significant safeguards to consumers even with respect to collection of valid debts. Each situation is different and if you are being contacted by a debt collector you should seek a free consultation with a consumer rights attorney.

Legal Disclaimer: The above article is for informational purposes only. Do not construe the information contained in this article as legal advice. Consult with an attorney before filing bankruptcy or taking other legal action.  Should you require legal advice regarding bankruptcy or consumer rights, contact Mickler & Mickler by calling (904) 725-0822 or sending an email to bkmickler@planlaw.com.

Bankruptcy Options for Underwater Property in Jacksonville, Florida

Escalating real estate prices from 2004 to 2007 created a tremendous housing bubble throughout much of the United States. The Florida real estate market particularly saw burgeoning prices during this economic boom. The collapse of the residential real estate market, among other factors, led to what was later termed the Great Recession.  Since the subprime mortgage crisis in 2007-2008, the Great Recession has seen the bankruptcy or government bailouts of companies such as Lehman Brothers, AIG, Bear Stearns, Fannie Mac, Freddie Mac, and Chrysler. Companies and individuals that never expected to seek government assistance or bankruptcy protection found themselves with little or no other options.

Four years later, the consequences of the subprime mortgage crisis continue as many homeowners and property investors in Florida struggle to sustain mortgage payments on underwater property. Owners also continue to struggle to sell or re-finance their property, either due to negative equity or tightened credit requirements, or a combination of these factors. Some Florida homeowners have chosen to fight foreclosure proceedings in state court. Except in very rare instances, the foreclosure defense process merely delays the inevitable loss of the property. Other homeowners seek relief through a short sale, which may prove beneficial where the lender offers cash and other incentives to the homeowner in exchange for maintaining and marketing the property.  Still, short sales often are time consuming, may result in 1099 tax liability for debt forgiveness, and certainly results in loss of the home. Title 11 of the United States Code (the “Bankruptcy Code”) provides another alternative for individuals and companies in financial distress, through Chapter 7 Liquidation, Chapter 11 Reorganization, or Chapter 13 Debt Adjustment for Individuals with Regular Income.

Underwater Property and Chapter 7 – Liquidation

There are many benefits to a Chapter 7 that will be discussed in other postings. For the purposes of this article, as it relates to coping with underwater real property, there are two alternative benefits available in Chapter 7. First, for a debtor behind on their mortgage payments who does not intend to keep their home, Chapter 7 eliminates the liability for any actual or potential deficiency judgment. This is true whether the deficiency judgment occurs now or in the future. The important factor is that the note and mortgage were signed pre-petition, ie – before the bankruptcy is filed. The Chapter 7 eliminates all pre-petition debts that are not re-affirmed.  You will be allowed to remain in the property after you filed the Chapter 7, assuming a foreclosure sale has not yet taken place.

A second important benefit of a Chapter 7, in dealing with underwater property, involves property encumbered by multiple mortgages. If the property is encumbered by a first mortgage that exceeds the market value of the property, the owner may eliminate any inferior lien on the property such as a second or third mortgage. This benefit marks an important change in the law following the recent Eleventh Circuit decision, In re McNeal, No. 11-11352 (11th Cir. May 11, 2012).  Prior to McNeal, the strip-off of a wholly unsecured second or third mortgage could only be accomplished through a Chapter 13. This interpretation of the law will vary by jurisdiction, but in the state of Florida, for now, the ability to strip-off of a second or third mortgage constitutes a valuable tool for Chapter 7 bankruptcy debtors.

Underwater Property and Chapter 13 – Adjustment of Debts of an Individual with Regular Income

While Chapter 7 and Chapter 11 each permit filing by corporate or individual debtors, Chapter 13 solely applies to individuals. A Chapter 13 may benefit a homeowner by allowing the homeowner to cure mortgage arrears, obtain a HAMP modification, eliminate a second mortgage, or a combination of these three goals.

First, Chapter 13 allows a debtor to strip-off a second mortgage that is completely underwater.  An individual who is behind on their first mortgage payments or holds non-exempt personal property may opt to strip off the second mortgage through a Chapter 13 as opposed to a Chapter 7, given that a Chapter 7 does not allow a debtor to cure first mortgage arrears or keep assets whose value exceeds their exemptions. Whether a Chapter 7 or Chapter 13 would work best for you should be determined by an attorney after discussing the value of your assets and exemptions.

Second, Chapter 13 allows a debtor time to catch up on their delinquent first mortgage payments. This provision could benefit an individual who lost their job temporarily, falls behind on their mortgage payments, but then finds new employment. A Chapter 13 allows for curing of mortgage arrears even after a foreclosure suit has already been filed. In order to keep the property, a Chapter 13 case must be filed prior to the foreclosure sale, as the Debtor’s right of redemption and ownership interest expires at the time of the sale.  By eliminating credit card payments, past due medical bills, and potentially stripping off junior mortgages and/or lowering car payments, many debtors are able to begin making their regular first mortgage payments and curing their arrears over time.

Even after eliminating credit card payments and other expenses in a Chapter 13, the curing of mortgage arrears may prove difficult for some individuals, as this does require a monthly payment equal to the regular first mortgage payment plus the 1/60 of the total arrears. If a homeowner is unable to support their regular first mortgage payment, the owner may still want to consider a home loan modification, the third potential option or benefit of a Chapter 13 case for underwater homeowners. The Bankruptcy Court in Jacksonville recently implemented a new mediation program that combines the Chapter 13 process with the HAMP mortgage modification process. Even if you have been turned down for a modification before, the success rate for obtaining a modification has proven much higher when attempted in combination with the Chapter 13 bankruptcy. To determine if you qualify for a Chapter 13 bankruptcy or HAMP Modification, please contact an attorney.

Underwater Property and Chapter 11 Reorganization

When considering the topic of Chapter 11, names such as American Airlines, Lehman Brothers, or Chrysler may come to mind. In actuality, a much greater percentage of Chapter 11 filings stem from small business and individuals. Chapter 11 offers the opportunity for Florida companies and individuals to retain their property by reducing the mortgage principal balance, re-amortizing the mortgage debt, and obtaining a lower, fixed rate of interest.

An individual who owns multiple investment properties might want to consider a Chapter 11 reorganization. As an example, consider an individual who owns ten residential investment properties in Jacksonville. Each of the properties is significantly underwater. Through a Chapter 11 Plan, the individual would propose a new mortgage with a principal balance based upon the current market value of the property, a fixed rate of interest of 4.0%, and a new thirty year amortization. The Chapter 11 Plan, once approved by the court, would essentially create a new mortgage based upon the current market value of each property. This may occur either upon agreement with the lender, or the court may “cramdown” the Chapter 11 Plan proposal over the creditor’s objection. In a non-consensual scenario, the court determines the value of the property based upon testimony of the the parties’ respective appraisers.

After determining market value, the court determines the appropriate interest rate based on the Wall Street Journal Prime Rate, which was 3.25% as of September 2012. The court then adds a risk factor, generally between 1-3%, based upon dicta in the Supreme Court’s decision in Till v. SCS Credit Corp,541 U.S. 465 (2004). Although Till involved a Chapter 13 debtor, its rationale applies equally in the Chapter 11 context where no credit market exists as to a particular debtor and particular loan. In determining an appropriate risk factor under Till, courts look at a number of factors, future cash flow, other liens encumbering the collateral,  and risk of future default on the modified mortgage. If the Debtor carries its burden of proof on the risk factor issue, a risk factor of 0.75% would result in a new fixed interest rate of 4%.

In order to obtain court approval of a Chapter 11 Plan, an individual debtor must satisfy the best interest of creditors test and, if an unsecured creditor objects, pay projected disposable income for a period of five years. The best interest of creditors test provides that creditors must receive a greater dividend through the Chapter 11 Plan than they would in a hypothetical Chapter 7.  Thus, if a Chapter 11 debtor held $75,000 worth of equity in non-exempt assets and only proposed to repay unsecured creditors $10,000 over the life of the Plan, or $166.66 per month, the Plan would not satisfy the best interest of creditors test. The debtor must prepare a liquidation analysis in each case to ensure the Plan satisfies the best interest of creditors test.

In addition to determining liquidation, an individual Chapter 11 debtor must prepare a projected budget to compare their future income and expenses in order to fix their amount of disposable income. If an unsecured creditor objects to the Chapter 11 Plan, 11 U.S.C. 1129(a)(15) requires the debtor pay future disposable income for a period of five years. For an individual with multiple investment properties, the necessary expenses include the new mortgage payments, among other things. If the liquidation value and disposable income are minimal, unsecured creditors may receive only a few dollars a month. Finally, once the other confirmation requirements are met, the court decides if the Plan is feasible. If the Debtor carries its burden of proof to show that he or she can afford the new payments, the Plan is put into effect through a Confirmation Order. The Confirmation Order outlines the new mortgage payments, which are binding on the debtor and creditors.

Important distinctions exist in the Bankruptcy Code as it applies to corporate Chapter 11 cases as opposed to individual Chapter 11 cases. Discussed in more detail above, the best interest of creditors test applies in both contexts. The requirement of 11 U.S.C. 1129(a)(15), which requires payment of disposable income to unsecured creditors, applies only to individual debtors. Similarly, the Bankruptcy Code does not require a corporate Debtor to contribute future earnings to fund a Plan, as may be required for an individual under 11 U.S.C. 1123(a)(8). Perhaps the most important distinction involves the applicability of the absolute priority rule. The applicability of the absolute priority rule in corporate Chapter 11 cases makes it difficult to reduce mortgage debt on underwater property. Corporate debtors must look to adjusting the interest rate and term of amortization in order to obtain reduced monthly payments and maintain cash flow. An amendment to the Bankruptcy Code in 2005 created an exception to the absolute priority rule for individual debtors. Much debate has occurred regarding the scope of that exception.

Courts are split as to the applicability of the absolute priority rule with respect to individual Chapter 11 debtors. Given the split of authority, debtors must carefully consider the law applied in their jurisdiction. The leading decision in the Middle District of Florida is the case of SPCP Group LLC v. Biggins (In re Biggins), 2011 U.S. Dist. LEXIS 107728, 2011 Westlaw 9841 (Bankr. S.D. Fla. 2011). This decision applies to cases filed in the Middle District, which covers Jacksonville, Orlando, Tampa and the surrounding areas. The federal court, in an opinion issued by Judge Susan C. Bucklew, decided that the absolute priority rule did not apply with respect to individual Chapter 11 debtors. Judge Bucklew affirmed the decision of the bankruptcy court, which approved the Debtor’s Chapter 11 Plan over the objection of unsecured creditors.  The decision in Biggins and the inapplicability of the absolute priority rule proves particularly helpful to individual investors with underwater real estate.

Legal Disclaimer: The above article is for informational purposes only. Do not construe the information contained in this article as legal advice. Consult with an attorney before filing bankruptcy.  Should you require legal advice regarding bankruptcy, contact Mickler & Mickler by calling (904) 725-0822 or sending an email to bkmickler@planlaw.com .