Our mission is to manage our clients' needs in the new reality of foreclosures in the state court systems, as well as through the challenges of the Bankruptcy Court Systems.  

When borrowers & mortgagors seek shelter in the Federal Bankruptcy System we are there to protect our clients' interests through the process.  Our goal is to minimize delays and bring value to our clients.  

Regardless of the type of bankruptcy filed, the filing of a bankruptcy by a borrower/mortgagor raises the automatic stay under 11 USC §362(a) preventing creditors from proceeding in the foreclosure/collection process.  Under certain circumstances, the automatic stay may be limited or not arise.  We believe it is important for our clients to understand the impact and significance of each type of bankruptcy and how it affects our efforts to enforce their rights, whether secured or unsecured.

Chapter 7 Filings

Chapter 7 is not intended to allow borrowers to address or cure payment defaults.  It is intended to allow borrowers/debtors to discharge debts in order to obtain a "fresh start".  The typical Chapter 7 has a duration of 4 to 6 months.   Individual filers must meet certain income (and expense) criteria in order to proceed through a Chapter 7.   

Chapter 7 bankruptcy may be filed by individuals, married couples and business entities.

Chapter 11, 12 & 13 Petitions

Chapters 11, 12 & 13 are traditionally considered as repayment plan bankruptcies.  The debtor has various options and rights in addressing payment defaults to creditors, including mortgagees and holders of other secured claims.   These bankruptcies require the debtor to file a proposed plan of reorganization whereby the debtor sets forth how the debtor will address the obligations to creditors.

Chapter 13 is for individuals and couples with secured and unsecured debts under certain limits, regardless of income. Chapter 12 is for family (non-business entities) farmers deriving most of their income from farming activities.  Chapter 11 is for individuals and couples with debt in excess of Chapter 13 limits and for business entities.    

The Automatic Stay under 11 USC §362(a)

(and 11 USC §1301)

Common to bankruptcies is the automatic stay.  All collection activities and enforcement of rights against the debtor and property of the estate must cease until there is relief from the automatic stay.  If the Debtor is the borrower, mortgagor, guarantor, surety, owner of the encumbered property or otherwise attached to the property subject of your recovery efforts, then you need to carefully determine if your activities are stayed.  It is not surprising that debtors file for bankruptcy protection on the eve of a pending sheriff sale, extending the process out rather than seeking to obtain a resolution. 

Creditors may seek relief from the automatic stay.  11 USC §362(d) provides the basics for relief.  Typically relief is sought through the filing of a motion for relief.  With some creativity, creditors may seek relief through alternative solutions.  By obtaining relief, a creditormay proceed with its collection activities against the mortgaged/secured property.  Essentially, the mortgage foreclosure proceeding (or replevin action) may proceed.  The two core concepts underlying why the Court will grant relief are lack of equity and/or lack of adequate protection.  While the Bankruptcy Code makes a distinction between the items, they are not mutually exclusive.  Lack of Equity means that the debtor has little to no equity or value in the property after taking the reasonable value of the property less the liens and encumbrances against the property.  A house or property that is considered to be "underwater", where the amounts due on the secured liens exceeds the value of the property, have no equity.  Lack of equity may be a ground for relief from the automatic stay.  Lack of adequate protection is the situation where a debtor cannot provide sufficient assurances that the creditor's (mortgagee's) interest in the property and current financial position will not be negatively impacted by keeping the bankruptcy stay in place.  Most traditional adequate protection in a bankruptcy is the maintenance of post-petition monthly payments with a bankruptcy plan that will cure any pre-petition default.  Adequate protection varies on a case by case basis.  

In a Chapter 7 bankruptcy the debtor is not able to propose a plan of reorganization.  Hence, if the debtor is behind in monthly payments or otherwise in breach of the obligations of the note and security intrument (mortgage, etc...) then the creditor should decide whether or not to proceed with a motion for relief to continue with enforcement efforts.  A Chapter 7 is not a proceeding intended to cure an ongoing default.  

The other bankruptcy proceedings are inetnded to be utilized by a debtor to bring a secured account current, pay it off, or utilize other bankruptcy tools available.  We focus on those efforts to bring an account current.  Each of the other chapters (11, 12 and 13) involve the debtor proposing a plan on handling and bringing an account current.  Typically the plan provides for repaying pre-petition arrears over the course of the plan, as well as paying post-petition payments as they come due after the filing of the bankruptcy.  When the creditor is not provided for in the plan and/or the debtor is not taking steps to truly cure the pre-petition default while keeping the account current post-petition, then it may be time to seek relief.

Upon entry of an order for relief (and after the expiration of the 14-day waiting period under Bankruptcy Rule 4001(a)(3), if applicable) the creditor may continue with enforcement of rights under state law.

Pursuant to the Bankruptcy Rules, once a motion for relief is filed the respondents have 17 days to file a response followed by the hearing.  Many motions are either uncontested and the order for relief is entered or result in a stipulation (adequate protection order) in which the debtor promises to "make good".  Notwithstanding, each jurisdiction (and each Judge) has their own way of handling the motion for relief process.   Each jurisdiction has its own additional requirements beyond the standard national rules.  

At Stern & Eisenberg we make sure our clients comply with each jurisdiction's specific filing requirements before proceeding with any motion for relief.  We also look to provide our clients with creative and thoughtful alternatives rather than a mechanical approach to the law.

Beyond the automatic stay:

While a Chapter 7 is a basic, traditional type of bankruptcy, Chapter 13 (and 11 & 12) bring more challenges and complexity.  Debtors have many options for which creditors need to be ready to protect their interests.  From seeking to cure pre-petition defaults to eliminating a creditor's security interest/mortgage, debtors' plans can be involved and intricate.  While some may analyze a plan purely by the numbers (does the plan cure pre-petition arrears and keep current post-petition), we look beyond the simple numbers to make sure the other hidden terms of the plans do not alter or improperly effect our clients' rights and interests.

As part of the Chapter 13 process, our clients are required to file a proof of claim setting forth the amounts owed (both pre-petition arrears and totals at the time of the filing).  The proof of claim sets forth the amount owed to the creditor.  It should provide a breakdown of the amounts due such that the debtor is aware of the amounts owed and the basis for the amounts.  Inclusion of the mortgage and note (and assignment to the current holder of the mortgage) along with an explanation of the amounts due helps avoid confusion and/or unreasonable and wasteful objections to the claims.  

If the debtor plans on retaining the secured asset, then the debtor must propose a plan that provides for the claim within the requirements of the bankruptcy code.  If the debtor's plan does not do so, then the creditor may file an objection to the plan provising why the plan should not be approved as proposed.  Each jurisdiction has its own time frames for objecting to the proposed Chapter 13 plans and each jurisdiction has a different method for allowing amended plans to be proposed.

At Stern & Eisenberg our attorneys have experience in handling bankruptcy matters including the complexities of litigation over valuation proceedings, non-dischargeability and preference actions.  Our attorneys' have experience and knowledge from both the debtor and creditor sides and offer our clients insight and flexibility not always available to our clients from other vendors.