Debt Limits Sometime Require a Chapter 11

It is unusual for a consumer filing for reorganization under the bankruptcy code to resort to Chapter 11. There is a good reason for this. Chapter 13, involved as it may be with the accounting for property and making monthly payments to a Chapter 13 trustee, is not nearly as convoluted and costly as a Chapter 11. 

Michael Vick and Wayne Newton, among many others, filed Chapter 11 for one simple reason. They had too much debt to qualify for Chapter 13. 

Chapter 13 is defined as an “Adjustment of Debts for Individuals with Regular Income.” Both Michael Vick and Wayne Newton were individuals; both presumably had regular income at some point. But in order to qualify for Chapter 13, a debtor’s secured debt may not exceed $1,149,525 nor may unsecured debt exceed $383,175 (as of the date of this writing). If a debtor needs to reorganize in bankruptcy, and their debts exceed either of those limits, then the only “game in town” left for the debtor is Chapter 11. Few individuals elect to go the Chapter 11 route due to the plethora of additional challenges involved. 

First of all, the filing fee just to walk into court and hand them your petition is currently $1,717. This, of course, does not include fees for attorneys, appraisers, accountants, real estate agents, and other professionals which will often have to be involved to develop a successful Chapter 11 case. The debtor must file a Disclosure Statement pursuant to a Plan of Reorganization, both of which documents are much more detailed and complicated than that required by Chapter 13. 

In addition, there is a quarterly fee that must be paid to the Executive Office of the United States Trustee (UST) for the privilege of having the UST examine and critique every detail of the case. Part of this examination includes the UST review of the monthly reports that must be filed in the case as directed by the Operating Instructions and Reporting Requirements (OIRR) issued by the UST, which are about 3/8” thick. The OIRR includes such directions as the requirement to close out all bank accounts and reopen them as new accounts with your bankruptcy information noted on the checks. 

Other features of Chapter 11 include the need to immediately file for what are called “first day orders” so that the attorney for the debtor can be approved as counsel to the debtor and in some cases just to get the right to use the money the debtor already has in the bank for ongoing operations (called “cash collateral orders”) depending on the debtor’s debt configuration. Additionally, debtors must solicit approval from the creditors who literally get a ballot to vote on the debtor’s plan. 

However, it is not all “doom and gloom.” There are many advantages to Chapter 11 which one does not find in the others chapters. One is that the debtor becomes what is called a “debtor-in-possession” (DIP), which means that no trustee is appointed to administer the case. While the UST certainly has an oversight function, as long as the debtor is honest and competent, then the debtor gets to retain control over the operation. If the DIP is either not honest or competent, then the DIP runs the risk of a Chapter 11 trustee being appointed to take control of everything. 

One also finds more flexibility, generally, in Chapter 11. While the OIRR is the template for how the DIP must operate, if common sense dictates that some other approach should be taken, then the court will often allow it, sometimes with the agreement of the UST, and sometimes not. 

Chapter 11 is rarely anyone’s first choice when considering a bankruptcy filing to obtain protection from one’s creditors but sometimes it is the best if not the only choice. Our office has handled a number of such cases successfully, but they are always a challenge and require the greatest of attention to detail. Many seasoned consumer bankruptcy professionals will not attempt to navigate the choppy waters of Chapter 11, and for good reason.

Should You Use A Debt Settlement Firm Instead Of Getting Relief Under The Bankruptcy Code?

There are varying opinions on whether using a debt settlement agency makes sense and “saves” a debtor from filing bankruptcy in an effective fashion. As a bankruptcy lawyer, many of my clients have tried using such agencies and the effort has failed, which is why they then come to see me to get the relief that the bankruptcy code offers. For obvious reasons, I rarely have a client who has had success with such efforts because they probably would not be coming to see me. 

Below is a link to an article on which suggests that debt relief agencies aren’t all they are cracked up to be.

To Reaffirm Or Not To Reaffirm: That Is The Question.

         Whenever a person files a bankruptcy petition in Chapter 7, that person is usually looking for a “fresh start” by obtaining a discharge of their debts. With certain few exceptions, the discharge that a person (called the “debtor”) receives as part of the process applies to all creditors who are listed on the debtor’s schedules and who have received notice of the bankruptcy filing. More notable exceptions to the discharge are certain taxes, most student loans, child support and alimony payments along with other debts more specifically described in the Section 523 of the Bankruptcy Code.

          This means that the discharge also applies in most instances to secured debts like home mortgages and car loans unless the debtor enters into a Reaffirmation Agreement with that particular creditor saying, in essence, that the debtor agrees to pay the debt even though the debtor filed Chapter 7. The process for reaffirming a debt in Chapter 7 can be found in Section 524(c) of the Bankruptcy Code. The question is when, if ever, should a debtor consider entering into a Reaffirmation Agreement reaffirming a debt that would otherwise be discharged in bankruptcy?

          A Reaffirmation Agreement revives the debt that would otherwise be discharged, re-establishing the legal obligation of the debtor to pay the debt just as if the debtor had not filed Chapter 7 at all. This means that if a debtor reaffirms a car loan with a balance of, say, $10,000 but the vehicle securing the loan is worth only $8,000, then if the debtor fails to make the payments, the vehicle can be repossessed, sold at a “meat-axe” price at an auto auction, and the debtor is liable for any deficiency on the sale. So, if the vehicle with a retail value of $8,000 gets sold at auction for $3,000 (certainly not an unusual outcome), the lender holding the reaffirmation agreement will most certainly show up with its hand out looking for the $7,000 balance owed plus costs of the liquidation of the vehicle even though the debtor received a discharge for all of the other debts in Chapter 7 and cannot file another Chapter 7 in which the debtor receives a discharge again for a period of up to eight years from the date of the first filing.

          On the other hand, if the debtor declines to reaffirm the debt, the debt gets discharged and the creditor may not demand payment of the debt. All the creditor can do is look to the collateral (the car, the house, etc.) to get as much as it can to satisfy the claim. This is because the creditor does not lose its security interest (e.g. mortgage, lien on car) when the debt is discharged. This is why the creditor obtained collateral for its loan in the first place. But getting its money means the creditor has to either liquidate the collateral, or continue to accept payments on the loan. It turns the debt into something akin to what is referred to in the law as a “non-recourse obligation” meaning that the creditor has no direct recourse against the debtor to get paid.

          Notice the distinction between the creditor demanding payments, and accepting them. Section 524(f) of the Bankruptcy Code makes it crystal clear that just because a debt is discharged does not mean that the debtor cannot pay it if the debtor so chooses. The creditor may not “demand” the payment but if the debtor voluntarily sends payments, the creditor can, and usually will, accept them.

          When a person files Chapter 7, one of the forms that must be completed, signed and filed is something called a “Statement of Intention” regarding secured consumer debts. The Statement of Intention records the debtor’s intention at the time of filing it as to what course the debtor intends to follow as to the car loan or the home mortgage or the like. In New Hampshire, which is in the First Circuit, the options are specifically limited to surrendering the collateral (and discharging the debt); redeeming the collateral by paying the creditor the value of the collateral; and reaffirming the debt and, subject to repayment, retaining the collateral. There is also a space on the form for “other” which sometimes comes into play in unique circumstances, such as when there is a co-signer on the loan.

          The Statement of Intention is the intention of the debtor at the time the debtor signs the statement. The debtor can change his or her mind two minutes after signing it and even has up to sixty (60) days after the signed reaffirmation agreement has been filed with the court to rescind the agreement if the debtor has a change of heart.

          Entering into a Reaffirmation Agreement should only be entertained after careful consideration of all of the consequences of doing so. The attorney representing the debtor is also a sometime participant in the process if the attorney decides to sign the agreement as well on the basis that entering into the agreement will not cause an undue hardship on the debtor and/or the debtor’s dependents. Many attorneys refuse to sign reaffirmation agreements at all. If the attorney refuses to sign a Reaffirmation Agreement that the debtor wants to sign and file, then the bankruptcy court will hold a hearing on validating the agreement anyway. And the court will usually approve the agreement after explaining all of the pitfalls that the debtor might encounter after reaffirming a debt. Why will the judge approve it when the attorney would not? The simple reason is that debtors can sue an attorney later for letting them do a reaffirmation agreement that goes bad whereas the judge has judicial immunity meaning that the debtor cannot sue the judge.

          I do not have a blanket policy of refusing to sign reaffirmation agreements but I am very selective about doing so. The issues are pretty simple. How much equity does the collateral have such that if a foreclosure or repossession occurs later, will there likely be a deficiency? Will the debtor’s post-bankruptcy budget allow for the payments to the secured creditors without sacrificing other essentials such as food, lights, heat, clothes, etc? Is it likely that the income being relied upon to make the payments will still be there a year from now (or however long) to be sure the payments can be made?

          A final question that is inevitably asked by a debtor is what will the creditor do if the debtor does not enter into a reaffirmation agreement for collateral that the debtor wants to retain? The answer largely depends on the creditor.

          Some creditors will engage in such petulant activities such as shutting off a debtor’s access to on-line payment procedures on the flimsy basis that by allowing a debtor on-line access somehow violates the automatic stay after the bankruptcy is filed, or later on the discharge injunction after the debtor receives the discharge and the case is closed. They will also stop sending statements to the debtor which is a violation of the automatic stay although I have seen some creditors who will ultimately resume sending them bearing language that the statement is not an attempt to collect a debt but is only for informational purposes. So it is important for the debtor to know where to send “snail mail” payments so that the loan is paid in a timely fashion.

          Some creditors will also refuse to report timely payments made to credit bureaus on the basis that since there is no legal debt and any such payments on the debt are only voluntary, they need not be reported. Personally, I think this could well be a violation of the Fair Credit Reporting Act (FCRA) because payments are being made, voluntary or not. The “flip side” of that is, I suppose, that the creditor probably cannot report that payments are NOT being made since that would probably be a violation of the discharge injunction as an impermissible attempt to collect a debt. The debtor, however, can blunt the effect of this by retaining spotless records showing payments being made that can be presented to a future potential lender who wants to know if the debtor made the payments.

          But what the debtor really wants to know is if the creditor will still take action to foreclose or repossess even if the payments are made in a timely fashion and my personal experience is that the creditor will usually not take such action. I have heard of it happening anecdotally, but I have never seen it with my clients. Keep in mind that I have seen creditors move quickly to repossess vehicles, more so than usual, where the debtor falls behind on payments if the debt has not been reaffirmed. But in my practice, which stretches out over three (3) decades, I have never had a client tell me that a creditor repossessed a vehicle when the payments were being made in a timely fashion. I have had creditors attorneys TELL me that they would do so; but I have never had one actually do it. Essentially, the choice for the creditors is to either accept money (which one would presume is the better option) or “eat metal.” My experience has been that invariably creditors choose the former.

The Automatic Stay is “Automatic.” Right? Maybe Not.

One of the benefits of filing a bankruptcy petition is that at the moment a debtor files the petition, something goes into effect that is called the “automatic stay.” The automatic stay is a preventative, a “prohibition,” if you will, against most creditors taking any action against the debtor to collect a debt. The creditor cannot call you, write you, sue you, continue to sue you if they have sued you, or foreclose on or repossess property. This gives the debtor time to work out his or her financial issues without continued creditor pressure. This also prevents creditors from basically “pulling a fast one” on the debtor, such as telling the debtor that the creditor is considering a modification proposal for the mortgage, and then turning around and starting the foreclosure anyway. Some creditors or proceedings are not subject to the automatic stay. A complete list of persons and proceedings not stayed can be found in Section 362(b) of the Bankruptcy Code, and include things like child support not being taken from property of the bankruptcy estate, the duty to file tax returns, and criminal proceedings.

But there are other instances in which the automatic stay may not go into effect, and such instances include those involving debtors who file multiple petitions within a short period of time. Section 362(c) of the Bankruptcy Code sets out the deficiencies of the automatic stay when the debtor has filed one or more cases within a year prior to the filing of the new case. If one case has been filed and dismissed, the automatic stay goes into effect for only 30 days during which time the debtor must file a motion with the court to extend the stay to some or all creditors after the initial 30 day period. Notice of the motion must be given to creditors and a hearing must be held within the 30 days by the court. In order to obtain an extension of the stay beyond the 30 day initial period, the debtor must demonstrate that the second filing was made in “good faith.” 

If two or more cases had been filed by the debtor within the one year period preceding the filing of the present case, then no automatic stay, even for 30 days, will go into effect and the debtor must demonstrate good faith by “clear and convincing evidence” overcoming a rebuttable presumption that the second filing was in bad faith. No stay is in effect at all upon the filing of the later case, and a hearing must be held resulting in a favorable court ruling before one does. And it goes into effect, if at all, only at the time of the order of the court and does not relate back to the date of the filing of the petition. 

Judge J. Michael Deasy of the U.S. Bankruptcy Court for the District of New Hampshire addressed these issues in an opinion issued on January 17, 2014. In the case of In re James, Bk. No. 13-12924-JMD (2014 BNH 002-an unreported opinion), Judge Deasy addressed the effectiveness and imposition of the automatic stay involving the case of a “serial” filer, i.e. a debtor who filed multiple bankruptcy petitions in Chapter 13 over a one-year period. Without going into the detailed and complicated fact situation of that case, which generally involved a debtor attempting to pay significant family support arrears in a Chapter 13 plan contrary to a Massachusetts Probate Court, Judge Deasy focused on the statutory requirements of the bankruptcy code. He noted that in order to rebut the presumption by clear and convincing evidence that the current filing was in bad faith, the debtor had to show that he had acted honestly and in good faith, that there had been a “substantial change in his financial or personal circumstances” from the previous filing,and that he was likely to confirm and perform a Chapter 13 plan. He pointed out that a debtor attempting to unfairly manipulate the bankruptcy code was not entitled to continue to use the code for that purpose. 

So, in some cases, the automatic stay is not “automatic.” If the debtor has filed a case within the past year that has been dismissed, the automatic stay only goes into effect for 30 days pending a further ruling by the court on a timely-filed motion. And the automatic stay does not go into effect at all upon the filing of a third (or subsequent) case and may never go into effect unless the debtor can convince the court that the multiple filings are not just a nefarious attempt to “game” the system.


What Does A Chapter 7 Debtor Own? At First, Virtually Nothing!

            One of the harder concepts to convey to Chapter 7 clients is that, as of the time the bankruptcy petition is filed and perhaps up until the case is closed, the Chapter 7 debtor owns virtually nothing.

            There is a good reason why many debtors fail to understand this. Most Chapter 7 individual debtors (this includes joint filings of married couples) do not lose anything in the process of filing bankruptcy except attorneys fees and filing fees, and a down-tic in their credit score, which then generally begins to rebound after they file Chapter 7.  Available exemptions usually cover everything they own so that their providing documents and information for the preparation of the bankruptcy schedules, signing of the documents, attendance at the creditors meeting, and mandatory credit counseling and debtor education are usually the extent of their participation in the process along with a few meetings with their attorney and the attorney’s staff. So it is reasonable for a person to think that if they do not lose anything once the bankruptcy has ended, then they never did.

            But, in Chapter 7, this is actually not the case. The moment a person files Chapter 7, they give up ownership of everything they own. Legally. Right down to their underwear and tooth brush. At the moment a petition is filed, a “bankruptcy estate” becomes the owner of all property previously owned by the debtor, and the Chapter 7 trustee administers the estate for the benefit of the creditors. 

            There are few exceptions to this, and even these exceptions must generally be noted somewhere on the debtor’s schedules and statements filed with the court as part of the debtor’s duty to disclose his or her complete financial situation. For instance, a valid 401-k plan is not technically property of the bankruptcy estate as a result of the Supreme Court ruling in Patterson v. Shumate decided way back in 1992. But it still has to be listed on Schedule B, the property list, so that the trustee has an opportunity to make a determination that it truly is a valid 401-k.

            But other than that, pretty much all property of the debtor is subject to this transfer of ownership. Now, to be sure, even though the trustee owns your stuff, he or she rarely takes any of it into actual possession. This is for the practical reason that debtors apply exemptions to their property which statutes give them, allowing them to keep certain property as part of their “fresh start” in bankruptcy. The debtor is allowed to exempt reasonable clothing, furniture, fixtures, automobiles, tools of the trade, and other things up to certain acceptable values. For most Chapter 7 debtors, the exemptions are enough to cover everything. 

            And sometimes not. Let’s say a debtor owns a Mickey Mantle rookie baseball card, which is worth quite a bit of money these days, and the debtor does not have an exemption to cover it or the money or desire to buy it back from the trustee (remember, the trustee owns it). In that situation, the trustee is free to take that baseball card to the highest bidder, sell it, and use it to pay administrative expenses and creditors to the extent it will do so.

            But even if all of the property of a debtor is exempt, the debtor still is not entitled to dispose of it in any way until the trustee no longer owns the property, and this is true even if the time has passed for the trustee to object to the claim of exemption the debtor has asserted for that property. The debtor may not sell, give away, or throw in the trash any property so long as the bankruptcy estate owns it.

            The trustee no longer owns the property, i.e. the property is no longer property of the estate under Section 541 of the Bankruptcy Code, in only one of two instances. 

            First, the trustee no longer owns the property of the estate if the trustee takes the affirmative step of abandoning the property under Section 554 of the Bankruptcy Code. This is actually a pretty simple process. Assuming that the trustee agrees as to the value of the property and the exemption is properly asserted by the debtor, the trustee need only file a one page notice with the court stating (for whatever reason; basically he or she does not care about it) his or her intention to abandon the property. The court gives notice of the intended abandonment to all creditors of the estate and other interested parties so that they can object if they have a basis to do so. If, after fourteen days from the court’s notice, no one objects, the property is abandoned, meaning it is no longer owned by the trustee and is now once again owned by the debtor to do with as the debtor wishes.

            The only other way that the debtor actually regains ownership of the property is for the bankruptcy case to close. Note that I emphasize close. I have seen debtors receive their discharge and think that does it, and that they are free at that point to do what they like. This is not an unreasonable conclusion, I suppose. Debtors are generally informed from the first consult (in my office, at least) that their “fresh start” in Chapter 7 begins, with limited exceptions, at the moment their bankruptcy petition is initially filed with the court.

            But, legally, the bankruptcy estate continues to own everything unless there has been an abandonment or the case closes. This is because the case closing constitutes a “deemed abandonment” of all property not administered by the trustee.

            Another caveat is that this only applies to property of which the trustee is aware, i.e. which is actually listed on the debtor’s schedules. This is critical to understand. If the debtor “forgets” to list the yacht sitting in the marina down at Cape Cod, that yacht becomes property of the bankruptcy estate nonetheless, and is never abandoned until the trustee is made aware of it, usually by amending the schedules and adding it. If the trustee finds out about it otherwise, he or she is free to re-open the case, take possession of the yacht, and use it to pay creditors. And it is probably too late for the debtor at that point to try to exempt it even if the debtor could have in the beginning.

            The failure to recognize the trustee’s ownership interests in the debtor’s property can lead to some frightful situations, some of which may not be recognized for years. I will offer an example to demonstrate such a possible outcome, and then let it go, this article already being longer than intended.

            I became aware recently of a debtor who filed Chapter 7, fully exempted the substantial equity in his home, entered into a Purchase and Sales Agreement for the home after the bankruptcy was filed, received his discharge in bankruptcy, and then closed on the home sale. A problem arose. The bankruptcy case had not yet closed and the trustee had not abandoned the real estate. It would have been a simple matter to get the trustee to abandon the property but the debtor mistakenly believed he did not need such authorization so he did not even bother to tell his attorney about the pending sale.

            In some manner, the closing agent found out about the seller’s bankruptcy. They conducted the closing but would not release the net proceeds from the sale to the debtor until they got “authorization” from someone, meaning the court or the trustee. So the debtor called his attorney, told him the problem, and the attorney basically told the debtor that he had no authorization to sell the home. The debtor was advised that he could do one of two things. He could go to the trustee and request some kind of abandonment, which he undoubtedly would have gotten, or he could wait until the case closed. Since it appeared that the case was going to close imminently, everything seemingly incident to that result having taken place, and it would take around three weeks for the abandonment to be final, he chose the latter approach. It actually took longer for the case to close and the title company, apparently exasperated with the delay, gave up and gave him the money anyway. The case closed about six days later.

            No harm, no foul. Right?

            Not necessarily. The deed and the mortgage were signed and recorded before the case was closed and since there was no abandonment, the debtor signed a deed for real estate he legally did not own. The new “owner” signed a mortgage conveying a property interest which he legally did not have. The closing agent turned over money to the debtor to which he was not entitled because the debtor had legally transferred nothing. Suggestions of liability abound all around. At a minimum, there should have been an execution of confirming documents for a date after the closing of the bankruptcy case. That would probably solve most if not all of the problems created by this situation.

            If that does not happen, it is hard to say if many or no problems result. This may be one of those title defects that no one ever picks up on and, in my experience, many title examiners miss this one. But to be thorough, and given that indicia of a bankruptcy rarely shows up in the registry of deeds, an examination of the records of the bankruptcy court as to the seller is a step that should always be taken.

            But the lesson to be learned and understood is this. If you are in any kind of bankruptcy, not just a Chapter 7, and want to sell or otherwise dispose of property, call your attorney first. You will undoubtedly save yourself a lot of headaches if you do.


©Leonard Deming, 2014

What The Heck Is Chapter 20??

As a bankruptcy professional, I deal, obviously, with the U.S. Bankruptcy Code on a regular basis.  The Bankruptcy Code (or just “the Code” here) is more formally known as Title 11 of the United States Code, and it is comprised of a number of “chapters,” just like some books.  Some of these chapters address basic issues regarding bankruptcy, such as who may be a debtor, when one may file a petition in bankruptcy, the duties of trustees and debtors, and so on.  Some chapters are restricted to particular types of relief that a debtor might avail himself or herself of, such as Chapter 7 which is a liquidation type of bankruptcy (also known colloquially as a “fresh start” bankruptcy for individual debtors) and Chapter 13, which is known as an “Adjustment of Debts for Individuals With Regular Income.”  Notice it states “individuals.”  While individuals who operate a business as a sole proprietorship might be able to file Chapter 13, corporations, limited liability companies, partnerships and other such entities may not.  If they want to reorganize their businesses, they must do so in Chapter 11.

The chapters of the Code consist of all of the odd numbers from 1 through 15 with the exception of Chapter 12, which is sort of like a Chapter 13 with a little Chapter 11 sprinkled in and is reserved specifically for the family farmer or fisherman.

The two other specifically reserved chapters are 9 and 15.  Chapter 9 has been in the news quite a bit recently and it is reserved for municipalities such as counties or cities.  The most recent is, of course, the filing by the City of Detroit.  Chapter 15 is a relatively new chapter aimed at ancillary administration in aid of bankruptcies filed in other countries.

But one thing is certain.  Search as one might, the Code makes no reference to Chapter 20.  Still, “Chapter 20” can and is used by debtors in certain circumstances who cannot obtain complete relief in one chapter under the Code.

Essentially, Chapter 20 is the combination of two bankruptcies filed consecutively.  A debtor might file a Chapter 7 and obtain a discharge but finds that, despite obtaining a discharge for most if not all debts, the relief obtained was not complete.  A person may not file another Chapter 7 case in which he or she receives a discharge of their debts until eight years have passed since filing the first one.  The time limit in order to obtain a discharge in Chapter 13 after having filed Chapter 7 is four years.  Still, even though a discharge may not be issued until those time periods lapse, a person may still find that filing a Chapter 13 after having filed a Chapter 7 (hence, “Chapter 20”) could afford significant relief.

For instance, a Chapter 7 debtor may have significant debt owed to the IRS or other tax entity which was not discharged by the Chapter 7.  Once the Chapter 7 discharge is granted, the tax entity may usually begin collection action again.  If the debtor cannot come to an agreement with the tax entity (often they can), then they might seek relief in Chapter 13, putting the debt in a plan of up to five years without interest or penalties.  No discharge is necessary since the debt is being paid in full.

An issue that has arisen over the past few years is whether a debtor may strip off a wholly unsecured lien (such as a second mortgage) in Chapter 13 after having filed a Chapter 7.  Typically, a Chapter 13 debtor may do just that if the debtor can show that the value of the property is less than the amount owed to a senior lien holder (such as a first mortgage) which means that the second or third mortgage really have no equity.  In order to do this, the debtor must complete a Chapter 13 plan and receive a discharge.  With the discharge and the court’s order finding no equity reaching the junior lien, the junior lien is “stripped off” meaning it is void and of no effect.  The question is whether such a “strip off’ is permitted after a Chapter 7 has been filed and an earlier discharge granted to the debtor.

Some courts around the country allow this approach and some do not.  Some of those that do not allow lien stripping in Chapter 20s focus on the requirement of a Chapter 13 discharge and state that since no discharge can be granted in the subsequent Chapter 13, then no lien may be stripped either.

However, in a case of first impression in the District of New Hampshire and, apparently, the First Circuit, the Honorable J. Michael Deasy has found in the case of In re Dolinak, 2013 BNH 015, that lien stripping in a Chapter 20 may, in some circumstances, be permissible.

In Dolinak, Judge Deasy, in a carefully-reasoned opinion, addressed the three different approaches taken by other courts around the country and found nothing in the bankruptcy code which prevented an out-of-equity junior lien from being stripped in a Chapter 20.  He did emphasize the ubiquitous “good faith” requirement found in all Chapter 13 cases and determined that such efforts at lien-stripping must be assessed on a case-by-case basis.  He pointed out that some debtors might try to manipulate the bankruptcy code in an impermissible fashion in order to obtain such relief but he also found that just because someone might try to do that was no reason to not grant relief to the honest debtor who was acting in good faith.  After considering a number of factors, Judge Deasy found that the debtor in Dolinak had acted in “good faith.”

So, for the time being, Chapter 20s aimed at eliminating junior liens which are entirely out of equity may be successful in New Hampshire as long as the debtor is acting in good faith.  This undoubtedly is a lesson to be taken by both creditors and debtors.  Debtors should make every effort to come to a reasonable agreement with creditors after filing a Chapter 7 and receiving a discharge; creditors should do the same.  If the debtor makes a real effort to treat the creditor fairly but the creditor still attempts to conduct a meaningless foreclosure, such as occurred in Dolinak, then the debtor may be able to resolve the matter in “Chapter 20.”

Publishing New Hampshire Bankruptcy Filings

A question I am often asked by clients is whether newspapers or other media will publish the fact that they filed a bankruptcy petition.  These days, the answer is generally “no.”  Over twenty years ago, the Manchester Union Leader would publish public notice of every filing made in the state.  But this was more or less because few bankruptcies were actually filed, relatively speaking.

In 1986, something less than 700 total filings occurred in New Hampshire.  The next year, the filings nearly doubled to over 1,300.  In 1988, filings jumped again to over 2,000.  Filings continued to rise steadily, especially after the 1988 stock market crash which, in my opinion, led to the NH (and elsewhere) real estate crash such that in at least one year in the 90’s, filings went above the 5,000 mark.

At some point, newspapers apparently decided that the effort to plant the “Scarlet B” on debtors’ foreheads was not worth it.  Today, consumer bankruptcies are rarely published.  Publication is usually reserved for some businesses and prominent individuals.  I tell my clients that the only entities that will know about their filing is usually limited to their attorney, their creditors, the trustee, those who are present at the creditors meeting (usually other debtors and their attorneys), and whomever they tell.  If they feel it is necessary to make a confession to everyone they meet, I suppose they are free to do so.  But I figure it is their business, and no one else’s except for creditors and trustees.