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Questions and Answers (Q & A) about the New Bankruptcy Law Amendments (continued)

77. Does the New Law make changes in Relief from Stay (RFS) procedures? YES:

a. New RFS ground Section §362(d)(4) added: Under existing law RFS is governed by 11 USC §362(d)(1) (“cause”), (2) (“no equity” and (3) (single asset real estate RFS). The New Law adds a fourth subsection, §362(d)(4), which provides that the court shall grant RFS regarding real property where the court finds that the filing of the bankruptcy petition was part of a scheme to delay, hinder and defraud creditors by transferring all or part ownership in the porperty without consent of the secured creditor or court approval, OR there are multiple filings affecting the same property. [§362(d)(4)(A) and (B)].

i. This later means by the time a debtor files a 13 and it gets dismissed for nonpayment or incomplete documents, and then files a second 13, there are “multiple filings affecting the same property” so apparently new §362(d)(4)(B) would apply to give the mortgage lenders a right to RFS.

b. As already discussed immediately supra, he New Law changes regard relief from stay in unlawful detainer proceedings to a file-a-certification and court rules on veracity of certification, rather than a motion process, relating to a debtor trying to get a stay regarding a residential unlawful detainer action, per 11 USC §362(b)(22 and 23) and §362(h) and (l) {that’s “L”}, as discussed immediately supra.

c. The old law is NOT changed, just renumbered as §362(e) that the stay terminates 30 days aftera RFS motion, unless the court, after notice and a hearing, orders the stay continued in effect pending final hearing. However, the New Law adds §362(e)(2) which provides that where the detebor is an indivdual, the stay shall terminate 60 days after a RFS motion is brought unless, the court rules on the motion with 60 days after it is filed, or all parties agree to extend the 60 days, or the court extends the 60 days , for “a specific period of time..the court finds is reuiqred for good cause, as describe in findings made by the court.” [§362(e)(2)]

d. Existing §362(d)(3), governing RFS in single asset real estate cases, is modified by two New Law amendments:

i. To avoid an order lifting the stay, the debtor must stillc ommence and pay monthly payments to each creditor (except judgment creditors and statutory lien creditors) whose claim is secured by the single asset real property, but §362payments to the secured parties must have begun within 90 days of the filing of the petition and must include interest at the contract rate, not the market rate, as previously allowed. In addition, the debtor has the sole discretion of using rents from the real property to make payments to the secured parties. [§ 362(d)(3)(B)]

78. OMITTED
79. OMITTED
80. OMITTED

81. Under the New Law does the Court have to hold a hearing before granting an individual debtor a Chapter 7, 11 or 13 discharge?

a. Per 11 USC §1328(h), 727(a)(12) and 11 USC §1141(d)(5)( C ), the Court may not grant an individual a Chapter 7, 11 or 13 discharge unless the court “after notice and a hearing” held not more than 10 days before the date of entry of the discharge order finds that there is no reasonable cause to believe that the homestead exemption provision [11 USC §522(q)(1) ] re reducing the homestead exemption if debtor has committed certain types of fraud, breach of fiduciary duty or other specified torts. “Notice and a hearing” means all creditors and other parties in interest have to be given notice and given right to object, and to request a hearing be held on issue in court. If notice given and no one objects, the Court can enter discharge order without holding a hearing; but if any party in interest objects to discharge on this ground and timely requests a hearing, Court must hold an actual hearing.

82. What changes does the New Law make regarding how often a debtor can get a discharge.

a. New Law places additional restrictions on how often a debtor can get a discharge. For those individuals for which bankruptcy has become a way of life, the New Law will cut into that lifestyle:

i. Under existing law, a debtor cannot receive a discharge in a second Chapter 7 case unless the second Chapter 7 case was commenced more than 6 years after the first Chapter 7 case in which the debtor received a discharge was commenced. The New Law amends 11 USC §727(a)(8) to increase the 6 years to 8 years; so that under the New Law a debtor cannot receive a discharge in a second Chapter 7 case unless the second Chapter 7 case was commenced more than 8 years after the first Chapter 7 case was commenced.

ii. End of Chapter 20: Is this the end of Chapter 20, ie the practice of filing a Ch 7, discharging as many debt as possible in the chapter 7, then soon thereafter filing a Ch 13 to deal with the remaining “nondischargeable” debts and mortgage arrearages? Yes, pretty much. A debtor cannot receive a discharge in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 that was filed within 4 years before the Chapter 13 is filed, per New Law 11 USC 1328(f)(1).

iii. What about getting discharges in successive Chapter 13 cases. Per New Law 11 USC 1328(f)(2) a debtor cannot receive a discharge in a second Chapter 13 case if the debtor received a discharge in a previous Chapter 13 case filed within 2 years before the second Chapter 13 case was filed.

iv. Will 1328(f)(2) stop debtors from filing successive Chapter 13 cases? No, because most debtors who file successive Chapter 13 cases are not doing so to get successive discharges, they are filing a second, third or fourth Chapter 13 case because their previous Chapter 13 cases were dismissed for failure to timely file all required schedules, failure to make plan or mortgage payments, failure to confirm a plan. So 1328(f)(2) won’t affect successive cases filed for any of those reasons, because when the previous cases are dismissed, the debtor has not received a discharge in those previous cases.

83. Please contrast how debtors can treat car loans, and other debts secured by personal property in Chapter 13 under existing law, and how they will have to treat car loans in Chapter 13 under the New Law?

a. Many debtors owe substantially more than the FMV of their cars, TV’s and other personal property debts secured by purchase money liens on the personal property item.

i. Under present law, the debtor in a Chapter 13 can “lien strip” the car loan, meaning the debtor can split the car loan into a secured debt that is the Rash value of the car, and then put the deficiency in the general unsecured class. The secured class gets paid 100% over time, the unsecured class gets paid pennies on the dollar or zero. Result, the debtor gets the car for a lot less than the debtor owes. The secured creditor has to release its lien either when the secured class is paid off, or when the secured class is paid off and the debtor gets a discharge (split in caselaw on this).

b. Under existing law, per the Rash US Supreme Court case, the debtor had to value the secured claim as what the debtor would have to pay to buy a similar (used) car, TV, refrigerator, furniture. So debtors would look in the Recycler, or other classified newspaper ad to look people offering to sell such items used at low prices, and then that was the FMV of the item for the secured claim.

c. Under New Law the car lenders, appliance dealers, furniture dealers, and other creditors who take a purchase money lien on the personal property consumer items, are HUGE winners:

i. First, the New Law legislatively overrules Rash. Per New Law, [ 11 USC -------------]the fair market value of the item the lien is on is the price a consumer would have to pay a dealer to buy the item, and everyone knows that retail dealers charge a lot more for used items than you pay if you buy the used item from another consumer, through the recycler or other classified ad. This change legislatively overrules the Rash US Supreme Court case pronouncement that FMV for a consumer good is what the debtor would have to pay to buy it on the open market.

ii. Second, the New Law, adds 11 USC 1325(a)(5)(B)(I), which provides that the holder of a sedcured claim must “retain the lien securing such claim until the earlier of (aa) the payment of the underlying debt determined under nonbankruptcy law [which is the total amount owed]; or (bb) discharge under section 1328".

iii. This resolves against the debtor a split in case law under existing law. The split was between decisions which held the secured creditor had to release its liens as soon as the secured claim was paid, before the deficiency portion of the claim, was paid, even if the deficiency (general unsecured) portion of the claim was never paid; and decisions that held the creditor was entitled to retain its lien until the plan was completed and the debtor received a Chapter 13 discharge, which would discharge the deficiency part of the claim. This latter, which the New Law specifies, was the better reasoned caselaw, because if the debtor’s Chapter 13 case was dismissed without debtor recieving a discharge, then all general unsecured debts–including the creditor’s deficiency–were still owed and enforceable outside of bankruptcy, by repossessing and selling the car, TV, refrigerator, furniture or other item the creditor had its lien on.

iv. New Law 11 USC 1325(a)(5)(B)(II) is added, and provides if the Chapter 13 case “is dismissed or converted without completion of the plan, such lein [the secured creditor’s lien] shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law.” Again, the effect is to allow the lienstripping on collateral worth less than the amount owed ONLY if the debtor completes plan payments and receives a Chapter 13 discharge.

v. Per 1325(a)(9), biggest winners among personal property lenders are car loans. 1325(a)(9) New Law provides that if the motor vehicle was purchased within 910 days before the bankruptcy is filed, the car creditor retains its lien until the entire amount owed under nonbankruptcy law is paid, meaning no “lien stripping” at all is allowed on car loans that are under ___ years old on the date the bankruptcy is filed.

vi. In addition 11 USC 1325(a)(5)(B)(iii )(I) is added to require that plan payments to secured creditors “shall be in equal monthly amounts”, which will make it harder to do “step” plans, which are plans where the debtor pays $X for a certain number of months, then $Xplus Y for the rest of the months.

vii. In addition, 11 USC 1325(a)(5)(B)(iii )(II) is added to require that the monthly amount paid the secured creditor must be “an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan”. It will take years of caselaw to figure out what that means. Probably the minimum per month would be the $$ that the collateral was reducing in value/depreciating each month during the plan.

84. Under present law Chapter 11 plans cannot be modified after “substantial consumation of the plan, which usually happens as soon as payments commence. Does New Law change this?

a. Changes it in individual Chapter 11 cases. Like Chapter 13 plans, which can be modified after confirmed, 11 USC §1127(e) provides that an individual Chapter 11 plan CAN be modified up or down after confirmation and before completiton of payments under the plan, even if the plan has been “substantially consummated”, and not just on request of debtor, can be on request of debtor, trustee, US trustee or holder of an anllowe duunsecured claim to increase or decrease amount to be paid to a lcass, extend or reduce legnth of plan; have to do on notice and hearing, and have disclosure as required by 1125 [disclosure statement provision].

85. Some bankruptcy judges don’t hold a plan confirmation hearing if no one has objected to the chapter 13 plan, they let the chapter 13 trustee sit in court and call the “no objection” cases and state they are confirmed and then submit confirmation orders to the judge to sign. Will the New Law change this practice.

a. The old law is not changed in that respect. It still states, in 11 USC 1324 that After notice, the court SHALL hold a hearing on confimration of the plan. A party in interst may object to confirmation of the plan. However, New Law 1324(b) adds some time limits, though waivable by the court, which are the plan confiratmion hearing may be held not earlier than 20 days and not leater than 45 days after the 341a meeing “unless the court determines that it would be in the best interswts of the creditors and theestate to hold such hearing at an earlier date and there is no objecdtion to such earlier date. Practice pointer: creditor’s written objection, filed before 341a meeting should object to plan confirmation hearing being outside of these 20-45 day time limits.

86. Omitted
87. Omitted
88. Omitted
89. Omitted

New Law Changes that Affect Business Bankrutpcy cases: You have told us that 90% of New Law changes affect consumer bankruptcy cases; but lets switch to talking about some of the New Law changes affecting NON consumer bankruptcy cases?:

1. How does the New Law affect “small business” chapter 11 cases.

a. Under the New Law , filing Chapter 11 as a “Small business case” is mandatory, if the debtor meets the definition of “small business” debtor, 11 USC §101(51C), and 101(51D) which is noncontingent liquidated secured and unsecured debt not more than 2 million. The New Law “small business case” rules are too lengthy to go over in this program.

2. Do the New Law Bankruptcy automatic stay changes affect Chapter 11 cases?

a.Yes, as already discussed.

3. How does the New Law affect deadlines for assuming/rejecting executory contracts and unexpired leases?

a. shortens them [discuss 365 changes]

4. How does the New Law affect “key employee” retention and severance payments?

a. The New Law places aggressive restrictions on “key employee” retention and severance payments

5. How does the New Law affect wage and benefit priority amounts?

a. New Law increases priority amount, and gives longer reach back.: The administrative priority for wages owed, and pension benefits owed, a certain number of days before bankruptcy is filed used to be 507(a)(3) and (4) priorities, and now are 507(a)(4) and (5) priorities. The New Law increase the amount of the priority for unpaid wages or commissions to $10,000, and the time period to owed for work in the 180 days before bankruptcy is filed, instead of owed for work within 90 days before bankruptcy is filed The priority for pensions contributions that an employer debtor owes to employee pension plans is increaded to $10,000 and the time period is still 180 days. For a debtor with a large number of employees can be hundreds of thousands of dollars

6. Changes in rules for plans and disclosure statements

7. How does the New Law affect the ordinary course of business defense to preference, §547( c ) (2)?

a. received in “Ordinary course of business” defense to preference adversary proceeding is made much EASIER for the defendant to utilize. 11 USC §547( c ) (2) is amended. Under present law, to be able to use the ( c )(2) “ordinary course of business” defense to a preference suit, the creditor bears the burden of proving that the payment was made in the ordinary course of business or financial affairs of the debtor, received in the ordinary course of affairs of the creditor, AND that the payment was “made according to ordinary business terms”, which has been interpreted in case law as meaning the creditor has to present expert testimony as to what the normal terms of payment are in the industry in question, and prove that the payment received fell within the normal terms of payment in the industry. Under the New Law 547( c )(2), its “either / or”, NOT “and”: the creditor bears the burden of proving either that the payment was “made in the ordinary course of business or financial affairs of the debtor and the transferee (creditor)” OR that the payment was “made according to ordinary business terms

8. Are some transfer excepted from being recoverable as preferences which were recoverable as preferences under existing law?

a. Yes, transfers that “aggregate” less than $5,000 cant be sued on at all to be recovered as preferences, per 11 USC §547( c )(9), in a case filed by a debtor whose debts are not primarily consumer debts

9. How does the New Law affect fraudulent conveyance?

a. Reach back for fraudulent conveyance under 11 USC 548 is increased from 1 year prepetition to 2 years prepetition, but not really significant, because California and most other states have UFTA (Uniform Fraudulent Transfer Act) which has a 4 year reach back to avoid fraudulent transfers. However New Law adds 548(e), which makes 10 year reach back for undoing as fraudulent conveyance debtor’s transfer of an interest of property into a self settled trust (trust where debtor is the beneficiary) or similar “asset protection” device, where the transfer was made with an actual intent to hinder delay or defraud any creditor.

10. Lots of times Chapter 11 debtors don’t complete making their plan payments, after the debtor has already gotten a discharge. Does the New Law address this?

a. Under the New Law Individual Chapter 11 debtor can’t get a discharge in Chapter 11 unless the debtor completes all payments under the plan, unless, “on notice and a hearing” and for cause, the court grants the discharge without the debtor making all payments, per New Law 11 USC §1141(d)(5).

b. Contrast that with how corporate and partnership Chapter 11 discharge is treated under New Law?: No change under New Law: Corporate and partnership chapter 11 debtors can continue with the present practice of getting a discharge upon confirmation of their Chapter 11 plans, or upon “substantial consummation of the plan, which usually happens when the plan payments commence, and then default on the plan payments, as they have been doing for years.

11. Does the New Law impose Chapter 11 disclosure statement duties regarding revealing tax consequences?

a.Yes, the chapter 11 disclosure statement will be required to discuss the “potential material Federal tax consequences” to the debtor, any successor and to a hypothetical investor. [11 USC §717]

12. How about payment of priority taxes in Chapter 11 under the New Law?

a. In Chapter 11, priority tax claims will have to be paid within 5 years from the date of entyr of the order for relief, whereas under existing law, the priority tax claim had to be paid over a period of no more than 6 years from date of assessment; and the priority tax must get the same payment terms as the “most favored non-priority unsecured claim” treated by the plan, which means you can’t make the IRS wait while you pay trade creditors you want to keep doing business with [11 USC §1129(a)(9), including new 11 USC §1129(a)(9)( C )(iii).

13. Are some New Law changes in title 28 re taxes?

a. Yes, 28 Judicial Code §960 is amended to clarify that a trustee or debtor in possession in bankruptcy is required to pay all federal, state and local taxes applicable to the debtor, with certain limitations.

14. Does the New Law address transnational bankruptcies?

a.Yes, there is a whole new Chapter on New Transnational Bankruptcies–Title VIII

CONCLUSION: Is the new law just a nightmare for consumer debtors and consumer debtors attorneys that will go away?

b. No, a technical corrections bill may get passed, so there might be a little nibbling around the edges of the New Law; but unless the Democrats get control of Congress and of the Presidency, its unlikely that legislation will be passed in the next several years by Congress, and signed into law, to do any significant rollback of the New Law.

(Section 10 of 10)
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