Welcome to today s webinar! Basic Bankruptcy Victor A. Davis February 21, 2019

Transcription

1 Welcome to today s webinar! Basic Bankruptcy Victor A. Davis February 21, 2019

2 In order to obtain a CE Certificate or CLE Credit, you must listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 2

3 ATTORNEY INFORMATION Because of opinions expressed by the Texas Department of Insurance (TDI) concerning rebates, legal credit is available only to: Attorneys who own title agencies that are Stewart Title Guaranty Agents Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity We welcome any other lawyers to listen, but cannot provide continuing education credit to you. 3

4 Basic Bankruptcy Victor A. Davis Underwriter Stewart Title Guaranty Company Houston, Texas

5 Basic Bankruptcy What is Bankruptcy? What are the types? What happens? What is in the Estate? Who can sell during? What is a Discharge? Who can sell after? 5

6 Bankruptcy What is it? Title 11 of the U. S. Code Article 1, Section 8 of the U.S. Constitution authorizes Congress to enact uniform laws on the subject of bankruptcy throughout the United States. Title 11 of the U.S. Code is the Bankruptcy Code. We Americans believe in second chances. People or entities that are in financial difficulties are given an opportunity to reorganize their business affairs or liquidate their assets in an orderly manner to satisfy their creditors. And afterwards, there is a fresh start. 6

7 The Debtor and the Creditors The Debtor is the party that is the subject of a bankruptcy. The Debtor can be an individual, a married couple, a partnership or a corporation. The Creditors are the parties that the debtor owes money to or that claim the debtor owes them money. 7

8 The Secured and the Unsecured Creditors can be secured creditors, meaning that they have a security interest recognized by law in some property of the Debtor, such as a recorded deed of trust or lien, or a lien on a vehicle or manufactured home title. Creditors can be unsecured creditors, meaning they are owed money, but have no security interest in the Debtor s property. 8

9 The Chapters of the Code The Bankruptcy Code is divided into a series of Chapters. The Chapter defines the type of bankruptcy you are dealing with and the rules and procedures that govern that type of bankruptcy. Chapter Chapter 7 Chapter 9 Chapter 11 Chapter 12 Chapter 13 Chapter 15 Type of Bankruptcy Liquidation (sale of non-exempt debtor property for creditors) Municipalities Reorganization (by usually corporation or partnership) Family Farmer or Family Fisherman Individual Debt Adjustment Ancillary or Other Cross-Border Cases 9

10 The Chapters of the Bankruptcy Code 10 Chapter 7 of the Bankruptcy Code involves liquidation of the non-exempt assets of the Debtor. This continues to be the most common form of bankruptcy for individuals. The Debtor s non-exempt assets are sold off to pay the claims of the creditors by a court appointed Trustee. Individuals, partnerships, and corporations are eligible to file a Chapter 7 petition.

11 The Chapters of the Bankruptcy Code Chapter 9 Reorganization for Municipalities Allows a financially distressed municipality (a political subdivision or a public agency or instrumentality of the state) to adjust its debts. If you ever encounter this, give us a call. 11

12 The Chapters of the Bankruptcy Code Chapter 11 - Reorganization - allows an individual, corporation or partnership to retain some of their assets and to use income to pay off some existing creditors. Chapter 11 bankruptcy by individuals is rare; it is used principally by businesses. Plan and Confirmation Within 120 days, the Debtor must submit and then have confirmed by the bankruptcy court a Plan of Reorganization that categorizes the creditors into different classes and explains how each class will be treated. Creditors can submit their own plan. The Plan can provide for payments for a period of up to 5 years. On successful completion of the Plan, the debtors are given a discharge from their debts. 12 Note: Plan and Confirmation will not invalidate valid pre-existing liens without lienholder consent, or by court order.

13 The Chapters of the Bankruptcy Code Chapter 12 is another reorganization chapter, but is limited to family farmers and fishermen with at least 80% of their income and 80% of their debts from farming or fishing. The Debtor must submit and have approved by the bankruptcy court a Plan of Reorganization that categorizes the creditors into different classes and explains how each class will be treated. The Plan can provide for payments for a period of up to 5 years. On successful completion of the Plan, the Debtor is given a discharge from their debts. Areas with extensive farming see Chapter 12 bankruptcies. The exemptions in a Chapter 12 bankruptcy are more extensive than in Chapters 7 and 13. However, there are few filings under Chapter

14 The Chapters of the Bankruptcy Code Chapter 13 is the reorganization chapter for individuals with regular income. The Debtor is eligible for Ch.13 if their unsecured debts are less than $394, and their secured debts are less than $1,184,200. (adjusted, based on the consumer price index). The Debtor must submit and have approved by the bankruptcy court a Plan of Reorganization that categorizes the creditors into different classes and explains how each class will be treated. 14 The Plan can provide for payments for a period of up to 5 years. On successful completion of the Plan, the Debtor is given a discharge from his/her debts.

15 The Chapters of the Bankruptcy Code Chapter 15 is the reorganization chapter for foreign debtors and related parties. The foreign debtor is allowed access to US Bankruptcy Courts to administer assets in the United States. 15

16 Bankruptcy Filings U.S. Bankruptcy Courts Business and Nonbusiness Cases Filed, by Chapter of the Bankruptcy Code During the 12-Month Period Ending September 30, 2018 District Ch. 7 Ch. 9 Ch. 11 Ch. 12 Ch. 13 Ch. 15 All Chapters TX, N TX, E TX, S TX, N ALL TX

17 17 Bankruptcy Filings

18 Commencement of Proceedings 18 Voluntary Proceeding A voluntary proceeding is commenced by the filing of the petition. The commencement constitutes an order for relief. Involuntary Proceeding An involuntary proceeding may be commenced only under Chapter 7 (liquidations) or under Chapter 11 (reorganization). Company Policy: If the debtor in an involuntary case is offering to sell property before the order of relief is granted, the company requires a copy of the notification of the proposed sale, certification by the party mailing the notice that notice of the proposed sale was sent to all interested parties, and a final order of the bankruptcy court authorizing sale.

19 Commencement of Proceedings Death or Insanity of Debtor Once the estate is created, no interests in property of the estate remain in the debtor. Therefore, if the debtor dies or becomes insane after the commencement of the case, then only exempt property, abandoned property, or certain property acquired by the debtor after the case began will be subject to control and administration by the debtor s personal representative. The bankruptcy proceeding will continue in rem as to the bankruptcy estate property. 19

20 The Automatic Stay section 362(a) On your mark, get set, STOP! The moment that the Debtor files their bankruptcy petition with the Bankruptcy Court, all actions by all creditors seeking to collect on their debts are stayed or stopped. This includes lawsuits and foreclosure proceedings. A bankruptcy petition filed seconds before a foreclosure takes place stops the foreclosure, though a sale to a BFP third party may be honored. The Automatic Stay continues in effect until the bankruptcy is closed, dismissed or the bankruptcy court enters an order lifting the stay. 20

21 The Estate and Exemptions 21 The Estate is all of the property of the Debtor, which is identified on the Schedules of the bankruptcy petition. Debtor(s) may claim certain property as Exempt, or not part of the Bankruptcy Estate. There are Federal Exemptions and State Exemptions, each with limitations. Most common exemption is the Homestead. The Texas Homestead Exemption = 10 acres urban, 100 acres rural for a single person, and 200 acres rural for a married couple or the head of a household. Federal Lookback Exemption limit: A homestead interest acquired in another state within 1215 days (40 months) prior to bankruptcy petition that exceeds $146,450 in value is not fully exempt! an effort to end the mansion loophole 11 U.S.C. 522 (p)

22 Leases and Contracts 22 The interest of the debtor in a lease or contract (as lessor, lessee, purchaser, or seller) vests in the estate upon the filing of the bankruptcy. Company Policy: Insuring a purchase money mortgage: If the debtor enters a contract to purchase property before the bankruptcy commences; and If the property is not yet abandoned or revested in the debtor (pursuant to a confirmed plan), You must require a court order authorizing the completion of the contract and execution of the mortgage. You must except to the effect of the automatic stay on foreclosure of the purchase money mortgage.

23 Community Property If only one of the spouses files a bankruptcy petition and that debtorspouse owns community property, then the community property under the sole or joint management of the debtor and other community property which is liable for claims against the debtor (to the extent of liability) are part of the estate. The nondebtor spouse has a right of first refusal to buy that property. The separate property of the nondebtor-spouse and the community property under the sole management of the nondebtor (where there are no claims against the debtor which could extend to that property) shall not be subject to the bankruptcy proceeding. 23

24 Exempt Property Rule 4003 specifies a 30-day limit after conclusion of the creditor s meetings to file objections to the scheduling of property as exempt. If no objections are made and if the time to object is not extended, the property (or equity) which is scheduled as exempt is not property of the estate. Exempted property may not be sold by the trustee. 24

25 Abandoned Property If property has been properly abandoned by the estate, then you can secure a deed from the debtor (with any necessary corporate resolutions) without any need for a motion, notice, or order of sale. 25

26 Abandoned Property What is Abandoned Property? All of debtor s non-exempt property goes into the bankruptcy estate. The Trustee may decide that a piece of property in the estate is not worth selling, and would abandon the property so that it goes back to the debtor. Example: Debtor owns a non-homestead property worth $60,000. There is a lien against the property for $58,000. The trustee decides that he cannot sell the property and abandons it to the debtor. 26

27 Unscheduled Property The property of the debtor vests in the estate and is subject to the bankruptcy proceeding regardless of whether it is listed on the schedules and regardless of whether schedules are actually filed. If the property is not scheduled, the case is closed, and the property is not otherwise administered or abandoned, then it remains subject to the jurisdiction of the bankruptcy court. It is possible to have the case reopened to administer or abandon the property. 27

28 After-Acquired Interests Any property acquired by the debtor by gift, devise, or inheritance, or as a result of a property settlement agreement in a divorce within 180 days after the filing of the bankruptcy shall become property of the estate. Any property acquired during the bankruptcy as proceeds of property of the estate (e.g., distribution of corporate assets if stock is owned by estate) shall become property of the estate. The debtor cannot avoid this provision by disclaiming or renouncing a bequest or devise. Contingent or vested remainder interests owned by the debtor at commencement of the case are property of the estate. 28

29 Who can sell property during bankruptcy? In a Chapter 7 proceeding, the court appointed Trustee is in charge of the estate. The Trustee retains control of the nonexempt property, but can only sell by court order. However, 30 days after the Meeting of the Creditors has concluded*, if there are no objections to the Debtor s claim of exemption, property claimed as Exempt is returned to the Debtor and is no longer part of the bankruptcy estate. Debtor can then sell the exempt property. 29 * Watch for Creditors Meetings that are continued, because the 30 days doesn t begin to run until the meeting is concluded and adjourned.

30 Who can sell property during bankruptcy? 30 In a Chapter 11 proceeding any sale prior to confirmation of the Plan of Reorganization will require a court order. For volume real estate sellers, such as builders, the court may enter an order allowing the Debtor to continue sales in the ordinary course of business. This order may allow the sale to be free and clear of lien claims, such a mechanic s and materialmen s lien claims. Once the Plan has been confirmed, and if the Plan provides for the sale of the non-exempt property, the Debtor can sell the property without further court order but may not be free and clear of pre-existing voluntary liens... Any sales of non-exempt properties that are not provided for in the Plan will require a separate court order authorizing them.

31 Who can sell property during bankruptcy? During a Chapter 13 proceeding, any sale prior to confirmation of the Plan of Reorganization will require a court order. The DIP can sell exempt property (homestead) without further court order. Once the Plan has been confirmed, and if the Plan provides for the sale of the non-exempt property, the Debtor in Possession can sell the property without further court order but may not be free and clear of preexisting voluntary liens... Any sales of non-exempt property that are not provided for in the Plan will require a separate court order authorizing them. 31

32 Discharge and Liens Most people believe that a bankruptcy discharge of the Debtor means that all liens against the debtor s property cease being liens following the debtor's discharge and case closure. A discharge means that the debtor is relieved of the personal obligation to pay the discharged debt. It does not mean that a valid lien which existed prior to the bankruptcy is also discharged as well. It means that while the debtor has no personal obligation to pay the lien, the debtor's property, in effect, may be used to pay the debt. 32

33 33 Effect on Lien of Discharge of Debt in Bankruptcy Tex. Prop. Code a) A judgment lien is not affected by the order of discharge and cancellation and may be enforced, if the lien is against real property owned by the bankrupt or debtor before the debtor was adjudged bankrupt or a petition for debtor relief was filed under federal bankruptcy law, and: 1) the debt or obligation evidenced by the judgment is not discharged in bankruptcy; or 2) the property is nonexempt and is abandoned during the course of the proceeding. b) Except as provided by Subsection (a), the judgment is of no force or validity and may not be a lien on real property acquired by the bankrupt or debtor after the discharge in bankruptcy.

34 Discharge and Cancellation Tex. Prop. Code a) A judgment is discharged and any abstract of judgment or judgment lien is canceled and released without further action in any court and may not be enforced if: 1) the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law; and 2) the debt or obligation evidenced by the judgment is discharged in the bankruptcy. b) A judgment evidencing a debt or obligation discharged in bankruptcy does not have force or validity and may not be a lien on real property acquired by the debtor after the petition for debtor relief was filed. 34

35 Exceptions to Discharge and Cancellation Tex. Prop. Code A judgment lien is not affected by this subchapter and may be enforced if the lien is against real property owned by the debtor before a petition for debtor relief was filed under federal bankruptcy law and: 1) the debt or obligation evidenced by the judgment is not discharged in bankruptcy; or 2) the property is not exempted in the bankruptcy and is abandoned during the bankruptcy. 35

36 Partnerships 36 A Partnership The partnership and a partner are treated as separate entities and their interests are separate. If a partnership owns property, then the filing of a bankruptcy by an individual partner does not vest the partnership property in the estate. Company Policy: If a partnership is the record owner and one of the partners is personally in bankruptcy, prior to a sale of partnership property, you should secure joinder of or consent by the debtor-partner (or trustee) to the sale pursuant to a final court order or after notice to all interested parties of the estate.

37 Partnerships Foreclosure The estate of a partner consists only of the partner s personal property interest in the partnership. Thus, the automatic stay does not prevent foreclosure of a lien against the partnership property merely because a partner files a bankruptcy. Company Policy: Foreclosure on partnership assets is not stayed by a bankruptcy of a partner. 37

38 Trustee and Trusts If the debtor has title to property as a trustee (of a private trust), the estate will succeed to the property, subject to the interests of the beneficiaries. The estate cannot exercise the fiduciary powers of the trustee (of a private trust). Company Policy: Require abandonment or joinder of the trustee or debtor in possession in the bankruptcy proceeding, and joinder of all other necessary parties in accordance with the trust documents. 38

39 Loans During Bankruptcy 39 In a Chapter 7 proceeding, 30 days after the conclusion of the Creditors Meeting, the Exempt property is no longer part of the estate and the Debtor can use it as collateral for loans. Unless specifically provided for in the Plan, new loans in a Chapter 11 or 13 bankruptcy will require a court order authorizing them. If a Debtor in a Chapter 13 bankruptcy has sold their exempt property and are proposing to buy a new one, need a court order authorizing the new loan since the new debt may prejudice the Debtor s ability to make payments under the Plan.

40 Finality Appeals 40 Any judgment, order or decree of bankruptcy court may be appealed To district court; or to 3 judge bankruptcy panel (on consent of all parties) Appellant must file notice of appeal w/in 10 days of the date of entry of judgment, order or decree appealed from (may be extended by court) Company Policy: Must be satisfied that any bankruptcy order is FINAL and not being further contested/appealed. Can be shown by: by letter from counsel; review of the bankruptcy court file and docket sheet; or bankruptcy court clerk s letter of certifying finality, after time period elapses (14 days after order of sale, mortgage, lease or confirmation, after 30 days for all other orders)

41 41 Sales After Bankruptcy Does the owner/former debtor actually own the property and can they sell it? Property claimed as Exempt with no creditor objections is returned to the Debtor s control can be sold. Non-exempt Property that was listed on the Schedules of the Bankruptcy Petition but revealed as returned to the Debtor, can be sold, but may not be free and clear of pre-existing voluntary liens. Non-Exempt Property that was not disclosed on the Schedules of the Bankruptcy Petition or Plan raises issues of fraud on the creditors and will require underwriter approval to insure.

42 Sales After Bankruptcy Voluntary Lien A lien on property which arises by consent or contract of the debtor such as a mortgage lien. Involuntary Lien A lien on property which arises without the consent of the debtor such as a judgment lien. 42

43 43 Sales After Bankruptcy What happened to the Voluntary Liens against the property? Unless the voluntary liens avoided by court hearing and order, the voluntary liens are still against the property. Occasionally disclosed property wasn t dealt with in the bankruptcy. The Debtors thought the lender would foreclose, since they stopped making payments, but the lender never did. Although the bankruptcy may have discharged the Debtor s personal liability on the debt, the lender s prior lien against the property remains. Company Policy: We will not rely on a Discharge or Plan Confirmation to waive/extinguish voluntary liens. The Discharge and Plan Confirmation do not extinguish a preexisting voluntary lien. Get a release from the creditor.

44 Sales After Bankruptcy What happened to the Involuntary Liens against the Debtor/Property? Federal Tax Liens are not discharged by filing bankruptcy. We require releases from the IRS. State Tax Liens: the debt can be discharged in bankruptcy if the State is scheduled as one of the creditors on the order. However, if the lien was recorded prior to bankruptcy, lien must be released since only the debt was discharged. Abstracts of Judgment can be discharged in bankruptcy, but whether we can rely on that is governed by Sections to of the Texas Property Code: Sec of the Property Code provides that discharge in bankruptcy cancels the AJ lien if 1. the lien preexists the bankruptcy filing, and (2) the judgment debt is discharged. Sec of the Property Code says : AJ Lien not cancelled when (1) the lien preexists the bankruptcy filing, and (2) the judgment debt is not discharged, OR (3) the property is not exempted but is abandoned by the Trustee. 44 Read the Discharge Order!

45 Limit on Filing A debtor is generally not entitled to a discharge if the debtor was granted a discharge in a case commenced within six years before the date of filing of the current case. This time limit does not apply if the prior case was a Chapter 12 or Chapter 13 proceeding, and payments totaled 100% of unsecured claims, or payments totaled 70% of claims and the plan was proposed in good faith and was the debtor s best effort. 45

46 Foreclosure Do-Over Southern Bank of Lauderdale County v. IRS, 770 F.2d 1001, 1985 U.S. App. LEXIS 23060, 85-2 U.S. Tax Cas. (CCH) P9670, 56 A.F.T.R.2d (RIA) 5952 Mortgagees failed to provide notice to Internal Revenue Service and subsequently purchased the properties at foreclosure that were subject to valid federal tax liens. Mortgagees tried to foreclose again providing notice to IRS. Because Mortgagees conducted foreclosure sales and purchased the properties, a complete merger of title resulted, vesting the fee simple title to the properties in Mortgagees. This title was superior to all liens except those not extinguished, such as the federal tax liens that were properly perfected. 46

47 Contact Info Be careful out there! Victor A. Davis Underwriting Counsel Stewart Title Guaranty Company Houston, Texas

48 Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must: listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 48

49 To Receive CE Credit Each individual seeking credit hours must send their own certificate request to: Please include the following information: Provide only this Presentation Name in the Subject Line of your Basic Bankruptcy In the body of your Name of Participant (as it appears on your Escrow Officer License); Presentation PASSWORD given at the end of the webinar; License Number Only (located on left side of Escrow Officer Certificate of License for example: License Number: ) For Attorney CLE Credit also include: Texas State Bar Number Affiliation with Stewart Employed by Stewart Title Guaranty Company; an affiliate; or a Stewart agent For more details, see the CE and CLE FAQs at: 49

50 Recordings Under Texas TIPS tab Posted online 10 days after live presentation Other current courses available Certificates Processing can take up to 10 business days. Contact us if you haven t received your certificate after the allotted processing time. CEcertificate@stewart.com 50

51 Join us for the next Texas TIPS webinar! March 21, 2019 Alternatives to Probate Zoiliss Rios For Questions/Comments or 51

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