Mitchell & Culp » Chapter 7 Bankruptcy

Chapter 7 Bankruptcy: Businesses & Individuals

Heather Culp — Mon, 22 Feb 2010 12:57:46 +0000

The word”bankruptcy” is heard everywhere, from coffee shops to church bazaars and the evening news. It’s clear to me that, despite this general knowledge of bankruptcy, few people understand what it means to file for protection under Chapter 7, Chapter 11 or Chapter 13.

Chapter 7 is a liquidating bankruptcy. It is normally utilized to obtain a “fresh start” for an individual debtor, and, far less often, to wind down the affairs of a business debtor.

Chapter 7 for individuals

In many cases, a Chapter 7 bankruptcy allows an individual debtor to wipe away all of his or her debts without losing any assets. We can advise you as to whether you, as an individual, would qualify for a Chapter 7 bankruptcy; and if so, what debts of yours would go away in a Chapter 7 bankruptcy; and whether you would have to give up any property as part of the bankruptcy.

Chapter 7 for businesses

We can also help a troubled business determine whether a Chapter 7 bankruptcy would be appropriate for the business. We usually find that small businesses — those owned by an individual or partners — must be evaluated for bankruptcy protection along with their owners. Why? Owners so often personally guarantee loans for their companies — by taking out second mortgages or pledging collateral — that what the courts view as “business” debt versus “personal” debt differs from the owners’ understanding. Often it is the business owner that needs bankruptcy protection.

The best place to start evaluating bankruptcy is in what’s called a “bankruptcy counseling” session. Many attorneys will see potential clients free of charge for such an evaluation, and only bill for that time if hired.

“This information is general and thus incomplete, and the reader should seek legal counsel for specific legal problems or questions.”

Primer for Distressed Homeowners: Part 1 of 3

Heather Culp — Mon, 30 Nov 2009 21:31:56 +0000

With the jobless recovery hitting the Charlotte region particularly hard, we’re getting a steady stream of calls asking for help preventing home foreclosures, forced sales and sheriff’s sales, and facilitating short sales.

The general news press has gotten sloppy in the language it uses for distressed real estate, so let’s start there:

Forced sale is not used often, but when it is it would include a sheriff’s sale or a foreclosure sale.
Foreclosure is the process by which the lender repossesses real property upon the borrower’s default.
Short sale, though, is a consensual deal between the lender and the borrower in which the lender agrees to take less than what’s owed; a short sale is not a forced sale in the strictly legal sense of the word.

The foreclosure process, step by step

The foreclosure process is straightforward. It begins when the lender files a lawsuit in the state court in the county in which the property is located, giving notice to anyone legally responsible for the debt — borrowers, co-signers, guarantors — and upon at least ten days’ notice to the responsible parties, a hearing is held at the courthouse.

A deputy clerk, an assistant clerk, or the clerk of court presides over the hearing; the lender must show only four elements: (1) that there is a valid debt secured by the property, (2) that the borrower is in default on that debt, (3) that there is a power of sale in the agreements between the borrower and the lender, and (4) that the responsible parties had ten days’ notice or more prior to the hearing. This can all be shown by affidavit and usually is — in other words, there is no live testimony. As part of the power of sale clause, the lender hires a “trustee” or “substitute trustee” — a neutral party — to foreclose on the property. The trustee/substitute trustee attends this hearing and provides the proof of these four elements. The clerk has no authority to consider anything other than these four elements; if they are met, then the clerk shall enter an order of sale, allowing the property to be auctioned on the courthouse steps. It is generally pointless for borrowers to attend these hearings and try to delay the process.

If a borrower believes he has equitable grounds to stay the foreclosure, then he has the right to file a lawsuit in the county’s superior court, asking that a temporary restraining order, preliminary injunction, and/or permanent injunction be issued to stop the foreclosure. These lawsuits are expensive and generally a long shot. In the absence of either a successful superior court suit or a workout between the borrower and the bank, the property will be auctioned on the courthouse steps about 25-30 days after the hearing. The bank usually places a credit bid at the sale — buying the property back for something short of the full amount of the debt. Anyone can bid, but live bidders are relatively rare.

There is a ten-day “upset bid” period following the sale, in which anyone can file a bid on the property that exceeds the sale price by the greater of 5% or $750.00. The filing of any upset bid triggers a new ten-day upset bid period, until the period passes with no new filed bids. Once the ten-day upset bid period expires, the sale is final; the trustee/substitute trustee signs a “trustee’s deed” giving the property to the winner of the sale, and files documents related to the sale.

The relationship between foreclosure and bankruptcy protection

A bankruptcy filing by a borrower stops a foreclosure proceeding until such time as the lender obtains from the bankruptcy court an order giving it relief from the automatic stay of all creditor activity.

Generally speaking, a Chapter 13 debtor can propose a plan that provides for payment in full of pre-bankruptcy mortgage arrearage, and at the same time keep current on post-bankruptcy payments, and keep the house. Falling behind on either aspect will likely lead to the lender getting relief from stay and then having the right to re-start the foreclosure process.

Also speaking generally, a Chapter 7 debtor can’t do anything to stop the mortgage company from getting relief from stay and thus restarting the foreclosure process, unless the debtor is able to do what he couldn’t do prior to the institution of the foreclosure — do a mortgage modification with the lender; refinance; or otherwise come up with a large lump sum to get current on the mortgage and then keep current with the monthly payments.

I just can’t have my credit ruined by a bankruptcy!

People often tell me that “I just can’t have my credit ruined by a bankruptcy!” and these people have a pending foreclosure, are in default on several credit card obligations, and are past due on other debts. While a foreclosure is probably less prejudicial to your creditworthiness than a bankruptcy, the reality is neither is good and a bankruptcy may be the only way to get a fresh start.

Another consideration in favor of bankruptcy: foreclosures are governed by state law and the practice and procedure varies wildly from state to state while bankruptcy is federally regulated. If you own real property in more than one state, consult with a bankruptcy attorney to see if the bankruptcy process may produce a less expensive outcome. Remember this summer’s talk about GM and Chrysler entering an “orderly bankruptcy?” Bankruptcy is indeed an orderly process.

In Part 2 of 3: Questions and Answers on preventing foreclosure, negotiating with a mortgage company, and what to do about an adjustable rate mortgage that will soon reset.

In Part 3 of 3: Questions and Answers on short sales and sifting through the confusing offers from those who want to help distressed homeowners.

Charlotte Bankruptcy in the Headlines

Richard Mitchell — Sat, 17 Oct 2009 19:08:43 +0000

When you’ve been around as long as I have, you call things as you see them. Maybe that’s why reporters call me to comment on high-profile bankruptcy cases.

Charlotte’s 210 Trade files Chapter 7 Bankruptcy

In case you missed my 2-second TV debut last week on WSOC, here’s a link to what I said about the 210 Trade condominium bankruptcy filing when the reporter asked if buyers were likely to be refunded their earnest money.

Lenders Pulling Plugs

I’ve commented twice on lenders foreclosing on commercial loans at the first sign of difficulty instead of taking a wait-and-see approach.

Last week the story in question surrounded condo developer Ray “Rip” Farris III, who sued his lender, First Horizon Home Loans, and parent company, First Tennessee Bank National Association. Mr Farris claimed that the companies acted in bad faith when they stopped paying on a $24.4 million loan.

My quote, “You’re free to sign away your life, and you’re free to reap the benefits,” made it into the paper, but it seems a bit obscure.

The quote referred to lending agreements that contain all sorts of terms that give lenders an open door to call loans and push harsh terms on borrowers. Either-do-this-or-we-call-your-loan type terms. Of course, the guarantees make the individuals liable. We are seeing some nutty stuff from banks that have decided to get out of land loans and don’t care who they run over to do it.

I think the reporter cleaned up my original statement, which was probably more like,

“We have freedom of contract. That means that we have freedom to make a great deal for ourselves, and we have freedom to make damn fools of ourselves.”

More on the story: Sometimes, depending on the facts of the case, I advise clients not to sue their lenders because such cases are difficult to win in NC, where banks hold great sway with the legislature. NC laws favor financial institutions, which means pursuing a case against one can cost millions and result in nothing more than wasted money. I had a builder, who is going through foreclosures and trying his best to salvage what he can with work outs, tell me recently that when this is over he would have a large number of new friends but that none of them would be bankers.

Cornelius Foreclosure

In case you missed this story, a huge project, Augustalee, in Cornelius, NC, was foreclosed by its lenders because it hadn’t met key project milestones. NOT because the developers had missed payments.

Foreclosing when the Loans are Current

Since I originally wrote about the story, The Observer has reported updates on the story, including the most recent news that the original developer has been replaced after a foreclosure auction. The mezzanine lender said the foreclosure resulted from “the borrowers’ failure to satisfy certain milestones and inability to raise additional capital needed to complete the project, including the financing of certain infrastructure and required offsite improvements.”

The developer countered in a lawsuit that the mezzanine lender promised to lend $23.5 million but paid only $19.5 million. Shortly after the fund failed to pay the remaining $4 million, the developers’ senior lender started to foreclose.

If you have business loans, I recommend reviewing them with a qualified attorney. Your legal counsel will identify possible triggers in the agreements that lenders could use to call your loans or foreclose. Lenders have legal departments to guide them in protecting their interests. You need a lawyer to help you protect yours.