This will be a test of CIT’s ability to move through the bankruptcy process while maintaining the trust of its constituents.  Typically, lenders have not fared well in bankruptcy, where perception of financial health is central to the business model.

Because she objected to this treatment, Reilly moved both to dismiss her bankruptcy petition and, later, to block the liquidation of her assets.  Reilly asserted that because the amount of her exemption matched exactly the scheduled value of the assets, her intention was plainly shown to be that of retaining the assets  – not just receiving their equivalent value in cash.  This was so because the assets were necessary for the operation of her business and had particular sentimental value to her. 

The bankruptcy court denied Reilly’s motion to dismiss her petition, but granted her motion to block the sale of the assets claimed as exempt.  The trustee appealed to the Third Circuit Court of Appeals, which affirmed the bankruptcy court’s ruling in reliance on its prior ruling in Taylor v. Freeland & Kronz.  In Taylor, the debtor improperly claimed the proceeds of a pending lawsuit as exempt, and listed the value of the proceeds as “unknown.”   Because the trustee failed to object timely to the claimed exemption, the court found that he had waived any claim to the proceeds of the lawsuit.  The Third Circuit panel held Taylor to mean that “where the debtor signals her intention to exempt certain property in its entirety by listing an identical entry for the property’s value and the amount of the exemption, the trustee must object . . . lest the property be rendered fully exempt.”

This is the issued to be decided by the Supreme Court: by claiming an exemption in her assets for the same dollar amount as their estimated value, did Reilly truly signal her intent to exempt the assets fully, thereby requiring the trustee either to object or to agree to the full exemption for the assets?  The Supreme Court’s decision will clarify this issue and, subject to properly claimed exemptions, will offer guidance to future debtors and their attorneys on whether matching exemption claims to valuation amounts will be sufficient to retain the physical assets and not just their value.

The title of Chapter 13[i] is “Adjustment of Debts of an Individual with Regular Income” and it gives a fairly clear indication of the story that chapter 13 tells: (i) debts are not eliminated, but adjusted; and (ii) this form of bankruptcy relief is for individuals with regular income, meaning those whose “income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13…”.[ii]  If you’re an individual with a steady job or you operate a business, and you’re unable to keep up with your debts, chapter 13 enables you to file a repayment plan with the bankruptcy court.  If approved, the plan will allow for the adjustment of your debts and a discharge of any dischargeable debts remaining after you fulfill the plan’s requirements.

 It is this creation of a payment plan as a condition of discharge that distinguishes a chapter 13 bankruptcy from one under chapter 7,[iii] since the focus is on reorganization of the debtor’s finances rather than on liquidation of non-exempt assets.  Depending on whether the combined monthly income of the debtor and his/her spouse is less or greater than the annualized State median income for the applicable family size, the plan will provide for payments stretching over no longer than 3 or 5 years, respectively.[iv]  Generally, the debtor must pay all priority claims in cash, in full, except under narrowly drawn circumstances.[v] 

The debtor generally retains control over her assets, called “property of the estate”[vi] and may request dismissal of the case at any time before it has been converted to a case under chapters 7, 11 or 12.[vii]  However, the case can (and probably will) be dismissed or converted to one under chapter 7 if the debtor fails to fulfill the requirements of the Bankruptcy Code dealing with filing of information and/or good faith conduct.[viii] 

Most important for many debtors, chapter 13 may be used to cure a default in payment of a mortgage securing a debtor’s principal residence and to provide for payments to the mortgagee under the plan, even when the plan expires before the final payment date of the mortgage note – in other words, you can save your home![ix]  In this respect alone, chapter 13 may be the preferable choice for many homeowner-debtors and is almost always a better solution than the promises made by “loan modification” services. 

In short, a chapter 13 bankruptcy is a court-supervised workout of your debts which, if followed completely, results in the discharge of any remaining dischargeable debts upon successful completion of a 3- or 5-year plan.  Because loan modifications are successful only about 14 percent of the time, and because there is often a large up-front fee payable to the “loan modification service,” a chapter 13 proceeding may offer the best and most secure opportunity for an adjustment of debts and retention of the debtors assets – particularly his home.

[i] 11 U.S.C. §§ 1301 et. seq.

[ii] 11 U.S.C. § 101(30).

[iii] 11 U.S.C. § 1321.

[iv] 11 U.S.C. § 1322(d).

[v] 11 U.S.C. § 1322(a).

[vi] 11 U.S.C. § 1306.

[vii] 11 U.S.C. § 1307(b).

[viii] 11 U.S.C. § 1307(d).

[ix] 11 U.S.C. §§ 1322(b), (d).

[1] 

 The purpose of the protections embodied in the United States Bankruptcy Code[2] is to provide debtors with a “fresh start” on the road to financial recovery, and to provide for the distribution to their creditors of whatever non-exempt assets they may have. (In the majority of chapter 7 cases, most of a debtor’s assets will be exempt and not available for distribution to creditors.)  Generally, a person who resides in or has a domicile, a place of business, or property in the United States, and who has not previously filed a petition for relief during the preceding 180 days or received a discharge within the previous 8 years, is eligible to be a debtor in a chapter 7 case.[3]  A successful chapter 7 case from a debtor’s perspective will result in the court’s issuing a discharge, allowing the debtor to emerge from bankruptcy free and clear of all unsecured pre-petition debts.  The protections available to individuals and businesses under other chapters will be discussed in future articles.

 A debtor may be considered insolvent if her liabilities (debts) are greater than her assets (a condition called “balance sheet insolvency”), or if she is unable to currently pay her debts (referred to as “cash flow insolvency”). There is no requirement in the Bankruptcy Code that a debtor be insolvent, although there is a requirement that a petition not be filed fraudulently or in bad faith[4].  Therefore, if you know that your current debts exceed your income and you anticipate that you will not be able to remain current in your payments, you may be a candidate for chapter 7 bankruptcy relief before your financial condition worsens. 

 Ultimately, the decision to seek bankruptcy relief will require a careful review of a client’s financial situation with either an accountant or a qualified bankruptcy attorney, but one thing is certain: delaying action until you are floundering will not make your debts go away and will not improve your financial situation.  Moreover, under the 2005 amendments to the Bankruptcy Code, a debtor filing under chapter 7 must receive financial management counseling through a qualified credit counseling agency, which exercise often may be instructive on how to re-think money management. 

 There are many ways to approach financial difficulties, including debt consolidation and loan modification, all of which should be explored as part of a comprehensive financial review with a qualified bankruptcy attorney.  If chapter 7 is your chosen solution, it should be the path to a financial fresh start – not a trip to purgatory.

[2] 11 U.S.C. §§ 101 et seq.

[3] 11 U.S.C. §§ 109, 727.

[4] 11 U.S.C. § 523(a)(2)(A).

It’s time to welcome Rich Agins from Sigman and Rochlin Law to the wonderful world of blogging.

Richard Agins is a member of our firm resident in the Connecticut and New York offices.  He brings a unique set of credentials to rendering legal advice and counsel, embracing extensive experience as a general corporate lawyer and an expert on financial transactions. Richard has long-standing financial consulting and accounting experience, as well as frontline executive experience as president of a closely-held New York City corporation. Licensed as a CPA for many years, Richard has a thorough understanding of the financial aspects of business and the ability to quickly analyze financial reports and statements.  This rare combination of expertise and experience allows Richard to help clients address both strategic and practical business issues.
Before beginning the practice of law, Richard held both financial and operations positions, serving in roles ranging from Chief Financial Officer to independent management consultant for companies in the construction, supply/distribution and food service industries, to principal of a closely-held manufacturing company in the fashion industry.  Having earned an MBA early in his career, Richard has approached the practice of law from both a strategic and a tactical perspective, evaluating the interrelationship among the various business functions and always viewing business from the broadest legal perspective and the law from a thoroughly commercial point of view.
During the course of his legal career with the major international law firm, Bingham McCutchen, LLP, Richard worked on large bankruptcies and out-of-court restructuring engagements, both domestically and internationally.  As part of the teams handling these high-stakes engagements, he contributed his financial knowledge in evaluating the debtors’ condition and the prospects and methods for maximizing creditor recovery.  Richard has evaluated and proposed debtor-in-possession credit facilities, and has assessed private placement memoranda and bond indentures.  Richard has also handled a variety of personal bankruptcies, always combining sound legal counsel with compassion and personal attention to his clients’ needs.  Fluent in Spanish, Richard also has analyzed commentaries on Spanish-language insolvency laws and restructuring documents, as well as assessing and commenting on proposed plans of reorganization in cross-border representations.  Richard also has focused his practice on general business law, mergers and acquisitions, and business organization formation.