Condo Law Watch

Chapter 13 Bankruptcies in Depth – Understanding the Payment Plan Bankruptcy

Chapter 13 bankruptcies are quite different from Chapter 7 bankruptcies. While Chapter 7 affords a fresh start to the debtor, a Chapter 13 bankruptcy allows for the debtor to reorganize their debts and pay down their obligations over time, often with a reduction in debt as part of the plan. The debtor has the option, as does the trustee, to state a payment plan that provides for repayment to pre-petition creditors in whole or in part. Depending on their financial situation, some debtors may not be able to pay much of their pre-petition debt and creditors, such as a condominium association, may get a smaller percentage than the amount that is due in full. Other debtors will use Chapter 13 bankruptcy to reorganize certain larger debts, and will often have sufficient income to repay condominium associations nearly in full. Chapter 13 cases divide creditors into “secured” or “unsecured” categories to assign priorities for repayment. Associations are usually secured creditors with priority over unsecured debts, although they may sit behind some other secured creditors.

Unlike a Chapter 7 bankruptcy, where very little action is required except for seeking leave of court to collect post-petition assessments, there is more activity involved in a Chapter 13 bankruptcy. Once an association receives a 341 Notice for the meeting of creditors in a Chapter 13 bankruptcy, there are important dates to which the association must adhere. Most important is the date on which the association must file its “proof of claim” or statement of the balance due from the debtor. The proof of claim states the amount that is due from the debtor to the association at the time the petition was filed and the basis for that debt. The association’s attorney will contact the board and obtain a copy of certain documents to prepare the proof, like the current ledger, a copy of the declaration, and a statement of any fines that are due. Once the bankruptcy court receives the proof of claim, the trustee and the debtor’s attorney will review it for the formal bankruptcy payment plan, or Chapter 13 plan.

The Chapter 13 plan is the court supervised, and trustee approved, plan through which the debtor proposes to pay their pre-petition debts. The plan will account for all of the property of the debtor as well as all of the debts at the time of filing. The association, if it wishes to recover any pre-petition amounts due, must be included in this plan by filing a proof of claim within the time allowed.

Associations are generally “secured creditors” because they have a legal interest that attaches to the property – the condominium unit of the debtor. Once the debtor has proposed their Chapter 13 plan, the parties have an opportunity to review it and may state their objections to the plan before it is confirmed. Once confirmed, the plan operates as final judgment on the pre-petition amounts due that are recoverable by the association. Associations should consult their attorney about the timing and deadlines involved in a Chapter 13 case to ensure that they file the required paperwork on time to protect any balances that are due through the bankruptcy proceeding. If an association does not seek to recover pre-petition balances through the plan, and the plan is confirmed, the association could be barred from trying to recover that balance due.

Once the debtor’s plan is confirmed, the debtor will start making payments according to the plan. Chapter 13 plans are usually valid for a number of years, between three and five years. Provided the debtor makes all their payments as due, the trustee and the court will then grant a discharge of the remaining debts due from the debtor, pre-petition.

If a debtor does not make the plan payments, and does not keep current with post-petition assessments, an association’s attorney can file a motion for relief from stay, just like in a Chapter 7 case, to seek court authority to collect post-petition assessments or to compel the debtor to proceed with making its plan payments. In either event, the association would be able to seek its state court remedies to collect assessments and seek possession of the unit to recover that balance. The association cannot take any actions against the debtor for pre-petition debt or debt incurred during the pendency of the bankruptcy action without seeking this relief from stay. Often, the debtor’s attorneys or the courts will try to get the debtor to comply and make pre- and post-petition payments due to a condominium association during the course of the bankruptcy. Associations are allowed to collect their attorney’s fees and costs for collection actions during a bankruptcy proceeding as well.

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