CM/ECF Tip: Financial Management Codes

Very helpful electronic filing information for bankruptcy attorneys was provided in the latest issue of Court News.

Please  remember  that  when the Financial Management Course certificate is being filed, the Financial Management Course     –   Debtor event code is to be used for single debtor cases.  The Financial Management Course – Joint Debtor is for cases with two debtors.  When selecting the Financial Management Course – Joint Debtor, CM will ask the user:  “Have you already filed the certificate for the Debtor?” The  user must select “Yes” or “No,” then click “Next” in order to complete the filing.   If only the    joint  debtor’s  certificate is being filed, “No” must be selected.

CM/ECF Tip: Credit Counseling

The Central District Bankruptcy Court provides the following CM/ECF tip for bankruptcy lawyers.

Certificate of Credit Counseling

When filing a petition, the Certificate of Credit Counseling must be filed as a separate event code. If the certificate is not filed as a separate event code, it will be flagged as deficient and the case will not be discharged. In a joint petition, two certificates may be filed under one event code. However, the certificates still need to be filed separately from the bankruptcy petition itself.

CM/ECF Tip: Amended Schedules

From the Central District Court News.  

For bankruptcy attorneys, the following is excellent guidance on filing with CM/ECF.

Filing Amended Schedules

When filing Amended Schedules D, E and F, select the event code Bankruptcy -> BK- Other– Amendment – Amending Schedules D,E,F for Ch 7, 11 &13 (fee). Please do not include any other schedules; you may attach a creditor list with only the new or amended creditor information. By using this code you will be prompted to pay the $26.00 filing fee. When amending schedules A thru I, please select the Bankruptcy-> BK- Other – Amendment -Amending Schedules D,E,F for Ch 7, 11 & 13 (fee) event code. Next, press and hold the control key and select each of the other schedules to be filed. The system will ask if the schedule is being amended and you must answer “Yes” to the question each time it appears. The question will appear once for each additional schedule being  amended. Using the correct event code will expedite case management and save money and court resources. Failure to file amended schedules properly will result in an assessment of fees.

Bankruptcy Notice Addresses

You must provide notice to certain governmental agencies and taxing authorities at precise addresses.  I have placed several of those addresses here for easy reference.

Internal Revenue Service
P.O. Box 7346
Philadelphia, PA 19101-7346

Securities Exchange Commission
5670 Wilshire Boulevard, 11th Floor
Los Angeles, CA  90036

Employment Development Department
Bankruptcy Group MIC 92E
P. O. Box 826880
Sacramento, CA  94280-0001

Service of Adversary Proceedings:
Franchise Tax Board
Chief Counsel
c/o General Counsel Section
P.O. Box 1720, MS:  A-260
Rancho Cordova, CA 95741-1720

Franchise Tax Board
Bankruptcy Section, MS: A-340
P. O. Box 2952
Sacramento, CA  95812-2952

Los Angeles County Tax Collector
P. O. Box 54110
Los Angeles, CA 90051-0110

Ongoing HOA Fees Dischargeable in Chapter 13?

The following summary of a case concerning the discharge of ongoing HOA fees was taken from the website for BestCase software and was written by George Basharis, JD.

Bankruptcy Chat: Ongoing Association Fees Dischargeable

by George Basharis J.D.


Chapter 13 debtors’ plan that did not provide for the payment of ongoing condominium assessments could be confirmed over the objection of the homeowners association. The obligation to pay future assessments arises prepetition and, therefore, the obligation, although contingent and not yet matured, is a dischargeable “debt” within the meaning of Bankruptcy Code Sec. 1328(a).

The debtors abandoned their condominium and stopped paying association assessments almost two years before filing for bankruptcy. Wishing to avoid personal liability for ongoing assessments, the debtors’ proposed plan provided for the transfer of title in the condominium to the bank holding a first mortgage on the property.

The bank and the homeowners association objected to confirmation of the debtors’ plan. The bankruptcy court sustained the bank’s objection as to the debtors’ proposed forced transfer of title through the Chapter 13 plan because, under applicable state law, a transferee of property must accept the transfer and the bank was not willing to accept the proposed transfer.

Personal Liability

However, the debtors did not have to divest themselves of title to avoid personal liability for future assessments. The bankruptcy court identified a split among courts regarding the dischargeability of ongoing association assessments under Sec. 1328(a). Some courts assert that assessments arise under covenants that run with the land and conclude that ongoing assessments are not dischargeable. Other courts view assessments as arising under a contractual agreement between the parties. Under the latter view, adopted by the bankruptcy court in this case, ongoing assessments are a “debt” as contemplated by the discharge provision under Sec. 1328(a).

Characterization of Future Assessments

The term “debt” is defined by the Bankruptcy Code as a “liability on a claim,” and the term “claim” is defined very broadly as a “right to payment.” Using the Code’s broad characterizations of “debt” and “claim,” the bankruptcy court observed that the debtors’ prepetition act of taking title to the condominium gave rise to the homeowners association’s claim for assessments, including a contingent and unmatured claim for future assessments.

The bankruptcy court also noted that the characterization of ongoing assessments as a “debt” was supported by Sec. 523(a), which provides that certain debts, including debts for ongoing association assessments, are not dischargeable under Chapters 7, 11, 12, or Chapter13 if the debtor receives a hardship discharge under Sec. 1328(b). By including ongoing assessments on the list of debts in Sec. 523(a), Congress identified those obligations as “debts” and as a corollary identified them as dischargeable absent a specific exception.

Moreover, the bankruptcy court rejected the homeowners association’s argument that future assessments are not dischargeable because they arise postpetition. Not only did the debtors’ obligation to pay ongoing assessments arise prepetition when the debtors took title to the condominium, the association’s argument would render Sec. 523(a)(16), which provides for the nondischargeability of ongoing assessments unless the debtor receives a discharge under Sec. 1328(a), meaningless because postpetition debts generally are not subject to discharge. Moreover, the court observed that allowing for the discharge of ongoing assessments is consistent with Congress’ policy that Chapter 13 should provide broader relief than other chapters of the Bankruptcy Code.

In re Coonfield, 2014 Bankr. LEXIS 4097 (Bankr. E.D. Wash. Sept. 25, 2014)

Selling Chapter 11 Estate Property Free and Clear of Non-Debtor Interests

A Debtor in Possession ("DIP") may sell estate property free and clear of third party interests, such as liens, claims, and encumbrances.  Authority is found in 11 USC 363(f).  A sale free and clear of third party interests is authorized if one of the following conditions is found:

  1. A sale of the property free and clear of the interest is authorized by nonbankruptcy law;
  2. The third party affected consents;
  3. The affected interest is a lien and the sale price of the property is greater than the aggregate value of all liens on the property;
  4. The affected interest is in bona fide dispute; or
  5. The Third party whose interest will be affected could be be compelled in law or equity to accept a money satisfaction.

To qualify under item 3, above, several courts in the Ninth Circuit have held that the sales price must be greater than the aggregate amount of the debts encumbering the property so there will be some equity for the estate.  This may give leverage to junior lienholders to receive compensation from senior lienholders to let the sale go through.

Most importantly, property may be sold free and clear of nondebtor's interest that is in bona fide dispute.  The bankruptcy court need only determine that a dispute exists.  In re Gerwer (9th Cir. 1990), 898 F.2d 730, 733.  11 USC 363(f)(4).

The authority to sell free and clear is, of course, subject to adequate protection.  Courts typically order that the affects nondebtor interests attach to the sale proceeds. 

Don't forget that any secured creditor can "credit bid" at a sale.  This means that the secured creditor can offer a bid in the amount of the lien.

Sale orders involving Chapter 11 debtors in the Central District must include a provision requiring a certified copy of the escrow closing statement to be submitted to the U.S. Trustee within 10 days after the close of escrow or completion of the sale.

Mansfield Cheney, PC is here to help Chapter 11 debtors through the sale of assets.  

Selling Estate Property in a Chapter 11

The DIP must articulate a business justification for selling estate property out of the ordinary course of business.  Estate property may be sold through a confirmed plan, by public auction, or by private sale.  Most DIPs negotiate a sale of estate assets with a specific buyer, subject to overbidding by other parties at the court hearing on the sale.

The DIP should obtain court approval of the overbid and sale procedures before noticing the sale hearing.  Not doing so may make the sale vulnerable to objections at the hearing.  This can result in a delay of the hearing.

Special requirements apply to motions to establish sale procedures in the California Central District.  Those rules are found in Local Bankruptcy Rule 6004-1 to 6007-1.

  1. A hearing on a Motion to Establish Procedures for the Sale of the Estate's Assets may be scheduled on not less than 7 days notice (without an order shortening time).
  2. Notice must describe the proposed bidding procedures and include a copy of the proposed purchase agreement.  The notice must describe the marketing efforts undertaken.  
  3. The notice must provide that opposition is due on or before 1 day prior to the hearing.
  4. The moving party must serve the motion and notice of the motion and hearing by personal delivery, messenger, telephone, fax, or email.  
  5. A date and time for a hearing on the motion to approve the sale itself may be obtained at or prior to the hearing on the Sale Procedure Motion.  The hearing must be scheduled no more than 30 days following.
  6. If a break-up fee is requested for the purchaser, evidence must show:
    1. The fee is likely to enhance the ultimate sale price; and,
    2. The fee is reasonable.

If the seller has been contacted by parties who may overbid, the Motion for Order Authorizing Sale must be set for hearing pursuant to LBR 9013-1(a).  

The moving party must submit a declaration establishing the value of the property and that the terms and conditions of the proposed sale, including the price and all contingencies, are in the best interest of the estate.  A memorandum of points and authorities need not necessarily be filed.

The Notice of Hearing must include a description of the property and the terms and conditions of the proposed sale.  This includes price and all contingencies.  The Notice of Hearing must declare that the sale is or is not free of all liens, claims, or interests, and describe those liens, claims, or interests.  It must also state that the seller is accepting higher bids.  The Notice must include a description of the commission to be paid, the identity of the broker, and possible tax consequences to the estate.

Don't forget to use Form 6004-2.NOTICE.SALE, which must be completed and submitted to the clerk at the time of filing for purposes of publication by the clerk on the court's website.

Court approved conditions on the sale usually cover:

  1. The length of time the property is marketed;
  2. Access to inspect or conduct due diligence;
  3. Deadline for receiving offers;
  4. Required form of offer and deposits; 
  5. Deadline for objecting; and
  6. The minimum initial and later overbid increments.


Use, Sale, or Lease of Chapter 11 Estate Property in the Ordinary Course of Business

Unless the court order otherwise, a Debtor in Possession ("DIP") in a Chapter 11 case may use, sell, or lease property of the bankruptcy estate in the "ordinary course of business" without court approval.  The DIP has automatic statutory authority to run the business in Chapter 11 unless the court orders otherwise.

The Ordinary Course of Business

The question is, "what is the ordinary course of business?"

Courts often apply a two-part test.  The first part, call the "horizonal" dimension, looks at whether the proposed DIP transaction is typical industry-wide  in other similar businesses.  The second part, called the "vertical dimension," considers whether transaction subjects creditors to risks different from those undertaken by the business at the time the creditor extended credit.  One might ask, "is this a new activity for this particular business?"

There are, of course, limitations on the DIP use of estate property.  When the property that is going to be used is subject to liens or co-ownership, "adequate protection" might be necessary.  Further, the use of cash collateral, defined as cash or cash equivalents in which a third party has a security interest, always requires creditor consent or authorization after notice and hearing.

But what if the proposed sale or use is not in the ordinary course of business?  Then, the DIP must first give notice to creditors and parties in interest of the intended use, sale or lease outside the ordinary course of business.  The DIP must show reasonable business judgment to obtain court approval.  Selling property of the estate, apart from sales of inventory, is ordinarily not in the usual course of business.

Adequate Protection

When property of the estate subject to a security interest is used or sold, upon request of the creditor, adequate protection must be paid by the DIP.  Adequate protection may include cash payments, additional or replacement liens,  or other relief that provides "indubitable equivalent" of the creditor's interest in the property.  Cash payments can be made periodically to equal the decrease in value from the use or the passage of time.  An equity cushion in property may also provide adequate protection to a secured creditor.

Always consult an attorney if you face a Chapter 11 case as a creditor.  Mansfield Cheney, PC is available to assist in complex Chapter 11 matters.  Call us at 805-642-6406 or visit us on the web at


Support Making Private Student Loan Debt Dischargeable in Bankruptcy

The average debt load per student loan borrower is now $24,301.  37 million people live with student loans. 15% of student loans apparently are from private banks and lenders.  Three Senators have now introduced legislation to make private student loan debt dischargeable in bankruptcy.  The bill below undoes a change in law from 2005 making private student loan debt nondischargeable

The full text of the very short bill is available on govtrak here.

The Press Release from Senators Durbin, Harkin, and Franken is reproduced below.


Durbin, Harkin, Franken and others say it's time to restore transparency, fairness and common sense to student loan process

[WASHINGTON, D.C.] – U.S. Senator Dick Durbin (D-IL) joined Chairman of the Senate Health, Education, Labor and Pensions Committee U.S. Senator Tom Harkin (D-IA) and U.S. Senator Al Franken (D-MN) in reintroducing two pieces of legislation – the Fairness for Struggling Students Act of 2013 and the Know Before You Owe Act of 2013 – to restore transparency, fairness and common sense to the student loan process.

According to the Consumer Financial Protection Bureau, the student loan debt among college students surpassed $1 trillion last year.  This reflects an average debt load of $24,301 for each of the 37 million student borrowers in the United States, according to the New York Federal Reserve Bank.  The CFPB reports that approximately $150 billion of outstanding student loan debt is in private loans.

“The first two pieces of legislation I will introduce this Congress deal with what I think is one of the biggest threats to millions of working families – the growing student loan debt crisis,” said Durbin. “Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family.  It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later.  It’s time for action.  We can no longer sit by while this student debt bomb keeps ticking.”

“Unless we take action to educate and protect borrowers, student loan debt will be the next mortgage crisis.  Young Americans are being hamstrung by record debt levels, forcing them to delay other important investments in their futures, including purchasing homes and saving for a secure retirement.  By empowering students with clear guidance about their federal financial aid options before they turn to more expensive private loans and restoring the option to discharge private loan debt through bankruptcy, the Know Before You Owe Act and the Fairness for Struggling Students Act will go a long way to help students make smart choices and provide relief to borrowers.  Students need to know how to avoid the higher interest rates and less favorable terms of private loans, so they can be on more stable financial footing when they graduate,” Harkin said.

“Mounting student loan debt not only saps the ability of students in Minnesota and across the country to prosper after they graduate, but it is now becoming a real threat to our country's economic well-being,” said Sen. Franken, a member of the Senate Education Committee. “The average Minnesota student now graduates from college with more than $25,000 in debt, and large repayment costs for many years afterward stop them from being able to purchase homes, cars or other goods which fuel our economy. That is why I’ve been pushing for commonsense reforms to the student loan process since I joined the Senate. The cost of a college education shouldn’t bankrupt a family.  As our economy continues to recover, this legislation will help protect our students.”

The Fairness for Struggling Students Act of 2013 – also cosponsored by U.S. Senators Sheldon Whitehouse (D-RI) and Jack Reed (D-IL) – aims to restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.  Since 1978, government issued or guaranteed student loans have been treated as nondischargeable during bankruptcy in order to safeguard federal investments in higher education.  In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections.  Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.

“A basic principle of our country is a fresh start for those who get in over their heads with debt, if they’re willing to face the rigors of bankruptcy,” said Senator Whitehouse.  “Even this is denied for those drowning in private student loans, as the result of a provision snuck into the 2005 bankruptcy reform legislation in the dead of night.  This bill gives us the chance to right that wrong.”

“Private student loans should be treated the same as other private debt in bankruptcy proceedings. This legislation would restore limited bankruptcy protection and send an important message to lenders and students that they need to be responsible,” said Senator Jack Reed.  “Getting a higher education is essential today and I will continue working to help make college more affordable.  This bill will give student borrowers who are struggling more options to meet their financial obligations and get back on their feet.”

The Know Before You Owe Act of 2013 would require schools to counsel students before they sign on to expensive, even unnecessary, private student loan debt and inform them if they have any untapped federal student aid eligibility.  It would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved.

There are several stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs.

In contrast, private student loans involve only private profit and often resemble credit cards rather than financial aid with uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees and few, if any, consumer protections.  Private student loans are ineligible for federal forgiveness, cancellation or repayment programs.

There are very few types of debts that the bankruptcy law subjects to a different standard, allowing for discharge in only the most extreme circumstances.  For example, the bankruptcy code makes it especially difficult for people to discharge child support responsibilities, overdue taxes, and criminal fines.  Privately issued student loans should not be on that list.

Central District of California, Northern Division Bankruptcy Filings Fall 34% from January 2012

A quick review of the PACER data indicates that total bankruptcy filings (all types) in the Northern Division of the Central District of California are down 34% from one year ago.  The figure for January 2013 was only 287 cases.  In January 2012, 434 cases were filed.  In January 2011, that number was 520 cases.

The average number of cases filed per month in 2012 was 414.  287 cases filed is low by any measurement.

The chart below shows the number of cases filed in the Northern Division per month since January 2011.