chapter 13

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)

Unsecured Chapter 13 Creditors and Proofs of Claim

What happens if an unsecured creditor fails to file a proof of claim?  While an unsecured creditor need not file a proof of claim and the claim is preserved during the Plan, a creditor who does this risks getting no distribution through the Plan and having the unsecured debt discharged at the end of the Plan.

Lien Stripping in Chapter 13 Bankruptcy

You may have heard that Chapter 13 bankruptcy proceedings allow some homeowners to "strip" off second mortgages or home equity lines of credit.  You may not realize that the procedure used to do so varies by United States District, Divisions within each District, and might even vary by bankruptcy judge.  Make sure you hire a bankruptcy lawyer experienced in the complexities and variations in Chapter 13 lien stripping.

Business Documents and Back-up Information Required for Self-Employed Chapter 13 Debtors

It is crucial that individuals filing a Chapter 13 bankruptcy and who are self-employed or business owners know that they must provide additional information to the Trustee.  That information includes:

(A) Projection of average monthly income and expenses for the next 12 months;

(B) Evidence of appropriate business insurance;

(C) Inventory of goods as well as a list of business furnishings and equipment as of the date of the filing of the petition;

(D) Monthly income and expense statements for at least the 6 months preceding the date of the filing of the petition, or for such shorter time if the business has been in operation for less than the requisite 6 months, signed by the debtor under penalty of perjury, including a statement regarding incurred and unpaid expenses;

(E) Tax returns for at least 5 years or since the start of the business, whichever period is shorter; and

(F) Such other evidence requested by the chapter 13 trustee, including bank statements, canceled checks, contracts, or other information relevant to the debtor's ability to fund the proposed plan.

These items are required by local bankruptcy rules in the Central District of California.  Be aware these requirements may only apply to the Central District of California.  As always, do not take this information as legal advice and by providing it you are not entering any form of attorney client relationship with Andrew Mansfield.  Seek the advice of an attorney if you are contemplating filing bankruptcy.

Consumer Bankruptcy Attorneys Should Review New Creditor Proof of Claims Rules

The Federal Rules of Bankruptcy Procedure (FRBP) revisions became effective December 1, 2011.  These new rules greatly affect the way that creditors in Chapter 13 bankruptcy cases must present "proofs of claim."  

1. FRBP 3001 has been amended to increase the types of information required to be attached to a proof of claim. While Rule 3001 has always required a creditor produce a writing to support its claim, now a creditor must also attach information relative to the principal, interest, fees, and any other expenses incurred pre-petition - including arrearages.
  • 3001(C)(2)(A) - now requires an itemized statement.
  • 3001(C)(2)(B) - requires a statement of the amount needed to cure any arrearages or defaults,
  • 3001(C)(2)(C) - applies if a security interest is claimed in the debtor's principal residence.
  • 3001(C)(2)(D) - if the creditor fails to provide the information and documents requested, Rule 3001(c)(2)(D) now provides for sanctions against the creditor.
FRBP 3002.1 is a brand new rule that applies to proofs of claims filed in Chapter 13 cases only and to claims secured by the debtor's principal residence. Rule 3002.1 also deals with the finality of Chapter 13 cases and curing any discrepancies in final cure payments. Most significant in the amendments are the new provisions that may award sanctions for non-compliance with the new rules.
  • 3002.1(B) - a creditor secured by the debtor's principal residence is required to "file and serve on the debtor, debtor's counsel, and the trustee a notice of any change in the payment amount."
  • 3002.1(C) AND (D) - requires the creditor file and serve on the debtor, debtor's counsel, and the trustee a notice "itemizing all fees, expenses, or other charges." Part D requires that this notice be prepared on the official form known as B10S2 "Supplement 2" and is entitled "Notice of Postpetition Mortgage Fees, Expenses, and Charges."
  • 3002.1(F) AND (G) - relates to the duties of the Trustee at the end of the debtor's Chapter 13 case. Rule 3002.1(f) requires the trustee serve on the creditor, the debtor, and the debtor's counsel a notice stating "that the debtor has paid in full the amount required to cure any default on the claim."
  • 3002.1(I) - contains a sanctions provision for noncompliance.
Official Proof of Claim Form - Form 10 - In addition to the amendments and additions to the proof of claim rules, the official claim form 10 has been modified. 

The changes are for individual debtor cases only. Moreover, in regard to Rule 3001(c)(2)(C) if the security interest is in the debtor's principal residence, the new official form must be filed with the proof of claim, along with an escrow account statement if applicable.

The new Rule 3002.1 applies to Chapter 13 cases only with claims that are (1) secured by a security interest in the debtor's principal residence; and (2) provided for under Section 1322(b)(5) of the Code and the debtor's plan. 

Most notable of the new rules is that they now provide for sanctions for non-compliance.

Finally, the new proof of claim form is to be used in all cases filed under the Bankruptcy Code.

Consumer Bankruptcy Attorneys May Steer African Americans Into Chapter 13

Three researchers recently uncovered evidence that African Americans are much more likely to be counseled to seek and then to obtain Chapter 13 bankruptcy protection. The abstract of the study is below. The full paper is available on Social Sciences Research Network ("SSRN").

The research was done by:

Jean Braucher
University of Arizona - James E. Rogers College of Law

Dov Cohen
University of Illinois

Robert M. Lawless
University of Illinois College of Law


We report on racially disparate uses of chapter 13 bankruptcy. Currently, approximately 1,500,000 bankruptcy petitions are filed each year, with about 30% of those petitions being chapter 13 cases. Although chapter 13 can offer some legal advantages for persons seeking to protect valuable assets such as a house or automobile, it generally offers less relief and costs more than the primary alternative available to consumers, chapter 7. The chief feature of a chapter 13 bankruptcy case is a plan under which the debtor must devote all of his or her disposable income to creditor repayment over a 3- to 5-year period. Chapter 7, in contrast, requires only that the debtor turn over all nonexempt assets, with over 90% of chapter 7 debtors having no assets to turn over.

This paper reports on two studies, one using data from actual bankruptcy cases and the other involving an experiment with a national random sample of bankruptcy attorneys. Because the court system does not collect racial data on bankruptcy filers, the first study uses data from the Consumer Bankruptcy Project. Even after controlling for financial, demographic, and legal factors that might favor a chapter 13 filing, African Americans are much more likely to file chapter 13, as compared to debtors of other races. The second study reports on an experimental vignette sent to a random sample of consumer bankruptcy attorneys who represented debtors. The attorneys were more likely to recommend chapter 13 when the hypothetical debtors were a couple named “Reggie & Latisha,” who attended an African Methodist Episcopal Church, as compared to a couple named “Todd & Allison,” who attended a United Methodist Church. Also, attorneys viewed “Reggie & Latisha” as having better values and being more competent when they expressed a preference for chapter 13 as compared to “Todd & Allison,” who were seen as having better values and being more competent when they wanted to file chapter 7, giving them a “fresh start.” Previous research and the results from the present experimental vignette study suggest consumer bankruptcy attorneys may be playing a very important, although likely unintentional, role in creating the racial disparity in chapter choice. Together, the two studies raise questions about the fairness of the bankruptcy system.

Surrendering Property in Chapter 13: Language

11 USC 1325(a)(5) provides debtors with three options for the treatment of secured claims under a Chapter 13 plan, two o f which may be implicated when a debtor seeks to surrender their property.  Subsection (A) allows confirmation if "the holder of such claim has accepted the plan" and, absent such acceptance, subsection (C) allows confirmation if the plan provides for surrender of the collateral to the secured creditor. 11 U.S.C. § 1325(a)(5)(C).

So what if your client wishes to surrender their property under the Chapter 13 plan – what are the implications? The two primary objectives of a debtor in proposing to “surrender” real property in a Chapter 13 Plan are to:

Resolve or discharge the outstanding indebtedness. In general, 11 USC 506(a) permits a creditor to file a general unsecured claim to the extent the creditor’s claim is undersecured (i.e., the value of the collateral is less than the amount of the claim). See In re Finley, 408 B.R. 111, 114 (Bankr. E.D. Mich. 2009). The key component of the Plan is to ensure that the “debt” is “provided for by the plan” such that a discharge pursuant to 11 USC 1328 is effective to extinguish the indebtedness. A plan that is silent as to the potential unsecured claim or classifies the creditor/claim in a section of the plan preserved for 1322(b)(5) claims (i.e., “continuing claims”) is insufficient and creates an ambiguity.

Divest themselves of the responsibility for the property (although in some instances debtors will seek to stay in the property for an extended period of time). Many debtors are under the impression that filing a Chapter 13 which offers to “surrender” property “washes their hands” of the responsibilities inherent in property ownership such as maintenance, insurance, and condominium association dues.   A proposed or confirmed Chapter 13 Plan which offers to “surrender” collateral to a creditor or creditors does not effectuate a legal transfer of ownership and the responsibility for the property remains that of the debtor post-confirmation. Surrender as used in a Chapter 13 Plan merely states an intention on behalf the debtor to make the property available to the creditor to pursue its state law remedies. Further, although the bankruptcy may be pending, pursuant to 11 USC 1327(b), confirmation of the case vests all of the property of the estate in the debtor.  Your client must be advised and informed that filing a Chapter 13 Plan which “surrenders” property does not obviate their responsibility to maintain the property. 

In order to avoid some of the pitfalls related to surrendering property in a Chapter 13 plan, here are some effective drafting suggestions:

  • Consider creating a separate section or classification in the Plan for “Property to Be Surrendered to Secured Creditor” and name the Creditor and the collateral and detail the proposed treatment of the indebtedness. 
  • For example: “Property/collateral shall be surrendered to creditor in satisfaction of their secured claim. To the extent an unsecured claim exists, creditor shall be treated as a general unsecured creditor.” See Branch Banking & Trust Co. v. Coffia (In re Coffia), 2010 Bankr. LEXIS 1563 (Bankr. S.D. Ga. Mar. 22, 2010) (confirming a Plan which proposes to surrender collateral in full satisfaction of creditor’s “secured claim” over creditor’s objection as court ruled that creditor retained right to seek reconsideration of its claim pursuant to 502(j) to assert a deficiency) (also, finding that “surrender” treatment pursuant to 1325(a)(5)(C) necessarily satisfies a creditor’s allowed secured claim)
  • “Property/Collateral shall be surrendered to Creditor. Any deficiency allowed pursuant to creditor’s non-bankruptcy rights shall be treated as a general unsecured claim and shall be subject to discharge pursuant to 11 USC 1328.” 
  • “Property/Collateral shall be surrendered to Creditor in full satisfaction of the outstanding debt” (this language can be used to the extent the debtor asserts that the claim is fully secured or the creditor’s non-bankruptcy rights restrict the collection of a deficiency). Of course, this language may solicit an objection from a creditor that asserts a non-bankruptcy right to a deficiency. Or the language may not draw an objection in which case the creditor will likely be deemed to have “accepted” the Plan pursuant to 1325(a)(5)(A) and any effort to collect a deficiency would be objectionable.


Chapter 13 Filings Increase in 2011

Court News reports that Chapter 13 filings are up 9..9% this year (in the Central District of California).  I speculate this is related to the fact that Chapter 13 is ordinarily the Chapter used in response to foreclosures.

Mansfield Law Office

National Bankruptcy Filings Shift More to Chapter 13

Bankruptcy Law Blog from Ventura Bankruptcy Attorney Andrew S. Mansfield

The American Bankruptcy Institute reports today that Chapter 13 filings constituted 31.5 percent of all consumer cases in October, a slight increase from September.  While the mix between Chapter 7 and Chapter 13 bankruptcies has shifted, overall consumer bankruptcies are declining around the nation.  

“The trend of declining filings has been consistent with consumers continuing to reign in their spending, household debt, and an overall pull back in consumer credit,” said ABI Executive Director Samuel J. Gerdano. “Total consumer filings for 2011 will be less than 2010.”

But why? Some commentators attribute the decline to negative factors.  The lull in foreclosures (soon to pick up again) freed up some cash consumers were committing to mortgages.  Many unemployed are at the tail end of extended unemployment.  Other commentators note that consumers are so discouraged some are simply letting their debts go into default and collection.

Analysis from the New York Times: Double Dip Recession Could Be Much Worse than First

The American Bankruptcy Institute sent the following summary of a New York Times article this morning:

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around, the New York Times reported today. "It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession," said Conrad DeQuadros, senior economist at RDQ Economics. When the last downturn hit, the credit bubble left Americans with lots of fat to cut, but a new one would force families to cut from the bone. Making things worse, policymakers used most of the economic tools at their disposal to combat the last recession and now have few options available. "There is no approachable precedent, at least in the postwar era, for what happens when an economy with 9 percent unemployment falls back into recession," said Nigel Gault, chief U.S. economist at IHS Global Insight. "The one precedent you might consider is 1937, when there was also a premature withdrawal of fiscal stimulus, and the economy fell into another recession more painful than the first." There is at least one factor, though, that could make a second downturn feel milder than the first: corporate profits, according to the experts. Corporate profits are at record highs and, adjusted for inflation, were 22 percent greater in the first quarter of this year than they were in the last quarter of 2007.