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Bankruptcy Basics for Boards: Don't Leave Money on the Table

Collect Post-Petition Assessments from Chapter 13 Trustee in a Converted Chapter 7 Case

Bankruptcy filings around the country are up, due to among other things, the decline in the real estate market.  Previously, debtors used the equity in their home to fund a Chapter 13 bankruptcy plan and pay back condominium, homeowners, and cooperative associations ('Associations').  Now, many debtors no longer have any equity in their homes. As such, this is leading some Chapter 13 cases to be converted to Chapter 7 liquidation cases. 
 

For Associations, such a scenario often means that the debtor stops paying their post-petition assessments.  But what happens to all the money that the debtor paid the Chapter 13 Trustee during the  bankruptcy? Does this money get distributed to creditors, the debtor or does the Chapter 13 Trustee keep it?  And importantly, can the Associations get any of those funds back?

 

Opportunity to Recoup Post-Petition Assessments
During the life of a Chapter 13 case, the Chapter 13 Trustee has a duty to hold onto all plan payments made by the debtor.  Upon conversion to a Chapter 7 case, the Chapter 13 Trustee is required to account for these funds and notice creditors that these funds will be returned to the debtor. When this occurs, Associations have one last chance to get some or all of this money back, rather than letting the debtor get a windfall.
 

Questions for Associations to Ask Bankruptcy Counsel
It is imperative that the Associations take quick action and file opposition to the Chapter 13 trustee's notice so it can possibly recoup these funds. Sometimes there may be a few thousand dollars held by the Chapter 13 Trustee. The Associations should talk with their bankruptcy attorney immediately.  Following are some questions to ask:

1. How much is owed post-petition?  It is advisable for the Association to provide its attorney an account history for the post-petition fees due and owing.  For instance, if it will cost $500 to file an objection and make an appearance, but there is only $100 held by the Chapter 13 Trustee for a $200 post-petition claim, it may not be worth pursuing.                      
2. Is there a consent order providing for an administrative claim?  There may be a consent order with the debtor providing for an administrative claim.  Bankruptcy Code §1326(a), specifically provides that the Chapter 13 Trustee is to pay all allowed administrative claims by such a consent order. 
3.  Will an objection automatically mean allowance of the administrative claim?  The short answer is no.  The Associations still needs to prove the validity of the post-petition claim.  The debtor may assert a defense to the claim.  As such, sometimes the Associations may wish to negotiate with the debtor to avoid unnecessary litigation expenses.

These and many other issues should be addressed by your bankruptcy attorney as soon as possible.  Although the bankruptcy process is complex, thoughtful and sound legal advice throughout the bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding and, hopefully, not leave money on the table.

Full post as published by New Jersey Law Blog on July 30, 2009 (boomark / email).