Tag Archives: Chapter 13

Chapter 13 Bankruptcy and Whether HOA Dues are Discharged Post-Petiton

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The Ninth Circuit Bankruptcy Appellate Panel issued an unpublished opinion that analyzes the Bankruptcy Code through history as it applies to homeowner’s association dues. See Batali v. Mira Owners Association; BAP No. WW-14-1557-KiFJu. We have a number of articles about HOA dues and this article does not discuss pre-petition homeowners association dues and their dischargeability. But please note, bankruptcy attorneys need also to be aware of whether or not the HOA has recorded a lien for the pre-filing unpaid dues.

In the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act the treatment of HOA dues was forever changed in Homeowner Association’s favor. There is a lot of confusion with homeowners associations and their non-bankruptcy attorneys regarding this issue. Many please say if you stay you pay. If you do not stay you do not pay.

1994 Changes to Bankruptcy Code

The push to not be able to discharge homeowner’s association dues post-petition began really in 1994. In 1994 Congress added Section 523(a)(16) to the Code. In 1994 Section 523(a)(16) excepted from discharge under §§ 727, 1141, 1228(a), 1228(b) or 1328(b):

A fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a dwelling unit that has condominium ownership or in a share of a cooperative housing corporation, but only if such fee or assessment is payable for a period during which — (A) the debtor physically occupied a dwelling unit in the condominium or cooperative project; or (B) the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.

2005 BAPCPA Changes to Section 523(a)(16)

Section 523(a)(16) was not changed again until the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Section 523(a)(16) was modified to include homeowners’ associations and delete the language that required debtors to actually physically reside in or collect rents rom the units.

There are a number of cases that discuss the post-petition treatment of HOA dues and whether they are discharged or not. A court in 1997 discussed whether HOA dues were a debt, and if so, did the Chapter 13 Plan provide for the debt? In that case since the time-share was surrendered through the plan the court reasoned the HOA dues were provided for and therefore discharged. The post-petition dues are a claim as defined by Section 101(5) of the Code. The Ninth Circuit Bankruptcy Appellate Panel addressed this issue in Foster v. Double R Ranch Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010). The 9th Circuit BAP concluded that that the “ongoing ownership of property with a running covenant creates a post-petition claim even if the debtor does not use the property.”

The issue is whether post-petition homeowner’s associations are discharged upon completion of a Chapter 13 Plan?

To begin the discussion the binding effect of confirmation of a Chapter 13 Plan pursuant to Section 1327 needs to be addressed. Section 1327(a) provides: The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan. While this is true the language of the plan needs to be reviewed. The main problem here is that model Chapter 13 Plans are difference from jurisdiction to jurisdiction and what Chapter 13 Trustee will object to is different from jurisdiction to jurisdiction. Also, a debtor can add language to a Chapter 13 Plan that is not part of a model Chapter 13 Plan. In this case, Batali v. Mira Owners Association, Batali’s Chapter 13 Plan made no mention of discharging the post-petition dues owed to Mira Owners Association. So how can the binding effect of the Chapter 13 Plan discharge the dues owed if no mention of the dues is made? The 9th Cir. BAP concluded the Chapter 13 Plan cannot discharge post-petition dues if they are not mentioned in the Chapter 13 Plan pursuant to Section 1327. Also in the Batali case Mira Owner’s Association requested relief from stay to pursue Batali for the post-petition dues owed and was granted that relief without any opposition from Batali.
Going back to the In re Foster case decided by the 9th Cir. BAP the panel looked at Washington State Law and concluded that are recorded condominium declaration, like that of Mira Owner’s Association, runs with the land and is a property right that cannot be extinguished in a bankruptcy. As long as the debtor continues to have an interest in the property at issue, a debtor cannot discharge the post-petition assessments that arise from the covenant that runs with the property.

We are therefore back to “you stay you pay” argument many bankruptcy attorneys will recite. The argument goes that the debtor provided in the Chapter 13 Plan that they are surrendering the property pursuant to the terms of the confirmed Chapter 13 Plan. The Ninth Circuit Appellate Panel again refers to the reasoning in the Foster case they decided previously. A debtor cannot extinguish a homeowners association’s recorded declaration and may therefore not discharge the debtor’s post-petition assessments even if a debtor does not reside in the property. The 9th Cir. BAP does not believe Section 523(a)(16) provides generally that post-petition HOA dues are claims or debts that can be discharged pursuant to Section 1328(a) of the Code.

The Ninth Circuit Bankruptcy Appellate Panel holds that Section 523(a)(16) is not applicable to discharge under Section 1328(a) and that state law governs the substance of claims. So if the state you are in is different than Washington State Law or more specifically that the HOA declaration is not a covenant that runs with the land then the decision in this case may have been different. The next issue is about what effect a debtor providing a piece of property is to be surrendered in a Chapter 13 Plan. Just because the Chapter 13 Plan says a property is to be surrendered that fact does not actually transfer the property out of the debtor’s name. The debtor still maintains their legal, equitable and possessory interest in the property until foreclosure or some other form of transfer of title out of the debtor’s name. Just giving up possession does not transfer title. Notice of intent to surrender only gives a creditor notice that a debtor will make the collateral available to the secured creditor to use their state law rights to take back the collateral securing the debt. Under most state laws the transfer of real property can only take place by deed.

In the Ninth Circuit and in the state of Washington, based upon Washington state law, homeowner’s association dues that come due after a Chapter 13 Bankruptcy case is filed and when the property titled is transferred out of the debtor’s name are not discharged. Like many things in law this analysis and conclusion may not be an absolute for other debtors in other states and with different Chapter 13 Plan language.

Can A Third Party Help Make A Chapter 13 Plan Payment?

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There are a number of requirements that must be met for proposed chapter 13 plans to be confirmed or approved by the bankruptcy court. See Section 1325 of the Bankruptcy Code for all of the requirements. The focus of this article is Section 1325(a)(6) which provides the court shall confirm a plan if, “the debtor will be able to make all payments under the plan and to comply with the plan.” The proposed chapter 13 plan must be feasible or possible. More or less the bankruptcy filer must be able to make the payments proposed in the chapter 13 plan for the entire life of the plan. Usually the plan will last three to five years depending upon the circumstances. So can a third party help make a chapter 13 plan payment each month for the entirety of the plan? The answer is yes under most circumstances.

Yes, A Third Party Can Help Make A Chapter 13 Plan Payment

This issue does not really come up too often for most bankruptcy lawyers. Most courts generally allow third party help, but it is disfavored for a number of reasons. See In re: Schwalb, 347 B.R. 726, 759 (Bankr. D. Nev. 2006. In Schwalb the court held that a debtor may rely on contributions from family and is not prohibited, but disfavored. Of course if the bankruptcy filer can get it done themselves that is much more favorable than having to rely on a third party for money each month. There has to be a firm commitment from the third party to make the contribution each month into the chapter 13 plan. If a third party contribution seems like it is speculative or will only be occasional then the chapter 13 plan can be considered not possible or feasible. The amount of the monthly contribution must be certain too. How can a court confirm or trustee recommend confirmation if the amount of the monthly contribution by the third party is not listed or known? There are a number of factors to consider: (1) the contributor’s relationship to the debtor and motivation in making the contributions; (2) the contributor’s long and undisputed history of making the contributions otherwise providing support for the debtor; (3) the commitment of the contributor to make the contribution in a specific amount for the duration of the chapter 13 plan; and (4) the financial stability of the contributor to make the proposed contribution. The bankruptcy filer and their bankruptcy attorney have the burden of proof in providing evidence to support confirmation of the proposed chapter 13 plan.

Why Would Someone Need Help With Their Monthly Chapter 13 Plan Payment?

The basic problem is the debtor or person filing bankruptcy does not have enough income after paying normal living expenses to meet their obligation under the bankruptcy code to creditors when filing chapter 13 bankruptcy. The bankruptcy filer may only have $100.00 left over each month, but they have taxes that must be paid back in the chapter 13 plan or mortgage arrears that must be paid back in the chapter 13 plan. To pay the unpaid taxes or mortgage arrears the bankruptcy filer, for example, would have to pay $300.00 each month to fund the plan and make it feasible. Again, the bankruptcy filer cannot afford the plan payment, so they obtain third party assistance from a friend or family member. The friend or family member pays the additional $200 a month to make the plan possible or feasible and meet the requirements of Section 1325(a)(6).

Are There Limits To Third Party Help In Chapter 13?

How these issues are dealt with is different from circuit to circuit, district to district and division to division. But generally speaking most jurisdictions allow third party help under most circumstances. In a recent case with third party help proposed, In re Carolyn Deutsh, 2015 Bankr. Lexis, 1368, the Bankruptcy Court actually denied confirmation of the debtor’s chapter 13 plan for not being feasible. What went wrong here? In this case the third party contributor was the debtor’s boyfriend. So, they are not married and the boyfriend is a new boyfriend who says he “intends to contribute only for so long as he is financially able” according to the declaration filed in the case. Okay, can that be relied upon? The bankruptcy court said no. The third party needs to have some sort of tie to the debtor that is not so new it cannot be depended upon. Also the language of the declaration leaves a lot to be said. Why the declaration in Deutsh or less says “I think or guess I will help” instead of “I will contribute $700 a month toward the chapter 13 monthly plan payment for the entire duration of the chapter 13 plan.” There still could have been an issue with the third party contributor being a new boyfriend, but if the language of the declaration had been more concise about the boyfriend’s willingness to help things in the Deutsh may have been different.

The moral of the story is make sure the third party contributor to the monthly chapter 13 plan payment is committed to help, you have known them for some time and the amount they will contribute each months is listed specifically in the declaration prepared and filed with the court.

Can a Lien be Stripped if Only One Spouse Files for Bankruptcy?

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In California, as part of the Ninth Circuit, the answer should be yes. The main distinction here is that California is a community property state. There are decisions from of circuits that contradict the decision discussed below. California is a community property state and both spouses are assumed to have command and control of community property assets. So why can a wholly unsecured or underwater lien be stripped if only one spouse files for bankruptcy?

The scenario is that a couple buys a house during marriage and therefore the presumption is the house is a community property asset. To be clear, there is no evidence to rebut this community property presumption because there is no evidence the funds used to purchase the house, pay the mortgage, insurance or property tax came from any separate property source. If there is any question as to whether the house is not community property be careful. So in this discussion the house is clearly a community property asset when filing for bankruptcy protection. Pursuant to Section 541(a)(2)(A) or (B) of the Bankruptcy Code all interests of the debtor and debtor’s spouse in community property as of the commencement of the case that is under the sole, equal, or joint management and control of the debtor; or liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

If the provisions of Section 541(a)(2)(A) or (B) are met then the community property of both spouses becomes property of the estate when one spouse files a bankruptcy petition. See In re Miller, 167 B.R. 202, 205 (Bankr.C.D.Cal. 1994). This issue was addressed in In re Maynard, 264 B.R. 209 (9th Cir. BAP 2001). In Maynard, Lillian B. Maynard filed for bankruptcy protection under Chapter 13 of the Bankruptcy Code and sought to strip off a wholly underwater mortgage from her real property. Her spouse did not file with her. Maynard’s bankruptcy attorneys filed a motion to value the property and eventually an order was entered ordering that the creditor’s claim is stripped as an encumbrance against Maynard’s real property and shall hereinafter be treated as a general unsecured claim pursuant to Maynard’s Chapter 13 Plan.

The creditor appealed various rulings of the lower bankruptcy court including whether the lien could be stripped given Maynard’s husband did not file for bankruptcy as well. The 9th Circuit Bankruptcy Appellate Panel held that under California law each spouse has an equal right to manage community property. Lawrence P. King et al., COLLIER FAMILY LAW 4.03[3][c] (Rev. 2000). Therefore, the real property of the nondebtor or non-filing spouse is included in the filing spouses or debtor’s estate and a creditor’s entire lien is subject to valuation and avoidance pursuant to Section 506(d) of the Bankruptcy Code.

If a fractional interest becomes property of the bankruptcy estate be careful. Bankruptcy lawyers should research how the property was purchased and how title of the property was taken at the time of purchase. The whole interest in the property the lien is trying to be stripped from must be part of the bankruptcy estate.