52
Welcome to today’s webinar! Basic Bankruptcy Victor A. Davis February 21, 2019
Welcome to today’s webinar!
Basic Bankruptcy
Victor A. Davis
February 21, 2019
▪ In order to obtain a CE Certificate or CLE Credit, you must ▪ listen to the webinar for a minimum of 55 minutes▪ obtain the password (provided at the end of the
presentation)▪ follow the instructions as given
2
ATTORNEY INFORMATION
Because of opinions expressed by the Texas Department
of Insurance (TDI) concerning rebates, legal credit is
available only to:
• Attorneys who own title agencies that are Stewart Title
Guaranty Agents
• Attorneys employed by a title insurance agent licensed
with Stewart Title Guaranty or Stewart entities
• Fee attorneys who have an Escrow Officer license
through a Stewart Title Agent or Stewart entity
We welcome any other lawyers to listen, but cannot provide
continuing education credit to you. 3
Basic Bankruptcy
Victor A. DavisUnderwriterStewart Title Guaranty Company
Houston, Texas
5
Basic Bankruptcy
• What is Bankruptcy?
• What are the types?
• What happens?
• What is in the Estate?
• Who can sell during?
• What is a Discharge?
• Who can sell after?
6
Bankruptcy—What is it?
Title 11 of the U. S. Code
Article 1, Section 8 of the U.S. Constitution authorizes
Congress to enact uniform laws on the subject of bankruptcy
throughout the United States.
Title 11 of the U.S. Code is the “Bankruptcy Code”.
We Americans believe in second chances. People or entities
that are in financial difficulties are given an opportunity to
reorganize their business affairs or liquidate their assets in
an orderly manner to satisfy their creditors.
And afterwards, there is a fresh start.
7
The “Debtor” and the “Creditors”
The Debtor is the party that is the subject of a bankruptcy.
The Debtor can be an individual, a married couple, a
partnership or a corporation.
The Creditors are the parties that the debtor owes money to
or that claim the debtor owes them money.
8
The “Secured” and the “Unsecured”
Creditors can be “secured” creditors, meaning that they have
a security interest recognized by law in some property of the
Debtor, such as a recorded deed of trust or lien, or a lien on
a vehicle or manufactured home title.
Creditors can be “unsecured” creditors, meaning they are
owed money, but have no security interest in the Debtor’s
property.
9
The “Chapters” of the Code
The Bankruptcy Code is divided into a series of Chapters.
The Chapter defines the type of bankruptcy you are dealing
with and the rules and procedures that govern that type of
bankruptcy.
Chapter Type of Bankruptcy
Chapter 7 Liquidation (sale of non-exempt debtor property for creditors)
Chapter 9 Municipalities
Chapter 11 Reorganization (by usually corporation or partnership)
Chapter 12 Family Farmer or Family Fisherman
Chapter 13 Individual Debt Adjustment
Chapter 15 Ancillary or Other Cross-Border Cases
10
The Chapters of the Bankruptcy Code
Chapter 7 of the Bankruptcy
Code involves liquidation of the
non-exempt assets of the Debtor.
This continues to be the most
common form of bankruptcy for
individuals.
The Debtor’s non-exempt
assets are sold off to pay the
claims of the creditors by a
court appointed Trustee.
Individuals, partnerships, and
corporations are eligible to file a
Chapter 7 petition.
11
The Chapters of the Bankruptcy Code
Chapter 9 – Reorganization for Municipalities
Allows a “financially distressed municipality” (a political
subdivision or a public agency or instrumentality of the state)
to adjust its debts.
If you ever encounter this, give us a call.
12
The Chapters of the Bankruptcy Code
Chapter 11 - “Reorganization” - allows an individual, corporation or
partnership to retain some of their assets and to use income to pay off
some existing creditors. Chapter 11 bankruptcy by individuals is rare; it is
used principally by businesses.
Plan and Confirmation
Within 120 days, the Debtor must submit and then have “confirmed”
by the bankruptcy court a “Plan of Reorganization” that categorizes
the creditors into different classes and explains how each class will
be treated. Creditors can submit their own plan. The Plan can
provide for payments for a period of up to 5 years. On successful
completion of the Plan, the debtors are given a discharge from their
debts.
Note: Plan and Confirmation will not invalidate valid pre-existing
liens without lienholder consent, or by court order.
13
The Chapters of the Bankruptcy Code
Chapter 12 is another reorganization chapter, but is limited to family
farmers and fishermen with at least 80% of their income and 80% of their
debts from farming or fishing.
The Debtor must submit and have approved by the bankruptcy court
a “Plan of Reorganization” that categorizes the creditors into different
classes and explains how each class will be treated. The Plan can
provide for payments for a period of up to 5 years. On successful
completion of the Plan, the Debtor is given a discharge from their debts.
Areas with extensive farming see Chapter 12 bankruptcies. The
exemptions in a Chapter 12 bankruptcy are more extensive than in
Chapters 7 and 13. However, there are few filings under Chapter 12.
14
The Chapters of the Bankruptcy Code
Chapter 13 is the reorganization chapter for individuals with regular
income. The Debtor is eligible for Ch.13 if their unsecured debts are less
than $394,725.00 and their secured debts are less than $1,184,200. (adjusted, based on the consumer price index).
The Debtor must submit and have approved by the
bankruptcy court a “Plan of Reorganization” that
categorizes the creditors into different classes and
explains how each class will be treated.
The Plan can provide for payments for a period of up to 5 years.
On successful completion of the Plan, the Debtor is given a
discharge from his/her debts.
15
The Chapters of the Bankruptcy Code
Chapter 15 is the reorganization chapter for foreign debtors
and related parties. The foreign debtor is allowed access to
US Bankruptcy Courts to administer assets in the United
States.
16
Bankruptcy Filings
U.S. Bankruptcy Courts—Business and Nonbusiness Cases
Filed, by Chapter of the Bankruptcy Code—During the
12-Month Period Ending September 30, 2018
District Ch. 7 Ch. 9 Ch. 11 Ch. 12 Ch. 13 Ch. 15 All Chapters
TX, N 5163 0 362 9 5919 0 11453
TX, E 2340 0 64 0 2668 0 5072
TX, S 3803 0 472 5 4776 0 9056
TX, N 4197 1 112 3 3770 0 8083
ALL TX 15503 1 1010 17 17133 0 33664
17
Bankruptcy Filings
18
Commencement of Proceedings
Voluntary Proceeding
A voluntary proceeding is commenced by the filing of the
petition. The commencement constitutes an order for relief.
Involuntary Proceeding
An involuntary proceeding may be commenced only under
Chapter 7 (liquidations) or under Chapter 11 (reorganization).
Company Policy: If the debtor in an involuntary case is offering to sell
property before the order of relief is granted, the company requires a
copy of the notification of the proposed sale, certification by the party
mailing the notice that notice of the proposed sale was sent to all
interested parties, and a final order of the bankruptcy court
authorizing sale.
19
Commencement of Proceedings
Death or Insanity of Debtor
Once the estate is created, no interests in property of the
estate remain in the debtor. Therefore, if the debtor dies or
becomes insane after the commencement of the case, then
only exempt property, abandoned property, or certain
property acquired by the debtor after the case began will be
subject to control and administration by the debtor’s personal
representative.
The bankruptcy proceeding will continue in rem as to the
bankruptcy estate property.
20
The Automatic Stay—section 362(a)
On your mark, get set, STOP!
The moment that the Debtor files their bankruptcy petition
with the Bankruptcy Court, all actions by all creditors seeking
to collect on their debts are “stayed” or stopped.
This includes lawsuits and foreclosure proceedings. A
bankruptcy petition filed seconds before a foreclosure takes
place stops the foreclosure, though a sale to a BFP third
party may be honored.
The Automatic Stay continues in effect until the bankruptcy is
closed, dismissed or the bankruptcy court enters an order
lifting the stay.
21
The “Estate” and “Exemptions”
The Estate is all of the property of the Debtor, which is identified on the
Schedules of the bankruptcy petition.
Debtor(s) may claim certain property as Exempt, or not part of the
Bankruptcy Estate. There are Federal Exemptions and State
Exemptions, each with limitations. Most common exemption is the
Homestead.
The Texas Homestead Exemption = 10 acres urban, 100 acres rural for a
single person, and 200 acres rural for a married couple or the head of a
household.
Federal “Lookback” Exemption limit: A homestead interest acquired in
another state within 1215 days (40 months) prior to bankruptcy petition
that exceeds $146,450 in value is not fully exempt!
—an effort to end the “mansion loophole” 11 U.S.C. §522 (p)
22
Leases and Contracts
The interest of the debtor in a lease or contract
(as lessor, lessee, purchaser, or seller) vests in the
estate upon the filing of the bankruptcy.
Company Policy: Insuring a purchase money mortgage:
If the debtor enters a contract to purchase property before the
bankruptcy commences; and
If the property is not yet abandoned or revested in the debtor
(pursuant to a confirmed plan),
You must require a court order authorizing the completion of the
contract and execution of the mortgage.
You must except to the effect of the automatic stay on
foreclosure of the purchase money mortgage.
23
Community Property
If only one of the spouses files a bankruptcy petition and that debtor-
spouse owns community property, then the community property under
the sole or joint management of the debtor and other community property
which is liable for claims against the debtor (to the extent of liability) are
part of the estate.
The nondebtor spouse has a right of first refusal to buy that property.
The separate property of the nondebtor-spouse and the community
property under the sole management of the nondebtor (where there are
no claims against the debtor which could extend to that property) shall
not be subject to the bankruptcy proceeding.
24
Exempt Property
Rule 4003 specifies a 30-day limit after conclusion of the
creditor’s meetings to file objections to the scheduling of
property as exempt. If no objections are made and if the time
to object is not extended, the property (or equity) which is
scheduled as exempt is not property of the estate.
Exempted property may not be sold by the trustee.
25
Abandoned Property
If property has been properly abandoned by the estate, then
you can secure a deed from the debtor (with any necessary
corporate resolutions) without any need for a motion, notice,
or order of sale.
26
Abandoned Property
What is Abandoned Property?
All of debtor’s non-exempt property goes into the bankruptcy estate.
The Trustee may decide that a piece of property in the estate is not worth
selling, and would abandon the property so that it goes back to the
debtor.
Example: Debtor owns a non-homestead property worth $60,000. There
is a lien against the property for $58,000. The trustee decides that he
cannot sell the property and abandons it to the debtor.
27
Unscheduled Property
The property of the debtor vests in the estate and is subject
to the bankruptcy proceeding regardless of whether it is
listed on the schedules and regardless of whether schedules
are actually filed.
If the property is not scheduled, the case is closed, and the
property is not otherwise administered or abandoned, then it
remains subject to the jurisdiction of the bankruptcy court.
It is possible to have the case reopened to administer or
abandon the property.
28
After-Acquired Interests
Any property acquired by the debtor by gift, devise, or inheritance, or as
a result of a property settlement agreement in a divorce within 180 days
after the filing of the bankruptcy shall become property of the estate.
Any property acquired during the bankruptcy as proceeds of property of
the estate (e.g., distribution of corporate assets if stock is owned by
estate) shall become property of the estate.
The debtor cannot avoid this provision by disclaiming or renouncing a
bequest or devise.
Contingent or vested remainder interests owned by the debtor at
commencement of the case are property of the estate.
29
Who can sell property during bankruptcy?
In a Chapter 7 proceeding, the court appointed Trustee is in
charge of the estate. The Trustee retains control of the non-
exempt property, but can only sell by court order.
However, 30 days after the Meeting of the Creditors has
concluded*, if there are no objections to the Debtor’s claim of
exemption, property claimed as Exempt is returned to the
Debtor and is no longer part of the bankruptcy estate.
Debtor can then sell the exempt property.
* Watch for Creditors’ Meetings that are continued, because the 30 days
doesn’t begin to run until the meeting is concluded and adjourned.
30
Who can sell property during bankruptcy?
In a Chapter 11 proceeding any sale prior to confirmation of the Plan of
Reorganization will require a court order.
For volume real estate sellers, such as builders, the court may enter an
order allowing the Debtor to continue sales in the ordinary course of
business. This order may allow the sale to be free and clear of lien
claims, such a mechanic’s and materialmen’s lien claims.
Once the Plan has been confirmed, and if the Plan provides for the sale
of the non-exempt property, the Debtor can sell the property without
further court order but may not be free and clear of pre-existing voluntary
liens...
Any sales of non-exempt properties that are not provided for in the Plan
will require a separate court order authorizing them.
31
Who can sell property during bankruptcy?
During a Chapter 13 proceeding, any sale prior to confirmation of the
Plan of Reorganization will require a court order.
The DIP can sell exempt property (homestead) without further court
order.
Once the Plan has been confirmed, and if the Plan provides for the sale
of the non-exempt property, the Debtor in Possession can sell the
property without further court order but may not be free and clear of pre-
existing voluntary liens...
Any sales of non-exempt property that are not provided for in the Plan
will require a separate court order authorizing them.
32
Discharge and Liens
Most people believe that a bankruptcy discharge of the Debtor means
that all liens against the debtor’s property cease being liens following the
debtor's discharge and case closure.
A discharge means that the debtor is relieved of the personal obligation
to pay the discharged debt. It does not mean that a valid lien which
existed prior to the bankruptcy is also discharged as well.
It means that while the debtor has no personal obligation to pay the lien,
the debtor's property, in effect, may be used to pay the debt .
33
Effect on Lien of Discharge of Debt in
Bankruptcy
Tex. Prop. Code § 52.025a) A judgment lien is not affected by the order of discharge and
cancellation and may be enforced, if the lien is against real property
owned by the bankrupt or debtor before the debtor was adjudged
bankrupt or a petition for debtor relief was filed under federal
bankruptcy law, and:
1) the debt or obligation evidenced by the judgment is not
discharged in bankruptcy; or
2) the property is nonexempt and is abandoned during the course of
the proceeding.
b) Except as provided by Subsection (a), the judgment is of no force or
validity and may not be a lien on real property acquired by the
bankrupt or debtor after the discharge in bankruptcy.
34
Discharge and Cancellation
Tex. Prop. Code § 52.042a) A judgment is discharged and any abstract of judgment or judgment
lien is canceled and released without further action in any court and
may not be enforced if:
1) the lien is against real property owned by the debtor before a
petition for debtor relief was filed under federal bankruptcy law;
and
2) the debt or obligation evidenced by the judgment is discharged in
the bankruptcy.
b) A judgment evidencing a debt or obligation discharged in bankruptcy
does not have force or validity and may not be a lien on real property
acquired by the debtor after the petition for debtor relief was filed.
35
Exceptions to Discharge and Cancellation
Tex. Prop. Code § 52.043A judgment lien is not affected by this subchapter and may be enforced if
the lien is against real property owned by the debtor before a petition for
debtor relief was filed under federal bankruptcy law and:
1) the debt or obligation evidenced by the judgment is not discharged in
bankruptcy; or
2) the property is not exempted in the bankruptcy and is abandoned
during the bankruptcy.
36
Partnerships
A Partnership
The partnership and a partner are treated as separate
entities and their interests are separate. If a partnership
owns property, then the filing of a bankruptcy by an
individual partner does not vest the partnership property in
the estate.
Company Policy: If a partnership is the record owner and
one of the partners is personally in bankruptcy, prior to a
sale of partnership property, you should secure joinder of or
consent by the debtor-partner (or trustee) to the sale
pursuant to a final court order or after notice to all interested
parties of the estate.
37
Partnerships
Foreclosure
The estate of a partner consists only of the partner’s
personal property interest in the partnership. Thus, the
automatic stay does not prevent foreclosure of a lien against
the partnership property merely because a partner files a
bankruptcy.
Company Policy: Foreclosure on partnership assets is not
stayed by a bankruptcy of a partner.
38
Trustee and Trusts
If the debtor has title to property as a trustee (of a private
trust), the estate will succeed to the property, subject to the
interests of the beneficiaries. The estate cannot exercise the
fiduciary powers of the trustee (of a private trust).
Company Policy: Require abandonment or joinder of the
trustee or debtor in possession in the bankruptcy
proceeding, and joinder of all other necessary parties in
accordance with the trust documents.
39
Loans During Bankruptcy
In a Chapter 7 proceeding, 30 days after the conclusion of
the Creditors’ Meeting, the Exempt property is no longer part
of the estate and the Debtor can use it as collateral for loans.
Unless specifically provided for in the Plan, new loans in a
Chapter 11 or 13 bankruptcy will require a court order
authorizing them.
If a Debtor in a Chapter 13 bankruptcy has sold their exempt
property and are proposing to buy a new one, need a court
order authorizing the new loan since the new debt may
prejudice the Debtor’s ability to make payments under the
Plan.
40
Finality—Appeals
Any judgment, order or decree of bankruptcy court may be appealed
‒ To district court; or
‒ to 3 judge bankruptcy panel (on consent of all parties)
Appellant must file notice of appeal w/in 10 days of the date of entry of
judgment, order or decree appealed from (may be extended by court)
Company Policy: Must be satisfied that any bankruptcy order is FINAL
and not being further contested/appealed.
Can be shown by:
‒ by letter from counsel;
‒ review of the bankruptcy court file and docket sheet; or
‒ bankruptcy court clerk’s letter of certifying finality, after time period
elapses (14 days after order of sale, mortgage, lease or
confirmation, after 30 days for all other orders)
41
Sales After BankruptcyDoes the owner/former debtor actually own the property and can they sell it?
Property claimed as Exempt with no creditor objections is
returned to the Debtor’s control can be sold.
Non-exempt Property that was listed on the Schedules of the
Bankruptcy Petition but revealed as “returned to the Debtor”,
can be sold, but may not be free and clear of pre-existing
voluntary liens.
Non-Exempt Property that was not disclosed on the
Schedules of the Bankruptcy Petition or Plan raises issues of
fraud on the creditors and will require underwriter approval to
insure.
42
Sales After Bankruptcy
Voluntary Lien
A lien on property which arises by consent or contract of the
debtor such as a mortgage lien.
Involuntary Lien
A lien on property which arises without the consent of the
debtor such as a judgment lien.
43
Sales After BankruptcyWhat happened to the Voluntary Liens against the property?
Unless the voluntary liens avoided by court hearing and
order, the voluntary liens are still against the property.
Occasionally disclosed property wasn’t dealt with in the
bankruptcy. The Debtors thought the lender would foreclose,
since they stopped making payments, but the lender never
did. Although the bankruptcy may have discharged the
Debtor’s personal liability on the debt, the lender’s prior lien
against the property remains.
Company Policy: We will not rely on a Discharge or Plan Confirmation
to waive/extinguish voluntary liens. The Discharge and Plan
Confirmation do not extinguish a preexisting voluntary lien.
Get a release from the creditor.
44
Sales After BankruptcyWhat happened to the Involuntary Liens against the Debtor/Property?
Federal Tax Liens are not discharged by filing bankruptcy. We require releases
from the IRS.
State Tax Liens: the debt can be discharged in bankruptcy if the State is
scheduled as one of the creditors on the order. However, if the lien was recorded
prior to bankruptcy, lien must be released since only the debt was discharged.
Abstracts of Judgment can be discharged in bankruptcy, but whether we can rely
on that is governed by Sections 52.041 to 52.043 of the Texas Property Code:• Sec. 52.042 of the Property Code provides that discharge in bankruptcy cancels the
AJ lien if 1. the lien preexists the bankruptcy filing, and (2) the judgment debt is discharged.
• Sec. 52.043 of the Property Code says : AJ Lien not cancelled when (1) the lien
preexists the bankruptcy filing, and (2) the judgment debt is not discharged, OR (3)
the property is not exempted but is abandoned by the Trustee.
Read the Discharge Order!
45
Limit on Filing
A debtor is generally not entitled to a discharge if the debtor
was granted a discharge in a case commenced within six
years before the date of filing of the current case.
This time limit does not apply if the prior case was a Chapter
12 or Chapter 13 proceeding, and payments totaled 100% of
unsecured claims, or payments totaled 70% of claims and
the plan was proposed in good faith and was the debtor’s
best effort.
46
Foreclosure Do-Over
Southern Bank of Lauderdale County v. IRS, 770 F.2d 1001, 1985
U.S. App. LEXIS 23060, 85-2 U.S. Tax Cas. (CCH) P9670, 56
A.F.T.R.2d (RIA) 5952
Mortgagees failed to provide notice to Internal Revenue Service and
subsequently purchased the properties at foreclosure that were subject
to valid federal tax liens. Mortgagees tried to foreclose again providing
notice to IRS. Because Mortgagees conducted foreclosure sales and
purchased the properties, a complete merger of title resulted, vesting the
fee simple title to the properties in Mortgagees. This title was superior to
all liens except those not extinguished, such as the federal tax liens that
were properly perfected.
47
Contact Info
Be careful out there!
Victor A. DavisUnderwriting Counsel
Stewart Title Guaranty Company
Houston, Texas
800-292-5712 | 713-625-8767
Per the TDI and the State Bar, in order to obtain a CE Certificate or CLE Credit you must:
– listen to the webinar for a minimum of 55 minutes
–obtain the password (provided at the end of the presentation)
– follow the instructions as given
48
To Receive CE CreditEach individual seeking credit hours must send their own certificate request to:
Please include the following information:• Provide only this Presentation Name in the Subject Line of your e-mail – “Basic
Bankruptcy”In the body of your e-mail:• Name of Participant (as it appears on your Escrow Officer License);• Presentation PASSWORD given at the end of the webinar;• License Number Only (located on left side of Escrow Officer Certificate of License –
for example: License Number: 1234567-890123)
For Attorney CLE Credit also include:• Texas State Bar Number• Affiliation with Stewart
– Employed by Stewart Title Guaranty Company;– an affiliate; or– a Stewart agent
For more details, see the CE and CLE FAQs at:
http://www.stewart.com/en/stg/texas/education/texas-tips/ce-cle-faqs.html49
Recordings
www.stewart.com/texas
Under “Texas TIPS” tab
• Posted online 10 days after live presentation
• Other current courses available
Certificates
• Processing can take up to 10 business days.
• Contact us if you haven’t received your
certificate after the allotted processing time.
50
Join us for the next Texas TIPS webinar!
March 21, 2019
Alternatives to Probate
Zoiliss Rios
For Questions/Comments Email
or
51
