Chapter 11 Lawyers, Nassau & Suffolk Counties, Long Island

In the case of an individual debtor, often the debt that requires reorganization in Chapter 11 is a mortgage that is in arrears. One way of dealing with mortgage arrears is a plan where the debtor will “catch up” or cure the arrears under a traditional Chapter 11 plan, typically over five (5) to eight (8) years. However, now that many foreclosures are based on arrears of many years, a “catch-up” plan would not always work, since it may be too expensive to pay both the post-petition monthly mortgage payment directly to the lender and a separate “catch-up” payment — especially where mortgages are for higher amounts, as is generally true in Chapter 11 cases filed by individual debtors. Therefore, seeking a mortgage loan modification through Loss Mitigation programs adopted by most Bankruptcy Courts has become a standard way to proceed. Loss Mitigation is the pursuit of a mortgage modification by the debtor, overseen and encouraged by the Bankruptcy Court, which can pressure both the debtor’s and lender’s attorneys to coordinate over documents and information to determine whether the debtor qualifies for a modification.

In the initial part of the case, the debtor makes a motion to the Bankruptcy Court for Loss Mitigation, trying to show it has the financial ability to sustain a potential modification of the defaulted mortgage loan. The lender’s attorneys have the right to oppose that motion. Assuming the motion is granted, the debtor and the lender’s attorneys are required to attend regular Loss Mitigation conferences to determine whether the effort to obtain a modification is still viable. During this time, the Chapter 11 debtor pays a hypothetical “adequate protection” payment to the lender — usually similar to the former mortgage payment — to demonstrate an ability to pay the estimated amount if the modification were approved, and to prevent the lender’s secured position from deteriorating while the potentially long reorganization continues.

If the Loss Mitigation efforts remain viable, the Court keeps adjourning the conferences. If they look like they are failing, and reapplication or appeal options are not realistic, the Court will end Loss Mitigation and eventually ask the Trustee to move for dismissal. On the other hand, if the effort results in a trial modification the debtor accepts and pays regularly — from three (3) months to a year — the lender will eventually offer a permanent modification agreement, subject to Bankruptcy Court approval after a motion. Once approved, the loan modification may be part of an overall Chapter 11 Plan under which the debtor reorganizes all of its debts. Although a confirmed plan generally lasts an average of five (5) to eight (8) years, and modifications usually run thirty (30) to forty (40) years, the majority of the modification would continue past the end of the Chapter 11 plan. Alternatively, if the defaulted mortgage was the only debt to address, the debtor can voluntarily dismiss the case once the permanent modification is obtained and approved.

Motions to dismiss the Chapter 11 case, or to convert it to Chapter 7, can be made by the U.S. Trustee overseeing a case that is drifting where a reorganization seems delayed or problematic, and less often by a creditor or the Court on its own. Such a motion is not unusual in the early pre-confirmation part of a case, based on any administrative, procedural, financial, or documentary deficiency. Reasons include: payment arrears on vital payments, such as post-petition taxes, secured-creditor adequate-protection payments, and basic operational expenses; lack of feasibility of the plan given the proofs of claim filed; lack of compliance with the production of financial documents requested by the Trustee; problems or delays with the bankruptcy schedules, Chapter 11 plan, or credit-counseling certificate; non-attendance at critical hearing dates, such as the creditors’ meeting; and unreasonable delays or impossibility in getting a modified loan in a loss-mitigation case. Essentially any problem in the early part of a case gives reason for such a motion. Once the plan is confirmed, there are fewer reasons — except for arrears on Chapter 11 plan payments and other critical payment matters.

If a motion to dismiss is granted, the case is over, and to overcome such an order one would need to vacate the dismissal order or start a new Chapter 11 case where possible. If a motion to convert is granted, the case continues as a Chapter 7 case, where a Chapter 7 trustee is appointed to liquidate and marshal assets for creditors. Debtors having difficulty reorganizing usually prefer to have a case dismissed rather than converted — but the choice of what to do with an unsuccessful reorganization is made by the Court. If a debtor can show there is no advantage to creditors in conversion after the unsuccessful reorganization effort, the case would be dismissed rather than converted.

Motions for relief from the automatic stay (to lift, modify, or vacate it) are made by secured creditors where the debtor has fallen into arrears with post-petition mortgage payments or other post-petition secured payments, which are often considered “adequate protection” for their secured positions. Any secured creditor expecting a regular monthly post-petition mortgage, HELOC, vehicle, tax, or other secured payment can move for relief if such payments are not made timely. Other creditors who can potentially be granted relief are contested creditors in litigation with the debtor over liability or damage issues — in tort, matrimonial/family, surrogate’s, and other matters not involving obligations created by credit and lending. Once relief from the stay is granted, the creditor can pursue the litigated matter as if there were no pending bankruptcy case.