Reorganize Your Nassau Business and Stay in Control of It

For an individual debtor, the debt that requires reorganization in Chapter 11 is often a mortgage in arrears, which is common among Nassau homeowners with high-value properties. One way to deal with arrears is a plan where the debtor “catches up” or cures them under a traditional Chapter 11 plan, typically over five (5) to eight (8) years. Now that many foreclosures rest on years of arrears, a “catch-up” plan does not always work, since paying both the post-petition monthly mortgage directly to the lender and a separate catch-up payment can be too expensive, especially with the larger mortgages generally seen in individual Chapter 11 cases. Seeking a mortgage loan modification through the Loss Mitigation program adopted by the Bankruptcy Court has therefore become a standard way to proceed. Loss Mitigation is the debtor’s pursuit of a modification, overseen and encouraged by the court, which can press both the debtor’s and lender’s attorneys to coordinate over documents and information to determine whether the debtor qualifies.

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 it is granted, the debtor and the lender’s attorneys must 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 keep the lender’s secured position from deteriorating while the reorganization continues.

If the Loss Mitigation efforts remain viable, the Court keeps adjourning the conferences. If they appear to be failing, and reapplication or appeal options are not realistic, the Court ends Loss Mitigation and eventually asks the Trustee to move for dismissal. On the other hand, if the effort produces 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 modification may be part of an overall Chapter 11 plan under which the debtor reorganizes all of its debts. Although a confirmed plan generally runs five (5) to eight (8) years, and modifications usually run thirty (30) to forty (40) years, most of the modification continues past the end of the Chapter 11 plan. 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 United States Trustee overseeing a case that is drifting where the 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: arrears on vital payments, such as post-petition taxes, secured-creditor adequate-protection payments, and basic operational expenses; lack of feasibility given the proofs of claim filed; noncompliance with the financial documents the Trustee requests; problems or delays with the schedules, plan, or credit-counseling certificate; non-attendance at critical hearing dates, such as the creditors’ meeting; and unreasonable delay 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 plan payments and other critical payment matters.

If a motion to dismiss is granted, the case is over, and to overcome that order one would need to vacate the dismissal or start a new Chapter 11 case where possible. If a motion to convert is granted, the case continues as a Chapter 7, where a Chapter 7 trustee is appointed to liquidate and marshal assets for creditors. Debtors having difficulty reorganizing usually prefer 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 failed effort, the case is 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 on post-petition mortgage or other post-petition secured payments, which are often treated as “adequate protection” for their positions. Any secured creditor expecting a regular monthly post-petition mortgage, HELOC, vehicle, tax, or other secured payment can move for relief if payments are not made on time. Other creditors who can be granted relief are contested creditors in litigation with the debtor over liability or damages, in tort, matrimonial or family, surrogate’s, and other matters not involving obligations created by credit and lending. Once relief is granted, the creditor can pursue the litigated matter as if there were no pending bankruptcy case.