Adversary demanding 100% of bonus for 5 years!!

[narf]

- warning - long, complicated story ahead -

I filed an individual Chapter 11 in July 2011. I have a large income and did not qualify for 7; I have large debts and did not qualify for 13, so that's how I came to a Chapter 11 filing. The main debt (90% of total) was a mortgage on a piece of commercial real estate, the mortgage holder filed and received a judgment, which pushed me into BK, then sold the mortgage. This took up the first year of BK. The new mortgage holder retained an attorney, and it looks like they will insist on a plan that assumes my full bonus will be paid out for 5 years. In the past, my bonus has been a large amount of my salary (25%) but in this economy, I don't expect this to continue and don't want a plan that could fail in 3 months if bonuses are less than the past or absent.

My attorney thinks I can appeal to the UST to convert to a 7 if the negotiations fail or founder, based on his experience. The negotiations will be hugely expensive.

I think a 7 would be way less costly than the 11 based on discussions so far. I am fortunate to have a rather large 401K and could pay off the value of my non-exempt assets (mainly 50% of equity in home that I co-own with my spouse) with 401k funds if Chp 7 conversion was agreed.

Any advice on probability of converting? Any obvious loopholes/strategies missing here? I just want to find a plan to start working my way out of this limbo!!

Thanks in advance.

[narf]

Typo corrected - filed in July 2010.

[lrprn]

Unfortunately 99.9% of our forum members have no experience with Ch 11 or converting to Ch 7 after filing Ch 11. Perhaps one of our bk lawyer members or one of our "legally experienced" forum moderators might have thoughts to share with you?

[despritfreya]

HOLD ON A MINUTE. What do you mean when you state you did not qualify for a 7? 90% of your debt is not consumer debt (deficiency claim on the commercial building). You are a "non-consumer"/"business" case. You do not have to "qualify" for a 7 and, with a rare, rare exception, your high income is not relevant. So, what was the real reason for the 11? My guess is that you do not want a Chapter 7 Trustee meddling in your affairs. The fact that you can dip into a 401k to buy back assets existed the day before you filed so there must be some other reason.

In the Chapter 11 you are required to pay 5 years of projected disposable income. If you historically were receiving large bonuses then a creditor can demand that be taken into consideration in determining your projected disposable income. If your employer is no longer giving such bonuses then, I suppose, your Disclosure Statement should state so and attach an affidavit from the employer that bonuses have been cut. Alternatively, I am sure you could formulate a Plan that provides for the disbursement of the bonuses to creditors if and when you receive them. Where there is a will there is a way and Chapter 11's are very flexible. Just sounds like you want to pay as little as possible which, if there were no creditors objecting, would not be an issue. But your largest creditor is going to make sure you pay what you can afford to pay, as is its right. You need to sit down with your attorney and figure this out or, if your attorney is not well versed in Chapter 11 cases, find another one.

Des.

[AngelinaCatHub]

hold on a minute. What do you mean when you state you did not qualify for a 7? 90% of your debt is not consumer debt (deficiency claim on the commercial building). You are a "non-consumer"/"business" case. You do not have to "qualify" for a 7 and, with a rare, rare exception, your high income is not relevant. So, what was the real reason for the 11? My guess is that you do not want a chapter 7 trustee meddling in your affairs. The fact that you can dip into a 401k to buy back assets existed the day before you filed so there must be some other reason.

In the chapter 11 you are required to pay 5 years of projected disposable income. If you historically were receiving large bonuses then a creditor can demand that be taken into consideration in determining your projected disposable income. If your employer is no longer giving such bonuses then, i suppose, your disclosure statement should state so and attach an affidavit from the employer that bonuses have been cut. Alternatively, i am sure you could formulate a plan that provides for the disbursement of the bonuses to creditors if and when you receive them. Where there is a will there is a way and chapter 11's are very flexible. Just sounds like you want to pay as little as possible which, if there were no creditors objecting, would not be an issue. But your largest creditor is going to make sure you pay what you can afford to pay, as is its right. You need to sit down with your attorney and figure this out or, if your attorney is not well versed in chapter 11 cases, find another one.

Des.

wow!

[despritfreya]

wow!

Hub,

Why "wow"? In dealing with 11's, it just seems obvious to me. Either OP's attny is not versed in individual 11's or there is something else to this.

If OP had a way to buy back non-exempt property and OP's debts were not primarily consumer debts then a 7 would have been the way to go. The issue of non-exempt property, to me, does not appear to be the determining factor. There must be something else. Maybe there were preferential payments or other recoverable transfers. Certainly, staying in an 11 for over 1 year and being no closer to a confirmed plan than OP was on day one is telling.

Des.

[justbroke]

I was going to say the same thing. I'm a non-consumer Chapter 7 filer! My non-consumer debt was from real-estate investments (over $900,000 worth), so I qualified for Chapter 7 quite easily. However, I went the Chapter 13 route and almost ended up in a Chapter 11 myself. I was lucky to stay under the numbers for Chapter 13 and eventually converted to Chapter 7.

This just doesn't make sense here. It would appear to me that a lot of money is being spent on this Chapter 11. I don't know why Chapter 11 was chosen. Perhaps there is an actual reorganization in process -- attempt to save property? After what I went through... I'm not sure that saving property is the best plan.

[HHM]

It sounds like an attempt was made to save the property, but too hard to tell.

Generally, unless the property is way upside down, the 1st mortgage holder wouldn't be the one objecting because they are a secured claim and must be paid. So it sounds like some sort of strip down was being attempted, thereby making the 1st mortgage holder a partially unsecured creditor, and giving them a vote (bad strategic move unless you have spoken to the mortgage holder ahead of time).

Anyway, sounds like inexperienced counsel.

[AZNoName]

I almost ended up in 11. Made too much to qualify for 7, but *almost* had too much secured debt to fit into a 13. That sounds like the issue with narf, but I don't know how how you could convert into a 7 though...

[justbroke]

So it sounds like some sort of strip down was being attempted, thereby making the 1st mortgage holder a partially unsecured creditor, and giving them a vote (bad strategic move unless you have spoken to the mortgage holder ahead of time).

Exactly my thoughts. A Chapter 11 is all about the "largest" unsecured credit holders which essentially become the committee that votes on the Plan. You should always, in a Chapter 11, have already negotiated with the largest unsecured credit holder(s) to insure a clean vote. This was the scariest part of me going into Chapter 11 since my largest unsecured creditor would have been the mortgage companies!

[jst4f]

We also have large real estate debt with high income and qualify for BK7. BK13 was not considered a good option and BK13 never came up. If possible convert to BK7. BK7, total liquidation, sounds scary but it was the best business decission we made.

[TrainWreak]

Please delete my post if you want but everyone needs commendation once in awhile. You guys & gals deserve a hamster dance just for being so knowledgeable about all this!
My burning question as to why be a moderator of a BK forum or even revisiting here after the discharge has been answered. You want to help and are intrigued by the process at least that's my take.
Sorry off the beaten path. Just got back from the dentist again and I guess torture brings out the truth!

[narf]

Des.

I was not clear enough - the major debt is for a residential lot (considered commercial from bank's point of view since there is no home on it) - I cosigned a personal loan with elderly family member for this parcel to cover her medical expenses (stupid I know), property dropped in value ~75% leaving me with an enormous deficiency (high six figures). So, am individual case. Mortgage = secured, deficiency = unsecured.

With this info, do you still think I was eligible for Chp 7 from the beginning?

Did not have opportunity to negotiate with largest creditor prior to filing, since largest creditor sold mortgage to another creditor post-filing. (Is this weird or what?) New largest creditor would like a plan that's nearly triple what was proposed, though it was expected to increase.

[despritfreya]

Des. I was not clear enough - the major debt is for a residential lot - I cosigned a personal loan with elderly family member for this parcel to cover her medical expenses. . .

This probably puts it back into the consumer realm.

The definition of consumer debt. . . "debt incurred by an individual primarily for a personal, family or household purpose".

There is no definition in the Code for what constitutes "family". Does it have to be a legal dependant or an immediate family member like a child, parent or spouse? Or, can it extend beyond that to any relative? I do not know. Since the debt was incurred to pay for a relative’s medical bills the next question is, “how close a relative?”.

I have no words of wisdom as to whether or not you can defeat a “presumption of abuse” issue if you convert. If this is a real distant relative you might try the “non-consumer” debt approach. I suppose you have nothing to lose but the complete dismissal of the case. If you can’t confirm a Plan that may happen anyway.

Another suggestion - bate the UST into filing a Motion to Convert. This could happen if you stop filing your monthly reports and stop paying the quarterly fees. Usually the Motion is one for either dismissal or conversion. If such is filed you could simply stipulate to the conversion. Discuss this approach with your attorney. It might be something that is worth trying.

______________

Assuming the creditor has filed an unsecured claim. . . I just want to clarify some points made by others:

1) I am sure a creditor's committee was not formed in your case. It is rare to see one in an individual case.

2) Voting is probably not the definitive issue in your case. What is most likely at issue (tell me if I am wrong) is 11 USC 1129(a)(15) which brings into Chapter 11, 11 USC 1325(b)(2) for individuals. This section provides that if a creditor with an allowed unsecured claim objects to the Plan (different than voting under 11 USC 1129(a)(8)) either the creditor gets paid in full or the debtor must commit 5 years of projected disposable income to the Plan. Your creditor is looking at your historical earnings and asserting that since nothing has changed you must use the historical numbers projected into the future.

Des.

[justbroke]

So, am individual case. Mortgage = secured, deficiency = unsecured.

Doesn't matter. It's the total non-consumer liability / consumer liability to reach the percentage. Any mortgage obtained on property that is not your homestead -- and purchased essentially for investment purposes -- is non-consumer debt.

With this info, do you still think I was eligible for Chp 7 from the beginning?

Absolutely eligible. I think you could even convert to Chapter 7 without refiling (just by doing a notice of conversion).

Did not have opportunity to negotiate with largest creditor prior to filing, since largest creditor sold mortgage to another creditor post-filing. (Is this weird or what?) New largest creditor would like a plan that's nearly triple what was proposed, though it was expected to increase.

The largest creditor saw the writing on the wall. It is not uncommon for unsecured creditors to dump their BK'd portfolios to companies like eCast Settlement, LVNV Funding, B-Real, B-Line, Roundup Funding, etc. I have never heard of this for secured debt, but they probably knew they were in trouble!

Let me know if the buyer was one of those companies I just listed! They love to buy debt like this and then pester the debtor in Chapter 13s (and Chapter 11s) by objecting to confirmation.