Complicated Bankruptcy - Need Advice

[eagle28]

I am here in this forum to share my family's experience in bankruptcy and to seek advice that may help us.

To begin, my father and mother saved their money so they could buy properties, build new houses, and sell them for a profit. After about ten years, they put their savings into building an apartment building, in hope of being able to rent it out and pay off the mortgage of the building over many years. However, despite using property management companies and even trying to self manage, the property kept losing money. Through this process my parents accumulated about 100k in credit card debt along with the $10 million or so owing on the apartment building.

As they were unable to pay their debts, the company that the apartments were built under declared Chapter 11 Bankruptcy and my parents eventually declared Chapter 7 Bankruptcy. It has been a year now and the bankruptcy still has not been discharged. Before I get into that, I should say that up to this point we have lost our home and my father has suffered a heart attack and is no longer able to work many hours due to his physical health. My mother is uneducated and works a minimum wage job and is unable to pay off this debt.

Once bankruptcy was declared the trustee sold our home (which was mortgaged to help keep the townhouses afloat) and sold the apartment complex for 10.5 million (the loan was now at 11) when the property was valued at 13 million. The US trustee is now filing a motion to grant my parents a denial of discharge because of a mistake they made. My parents listened to one of their friends, who has gone through the bankruptcy process, who said they can use the money coming from the apartments to pay off other debt like their credit card debt. My parents made the mistake of listening to this man, they moved the money to another account, but once their lawyer told them this was not allowed they moved the money back to the original account. However, the trustee is now claiming that my parents committed fraud and is trying to prevent a discharge. Their current lawyers are refusing to fight the trustee's claim, because they are saying my parents are likely to lose.

My oldest sister is in medical school, my other sister is in nursing school, and I am an undergraduate. My parents are working hard to try to pay for our school, and we have somehow been getting FAFSA loans despite my parents bankruptcy. My parents are trying to get a fresh charge from a discharge, but the trustee is not letting that happen despite taking away all our assets. He even told my parents that "people in bankruptcy should not have children in college".

As I said, my parents have over half a million dollars in debt remaining. My father has suffered a heart attack and is able to work very limited hours, and my mother makes very little. They do not have the financial resources to hire a lawyer to fight the discharge denial (without borrowing from my relatives), and if they are denied they will not be able to pay off the debt.

It has been heartbreaking to see everything that my parents have worked for taken away from them and I just want them to be able to move on from all this. I understand that they made a mistake in the bankruptcy process, but if they are denied the discharge what will happen to their debt if they cannot pay? If my parents can borrow from relatives to fight the discharge denial, what can they do to heighten their chances of winning? Please if you have any advice of what to do in this situation, I would really appreciate it.

[pamkev]

I have no advice as this one is for the experts on this forum. I just wanted to say so sorry your parents listen to there friend and not there lawyers.
As for college are you parents taking out parent plus loans or our the loans in the kids name?

[AngelinaCatHub]

First it is a very bad idea to borrow anything, particularly from a friend. Have them stop as new debt in a bankruptcy is not allowed. It seems your parents are so in debt that they cannot pay it off. I don't see how un-educated Mom can supply monies to a student/s in school. It sounds as if they may have funds and the lawyer knows this or he would do his job and fight the UST. Something just does not seem correct here. The UST would understand this mistake. The appearance of wrong doing and real wrong doing could be explained.

To help you further, you would have to give more details though. Write it plain and simple and not so long. The large post sometimes drive people to passover your posts. Keep it simple and to the point. Thanks. 'Hub

[despritfreya]

Unfortunately the situation your parents find themselves in is not unusual and the eventual outcome might be that they have to “buy” their right to a discharge by settling with the Trustee for some dollar amount. However, if they are judgment proof (no income to be garnished by creditors, no non-exempt assets) then the potential loss of their discharge might not matter as creditors cannot otherwise collect from people who have nothing.

The first mistake they made was filing a Chapter 11 for the single asset entity to which they had 100% control and then filing a personal Chapter 7. The moment they filed the Chapter 7 the Trustee stepped into their shoes. My guess is that he proceeded to take control over all aspects of the Chapter 11. Assuming I am correct, he then proceeded to turn the reorganizing Chapter 11 into a liquidating Chapter 11 and sold the building. He did a cramdown to the mortgage lender (paying less than the amount owed). The value your parents thought the building was worth became irrelevant. Alternatively an independant Trustee was appointed in the 11 due to your parent's failure to properly perform the duties of the Trustee.

The second mistake they made was hiding money. You do not give enough detail but it sounds like they took money from the entity before it filed bk and while it was in a bk and used those funds for their own personal gain. Assuming I am correct, by “raiding the corporate coffers” they breached their fiduciary duty to the creditors of the entity as well as committed a fraud upon the court. It also sounds like they continued to do this after they filed Chapter 7. In addition, it sounds like their Chapter 7 documents did not disclose the funds they were holding when they filed or any large transfer of funds. For that matter I must also assume the Chapter 11 schedules did not properly list transfers to the equity holders - your parents. Assuming I am partially right and further assuming there is much more to this story (which you either do not know about or simply don’t understand in a way that you can elaborate - or wish to elaborate) your parents are in trouble. Unless they find a way to settle with the Trustee or show they did nothing “wrong” they will lose their discharge.

If they are denied a discharge the debts simply will not be discharged and any creditor will have the right to collect under state law, subject to whatever statute of limitations there may be. Again, if your folks have no non-exempt assets that can be seized or garnished then who really cares? But, if they acquire assets that are not exempt such could be seized if and when creditors sue and get judgments.

Question. . .

Has the Trustee or anyone actually filed a Complaint under 11 USC 727 to deny the discharge or are we just dealing with the filings of Motions to Extend the time in which to file such a complaint?

They really need the assistance of a qualified bk litigation type attny. Their current attny is not willing to help as the issues raised are probably way outside the scope of the retainer agreement and, possibly the attorney's expertise. If he is not willing to (or cannot) help defend then he probably can refer your folks to a local attny who handles these kinds of issues. The cost of defending will depend upon the attny hired but expect a retainer of between $2000 and $5000 to be billed at a customary hourly rate. The overall cost if this goes to trial could be in the $10-$20k range (or more) and that is why one tries to settle.

Des.

[tobee43]

i was under the impression that the company who built the apt house went chapter 11 (that builder could have had a number of buildings going under?), but your parents went 7???

also, my question is, if they did go 7, was the bk discharged but not closed? correct??

des, i hear what you're saying, but how can you blood from a stone. if the OP's father is ill and the mom is getting min wage how can they possibly pay back the debts. in light of the fact the trustee already sold all or most of the assets i just can't understand this.

eagle, just a note for your student loans. all that happens is once your parents apply for any type of parent loan and they are denied, you can apply yourself and you will get the loans direct. it works that way when parents are denied i.e. due to bk. so you will not have any problems getting your loans in most cases if the funds are available and you apply early enough for that school's allotment or distribution of available funds.

[despritfreya]

Tb,

The way I read the post is that parents set up an entity and that entity became the owner of a building that was being built. The entity owes at least $10 mill and the parents personally guaranteed the debt. The parents put the entity into a bk to try to reorganize (save the building and the income it generates) and shortly thereafter the parents filed bk. If I read it wrong then my above post needs some revising. But, if I read it right, the parents, IMO should not have filed a Chapter 7 - or maybe they discussed the 7 with an attny and weighed the chances that a 7 Trustee would actually take over a Chapter 11 that was so upside down. Hopefully OP will chime in.

As to your observation, I agree. If the parents have nothing then any creditor who gets a judgment will be out of luck when the creditor tries to collect. That may be these folks saving grace if they lose their discharge.

Des.

[LadyInTheRed]

After about ten years, they put their savings into building an apartment building...

As they were unable to pay their debts, the company that the apartments were built under declared Chapter 11 Bankruptcy and my parents eventually declared Chapter 7 Bankruptcy.

I think Des read it correctly that the company that built the apartment building was formed by the parents.

[eagle28]

Thank you for the replies everyone.

Yes, despritfreya is correct that my parents formed the entity and were the owners of the building that was being built, and also that they personally guaranteed the debt. As for declaring bankruptcy, they were at the point where they didn't and couldn't deal with the situation anymore and were willing to let it go for a fresh start.

I spoke with my parents and asked them for more details about the money transfer. They said that their friend advised them that before they declared bankruptcy that they could withdraw cash from their bank account. They didn't have a lot of money in the account but every month a $50,000 payment from the apartment building was coming in and they withdrew one of those payments. However, they did not spend it and once they declared bankruptcy and were told that this was not allowed, they returned the cash.

I believe the problem is that the trustee believes that they are hiding cash, while they are really not. Right now, my parents have been given an extension because of my father's health condition. I believe my parents currently owe around $1 million dollars, but are unable to pay it. If the discharge is denied, I understand that as long as my parents don't have any assets that there is nothing for anyone to take. But what happens to the limited amount of income that my parents are earning? Also, does this mean that they basically can never earn a significant amount of money again, and never buy a house or anything in their name?

Also, please tell me more about the monetary settlement that can be made with the trustee. How does the trustee decide on an amount? I am assuming it would be lower than the amount still owing right? Can this amount be paid over several years after the bankruptcy is closed? Someone mentioned that new loans even from family members are not allowed in bankruptcy, but can a family member just give my parents the money? Also, to sum it up would my parents basically be paying a portion of the remaining amount in order to get discharged on the rest?

Thank You

[tobee43]

Tb,

The way I read the post is that parents set up an entity and that entity became the owner of a building that was being built. The entity owes at least $10 mill and the parents personally guaranteed the debt. The parents put the entity into a bk to try to reorganize (save the building and the income it generates) and shortly thereafter the parents filed bk. If I read it wrong then my above post needs some revising. But, if I read it right, the parents, IMO should not have filed a Chapter 7 - or maybe they discussed the 7 with an attny and weighed the chances that a 7 Trustee would actually take over a Chapter 11 that was so upside down. Hopefully OP will chime in.

As to your observation, I agree. If the parents have nothing then any creditor who gets a judgment will be out of luck when the creditor tries to collect. That may be these folks saving grace if they lose their discharge.

Des.

I think Des read it correctly that the company that built the apartment building was formed by the parents.

got it!

yes eagle i understand it now. ho, that it was your parents company.

hopefully what des has mentioned about creditors getting nothing will hopefully happen for your parents.

best of luck to you!

[AngelinaCatHub]

Also, please tell me more about the monetary settlement that can be made with the trustee. How does the trustee decide on an amount? I am assuming it would be lower than the amount still owing right? Can this amount be paid over several years after the bankruptcy is closed? Someone mentioned that new loans even from family members are not allowed in bankruptcy, but can a family member just give my parents the money? Also, to sum it up would my parents basically be paying a portion of the remaining amount in order to get discharged on the rest?

Thank You

If you can settle with a Trustee (as we did) usually they are generous. We had a bit less to settle with but we got a year of a reduced amount no interest. The case WILL NOT be closed until settled, but they could be discharged. Understand, there is a difference in this case.

I'm not sure of the possibility of you paying for them as that could be considered a loan. However, if they agree and get a discharge, I don't think it would matter. 'Hub

[despritfreya]

Eagle,

So it sounds like the apartment was generating revenues of $50k/month and those funds were deposited into your parents’ personal bank account, not the account belonging to the entity. Is that correct? Your parents then withdrew the funds in cash (or cashier’s check), spent some of it (the $ really belonged to the entity) and, on the day they filed bk, failed to disclose the amount they were holding. Eventually they turned over the remaining funds to the Chapter 7 Trustee.

What happened in the Chapter 11? Did the 7 Trustee simply move to convert it to a 7 or did he take over operating the entity and then seek to recover the lost revenues (the $$ that your parents spent) from your parents? What is the Trustee looking for now? Is he simply investigating the books and records of your parents and/or the entity or has he made a demand for additional $$?

Settlement will turn on what, if any, additional $$ the Trustee claims belongs to the bk estate. If, in the end, your parents have to account for just the funds they usurped from the entity, how much is it (the difference between the $50k they pulled out and the $$ they turned over)? If we are not talking a fortune, settlement is definitely a possibility. Even if we are talking a fortune, due to your father’s health and depending on the attitude of the Trustee, settlement may be a viable solution. They won’t know until they open a dialogue with the Trustee - but this dialogue should be done with an attny.

If they are denied a discharge it simply means that creditors can proceed with collection efforts. If they are working and your State allows a wage garnishment, if a creditor obtains a judgment wages can be garnished. What cannot be touched is Social Security. So, if their only source of income is SS and they have no other property they are “judgment proof”.

Des.