WW&R Bankruptcy practice group of Weltman, Weinberg & Reis, the nation's largest creditor's rights law firm, is your source for bankruptcy news and information. We are committed to helping clients thrive in these ever changing times.
Last week, Jefferson County, Alabama filed for bankruptcy relief under Chapter 9 of the Bankruptcy Code as case number 11-5736 in the Northern District of Alabama. This represents the 12th municipal entity to file a Chapter 9 Bankruptcy this year, following on the heels of a recent Chapter 9 filing by the City of Harrisburg, Pennsylvania last month.[1] Based on the total amount of debt scheduled, this case represents the largest municipal Bankruptcy filing in U.S. history[2] , rivaling the bankruptcy filed by Orange County, California (case number 94-22272 filed in the Central District of California on December 6, 1994). Debts related to Jefferson County’s sewer system, alone, exceed $3.1 billion. According to the County’s bankruptcy counsel, Kenneth Klee, the filing came as a result of the inability of the County and its creditors to reach a deal to restructure the County’s debt, despite negotiations over the past several months. Jefferson County had previously defaulted on bonds, which were used to refinance the county’s sewer system. “There was an impasse reached,” Klee stated to Bloomberg News in an interview last week. “None of the creditors — zero– signed up to the deal that we have been negotiating for six weeks.”
By seeking Chapter 9 relief, the County may now have the ability to restructure and renegotiate its debt obligations over creditors’ objections. In addition, Chapter 9 gives the County the option of assuming or rejecting executory contracts, which potentially encompass a whole range of potential obligations, including ongoing service contracts, vendor agreements and perhaps even existing agreements with public employee unions.
Many other municipalities around the country will be watching this case closely, as they are faced with their own budget shortfalls, resulting from cuts in state and federal funding, as well as ever-increasing obligations for retirement benefits and health insurance for their workers and retirees. Whether the decision to utilize Chapter 9 for debt relief becomes a trend or a cautionary tale remains to be seen. We will continue to monitor the case as it progresses and will provide further updates as events warrant.
If you have any questions on this matter, please contact Mr. Scott Fink, Esq. Scott is an associate in the Bankruptcy Practice of Weltman, Weinberg & Reis Co., LPA located in the Brooklyn Heights office. He can be reached at 216.739.5644 and .
According to statistics from the National Bankruptcy Research Center (NBKRC), bankruptcy filings have declined through the first three quarters of 2011. Total consumer bankruptcy filings totaled 144,722, which was down approximately 10% from the first three quarters of 2010. In addition, bankruptcy filings in September 2011 declined substantially, down 17% over the same period of last year. Bankruptcy filings for September 2011 totaled 108,517. Although filings continue to decline, the NBKRC still projects an estimated 1.35 million bankruptcies for 2011. Many factors have contributed to the 2011 decline in bankruptcy filings, including the lack of available credit to consumers, foreclosure moratoriums and reduced spending by debtors.
New Bankruptcy Rules and Forms effective December 1st: Is your organization ready?
On December 1, 2011, certain bankruptcy rule changes and new forms will become effective. These changes primarily deal with the filing of a Proof of Claim and relate to mortgage creditors as well as debt buyers. However, the change in the Proof of Claim form will affect all entities who file Proof of Claims in bankruptcy proceedings.
The major change to the form involves attachments that are required to lay out certain fees and costs, and a breakdown of arrearages on the mortgage claims. It also requires that mortgage creditors provide an escrow statement as of the date of the bankruptcy filing. The new form provides for payment change notifications to be filed with the Court and the specific form that needs to be used.
The new rule also changes the procedures that are necessary when a Trustee finishes paying a mortgage through a Chapter 13 Plan. Weltman, Weinberg & Reis Co., L.P.A. (WWR) will be providing extensive information and training sessions for clients through webinars over the next two months to ensure that you are ready for the changes.
In addition to the changes to the procedures and forms pertaining to Proof of Claims, there has also been a change in the Reaffirmation Agreement form. The B240 form has been altered by a technical amendment to clarify some of the language on the form. This does not affect the procedure and the information needed within the reaffirmation agreement itself. The additional language is as follows and can be found in the form on the United States Courts website:
“Even if you do not reaffirm and your personal liability on the debt is discharge because of the lien your Creditor may still have the right to take the property securing the lien if you do not pay the debt or default on it. If the lien is on an item of personal property that is exempt under your State’s Law or that the Trustee has abandoned, you may redeem the item rather than reaffirm the debt. To redeem, you must make a single payment to the Creditor equal to the amount of the allowed secured claim, as agreed by the parties or determined by the Court.”
The changes in this language indicate that the redemption, pursuant to 11 U.S.C. § 722, must be made by a single payment. It also changes the language to say that “the amount of the allowed secured claim which is different from the current value of the property”. This now becomes consistent with the language contained in § 722 of the Bankruptcy Code. Although this change does not affect the information that must be included in the Reaffirmation Agreement as to balances, interest rates, monthly payments and arrearages, it is important when preparing a Reaffirmation Agreement after December 1, 2011, that the correct B240A-B alt form is used.
WWR will continue to keep you advised as to breaking news and trends in bankruptcy proceedings. Should you require further information please do not hesitate to contact Alan C. Hochheiser, Managing Partner of the Bankruptcy Group. Al can be reached at 216.739.5069 and .
As a creditor, when you hear that your debtor has filed for bankruptcy protection, the tendency is to expect that the debt owed to you will not be repaid. However, for our municipal and state clients, special rules apply that may warrant a closer look to determine whether the tax can still be collected. In today’s economic climate, every dollar of revenue for a political subdivision will help save jobs and programs for its residents.
As of the first quarter of 2011 state’s revenues remained at roughly 9% below pre-recession levels.[1] States and municipalities are addressing very large budget shortfalls. Forty-two states and the District of Columbia are projecting a combined shortfall for the 2012 fiscal year of over $103 billion dollars. Temporary aid to states as a result of the 2009 federal Recovery Act will largely be gone by the end of the 2011 fiscal year, and states and municipalities are facing deficits that threaten jobs and programs provided. The National League of Cities annual survey in October of 2010 found that almost 9 in 10 cities were feeling the economic crunch.[2]
States and municipalities need to look to every source of revenue possible, including taking a second look at bankrupt tax payers to determine if the tax may still be collected. First, certain taxes are not dischargeable by way of a Chapter 7 or Chapter 13 bankruptcy including:
• Taxes for which a return was not filed;
• Taxes for which a return was filed late and filed less than two years before the bankruptcy filing;
• Taxes relating to a fraudulent return or relating to the debtor willfully attempting to evade or defeat the taxes; and
• Withholding taxes for which the debtor is personally liable.
In a Chapter 7 bankruptcy, the following are also non-dischargeable:
• Income tax due for the tax year ending on or before the bankruptcy filing date, where return was due within 3 years of the bankruptcy filing date;
• Income tax for the tax year ending on or before the bankruptcy filing date, where the tax was assessed within 240 days before the bankruptcy filing date;
• Income tax not assessed before, but assessable after the bankruptcy filing date;
• Property tax incurred before the bankruptcy filing date that was last payable without penalty less than one year before the date of the bankruptcy filing;
• Employment taxes earned from the debtor prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing date;
• Excise taxes where a transaction occurred prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing date, or if a return was not required, where the transaction occurred in the three years proceeding the bankruptcy; and
• Certain customs duties.
While pre-petition and post-petition interest on a non-dischargeable tax is also non-dischargeable, penalties must provide for an actual pecuniary loss in order to be considered non-dischargeable when assessed on an otherwise non-dischargeable tax.
States and municipalities should also look at filing liens on property timely. Tax liens placed prior to a bankruptcy are considered a valid lien against the property that survives the bankruptcy, provided that they attach to actual equity in the property.[3] Liens for property taxes attach automatically to property on January 1 of each year, but are property specific. Liens may be placed by a municipality on specific property for costs expended by a municipality to remove or repair or secure an unsafe, abandoned or open property, to abate a nuisance or to make emergency repairs to hazardous conditions on that property. When this cost is certified by the legislative authority for the municipality, and provided to the county auditor with the description of the property affected, the lien is recorded in the tax duplicates. Finally, liens for unpaid income tax and other taxes may be filed once judgment is rendered for that tax amount. Unlike the above taxes, a judgment lien is valid against all property held by the debtor in the specific county in which the lien is filed, not just the particular affected property. Where these liens attached to equity in property prior to the bankruptcy filing, and survived the bankruptcy, the debtor may be required to pay the lien when transferring the property, and the lien must be considered in any foreclosure proceeding.
The WWR Governmental Collections Practice Group and WWR’s Bankruptcy Practice Group can help you determine whether a certain taxpayer’s taxes are dischargeable in bankruptcy and whether any further action is needed.
Amanda Rasbach Yurechko is an associate in Consumer & Commercial Collections, focusing on the Governmental Collections Group with Weltman, Weinberg & Reis Co., LPA. She is based in the Cleveland office. Amanda can be reached at 216.685.1060 and .
Footnotes:
[1]Elizabeth McNichol, Phil Oliff and Nicholas Johnson. “ States Continue to Feel Recession’s Impact.” Center for Budgeting and Policy Priorities. June 17, 2011. www.cbpp.org
[2]Jennifer Popovec. “Hungry for Tax Revenue, Municipalities Serve Up Tax Incentives to Lure Retailers and Developers.” May 2, 2011. www.retailtrafficmag.com
[3]Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150 (1991).
Northern District of Ohio Bankruptcy Court Clarifies Rules Regarding Reopening Cases to File Reaffirmation Agreements and Motions to Avoid Liens
Under certain circumstances the Bankruptcy Code provides that a case may be reopened to administer assets, accord relief to the debtor or for other cause. There are two situations that may arise in which a debtor may need to reopen a closed case. The first situation is to file a reaffirmation agreement and the second is to avoid a judgment lien. The Northern District Ohio under Judge Pat Morgenstern-Clarren has indicated that a case will not be reopened to allow the parties to file a reaffirmation agreement that was made after the discharge was entered. Under the second situation, Judge Morgenstern-Clarren will allow the case to be reopened if there is a very short gap between the case closing and the motion to reopen, and the motion provides a satisfactory explanation for why the lien was not avoided while the case was open.
With regard to the courts procedure on reaffirmation agreements from a creditor’s perspective, the court provided some clarification. Creditors should make certain to have the reaffirmation agreement signed and filed prior to discharge or the case being closed. If a delay is expected, a motion to delay discharge should be filed in order to provide more time to obtain the reaffirmation. From a creditor’s perspective, the courts procedure on motions to avoid is favorable as the court will not simply allow the reopening of the case in every situation and strictly scrutinize any motion filed.
David H. Yunghans practices in Bankruptcy with a focus on the Consumer Bankruptcy Group, and he is based in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. David can be reached at 513.723.2211 or .
A recent report indicated that the number of Mortgage Modifications dropped in February by 14% from the number completed in January. The number of modifications, whether under HAMP or through the Lenders themselves, dropped below 100,000 a month for the first time in 18 months. The question that remains is whether the reduction in February is just a blip on the radar or whether it will become a trend. This is in light of a decrease in the number of Foreclosure cases filed nationally by 24,000 in February from January 2011. The amount of delinquent mortgage loans also dropped in February as compared to the prior month.
As previous blog articles have noted, The Senate Judiciary Committee has cleared the way for the Senate to take up SB 222 which will allow Bankruptcy Judges to set up mandatory loan modification programs in Bankruptcy Cases. If the bill can obtain passage in both chambers of Congress, which is unlikely, we may see even more loan modifications in the future. If there continues to be a reduction in the number of modifications, will SB 222 gain some more steam? Time will tell.
Weltman, Weinberg & Reis will continue to keep you advised as to activities concerning the Mortgage Industry in Bankruptcy cases.
If you have any questions on this matter, please contact Alan C. Hochheiser, Esq. Alan is the Managing Partner of the Bankruptcy Practice Group of Weltman, Weinberg & Reis, LPA located in Brooklyn Heights. He can be reached at 216.739.5649 or .
