Secured Creditors in Bankruptcy: What Private Lenders Need to Know When a Borrower Files a Chapter 7, 11, or 13 Bankruptcy Case

Steven E. Ernest, Esq.:

All right, good morning all, good afternoon. Depending on the place that you are in, find yourself today. My name is Steve Ernest. I am one of the partners at the Fortra Law Firm. I'm also the director of litigation and bankruptcy here, bankruptcy being the important part of today. We appreciate you joining us. We're hopeful that you get your money's worth out of the next hour of this webinar. This is going to be kind of a basics of bankruptcy course and what lenders should expect, and hopefully it'll help you create a game plan and a procedure for what to do when you find a borrower filing bankruptcy against you. I'm delighted to have one of my colleagues, the super smart bankruptcy genius, Marina Fineman with me today. She's going to do most of the heavy lifting because despite her youthful appearance has nearly three decades of experience in exclusively practicing bankruptcy. Much of it represents creditors who are positioned just like you are in this space. And so like I said, we're hopeful that you can gain quite a lot from it. I'm going to share my screen so that you will have our pictures and you will have some reference points to go through our outline with us. The recording of this webinar will be shared with each of you for the same cost that you were charged to gain admission to this webinar.

So you'll have that probably tomorrow, but soon enough, the slides will be part of that. So you don't need to ask in my Q&A whether we're going to share the slides. The answer is yes, you will have them for the same low price that you've paid to join this webinar. So we hope that you find those instructive. And as you have questions going through here, do not ... Well, you can put them in the chat if you want them to be ignored. If you want your questions to be reviewed and answered, I will take all of those at the end, but only if you put them in the Q&A. So put them in the Q&A. I will find them at the end. I will read them aloud so we all understand them together. And then it'll be kind of a quizzical show that we put Marina to the test to see if she really knows as much about bankruptcy as I've alluded to before.

I think she's probably up to it, but do your best. If you have a really esoteric question about 111B perhaps, maybe we can stump our bankruptcy expert, but we'll have to see. So as we go. Marina, thank you for joining us. We're glad to have the crowd here. And let's see what we can learn about some bankruptcy today. The slide in advance. There it goes.

Steven E. Ernest, Esq.:

Am. So the minute somebody files bankruptcy, I'm the secured creditor. I can take your house away. I can foreclose on your hotel. I can get an assignment of rents. I can take away all your money. There's all these things that I can do. And then when the borrower files bankruptcy, a lot of that comes to a screeching halt. And the reason it halts so quickly is the automatic stay. It's automatic. The moment they file bankruptcy, the lender has to stop all of its state court remedies, all of its collection remedies, all of its consensual remedies. All those things have to halt right away because of what it says in 11 USC Section 1362A. You have to stop doing all that stuff. So if you got a foreclosure sale pending and the auctioneer is going to call the sale at 11 o'clock in the morning and the debtor files bankruptcy at 10:58, can't have your foreclosure sale.

If you do have your foreclosure sale, you got to unwind it and do some things, but everything has to stop. It doesn't matter if you told you about it or not. It doesn't matter if you knew about it or not, it stops automatically. That's the automatic part that you see right there, automatic.

Cash collateral restrictions. So this is the sort of one thing that the debtor loses when they file bankruptcy. Their money's not their own anymore. It kind of belongs to the trustee, or at least it's up to the bankruptcy trustee to administer that money. The debtor can't just give all the money to his uncle or those would be fraudulent transfers. Can't give all the money to his favorite creditor. That would be a preference. The debtor doesn't have control of its money anymore. If they do dispense with their money, they can get themselves into some trouble. There's some bankruptcy fraud issues there. Borrower's leverage increases. So before you had your thumb on your debtor and there was all sorts of collection remedies that you could employ, all kinds of pain that you could inflict on your debtor. When they file bankruptcy, they're kind of thumbing their nose at you.

You can't do any of that stuff and you got to clear anything that you're going to do with the bankruptcy court. And Maria's going to tell us a lot about how we're going to accomplish those things today. But the lender's going to have to pivot from the state law remedies, the foreclosures and the writs and the things like that they're doing into some federal procedures and get approval from the bankruptcy court to do much of anything while the bankruptcy case is pending. So there's a thumbnail sketch of what happens on day one and how your rights change and how your borrower's rights change. Now we're going to get to the hard stuff. Chapter seven case, that's a liquidation. One of the things I like to impress on clients about bankruptcy and chapter seven cases, chapter seven cases generally are filed so that the debtor can get a discharge in bankruptcy.

They don't have to pay their visa card bills and their unsecured debt. It's a lot of the reason people file chapter seven cases. But there's this rule, and this is a fun one to remember, and hopefully you can take this with you today. You have to have blood in your veins to have a discharge in bankruptcy. And what that means, only people. So you see me and Marina on the screen, we're actual people. It's not max headroom. We have blood in our veins, and we could get a discharge in bankruptcy if we filed a chapter seven case. If a business entity files a chapter seven case, they don't get a discharge at the end. The case will close. It's sometimes a nice way for a business entity to kind of wind up its business, but they're not going to get a discharge at the end.

They still owe you the money. Well, they don't have the money when they filed it. They're probably not going to have the money when they get out of it, but it's something to remember. There's no discharge injunction for a business entity. So blank screen. There you go. It's just something for you to take with you today. Chapter seven case, the court is going to appoint a trustee immediately. Like I said before, debtor in bankruptcy doesn't have control of their assets anymore. The trustee does, and the trustee is a stranger. So someone the debtor's going to pick themselves. The court's going to pick it for them. The debtor's going to lose control of its assets. Again, those are now controlled by the bankruptcy trustee. The secured creditor rights largely survive. So if you have UCC-1 filings, well, you still have the same priority and effective priority related to all their personal property.

If you have a deed of trust, which many of you lenders on this webinar probably do because real estate-secured creditors, you're still going to have your lien on their property. Your lien is going to survive. Now, deficiencies probably going to be wiped out. If you're doing a non-judicial foreclosure sale, probably doesn't matter an awful lot, but your secured rights are going to survive the bankruptcy. You're going to have to probably wait to enforce them, but they're going to survive. You'll have them. The chapter seven case is about liquidation, not reorganization. Like I mentioned earlier, a lot of times these cases are screw visa. They've got $6,000 of credit card debt because they went on a spending spree at Walmart a couple of weeks ago, and they're trying to get rid of all that because it's all unsecured debt. Those are what a lot of those cases are about.

I'm sure going through Marina's mind right now is if they did it two weeks ago, it's probably not going to work. And I don't know if that's part of this one or not, but it was part of my bankruptcy class a long time ago. So there's that one. Maybe the fastest path to foreclosure if there's no equity in the property.

If you're already foreclosing, they file a chapter seven case and it's sort of a speed bump for you, but you're going to get to where you're going in the short term nonetheless. All right, so here's the hard stuff. Briana welcome to our webinar. If I'm a secured creditor and my borrower files bankruptcy, I don't want to be in bankruptcy court. Okay. Everybody hates bankruptcy court except you. How am I going to get relief from stay? How do I get out of there? There's this automatic stay thing. What do I do?

Marina Fineman, Esq.:

Thank you, Steve. Thank you for the introduction and all of that initial information, very helpful. So we're in chapter seven at this point, and there are bankruptcy terms that you may have heard thrown around. Some people are very experienced, others not. A motion for relief from stay. So as Steve explained, the stay comes into effect immediately upon the petition being filed. And as a secured creditor trying to get to foreclosure, the goal is to dig yourself out of it and to get what's called relief from stay, relief from the automatic stay. And there are different grounds for when that's granted, and it also depends on whether you're in the chapter seven or in the chapter 11 or 13, because the goals of the debtor and therefore the court are different. In chapter seven, it's a liquidation. So the trustee's entire goal is to look for as many assets as the debtor has, see what's got equity, what's subject to what are called exemptions.

The debtor under state law gets to keep a certain amount of equity in their homestead, for example. It's pretty high in California. There's not a number. It depends on the value of the properties in the area now, but it's six or 700,000. It can be. So the debtor, the chapter seven trustee needs to figure that out. And if there is no equity in the property from which he can take money and then pay unsecured creditors, the Chapter seven trustee will abandon the property or it will not oppose the secured creditor's motion seeking relief from stay in order to foreclose. So the first thing to determine is the amount of equity and make sure that the property is properly insured. The way to do that is to get evidence before the court by way of appraisals. And I think that may be on the next slide or a different slide in connection with motions for leave from stay.

But it's always recommended that unless the debtor does not dispute the valuation of the property, that you have an appraisal, a BPO can serve in a pinch, but it's not the best evidence of value. And from there, if we can show the court or the chapter seven trustee that the number of liens, and that includes property taxes, and to that, you add a 6% cost of sale. If all of those numbers add up to more than what the property is worth, then there are grounds for relief from stay.

Steven E. Ernest, Esq.:

And these grounds that we're looking at here, Marina, are each independent. You don't have to show all of those are present. That is, if there's no equity in the property, you can probably get relief from stay. If they don't have insurance, you can get relief from stay. If they didn't make their post-petition payments, you can get relief from, say you don't have to have all three, just one of the three. Is that right?

Marina Fineman, Esq.:

Well, no, that's not correct. They can not make a post-petition payment, but if there's equity in the property, then that's okay because in a chapter seven case, the basic situation for the court to decide is, do I give the chapter seven trustee time to market and sell the property because there is money to be made from selling the property with which to pay unsecured creditors or is there not? And the property insurance, well, it's one of the factors really in a chapter seven case, the chapter seven trustee is tasked with the cost and the obligation to make sure that the property is insured while it is in chapter seven. If not, the trustee will just abandon the property or possibly dismiss the

Steven E. Ernest, Esq.:

Case. Okay. So no insurance, your creditor's probably going to get to pursue its remedies

Steven E. Ernest, Esq.:

Petition payment. Well, if there's equity in the property, then the adequate protection is the equity, not the post petition payment.

Marina Fineman, Esq.:

In a chapter seven, there is really no post-petition payments really are usually made by the chapter seven trustee. If there's equity, that means that the creditor is adequately protected, it's interest, the equity cushion is remaining, and that period of time to give the chapter seven trustee time to sell the property is what the court will do.

Steven E. Ernest, Esq.:

All right. So in a chapter seven case, the lender, if they're desirous of getting out of the realm of bankruptcy court, it's really from stay is the way to do it. And every lender, when they call me and tell me that they've got a chapter seven case, what they want to do is get out of it. And this is the way. These are the grounds. All right, here we go. Strategic points for relief from stay motion.

Marina Fineman, Esq.:

Okay. So in my experience, lenders who are, at least as familiar with this process, really want to file a motion for relief from stay immediately. And I caution that that's not always the correct strategy. It's a little bit more correct maybe in a chapter seven than it is in a different case. But I think the most important thing is to figure out what is the value of the property, and then to figure out if there really is equity, then the court's not going to grant your motion from stay. If the trustee has decided there is equity in the property, they want to hire a broker, that takes some time. They need to file an application to hire a broker than to market the property. That's going to take a few months. If there's equity in the property, then the good news for secured creditors is that you are going to get your post-petition default interest and all the other fees and even your legal fees, but it's going to take a few months to get there.

So if the property is worth two million and you're owed one million and the other liens are maybe a hundred or 200,000, that $800,000 in equity belongs to the estate. It either belongs to the creditors or then it goes back to the debtor eventually, but the court's not just going to allow a lender to foreclose immediately and keep all of that equity. So lenders, while not waiting too long is a good idea, you need to really assess in each case, does it make sense? If there's $800,000 of equity in a property, we should be talking to the Chapter seven trustee, working with trustee to come up with a game plan. How long are we going to agree to have the property listed, marketed, all of that? And we also want to make sure that there is a lot of equity. So it's not just a five to 10% margin, that's not enough.

Courts in the Ninth Circuit have said the equity margin needs to be between 15 and 20% so that if you're marketing the property for three to six months while default interest and fees continue to accrue, at the end of that period, the secure lender ought not find themselves unsecured, undersecured at that point. So while it makes sense, a motion for leave makes sense, it doesn't always make sense to immediately file one. And one of the things, if we do file one, then you want to get this 14-day waiver of the stay on the order. I usually advise, or I always advise my clients to set the sale date very close to the hearing on the motion for relief from stay, because what happens is the court will enter the order and then you want to be able to foreclose within a couple of days. There is in the bankruptcy rules a 14-day stay on a relief from stay order, but that 14-day stay is frequently waived by courts, almost always.

Almost there's a reason not

Steven E. Ernest, Esq.:

To. Yeah. So creditors are usually pretty horny, to use a word, to get relief from stay once a bankruptcy case is filed.

Your checkbox one, you don't always want to file right away. There's some strategery involved in this, and what you want is to win in the end. Well, you've got debt that's ballooning and potentially equity that's declining. So you got elevators moving in the opposite direction, and that creates some of the anxiety on behalf of the creditor to want to file right away. But the goal is when you file your motion for relief from stay, to be as sure as you possibly can, that it's going to be a winner, and that's the strategy that you're developing from the first day.

Marina Fineman, Esq.:

You don't want to be a knee-jerk motion filer in front of the court. You want to seem like you understand what's going on. The requests that you make are reasonable and timely. I would say this is just a regular sort of cautionary word to the whys to lenders, make sure you have enough equity cushion. When you're making the loan, that there's enough loan to value and that you don't ... I find actually a lot of our clients are sort of too nice sometimes and go on and on extending the filing a notice of default, working with a borrower, which is a very nice thing to do, of course, but don't wait too long to start those proceedings so that you have a date because you are eating away at your equity cushion. So what you don't want is to get ... And I've seen this happen many times where you get to finally the day of the filing of the bankruptcy and suddenly the equities eroded, whatever equity you had over the last year with all the fees that you've been working with the borrower, suddenly you're upside down.

So it's also something to be careful about.

Steven E. Ernest, Esq.:

Good stuff. So procedure, if somebody's trying to manage their expectations for what's going to happen in the bankruptcy case and what's going to happen with their debt, what's the procedure to follow here?

Marina Fineman, Esq.:

In chapter seven, again, it's very different from a 13 and an 11 where there are plans, and we'll get to that. Here you have, and in every bankruptcy case, you have what's called a 341A meeting of creditors, and that's usually set up 30 to 45 days after the case is filed. And that is an opportunity for all creditors. So you don't need to be a lawyer, you don't need to be represented by a lawyer. There's a notice that goes out, and this is either on Zoom or just a telephonic call. The Chapter seven trustee, after the debtor files its schedules. So to back up for a minute for those not familiar, in order to commence a bankruptcy case, a debtor has to file what's called a bankruptcy petition, and then they have to file what are called schedules of assets and liabilities. Those are due on the date of filing, but often debtors just file a petition on an emergency basis without the schedules.

Under the rules, you have 14 days to submit those schedules of assets that show what it sounds like, all of your assets, your income, your contracts, all of your obligations. And then at the 341A meeting, the chapter seven trustee will go through those schedules and will ask questions. The debtor is under oath. So this is not in front of the court. This is just managed in a chapter seven case by the chapter seven trustee, but the debtor is answering everything under oath. And so I often use that information for when I bring a motion for relief from state afterwards. And that's another reason to wait sometimes to see what the debtor is saying before, just to gather evidence for the motion for relief from stay. So in that case, it's either the debtor or the deputy representative who testifies.

Steven E. Ernest, Esq.:

At these 341A meetings, you said you don't have to be a lawyer to go. Any creditor can just show up and ask questions on their own. And that's true. Even as an attorney, which I've been every time I've gone to a 341A meeting, you don't get to take a deposition of these guys though. You can probably get a couple, three questions in and then the trustee's going to tell you, "Hey, look, if you really want to extenuate all of these questions, you need to set a, what was it called?"

Marina Fineman, Esq.:

2004 exam.

Steven E. Ernest, Esq.:

I knew it had a four in it, right?

Marina Fineman, Esq.:

A Rule

Steven E. Ernest, Esq.:

2004. You set their deposition and quit wasting the trustee's time, but they're not going to indulge this for very long.

Marina Fineman, Esq.:

Not in a chapter seven case, because a chapter seven case is really a cattle call, I would call it. It's got 20 debtors on deck for an hour scheduled meeting. So you really need to ask two or three pointed questions, and that's about it. In Chapter 13 or 11, we'll get to that, but they actually allocate the full hour to you. In Chapter 11, you get a full hour. And so I have been given a lot of leeway to ask questions. In the 13, you may get half an hour, so it's a little different.

Steven E. Ernest, Esq.:

Yeah. For these, if you've got a couple of good questions that you want to have answered, you better ask those right up front. There's no time for a warmup here.

Marina Fineman, Esq.:

That is true. And it is usually a good idea anyway if you've hired the lawyer to have your lawyer be on the call and do that, but not necessary. So let's see. So really from state hearings, when we do file those, depending on the district, the noticing is somewhere between 21 and 30 days depending on the district. And then in a chapter seven case, Steve discussed the discharge of the debts to an individual chapter seven debtor. So that usually happens within 60 to 90 days. Now, if you think that your debt should not be discharged, you have that time period to object to the debtor's dischargeability of the debt, and that is done by filing what's called an adversary proceeding. It's basically a mini lawsuit. So let's say the debtor did something very bad to you, stole money from you, and you filed a lawsuit in the state court, and then they filed for bankruptcy to stay that lawsuit, and you don't think that the debtor should just be able to walk away from this obligation.

You would then file what's called a non-discharge ability action. And that then is a proceeding in the bankruptcy court where you explain to the court why even though there's a bankruptcy, and even though the debtor's getting discharged of these other debts, your debt should not be discharged for bad faith, bad acts, various basis. So that's what the discharge is.

Let's see.

Steven E. Ernest, Esq.:

Did I move forward too quickly? Sorry.

Marina Fineman, Esq.:

Oh, you did. So that's a discharge and a trustee may abandon property that is burdensome to the estate. So again, if there is, for example, no equity in your property that you're trying to foreclose on, the chapter seven trustee can abandon it. And in a corporate chapter seven, that may be the answer, and that's all you need. You don't need to file a motion for leave from stay because it's a much faster process for the abandonment and for the closing of a case to happen in a chapter seven of an individual debtor because of what I just mentioned, the discharge period, the trustee's not going to close the case for 90 days. There are other things happening. So it's often a good idea. I usually did file a motion for leave from stay when there are grounds to do that. And then the state terminates ... So as to the debtor, even though the debtor gets a discharge, the stay as to the property and your right to foreclose is not lifted.

So there's still a process to that. So that's why filing a motion for really from stay in chapter seven is usually the best way to go for the fastest result.

Steven E. Ernest, Esq.:

All right. Now the next one. Claims. Are you going to bother to file a proof of claim in a chapter seven case? Yes.

Marina Fineman, Esq.:

So you do need to file a claim. Now, Steve, you mentioned earlier that a secured creditor does not need to file a claim to enforce its liens because the liens will ride through. But if you want a distribution, for example, if you're undersecured and the debtor has other money in the estate from other assets and you want to put in a claim for the deficiency, you need to file a proof of claim. The bar date typically is 70 days from the petition date, and the trustee in a seven, sometimes there is no bar date. It's not automatic. It depends whether the chapter seven trustee determines that there are assets, and then he'll set or he or she'll set a bar date because if it's a no asset case, there's no point in collecting proof of claim.

Steven E. Ernest, Esq.:

All right. So that's chapter seven, the discharge chapter. And now we got chapter 11, which is both hopelessly complicated and understood by Marina and six other people in the United States of America. And it's a reorganization for high net worth. We're going to talk first about the 11s, which are the big ones, and then we'll talk a little bit later about the 13s, which is the wage earner plans. But for the high net worth, a lot of assets, a lot of money in these cases, the reorganizations, it's a chapter 11. The debtor remains in possession of their assets, generally speaking, the business continues operating. The cash collateral requires concentra court order. So the debtor is not going to be able to take all of their money and transfer it to their kids or their uncle or waste it. And if they try to do that, they will get in some pretty big trouble with the bankruptcy court.

There's certainly though more leverage for the borrower, the debtor than there is in a chapter seven. So they get to do more things in an 11 than they could do in a seven, but they've got to file a plan of reorganization and they're going to get some trustee and court scrutiny on those plans and what they're doing with their assets, but the rights and the leverage as between the creditor and the debtor are certainly going to change with Chapter 11. And there are some different considerations on when you seek relief from stay in an 11 versus a seven because there's some strategy that goes into that. And we'll get to that in a minute. But Marina, what? The cash collateral, that's sort of the money in the bank account. What's going to happen with that upon our deadbeat borrower filing bankruptcy just to thwart all of our best plans?

Marina Fineman, Esq.:

Right. So in the context of private lenders only comes in sometimes because usually you have a lien on the real estate, but not on all of the debtor's other assets and cash. However, you will have a lien under the deed of trust for the rents. And so if this is an income property, then All of the rents that are collected are considered cash collateral, and the debtor is not allowed to use that without obtaining your permission and/or also a court order from the court. Usually this is done by way of a cash collateral stipulation where the secured lender agrees, okay, you can use my rents because obviously it's in everyone's best interest to keep. In this case, it would be a building, an apartment building, something like that. Operating, you want to make sure the landlord can pay insurance, taxes, utilities, all of those things.

But you want to make sure that you get replacement liens on all of the collateral and you get priority liens on the cash and the real estate. And then also adequate protection is what I mentioned earlier, which goes back to whether you have equity in the property or not. So depending on whether there is a lot of equity, if there is a lot of equity, the court may not require the debtor to make post-petition adequate protection payments to the secured lender. If there's not, then it's basically for the price of being allowed to stay in a bankruptcy case, the debtor has to make periodic payments. That could be the monthly interest payments to the secured lender while it continues to figure out what it's going to do in terms of reorganizing Chapter 11 plan, the options being it can refinance, it can assume and extend the loan, it can do a cram down plan, or it can just buy some time in order to market and sell the property and pay the secured creditor off in full.

So depending on what the facts and circumstances are, there would be something that we would negotiate and/or just ask the court for. Oftentimes what you do is file a motion for relief from stay and say that if it's denied, then there's a request in the same motion for adequate protection payments to make sure that at least your equity cushion is protected for the duration of the bankruptcy case. And when there is a cash collateral issue, you want to make sure that the debtor is submitting a budget, which is usually just part of the process when they file a motion for use of cash collateral showing, okay, I'm collecting $100,000 in rents and this is how I'm going to spend this lender's money. We want to make sure that when the debtor has more than one property and more than one income stream of rents, that your rents are being used only for your property, not for the entire estate.

So there are various things that we need to look at and don't stipulate casually. Make sure you have a lawyer and we're looking at the right things.

Steven E. Ernest, Esq.:

Yeah. Chapter seven case is not for the uninitiated. You need to have..

Marina Fineman, Esq.:

Chapter 11

Steven E. Ernest, Esq.:

Yeah, sorry. Chapter 11. You need to know what you're doing in those. All right. How do you get relief from staying in 11?

Marina Fineman, Esq.:

Okay. So relief from stay is similar, but like I said before, different considerations because in this case, the court is not just trying to help the trustee sell as many assets as the trustee's able to find and get as much as they can. In this case, the courts are more sympathetic to trying to help the debtor reorganize. The debtor is in chapter 11 and they need it. It's called breathing room. The entire point of a chapter 11 case is to give the debtor some breathing room to stop it from all the creditors, the lawsuits, the demands, and just take a moment and figure out, okay, what's my way at? So more leeway is given. And again, the same factors are considered. So first and foremost, is there equity in this property? And that, again, I always recommend getting an appraisal because that is going to be the number one piece of evidence that you're going to need to present to the court.

No matter whether you're arguing for adequate protection payments or for stay relief, you need to have evidence of what you think the property's worth, particularly important when your number differs from the debtor's number in the schedule. So I mentioned in the first 14 days in a chapter 11, sometimes that period of time is extended, but the debtor has to file a list of assets and liabilities, and it's going to schedule the amount of your claim, and then it's going to schedule what it thinks that the property is worth. So if you agree, then it's a much easier argument. Whatever argument you're going to make, everyone stipulates to what the debtor's valuation is. If not, then you should have your own evidence.

Then you can get relief from stay in ... Well, a bad faith filing is sometimes grounds as one of the reasons for why the debtor ... You can say to the court, look, the debtor filed, there's no case here. There's no reorganization. One of the grounds in a chapter 11 case for relief from stay is that the property at issue is not necessary for reorganization. The other one is cause. So cause can be that the debtor filed for a bad faith reason. The petition was not filed in good faith. And the property you have to show is not needed for this debtor's reorganization either because it's woefully under ... There's no equity, then because of that, the debtor is unable. There's no possibility to get a refinancing loan to take your loan out because there's just no loan to value there. There's no lender in their right mind would ever loan on this.

And the debtor just did this to delay. The debtor has had a year. The debtor has in fact, for example, listed the property at the price it says it thinks it's worth and no one's bitten for a year. There's just nowhere to go here. The property's not earning any income. There's no real reorganization. It's a delay tactic. So there's something called the single asset real estate where a debtor will either classify itself as such or will fight that designation, but that puts the debtor's Chapter 11 case on a much faster trajectory. And the debtor has to file a plan quickly within 90 days to show the court that this is really a reorganization and not just another excuse to not pay the creditor and to delay things. And if the debtor doesn't meet those deadlines, then the court will dismiss. And then even if the debtor does file a plan, often these are just sort of placeholder plans like, oh yeah, I'm going to sell this property in six months.

And in that case, you need a lawyer. We need to file what's called an objection. Well, you need to object to the plan based on the lack of feasibility, Your Honor. They've already marketed it for $2 million for a year no one's bought. There's no reason to believe this is going to now work. So there's just various considerations that courts will listen to and consider when deciding.

Oh, the other thing I wanted to say is-

Steven E. Ernest, Esq.:

Judges are going to pay more careful attention into Chapter 11. They're going to give them the breathing room you were talking about,

But they're going to figure out whether this is a scam or with you're just trying to buy time or whether this is legitimately somebody who's going to try to reorganize. The judges pay attention to these cases. And you always, in any court, want to be the person wearing the white hat. You don't want to be the creditor on the first day filing a motion for relief from stay, because if the judge likes the case, then he's going to hate the creditor. That having been said, if you give him a little bit of rope and can show the court, "Hey, Judge, these guys are scamming you and they're scamming me and we need to get out of this case," well, you've got a winning strategy then, right?

Marina Fineman, Esq.:

Yeah. And the other thing I wanted to mention at the end of the prior slide was that sometimes you want to file a motion to dismiss or convert instead of a motion for leave from stay. And when there are grounds, there's bad faith or there are other reasons to file, you don't even need an appraisal at that point. So it's not always a motion for leave from stay. It just depends on the facts.

Steven E. Ernest, Esq.:

It always depends with lawyers.

Marina Fineman, Esq.:

It always depends on lawyers and certainly in bankruptcy. And as I always tell all of my clients, we can be a hundred percent right on the law, but you can never guarantee or know what the judge is going to rule. Every single judge is going to have their own way of looking at something. And sometimes all we can do is present the facts and then just wait and see what happens. That I think is always the case in court. So some of the things, the basis for the objections to a chapter 11 plan. So feasibility is one. Feasibility discusses whether what the debtor proposes is actually a possible plan. So the debtor is saying, in my last example, I'm going to sell this for $2 million and pay up all the creditors, and there's going to be a plan where I pay nothing for six months and I will have a balloon payment at the end for the full amount.

And you need to say to the court, "This is not possible. The debtor has no ability to refinance. This property is not worth that much. It's been on the market for a year, or the debtor is not earning enough income to make the plan payments that it's proposing to make throughout the plan term." So any of those. If the debtor is trying to do a cram down plan, which means to confirm a plan, for example, at a lower interest rate, paying you a smaller amount on your claim than what you are asserting you're entitled to based on the default interest and other fees and costs, that's called a cram down plan. So in that case, there are certain requirements that a debtor has to meet and it has to obtain a vote of at least one impaired consenting class. But the improfit cram down interest rate is your rate under your notice 10%, and now they're saying, "Oh, I should be able to pay this back in over 10 years at 5%." That's going to be a fight.

Artificial impairment means, again, because a debtor needs an impaired consenting class, they may create one class and that they could otherwise have paid in full, but artificially impaired so that this one creditor will vote for their plan, which is another fight that often happens. Violation of the absolute priority rule discusses in the bankruptcy code, under 507, there's an order in which claims may be paid and they start with secured, and then there are administrative claims there which are claims that happen that are incurred by the debtor's estate after the filing post-petition. Then you pay out what are called priority claims that include certain support, family, child support, certain employee wages earned within 90 days of the bankruptcy, certain priority taxes, those are paid first, and eventually you'll get to non-priority, general and secured claims, and then equity. So whatever's left over goes to the equity, the owners of the company, and you have to go in that order in a regular Chapter 11 plan.

So if anything violates that, that the owner says, "I'm going to keep part of the equity of that paying the unsecureds in full," then that can be a problem. So things like that, unfair discrimination, again, where one creditor who's unsecured is put in one class and is treated differently than another, the treatment of default interest is another argument and modification of lien rights. So lots of things that are fought out in context of Chapter 11 plans.

Steven E. Ernest, Esq.:

There's always-

Marina Fineman, Esq.:

It's either complicated.

Steven E. Ernest, Esq.:

Yeah. Yeah. So this is sort of the strategery slide. How should we manage our expectations and what should the anticipation of the timing be when someone files a case? Chapter 11 case takes forever. We're not going to be able to foreclose for another 16 years. What's going to happen?

Marina Fineman, Esq.:

Yeah. In the context of our clients of Fortra and secured creditors just looking to foreclose on a property, it usually does not devolve into waiting for the debtor's exclusive rights. So the debtor has 120 days exclusive right to file its own plan. Then if that period is not extended, any other creditor can file a competing plan. That usually does not come up in our context, although that does happen in more of corporate big company reorganizations. But in what I'm seeing actually a lot more of, so Chapter 11 case, a standard one, when you have Kmart files, then there's a whole host of professionals that are hired. The debtor hires counsel, the debtor hires financial advisors, perhaps other experts. Then there's what's called an unsecured committee of creditors that's formed. And that is based off the debtor with a petition has to file a list of its 20 largest unsecured creditors.

These days, it's often 30. From that, the United States trustee picks a few of those people to be on what's called the Unsecured Creditors Committee, and they represent and are the voice of the unsecured creditors. They also hire their own lawyers. They hire their own set of financial advisors. As you can imagine, the debtor's estate has to pay for all of this. This is a very, very expensive process. So in 2019, the legislature enacted what's called the subchapter five process in chapter 11. So it's a subchapter of chapter 11, and we're seeing a lot of that in the private lending context. Most debtors who file chapter 11 case will file a subchapter five case, and I'll talk a little bit more about that. But the deadlines there are, again, like the single asset real estate case, you have to file a plan within 90 days and there's no committee.

It's a much cheaper process of reorganization, but there are caps to when you're allowed to file up to three and a half or so million dollars in debt, otherwise you don't qualify. But in a regular chapter 11 case, you have the exclusivity. The debtor has to file a plan. There is then a disclosure statement that's also filed that talks about the plan. Then once that's approved by the court, which could take several tries, the disclosure statement and plan are sent out to all creditors to vote on the plan. So that takes months.

Steven E. Ernest, Esq.:

Forever. And then at the bottom it says appeals risk. That's the bankruptcy appellate panel, right?

Marina Fineman, Esq.:

If any party who's appealing something has the ability to go to the bankruptcy appellate panel or the district court, they can decide.

Steven E. Ernest, Esq.:

Okay. So you would either go to the BAP, the bankruptcy appellate panel, and then the regular federal district court-

Marina Fineman, Esq.:

No, you elect whether you want one or the other. And from there you go to the Ninth Circuit.

Steven E. Ernest, Esq.:

All right. And then you would go to the Ninth Circuit or ... Have you ever had a

Marina Fineman, Esq.:

Case

Steven E. Ernest, Esq.:

For the BAP?

Marina Fineman, Esq.:

I have.

Steven E. Ernest, Esq.:

Nice. Did you win?

Marina Fineman, Esq.:

Yeah. Yes.

Steven E. Ernest, Esq.:

Of course you did. Of course.

Marina Fineman, Esq.:

All right,

Steven E. Ernest, Esq.:

Good.

Marina Fineman, Esq.:

All right. But I don't want to spend too much time in big Chapter 11s because that's usually not what we're dealing with at Fortra. I think most of that is here where we're at the subchapter five. So the debt limit- Good segue.

Steven E. Ernest, Esq.:

What do we do in a subchapter five?

Marina Fineman, Esq.:

So Subchapter five is a Chapter 11, but you are no longer dealing with all of the overlay of all the costs of having ... The debtor does not have to pay for everyone's professionals. There's no unsecured creditors committee. It's just basically kind of a chapter 13, but for corporate debtors. So doesn't cost as much, but there is a debt limit for when you're eligible to file. And in this case, there's now been a whole new panel of subchapter five trustees and one is appointed immediately, but it's not like a chapter seven trustee. They're basically more of an advisor, and the debtor does have to pay the subchapter five trustees fees, but they're significantly smaller. And they're more of a facilitator mediator between creditors and the debtor, and they're always at the hearing, but the court turns to the subchapter five trustee for advice and for their thoughts.

So the debtor in these cases has to file a plan within 90 days. It's a much faster track so that the court can suss out, is this a real reorganization or again, is this just another delay tactic by the debtor? And in that case, we have to see if the plan is realistic or if there are grounds to object on all the other basis that I discussed earlier, although in a subchapter five, you don't need the consenting creditor to vote on the plan. So it's a little easier for the debtor to get a plan confirmed.

Steven E. Ernest, Esq.:

Cool. Okay. It's so complicated. We have two slides about subchapter five.

Marina Fineman, Esq.:

Well, because that's really what we're dealing with a lot. When we look at chapter 11 in the Fortric client context, that's what we're dealing with. So again, the disclosure statement that I mentioned before is usually in a chapter 11, a separate document. In subchapter five, it's just one form. It tells ... Disclosure statement is more of the informational discussion about who the debtor is, why they got into bankruptcy, what's happened during the case, and how they're going to get out. It's more of a narrative discussion, whereas the plan is a much more technical document. So in a subchapter five, again, to save time and money, it's combined, and it talks about the history of the business. The debtor also has to show that the creditors will be better off under its plan as opposed to if the case were converted to chapter seven, the chapter seven trustee took all of its assets, sold it, and paid creditors.

So that's a constant throughout 11 and 13. A lot less expensive, as I mentioned, less overhead to your professional fees. So that's what the debtors who own one property maybe two are opting for, assuming they meet the debt limit.

Steven E. Ernest, Esq.:

Right. We're starting to run short on time, but I'm going to ask you a question that I didn't prepare you for, so this'll be fun. With regard to the litigation analysis, have you ever been in a chapter 11 case and represented a creditor and had the creditor agree with you that, yeah, this is better than a liquidation? The creditor always just wants relief from staying wants their collateral, right?

Marina Fineman, Esq.:

Yes.

Steven E. Ernest, Esq.:

Okay.

Marina Fineman, Esq.:

Yes.

Steven E. Ernest, Esq.:

There's your answer.

Marina Fineman, Esq.:

I thouh- perspective, of course. Especially if the property has equity, who doesn't want a foreclosure, right?

Steven E. Ernest, Esq.:

It's never happened for me either. The creditor always vehemently disagreed. And me personally, always disagrees with the liquidation analysis, which is an exercise of creative writing. They're totally lying. All right. Slide number three, subchapter five.

Marina Fineman, Esq.:

I think I've covered enough of this probably we can-

Steven E. Ernest, Esq.:

That's beautifully done. All right. Claims, are we going to file a proof of claim in an 11?

Marina Fineman, Esq.:

You do. You always should always file a proof of claim, but in a chapter 11, unlike they admit some changes to the rules a few years ago, but in a chapter 11 still, if the debtor schedules your claim in the correct amount that you agree with, you don't actually have to file a claim in order to have a claim and to be paid out of the estate. But I always say file a claim always.

Steven E. Ernest, Esq.:

You may as well get it submitted your way right

Marina Fineman, Esq.:

Now. And you can always amend it later, so that's always a good thing.

Steven E. Ernest, Esq.:

Yeah. All right. Chapter 13. So there's a debt limit that Marina's going to talk about in a minute, but at chapter 13, they call that the wage earner plan. So this is not this huge Kmart or Orange County filing a reorganization plan. Chapter 13 is usually people or small businesses, but it's not a seven where they're just trying to strip off their credit card debt. It's a 13 where they're going to file a plan and they say, "This is the way over the next three years I'm going to catch up on my arrearages and I'm going to make my post-petition payments as they come due when they come due." And that's almost never true either, but here they go.

Marina Fineman, Esq.:

Yes. What

Steven E. Ernest, Esq.:

Can happen in a chapter 13 plan?

Marina Fineman, Esq.:

So three to five years is usually the duration. Usually debtors up for five unless what they're seeking to do sometimes is just to sell the property and they just needed more time to do that. So in a chapter 13, like a seven, a chapter 13 trustee gets appointed immediately and they have to oversee the case. They have much more direct oversight involvement than a subchapter five, but this is sort of the debtor remains in possession in a chapter 11 of all of its assets. The debt limits are 526,000 in unsecured debt and 1580, 125, about 1.58 million in secured debt. Sometimes I have a couple of cases now where I'm objecting to the limit because what the debtor is, it has to be liquidated and not contingent. Well, the debtor will just mark those boxes on the schedule. They'll schedule your claim and then say it's contingent and unliquidated and disputed and then try to get in under the debt limit, which is questionable.

And that's because filing a subchapter five case is a lot more expensive. The filing fee and the whole process costs a lot more, so they're trying to do that just to waste more time. In this case, if your debt is maturing, so if the loan is already mature on the filing or will mature during this plan periods over the next three to five years, the debtor has to pay the full amount of the loan under the plan in equal payments or balloon payment, however they propose to do it. And so that's another issue that becomes contentious under a plan because it's unlikely that they can pay back $1.5 million on whatever income they have coming. And again, it becomes an issue of are they going to be able to sell or not in time? But also they have to file along with the schedules on the petition date, or at least within 14 days, a plan.

And that plan gets litigated much more quickly. And in that plan, if they propose to make $2,000 a month in payments, they have to start making those payments immediately to the Chapter 13 trustee or the case will get dismissed. They also can amend that plan to reduce that plan payment, and that goes on often as well. And eventually the court will set that for hearing and will consider the objections. So the Chapter 13 trustee then makes distributions to creditors from the amounts it receives.

Steven E. Ernest, Esq.:

Here's a short diversion so Marina can get a drink of water. I had a partner at my old firm who used to tell me, in a Chapter 13 case, I can tell by looking at the debtors whether the plan's going to work or not, just by looking at them. And 96% or so, looking at them, it's not going to happen. It's just not going to work. There's a very few, very small group of people who are going to file a Chapter 13 case and cure their arrearages and get through their plan and do all that stuff without all the creditors coming in and getting relief from staying all that. Most of the time it's an indelicate word, but it's a scam. It

Marina Fineman, Esq.:

Is very accurate.

Steven E. Ernest, Esq.:

So there you go. There's

Marina Fineman, Esq.:

A

Steven E. Ernest, Esq.:

Man on the street. How do you get relief from stay? I'm going to get out of this scam chapter 13 plan. How am I going to do it?

Marina Fineman, Esq.:

Same thing. Same grounds. We show that the debtor filed for bad faith reason. Equity in the property is the number one issue. Get an appraisal. If there is bad faith, if there are serial filings, it's another thing we didn't talk about, but there's called something called 365D4 Bankruptcy Code Section. And often what I've seen a lot with our clients is a debtor will file, will actually transfer a 5% interest in a deed and then have somebody else file for bankruptcy to get a state, and then they do it again and again. And this is a game I've seen some debtors play. Even though it's a violation of the loan documents, it doesn't matter. It still ends up effectively causing a lot of delay. And so eventually after one or two of these filings, I always move for what's called in- rem stay relief so that the relief from stay attaches to the property and not the debtor so that the next time somebody files for bankruptcy and says they own this property, it's not going to matter.

The lender just going to be able to go ahead and foreclose regardless of any more deed assignments or bankruptcy filings. And that has been a very useful tool and has come up a lot for our clients.

Steven E. Ernest, Esq.:

Right. So every bankruptcy judge, I think, before they were a judge was a bankruptcy lawyer, bankruptcy practitioner. And

Marina Fineman, Esq.:

There

Steven E. Ernest, Esq.:

Are plenty of bankruptcy judges that have a debtor's bend or sympathy, and the rest of them have creditor bends or sympathies in varying degrees. And after a year of these people being on the bench, you know which ones are which, and you can advise your client which way the wind's blowing in this case based on the judge to whom it was assigned. Even the debtor-friendly judges though, when they see these partial interest transfers in the serial filings, they know what's going on and they're going to give a creditor the type of relief that a creditor deserves in those circumstances, right?

Marina Fineman, Esq.:

They are. But I will say, and this is maybe a frustrating thing for clients to hear, but the timing of everything is really so dependent on the judge for exactly the reasons you said that I've seen relief from stay not granted for a year and a half, and I've seen it granted within 30 days, and it could be on very similar facts. Some judges get it, some judges are very just overly debtor-friendly and give them way too much rope and cause everyone to lose money. Other judges understand where everything's going. They've seen it a million times before, and they're just going to rule what I think is appropriate depending on the case. It's not always appropriate to grant relief from staying immediately. And so I've seen it. And also a lot of what happens is it depends on the other side. Some of these debtor's lawyers are just papering me with just multiple crazy motions that I still have to respond to.

And then they're asking for crazy relief and they're filing excess declarations and replies. And so things can get out of hand. It's very hard to anticipate a timeline and also a cost of what a motion for relief may cost. Because like I said, it's taken a year and a half to get a case dismissed, and then the debtor files again and it takes another year. That's an extreme case, but it just happens. So it's not common, but everything that we're doing as creditors oftentimes is just reacting to what everyone else is doing. We file our motion, but then all we can do is react to what the court, how the court's ruling, and what debtor's counsel's doing, perhaps what other creditors or parties in interest are filing as well. Often, a second lien holder will also jump in to object. It's happening in a case of mine now because they don't want to be for closed out.

So there's just a lot of paper to deal with sometimes on what should be a simple issue.

Steven E. Ernest, Esq.:

Wow. So riddle me this, if you, Marina Feinman, were a bankruptcy judge, would you be creditor-friendly or debtor-friendly or you're going to call it right down the middle?

Marina Fineman, Esq.:

I think if I would probably be down the middle leaning on the creditor side, especially given my experience.

Steven E. Ernest, Esq.:

All right, that's a

Marina Fineman, Esq.:

Pretty good answer. My years at Fortra.

Steven E. Ernest, Esq.:

Right. Well, that's a good answer because this webinar is being recorded and if you're having your confirmation hearing in front of the Senate, that's the only-

Marina Fineman, Esq.:

One day.

Steven E. Ernest, Esq.:

... answer that's ever going to get you on the bench. All right, beautifully done. Very politically savvy. Plan objections in a 13. I'm not going to get relief from state. I'm just going to crash their whole case. So I'm going to object to their plan. What are the grounds under which the court's going to sustain my objection and dismiss their case?

Marina Fineman, Esq.:

Similar incorrect amount of what you assert you're owed. They want to cram down an improper interest rate. There's a dispute about the property, what the property's worth, how much of the claim is secured, how much is unsecured. Feasibility, do they make enough money to make the plan payments or do they file in bad faith? Are they going to be able to sell during the period that they're saying and very similar topics?

Steven E. Ernest, Esq.:

Right. All right, cool. Timing, what should I expect other than it's going to take way too long and I'm getting ripped off?

Marina Fineman, Esq.:

Well, under the plan, like I said, the debtor has to start making payments immediately, but those payments can be whatever the debtor said is. And I'm having a big issue in a different case where the debtor filed one plan, said it was going to pay $3,000, didn't make those payments to the trustee, and then seven months later amended the plan and said, "Oh, I'm going to just start making $800 payments under the plan." And so that cures that default. So there could be various issues. You have to stay on top of the plan, make sure to object, make sure that the debtor has their fee held to the fire. So there's a claims bar date that's usually set. You should file a claim as we discussed in the other cases. And if the plan is confirmed within the 60 or 90-day period, it's not always that debtors often extend their amendments to the plan.

But once the plan is confirmed, then there is a stay on your ability to foreclose or do anything three to five years. But as Steve said, most of these things get defaulted on. So you'll then go back and then seek to have the case converted or dismissed for failure to make plan payments or the Chapter 13 trustee will hopefully make that motion for you.

Steven E. Ernest, Esq.:

Yeah, good stuff. Are we going to bother to file a proof of claim in a 13?

Marina Fineman, Esq.:

Yes. Always file a proof of claim. You have to.

Steven E. Ernest, Esq.:

This is the one. So you definitely-

Marina Fineman, Esq.:

And you can then file a supplemental claim later for your fees in the Chapter 13 case as well. Always file a proof of claim on time.

Steven E. Ernest, Esq.:

Yeah, they want to do that in these for sure. All right. So this was all very complicated. You've made it much more clear for us. And for the benefit of everyone who's going to get a copy of these slides, you've made this table that highlights the difference between the three different filing chapters. How quickly am I going to get to foreclose? Well, in chapter seven, it'd probably be pretty fast. Chapter 11, sad to inform everybody it's going to take forever. Chapter 13, somewhere in the middle. The debtor control of their own assets. Are they going to be able to get rid of all of their money and not give it to you? Well, chapter seven case, probably not. The trustee's controlling it. 11, a little more latitude because the debtor's in control of their own finances. 13, same thing. It's the way those things are going to go.

What about the plan of reorganization? Am I going to get stuck in this thing for three years? Well, chapter seven case has no plan, so there's no risk of it there. And 11, high risk. Like I say, the judges will get to know the debtors. There used to be a bankruptcy judge on the bench who I know named Judge Riddle. Any chapter 11 filing that came before her, she would set a meeting typically on a Saturday morning and she would make the actual debtor and the actual debtor's attorney come and sit in her chambers and talk about what their goals were in filing these chapter 11 cases. So judges pay attention to these. Chapter 13 cases, thousands upon thousands of them filed. The risk that you're going to have to sit through 13, 50 months of this, I think is relatively low. Marina put it down as moderate.

So that's the way these things go. Cram down risks, chapter seven case, there's none. Chapter 11 case for sure. 13 is somewhat. How much is it going to cost you? Well, chapter seven, you're not going to have to spend that much. Either you're going to wait it out for the discharge or you're going to get relief from stay relatively quickly, not an awful lot to do in those cases. So you don't have to spend quite as much money. Chapter 11's sad to inform our clients, those things are really expensive. They're complicated and you need a big brain in those things. It's not for the uninitiated. You just file a proof of claim and see what happens. A lot of times in a chapter 11 plan or a chapter 11 case, there's these first day motions. You just get inundated with hundreds of pages of paper with black writing on them that you don't really know what it means.

And a lot of them are what we call scream or die motions where something bad is going to happen unless you file a timely objection, which sometimes is tomorrow and sometimes it's within two weeks. So you need to get on those things quickly because you could find your rights eroded just by hiding. Chapter 13 plan much less so in those, the risk of that happening is moderated.

Nine mistakes secured lenders are going to make in a bankruptcy case. Failure to strategize early on. Each of the chapters that we talked about today had a strategy associated with it. You need to figure out what you're going to do and make your own plan for what's going to happen in this bankruptcy case as a creditor. Don't wait too long to file a relief from stay motion. But on the other hand, I talked a little bit about the White Hat. You don't want to be the guy who's filing your motion for relief from stay on the first day and screaming. It's fraud. Bankruptcy courts are designed for people who don't have enough money to pay their debts. That's what they're for. And so just going and telling the judge that you're not getting paid isn't particularly compelling because that's everybody who comes in the courtroom.

So not filing proof of claim. As Marina just indicated, you always want to get that filed on time and appropriately, and you don't want to ignore cash collateral budgets because you don't want the debtor spending all of the cash that should be used to pay you. Failure to monitor the cash collateral accounts and the rent and the adequate protection that you're supposed to be doing, that's arguably your money. You don't want them spending it on things that they're not supposed to be spending it on. So you want to keep an eye on that. If the chapter 13 or chapter 11 plan is not feasible or it ignores you or it says that your claim is $34,000 when really your claim is $334,000, all of those things, you need to object to the plan if it's not treating you appropriately. Poor valuation evidence. If you have a BPO that says the property's worth $2 million, maybe, but an appraisal is better.

A current appraisal is even better than that. And if it's a good appraisal, not just somebody who's saying what you told him it's supposed to be worth because you're probably going to get a debtor who opposes your appraisal and you want yours to win the day. And the way it's going to win the day is if it's appropriate and it takes into account all of the appropriate factors, which judges have seen before. You're not going to trick them with a bad appraisal. They know what they're doing. Not tracking your post-petition fees. Always make sure everybody's getting paid. And assuming the lien rights speak for themselves, often they don't. What debtors are sometimes doing is trying to trick you out of your lien position. So make sure that you have learned counsel and you're doing the things that you're supposed to do. So if you want to get in contact with me, there are two ways to do it right there on your screen.

Marina, a little more limited. There's only one way to get in touch with our listed there, but we're not hard to find. If you want our phone numbers, those are found on our website, and we are happy now to go through the lightning round of what are the questions that you have for us. So this could be exciting. You can ask us anything, put them in the Q&A. Already have four. Joe McNulty, who I saw at a pickleball tournament last week and at CMA asks, "What about our individual guarantee? How does that come into play?" So you have a borrower and you have a guarantor. If the borrower files bankruptcy, that does not have an effect on your guarantee. So your guarantee is completely separate from the bankruptcy case. The guarantor still owes you 100% of the deficiency if there is one. If your guarantor files bankruptcy, depending on the chapter and what the resolution of the case is, that is your guarantor trying to treat you like their credit card debt and getting out of having to pay the amount of your guarantee.

If you have three guarantors, two of them are married to each other, one of those married people files their Chapter seven bankruptcy case and gets a discharge, you can still collect from the other ones. All right. So there you go. Answered live.

Done. Summer Pham. Hi, please keep this question handy in case there isn't much traffic in the Q&A section. Well, okay, here it is. The reason is it's not directly bankruptcy. Oh, this will be good. I have a question where a creditor has reported a delinquent account for ... This is a long question, Summer,

A delinquent account for a business credit card. This took my personal credit from the 800s to the low 600s. I do not think this is a bankruptcy question at all, and now I have to rebuild my credit. I want someone to fight on my behalf to recourse this action by the creditor. I believe there's a chance to do so. I'm wondering if Fortra can help and the bankruptcy lawyers would be the best fit. So the question is at the end, can Fortra help? Well, we can, but that we don't represent debtors. We're a creditor's shop. And is bankruptcy the right way to repair my credit? I would think almost definitely not. Not giving you legal advice as a debtor, but if your credit score is low and you want to improve it, I don't think filing bankruptcy would be the right move, but you can find bankruptcy lawyers that can help you with that.

Go ahead, Marina. You look like you want to say something.

Marina Fineman, Esq.:

Yeah, I was going to take one from my Tannenbaum here. The provision of all my trustees covers reasonable legal fees. This is the question. The provision covers all reasonable legal fees. I'm assuming that protection also applies if a borrower declares bankruptcy. In that situation, should I contact a lawyer immediately on the assumption that my legal fees will be covered? So the answer is it depends. It depends on whether there's equity in the property. So all of the fees should be covered. If the debtor refinances or sells the property for more than what you're owed, then so far it's not ... I can never guarantee that there won't be an objection, but so far in my experience, I've not had my fees objected to or even default interest. If there's equity in the Ninth Circuit, that's the law. All

Steven E. Ernest, Esq.:

Right, cool. George Caballero, Go Tigers. You are having business purpose loan borrowers file Chapter 13. Are you seeing those? So almost all of our clients here at the Fortra Law Firm are private equity commercial loans, business purpose loans. Are we seeing very many Chapter 13 cases come through our office?

Marina Fineman, Esq.:

We are.

Steven E. Ernest, Esq.:

Okay. Yes. Is an answer. One word. That's all you get, George. All right. Sirigandia, how do we add post-petition expenses to the total debt owed? So they file in February, you've got to pay Marina. There are some costs involved. How are we going to get those fees and costs included in our proof of claim?

Marina Fineman, Esq.:

We file it in our proof of claim. That is exactly

Steven E. Ernest, Esq.:

Correct. That's the way you do it. You just add it in.

Marina Fineman, Esq.:

And then eventually if you're getting paid off, it'll be on the payoff statement that you provide to escrow if there is a sale or a refinancing. Steve, I want to say that in many cases, delay becomes a personified in the bankruptcy process. So secured creditors need to act early and strategically, and I hope that is the takeaway. Call us for advice, call us with questions. Happy to talk about bankruptcy with anyone anytime.

Steven E. Ernest, Esq.:

All right. Don't go away quite so quickly. I see what you just did and that was very crafty. Wonderfully done. I told everyone at the beginning to put their questions in the Q&A and not in the chat. And as many people do, they ignored that. So I've got all of the questions in the Q&A answered and I found several in the chat. And despite you not following my instructions, we're going to answer some of those too. So Michael says, how does the automatic stay work when the debtor files post sale? I'll field that one. So you've had your foreclosure sale, your borrower files a bankruptcy case, I don't think you really care, especially if you did a non-judicial foreclosure sale because you're not getting a deficiency against them anyway. I think you can largely ignore it. There might be a few circumstances where it matters, but I don't think very many.

If it's a guarantor who files post-sale, you've got some things to talk about and you'll want to give us a call. All right. So Civa, assume divorce. I've been married. It'll be 20 years this November. I never want to assume divorce, but because you asked me to, only for purposes of this question will I assume divorce. If both spouses sign the debt, what happens when divorced? All right, so husband and wife signed the note and deed of trust only ... Oh, and then they get divorced. What happened? So this isn't really a bankruptcy question, Civa. The very first time I ever went to court as a lawyer, so I got sworn in to the bar on a Sunday afternoon in my mother's living room. And on Monday morning, I went to divorce court on behalf of Fannie Mae having exactly this circumstance. And back then, this is a stereotype doesn't apply anymore, but it was always the wife who wasn't working that wanted to keep the house and wanted the husband to pay for it.

And it was always the husband who wanted the wife to keep the house and have the creditor not obligate the husband to pay for the house anymore. And that's what they were doing that day. And the wife's attorney and the husband's attorney both argued back and forth for 20 minutes. And I was sitting there literally in my first three hours as a licensed attorney. And the judge looks at me after they yelled at each other for a while and said, "Well, they can't do that, can they? " And I said, "Well, no." I didn't really know. I just said that. And the judge goes, "Motions tonight. Everybody get out of here." And I was like, "Wow, I'm a really great lawyer. I got that one right." So that's the answer to you, Siva. As I learned in my first two hours as an attorney, if both of them signed and then they get divorced, they're both still obligated.

It doesn't matter who lives there, doesn't matter what the divorce court said about who is supposed to pay, they're both obligated on the note and the creditor retains all their collateral rights. And that's the only time I'm going to assume divorce. All right, Michael, another one. Michael, coming back again, question number two, in the wrong place. And the post-sale rules under 2924. So that's definitely not bankruptcy. That is Civil Code Section 2924, but the post sale rules are this 2924 is very long. It deals with excess proceeds. It deals with deficiency rights. So that's a big question. I'm not exactly sure what you want to know about the post sale rules, but there are plenty of them.

Marina Fineman, Esq.:

Well, he's got another question up there. How does the automatic stay work when the debtor files post sale? I don't know if that second question was a follow-up.

Steven E. Ernest, Esq.:

I don't know that it does. Go

Marina Fineman, Esq.:

Ahead. The questions above from Michael. And the automatic stay works after the sale. Well, this has been a very complicated question, honestly. And under 29, 24 with all the new foreclosure, foreclosure rules in California has upended the bankruptcy stay and the finality of the gavel falling at the foreclosure sale. But in effect, if the sale closes before the filing, it should remain closed. There are a couple judges who have undone that, and I actually had a bankruptcy opinion published saying that that is not correct. So the bankruptcy does not undo a sale that happened pre-petition generally in front of most judges who understand the law.

Steven E. Ernest, Esq.:

Hopefully they do if they're a judge.

Marina Fineman, Esq.:

Not all. All right.

Steven E. Ernest, Esq.:

Well, we have answered every question in the Q&A, and despite the rules, we answered also every question in the chat and we still have 10 minutes to spare. So Marina, you can sing for us or we can just log off for now. Which would you prefer? I think

Marina Fineman, Esq.:

This is a good place to stop.

Steven E. Ernest, Esq.:

All right. No song for any of you today.

Marina Fineman, Esq.:

I have no singing voice, unfortunately.

Steven E. Ernest, Esq.:

It has been enjoyable. I learned something as I always do when speaking to Marina. I'm lucky to know you and you are a font of bankruptcy knowledge. We appreciate it. Such a great deal. We want to thank all of the people who registered and joined. If ever you have questions you were too scared to put in the Q&A or in the chat because you thought I was going to say your name on live webinar, which I would have, you can contact us at the email addresses or at the firm. We're always glad to talk to you and walk you through these things because we know what we're talking about. So we wish you a great day. Marina, thank you so much. Have a great rest

Marina Fineman, Esq.:

Thank you, Steve, for everything.