Bankruptcy: Debtor can contribute for Retirement in Chapter 13 Case

In the case of In re: Ricardo Cantu, Jr., the United State Bankruptcy Court at Alexandria ruled that a debtor in a Chapter 13 case can contribute for retirement under 11 U.S.C. Section 541 (b)(7).

In Cantu the Chapter 13 trustee objected to the debtor making voluntary retirement contributions. The Court, in its review, noted that the issue of voluntary contributions has been the subject of some debate in the case law in recent years. The Court stated that there are essentially three divergent lines of cases. The first line holds that the debtor is not entitled to any deduction for voluntary contributions, whether or not he was making voluntary contributions pre-petition. The second line is that voluntary retirement contributions may be continued as long as they are consistent with the debtor’s pre-petition history of contributions. The third line, which the Court noted was the majority view, concludes that the bankruptcy code allows for the deduction, whether or not the debtor was making voluntary contributions prior to the bankruptcy filing, but subject to a determination of the debtor’s good faith.

The Court noted that the bankruptcy trustee urged the Court to adopt the second line of cases, but the Court adopted the third, deciding that the bankruptcy code does not limit the debtor’s ability to make contributions post-petition, nor is there any distinction between pre-petition contributions and post-petition contributions. The Court held that the use of the term “any amount”, without limitations, followed by the term “contributions”, compelled the conclusion that Congress meant no such distinction.

The Court further decided that there was no evidence that the debtor proceeded in anything other than good faith. Accordingly, the Court overruled the chapter 13 trustee’s objection.

Collections: Acceleration of Demand Notes

The Twentieth Judicial Circuit examined a debtor's assertion that the note's "detailed enumeration of events consisting default was inconsistent with a demand note", and that since the note was not a demand note, the creditor must demonstrate "good faith" in accelerating repayment of the note. The case was NationsBank of Virginia, N.A. v Barnes. The Court examined Virginia Code §8.3A-108(a), which states that a note is payable "on demand" if it says it is payable on demand or states no time for payment. The Court found that the note in this case was a form with a box "on demand" checked, with no time set for repayment, only a provision requiring monthly payments of interest. The Court ruled that the note was unambiguous and clearly a demand note, and that no showing of "good faith" was required before requesting payment on the note.

Despite the favorable result for the creditor, great care should always be taken to clearly identify payment demand terms.

Foreclosure: Deed in lieu of Foreclosure

In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:

1. Value of the property vs. the amount of the debt.
2. Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.

Real Estate: The Virginia Property Owners’ Association Act – General Provisions

In the last issue of Creditor News we began a review of the Virginia Property Owners’ Act. Under the Act, sellers are required to disclose in their sales contract that the property is located within a development subject to the Act. The Act also requires the seller to retrieve the Disclosure Packet in the Act and provide it to the purchaser. The Disclosure Packet includes the following information: association documents, the name of the association, state of incorporation, register agent’s name and address, any other entity/facility to which the owner may owe fees or charges, budget or summary, income/expenses statement or balance sheet for last fiscal year, statement of balance due of outstanding loans, nature/status of pending lawsuits, unpaid judgments (with material impact on association or members or relating to lot being purchased), insurance coverage provided for lot owners including fidelity bond maintained by association, and much more

The purchaser may cancel the contract within three days if delivered by hand or email, or six days if sent by mail, after receiving the Disclosure Packet or being notified that it is “not available” (meaning: a current annual report has not been filed by the Association with either the SCC or the CICB; or the seller has requested in writing that the packet be provided and it is not received within 14 days; or the association has provided written notice that the Disclosure Packet is not available). Additionally, if the Disclosure Packet is not delivered or the association does not indicate that it is not available, the purchaser may cancel the sale any time prior to closing. If the purchaser received the Disclosure Packet, the owner also has the right to request an update. However, the rights to receive and cancel the contract are waived conclusively if not exercised before settlement. 

Failure to provide a Disclosure Packet after a written request for it has been made results in a waiver of any claim to delinquent assessments or violations of association documents up to that point, and the association will be liable to the seller for actual damages sustained up to $1,000 if the association is managed by a CIC Manager or up to $500 if it is self-managed. 

In the next two issues of Creditor News, we will discuss the provisions of the Virginia Property Owners’ Association Act that provide a memorandum of lien and foreclosure in the event of an owner’s default.