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Ask Terry L. Your Own Question
Terry L.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2842
Experience:  Better Business Bureau. 18yrs bankruptcy experience. Chicago Bar Assoc. American Bankruptcy Institute member.
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I am 20 months into my Chapter 13 bankruptcy payment plan.

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I am 20 months into my Chapter 13 bankruptcy payment plan. I didn't think to add as a Contingent Liability a personal co-guaranty I had signed with 4 partners for a Real Estate investment loan in 2006. The other partners in that deal bought me out in 2008, so I no longer had an ownership interest in the project. Now 7 years later the Lender is calling me seeking my contributions toward a loan deficiency: a 3rd party is looking to buy that loan for $.65 on the dollar. The Lender says "as a regulated institution" they have to seek compensation from me too during this transaction which will result in a loss for them. So I need to amend Schedule F to include the pre-existing Lender / Creditor. I'm curious after I do that, what recourse does the Lender have then? What process takes place to determine whether any adjustments are needed to my payment plan? The deficiency is in the millions of dollars so there is no chance I'd ever make a dent in that. Thank you for your help!

Terry L. :

Hi, thanks for your question. You should hire a lawyer for specific legal advice. No attorney client relationship is created here.

Terry L. :

Thanks for the fact pattern

Terry L. :

Couple issues here.

Terry L. :

Yes, you can file an amended Schedule F.

Terry L. :

As a 'cosigner' you can treat this several ways.

Terry L. :

If you wish them to get paid thru your plan, you would need to bring a motion to allow a late claim.

Terry L. :

Then, the bankruptcy court can pay it at the same rate as other unsecured creditors.

Customer:

I'm not wishing for them to get paid thru my plan...

Terry L. :

So, if you are doing a 10% plan, you can pay them 10 cents on the dollar.

Terry L. :

Depending on the amount, that could disqualify you from chapter 13.

Terry L. :

Cosigners/joint debts would survive for the remaining cosigners

Terry L. :

You may look into the argument that the previous buyout removed any further liability you had towards that obligation

Terry L. :

Did you have a liability clause with the buyout?

Terry L. :

Such as a hold harmless clause?

Customer:

You are asking if the new buyer of the loan included a "hold harmless" clause to the guarantors?

Terry L. :

No, I'm asking when you were bought out by your other partners, did your sale agreement include a hold harmless clause for that (and any other liabilities)?

Customer:

Oh I see, no we did not... although the Lender has told me that regardless of any indemnity agreements you have with your former partners, those do not apply to the Lender's claims.

Terry L. :

If it is a valid debt, and your total unsecured debt is above $383,175, then you are not eligible to be a debtor under chapter 13, and would have to look into converting the case to chapter 11.

Customer:

Ok the loan amount was for $9.5 Million and all partners co-signed for that total amount. The buyout offer is for about $7 Million, and the bank has told me and my other non-owner partners that they are seeking close to $500,000 between all of us.

Terry L. :

So, this can be problematic, since you signed as an co-obligor on the debt, and it seems like it's not contingent. Contingent under the bankruptcy code means that some other event must take place (excluding payment default) before you become liable for payments. Say for an accident case that would be pending.

Terry L. :

What you describe is a settlement on the debt, for $500k, but the true amount is the $9.5M which pushes you out of the chapter 13....

Terry L. :

Do you have a bankruptcy attorney?

Customer:

Hmmm the loan was in good standing in 2011 when I filed, and no payments have been missed in 7 years. Isn't that loan liability contingent on default?

Customer:

I have reached out to the attorney who handled my bankruptcy but she is no longer in private practice. I've since reached out to two others and am hoping to connect with them soon.

Terry L. :

Not necessarily, cosigning on the loan is guaranteeing the debt to be repaid. All parties are equally liable for payment, so the fact that the loan was paid doesn't change your obligation to pay.

Terry L. :

So, it is not contingent as per bankruptcy definition.

Terry L. :

You will need to discuss this in detail as to what amendments need to be done, and if your case needs to be converted.

Terry L. :

Did you have any other questions/

Customer:

I see, thank you for clarifying this. So I am obligated both to amend the existing and/or convert to Chapter 11 (if I no longer qualify for 13).

Terry L. :

Yes, you have a duty to correct any inaccuracies, unfortunately that creates more problems here.

Customer:

One further wrinkle: I am a co-guarantor on the loan. My wife is not. The Chapter 13 filing was for both my wife and I.

Terry L. :

Otherwise, once the lender finds out about the BK, they would contract the Trustee, and then it's worse than if you notified the court yourself

Terry L. :

No impact

Terry L. :

no difference

Terry L. :

One option though, is to dismiss you out of the case, and she can continue for her debts

Terry L. :

That way the case is still viable that way.

Customer:

I see so she can continue with her payments, but I carry on perhaps in Ch 11.

Terry L. :

or you can split case converting/dismissing your side, while hers can continue.

Terry L. :

yes.

Customer:

Ok. Well that's a shit sandwich no matter how you slice it.

Customer:

Thank you for your help.

Terry L. :

Yeah, i hear ya

Terry L. :

Not the typical case for sure.

Terry L. :

Chapter 11 can be similar to ch13, so all is not lost

Terry L. :

Any last questions?

Customer:

Is there a short answer to how Ch 11 would differ for me if / when I convert from 13?

Customer:

I don't expect you to answer in depth..

Terry L. :

It really depends on assets, income, how you treat each class, too in depth to get into here unfortunately.

Customer:

Fair enough.

Customer:

You've been very helpful, thank you. I will certainly be talking more in-depth with a bankruptcy attorney soon.

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