The new Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect on Oct. 17, and now bankruptcy experts around the country are highlighting the changes and trying to figure out how to apply them in the law. Not only are there sections that are nonsensical or contain gaping holes, but the new act includes many technical errors. And Congress has no intention of making amendments to it any time soon.
While it’s difficult to predict how many of the BAPCPA changes will affect self-storage operators, I can give you at least a preview of those I expect to have significant impact on the industry. I’ll supply updates in future columns.
Chapter 7 Eligibility
When it comes to bankruptcy changes, there are really only a few important things a self-storage operator needs to understand. The first is almost everything you already know about the subject still applies. The new act includes many revisions to the existing law, but general precautions remain the same. For example, you still need to remember an automatic stay goes into effect immediately once a tenant files bankruptcy, and you cannot continue with a foreclosure or lien sale if that occurs.
The largest change is the way in which a debtor is considered eligible to file Chapter 7, which involves a complete discharge of debt, or Chapter 13, which includes some form of repayment to unsecured creditors. Now, a debtor is forced to face a “means test,” which looks at income and expenses against a national standard, before he can file Chapter 7. If he has income in excess of the average (adjusted by region), he would, in theory, be forced into Chapter 13.
This is a welcome change to any self-storage operator who has had to halt a lien sale, lose use of a unit, or suffer the consequences of a bankrupt tenant who walked away from his debt. But the national average shows that 78 percent of people who have filed Chapter 7 would still be eligible, even with the means test in place.
Further, although more debtors will have to file Chapter 13, many U.S. District Courts approve very low-percentage repayment plans. Some states offer one so low it’s called a “pot plan.” In this plan, the amount paid to unsecured lien-holders like self-storage operators is so small it’s not even identified as a percentage—it’s just what’s left in the proverbial pot after payment of all other expenses and secured obligations.
So you might only get 1 or 2 cents on the dollar, and to get it, you’ll need to submit a Proof of Claim. If you fail to file by a certain date (the “bar” date), you’ll be excluded from the repayment, and all the debtor’s other creditors will get a higher percentage of the payout. The filing of a Proof of Claim is still a reasonably sophisticated, technical process best handled by your legal counsel, even though it may cost you more in legal fees than you get back in settlement.
Once a debtor files Chapter 7, the rest of the process remains largely unchanged. He pays a relatively low filing fee, and an automatic stay immediately goes into effect. This could tie up a storage unit for several months and, in most circumstances, the operator receives no payment on the pre-bankruptcy debt. The only way to get the debtor out of the unit is to spend a considerable amount of money on attorney and filing fees to file a Motion for Relief from Stay. None of this is new information.
Another change to BAPCPA is debtors wishing to file Chapter 7 or 13 have to go through some sort of debt counseling. This is a prerequisite, and the debtor must actually present a certificate of completion from a nonprofit debt-relief counselor before he can file.
Although this seems like a positive change, no information is really available about what this debt counseling is going to look like or how it will work. The U.S. Trustee’s Office of the Department of Justice was supposed to promulgate standards for debt counselors, which still hasn’t been released as of September. Although 5,000 certified counseling services were supposed to be in place by Oct. 17, at the end of September I knew of only one claiming to be approved. Therefore, there is some question about the kind of counseling that is actually available and whether this requirement will be suspended or waived for some period of time.
The change self-storage operators thought they were going to get was one to Section 362 of the Bankruptcy Code, which would clarify the amount of time a tenant who files bankruptcy can hold on to a storage unit before the operator can proceed with eviction or lien sale. A change to the code was made, but self-storage as an industry did not get the same advantages as apartment complexes.
According to Section 362 (B)(20), “Any action to enforce any lien against or security interest in real property following entry of an order . . . as to such real property in any prior case under the title, is not stayed.” However, your lien is generally not on real property, but on the personal property stored in the real property.
Section 362 (B)(22) discusses permission for the continuation of any eviction, unlawful-detainer action or similar proceeding by a lessor against a debtor that involves “residential property in which the debtor resides as a tenant under a lease or rental agreement, and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition a judgment for possession of such property against debtor.” Again, since you are not operating residential property, you don’t benefit. There is no acceleration or change in the procedure for removing a tenant from a unit post-bankruptcy.
A Motion for Relief from Stay, with all its trappings and filing fees, still appears to be the only way to get a tenant out of a unit during bankruptcy. Keep in mind the issue is whether he chooses to pay rent after he files. You are generally only entitled to ask him to leave if he doesn’t pay regularly and on time post-petition, as the pre-bankruptcy debt will be discharged or funneled into a repayment plan, depending on the Chapter he files. This is why it’s important to keep tight collection deadlines, so you never lose very much on the pre-filing rent.
Changes in Attorney Title
Another change you may notice is your business attorney may start referring to himself in his letterhead and other communication as a “debt relief agency.” This does not mean he is providing the aforementioned debt counseling or helping debtors avoid their bills. It’s just that any attorney who offers advice even minutely related to bankruptcy is now supposed to put people on notice of that fact. Per the new act, it has to be done, so do not be put off by this statement in your legal counsel’s correspondence.
Because of the change—and until it is sufficiently interpreted and addressed in the law—I strongly caution all self-storage operators to avoid any substantive discussion about bankruptcy-related issues with tenants. If a tenant informs you he is filing or thinking of filing, you can certainly ask questions such as: Who is your attorney? When do you expect to file? Have you already filed, and if so, what is your case number?” But do not go further than that or offer any kind of advice. Believe it or not, it might cause you to have to identify yourself as a “debt relief agency” also.
What It All Means
You may notice your tenants are not as quick to rush into bankruptcy these days. There’s going to be a learning curve to figure out some of the new procedures, and questions about how to handle the debt counseling and related certificates. You may see some increase in the number of Chapter 13 filings, but I’m not certain this will actually benefit you as a facility operator.
Overall, it’s worth meeting with your legal counsel to make sure you understand how policies and procedures are going to work in your district. When you see your first Chapter 13 is a good time to discuss the value and cost of filing a Proof of Claim vs. what you might get out of the case.
Once the code changes have really taken hold, I will include an update in this column. I expect some of the provisions to be appealed to federal courts rather quickly.
Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, call 513.721.5151; e-mail email@example.com.