“Time is money. Wasted time means wasted money means trouble.” Shirley Temple-Black.
Given its name, the preceding quote is certainly apropos to the timeshare industry. Timeshare creditors sell time, and a unit not producing dues, loan payments, or both is wasted income from a limited stream. Wasted income can lead to dues increases to cover costs in a reduced pool of owners. Most important, wasted income deprives creditors of the bargained-for value when they agreed to sell the timeshare unit. This loss of value is substantial. While the judicial or non-judicial foreclosure process is a way to return value to interested parties, the number one impediment to judicial or non-judicial proceedings is bankruptcy.
The Bankruptcy Code is a Federal law that provides a unique set of rights and responsibilities to debtors and creditors. Arguably the most important aspect of bankruptcy law is the automatic stay, which is the most powerful and comprehensive injunction provided by a statute in our legal system. This injunction is triggered when a debtor files a bankruptcy petition (hence the term “automatic”) and prevents creditors from taking any action to collect prepetition debts from the debtor and also protects any interest the debtor has in property, broadly defined in the Bankruptcy Code as “property of the estate”.
Collection actions include obvious activities such as starting or continuing judicial or non-judicial foreclosure proceedings, sending collection letters and making collection calls, and some not so obvious activities such as continuing to accept a direct debit from the debtor’s account and sending monthly statements that do not contain explicit warning language. The result is that all collection actions come to a halt when the debtor files a bankruptcy petition. Bankruptcy courts may impose significant sanctions against a creditor for violating the automatic stay.
The Bankruptcy Code has several “chapters” under which debtors may seek relief, but the two most common with timeshare owners are Chapter 7 (liquidation) and Chapter 13 (reorganization).
In a Chapter 7 case, all of the debtor’s property, including an interest in a timeshare property, vests in a Chapter 7 trustee. The Chapter 7 trustee has the authority to sell any asset in the estate pursuant to a court order, after notice is given to all interested parties, and subject to certain statutory exemptions. With advanced notice, a timeshare creditor can assess the potential return from a trustee sale and also allows the creditor to exercise a right of first refusal, a common provision in timeshare contracts.
In a Chapter 13 case, the debtor proposes a plan of reorganization that modifies certain contract terms (interest rate, amount of loan, etc.) provided the debtor dedicates all disposable income to the plan. The Chapter 13 trustee administers the payment of debts under the plan. Provided that the creditor has filed a proof of claim, the creditor will receive payments under the plan. If certain circumstances exist under either chapter, a creditor may file a motion with the court requesting that the automatic stay be lifted or modified, so that the creditor may pursue state court remedies against the debtor, property of the estate, or both.
Tools to Uncover Hidden Value
Many developers pursuing the recovery of a defaulted timeshare segment will stop any further action upon filing the bankruptcy petition and wait until the conclusion of the bankruptcy. While the length of a bankruptcy proceeding varies by chapter, the average is thirty-six months. This is a long period of time to have a non-performing asset. Timeshare creditors have two very effective tools to reduce uncompensated time during an active bankruptcy case: the proof of claim and the motion for relief from stay.
The Proof of Claim
Form 410 is a uniform proof of claim consistent throughout all 94 Federal jurisdictions. It is readily available on the court’s website and allows a timeshare creditor to continue to receive payments during the pendency of a Chapter 13 case. The form is mandatory where the debtor owes the timeshare creditor prepetition debt. Timeshare creditors need no attorney to file a proof of claim and can either register with the clerk of courts to file the proof of claim electronically or can print the completed form and mail it to the clerk’s office indicated on the notice of bankruptcy. Note that all proofs of claim must be filed within specified timeframes set forth on the notice sent at the commencement of the case. Most developers understand and know how to navigate this process.
The Motion for Relief
A less frequently used tool for creditors in bankruptcy is the motion for relief from stay. If the debtor fails to make plan payments in a Chapter 13 case, or files a petition under Chapter 7, timeshare creditors can significantly speed the recovery of timeshare segments by moving for relief. Filing a motion in a bankruptcy court is considered the practice of law, so an attorney must prepare and prosecute the motion. Most people are not thrilled to hire a lawyer because of the expense, however, most of this work is done by high-volume, specialized law firms that will perform this work for a reasonable, flat fee.
The grounds for granting a motion for relief are as follows: that the property is not needed for an effective reorganization, that the creditor is not being adequately protected, and that the property is of little or no value to the bankruptcy estate.
Timeshare properties are rarely a primary residence and it is reasonably easy to demonstrate the recreational nature of the timeshare interest and prove that the property is not needed for an effective reorganization. Adequate protection is a concept unique to bankruptcy law. It applies to creditors that hold a security interest in collateral to secure payment of a debt. If a secured creditor is not being paid on loan installments, dues, or both, the creditor may argue that their security interest is not adequately protected by offering a payment history reflecting non-payment as evidence. Finally, the difference between of the total value of the timeshare property on the open market, with evidence of the outstanding amounts due and the cost of liquidation, will typically show a lack of equity by the debtor in the property, which satisfies the value element.
Most motions are granted within sixty days from filing the motion. If the owner objects, the timeshare creditor and debtor frequently enter into a court-ordered agreement to bring the account current, often within six months or less. The motion for relief reduces the delinquency time when an owner is in an active bankruptcy case.
Bankruptcy offers timeshare creditors a chance to substantially reduce or even eliminate the time an account is delinquent. By proactively pursuing remedies in bankruptcy, timeshare creditors provide value to timeshare associations, owners who are current, and even the delinquent owners. Similarly, by failing to act in bankruptcy, a developer may impair the health of the development by starving it of much-needed association dues. Receiving funds expeditiously lets the association provide needed services without resorting to dues increases to offset losses from delinquent accounts. This benefits owners who are current and enhances the overall value of the development.
While bankruptcy may seem like an unlikely place to look, timeshare creditors have several tools to help them find the hidden value in bankruptcy.
This article originally appeared in the October 2018 issue of Developments Magazine.