By Ryan C. Wood
On September 12, 2014, actress Teri Polo filed her Disclosure Statement with the United States Bankruptcy Court, Central District of California. A Disclosure Statement is a key document in every Chapter 11 bankruptcy reorganization case. A Disclosure Statement provides the overall picture of the case and more or less what the plan is for repaying creditors pursuant to the Bankruptcy Code. Ms. Polo’s original petition for relief was filed on April 14, 2014, in the Bankruptcy Court for the Central District of California.
How Chapter 11 Works vs. Chapter 13 Bankruptcy Reorganization
Chapter 13 reorganizations are for individuals with regular income that are within the debt limitations set forth in Section 109(e) of the Bankruptcy Code. To reorganize your debts under Chapter 13 you must have unsecured debts of less than $383,175.00 and secured debts of less than $1,149,525.00. Chapter 13 is a streamlined reorganization and the most significant difference is that creditors do not get to vote on accepting or rejecting the plan of reorganization. Ms. Polo was not able to reorganize her debts in Chapter 13 given her unsecured debts exceed $383,175.00. She was forced to reorganize under Chapter 11. Chapter 11 is much more expensive then Chapter 13 regarding bankruptcy attorneys’ fees and costs and the requirements to confirm or have a plan of reorganization approved by the Bankruptcy Court is traditionally more difficult. Creditors generally participate more in a Chapter 11 case than in a Chapter 13. Again, creditors are able to vote to accept or reject a plan of reorganization in Chapter 11.
Actress Teri Polo’s Plan of Repayment to Creditors
There really is nothing very extraordinary about Ms. Polo’s Disclosure Statement or plan of repayment in her Chapter 11 bankruptcy reorganization. Like many reorganizations under Chapter 13 or Chapter 11 there is usually very little money for general unsecured creditors to be paid once the bankruptcy filer’s reasonable living expenses are deducted from monthly income and then secured creditor are paid (if any) and priority unsecured creditors are paid from the disposable income of the bankruptcy filer. That is the priority of who gets what: first secured creditors, priority unsecured creditors then general unsecured creditors. Specifically Ms. Polo estimates her monthly gross income to be $41,297.83 for the 60 month life of the plan. Her monthly expenses are estimated to be $35,247.40 leaving monthly disposable income of $6,467.10 available to her creditors. Actress Teri Polo is paying back approximately $388,027 in debt while discharging approximately $536,854.58 in general unsecured debts. Ms. Polo debts are primarily owed to the Internal Revenue Service and the Franchise Tax Board (87% of debts are unpaid taxes), but she is paying back approximately 39% of her unpaid taxes and discharging approximately $407,146 of unpaid taxes. As a bankruptcy attorney that formerly worked for a Chapter 13 trustee I can confirm paying back $388,027.00 of debts in an individual reorganization bankruptcy case is substantial.
Credit Objections to Confirmation/Approval of the Disclosure Statement
So far only one creditor has filed an objection to Ms. Polo’s Disclosure Statement. Edwin McPherson and Tracy B. Rane filed the objection and are listed in Schedule F as having a disputed claim totaling $30,000 from a California State Court lawsuit, Case No. BC535153, resulting from a rental lawsuit. I have not reviewed the state court lawsuit, but it appears no judgment was entered in the case and therefore the amount of the claim is disputed. As soon as a bankruptcy case is filed the automatic stay takes affect stopping any and all collection activity include lawsuits. A creditor may attempt to seek relief from the automatic stay from the bankruptcy court to continue to the lawsuit in state court, but that is an uphill battle and the creditor must have the proper grounds to make the request. The Edwin McPherson and Tracy B. Rane objection provides little to no legal grounds for the objection to the “plan”, which technically has not been filed yet in the case. They are really objecting to the disclosure statement. Naturally, since Edwin McPherson and Tracy B. Rane have an unsecured debt, their objection alleges Ms. Polo has disposable income to pay unsecured creditors. The objection fails to specifically detail what expenses of Ms. Polo are not reasonable or how much disposable income Ms. Polo should or could have to pay any of her unsecured creditors in the bankruptcy. Edwin McPherson and Tracy B. Rane have yet to file a claim in the case as of the writing of this article as well. Every creditor must file a proof of claim to prove how much they are owed and how the claim should be treated by the plan of reorganization. If a proof of claim does not include the proper documentation to support the claim, the claim can be objected to and potentially disallowed. The failure to file a claim is most likely because Ms. Polo filed for bankruptcy protection while the California State Court case was ongoing and again, before a judgment was entered or dismissal of the case. This is not uncommon. If Edwin McPherson and Tracy B. Rane did file a proof of claim Ms. Polo would most likely object to it and an evidentiary hearing may have to be held to determine if the claim is valid.
Looking Forward
The next part of the process is to have the filed disclosure statement approved and have creditors vote on acceptance or rejection of the plan of reorganization. Time will tell if Ms. Polo’s receives the necessary votes from the different classes of creditors. If not, a much more complicated process to confirm/approve the plan will have to take place. I will leave that for if and when it happens.
