Bankruptcy
Professor Coco
Fall 2020
Coco Article
Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA"),
Link to the text of the note which bifurcates the jurisdiction of the bankruptcy court into "core"
proceedings, in which a bankruptcy judge enters a final order, and "non-core" proceedings, in
which the bankruptcy judge submits findings of fact and conclusions of law to the district court
judge for entry of a final order.
This two-tiered jurisdictional system has been said to arbitrarily and unjustifiably limit the
jurisdiction of the bankruptcy court and the power of bankruptcy judges by rendering the
bankruptcy court a dependent "unit" of the district court.
Several legal arguments have been offered to explain the continued subordinate status of the
bankruptcy court: 1) bankruptcy is a specialized and narrow area of law that does not need courts
with full Article III powers and protections, and 2) appellate review by an Article III tribunal
sufficiently checks the power exercised by the bankruptcy court.
The profession of bankruptcy is accorded low prestige and power because of the subject matter
and the clientele. Article III judges have often perceived bankruptcy law and the legal actors who
practice bankruptcy as illegitimate and subordinate. They think bankruptcy court is not an
appropriate arena for the articulation and demonstration of the judicial power of the United
States; rather, they assume that the bankruptcy court is an arena for the expression of an "inferior
form of justice."
The bankruptcy court and its judges were denied full Article III status and powers at each of
these crucial moments - an outcome that can only be explained, as discussed in Section III, by an
understanding of the sociocultural stigma attached to debt, failure, and bankruptcy in American
society and the exploitation of that stigma by entrenched power actors in the American legal
field.
The purpose of these structural reforms was to create a functionally independent court vested
with complete and original jurisdiction over all bankruptcy cases and civil cases related to
bankruptcy.
The bankruptcy court remains officially defined as an adjunct to Article III courts.
Jurisdictionally, the bankruptcy court is a division of the district court. The district court is
vested with original and exclusive jurisdiction over all bankruptcy matters, matters that are then
referred to the bankruptcy court. Bankruptcy judges do not have life tenure during good
behavior. They are appointed by a federal circuit court to 14-year 54 terms and are paid 92% of a
district court judge’s salary. As mentioned above, the bankruptcy judge’s power is limited by a
two-tiered jurisdictional structure into “core” proceedings, in which a bankruptcy judge enters a
final order, and “non-core” proceedings, in which the bankruptcy judge submits findings of fact
and conclusions of law to the district court judge to enter a final order.
The bankruptcy court would remain a division of the federal courts, but it would operate with its
own facilities and staff. The most important change was that the enrolled H.R. 8200, by means of
automatic delegation from the district court, vested bankruptcy courts with original and exclusive
jurisdiction over bankruptcy cases and shared jurisdiction over civil proceedings arising under or
related to the bankruptcy case.
In response to Marathon, Congress continued sidestepping the issue by enacting amendments to
the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA) that bifurcated
bankruptcy jurisdiction. The bankruptcy court would hear and determine matters the
amendments label as "core," and the bankruptcy judge would continue to hear, but not decide,
"non-core" matters.
The Commission's Report again recommended to Congress that the bankruptcy court be
established under Article III of the Constitution, explaining that "the procedural morass of the
bankruptcy judicial system is extraordinary, costly and inefficient." Congress did little to address
the Commission's jurisdictional concerns. Instead, Congress enacted the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (BAPCPA). BAPCPA reflected a distrust of
bankruptcy courts by including "provisions intended to "reduce the discretion' of bankruptcy
judges" - a limit that was "the self-proclaimed backbone of BAPCPA." Rather than increasing
the powers of the bankruptcy judge, the new amendments decreased them.
For decades, the bankruptcy bar was primarily comprised of and [*210] dominated by Jewish
attorneys. 157Link to the text of the note This close pairing of bankruptcy law and Jewish
attorneys is a result of a double stigmatization. As mentioned above, the large firms in the legal
field rejected bankruptcy law and practice as undesirable, and these firms simply excluded the
practice area.
A bankruptcy ring was a small group of professionals who consistently appointed and selected
each other to perform the functions of the bankruptcy court process. The rings were
characterized by consistent dealings over a period of many years among the same group of
attorneys, trustees, and judicial officers.
The limited number of bankruptcy professionals in any region reinforced the perception and
reality of bankruptcy as an insider practice. The bankruptcy bar was comprised of a small group
of attorneys who tended to be well-acquainted with each other.
A district court judge can withdraw any proceeding from the bankruptcy court for cause, and
must withdraw a proceeding if it involves Title 11 and another law of the United States affecting
interstate commerce. The district court rarely exercises its discretionary authority to withdraw a
case from the bankruptcy court, however. Instead, it refers cases under Title 11 to the bankruptcy
court, and, in most districts, the referral is automatic by means of a local rule. This referral of
jurisdiction is two-tiered depending on whether the proceeding is "core" - meaning one that
arises under or arises in Title 11 - or "non-core" - meaning a case involving a third party that is
merely related to a case under Title 11. The bankruptcy judge may enter final orders in core
proceedings but may only enter a final order in non-core proceedings when the parties expressly
consent to the bankruptcy judge deciding the issue.
The dominant test for the outer limits of “related-to” bankruptcy jurisdiction in third-party
disputes is the Pacor test. Scholars describe the Pacor test as “manifestly inadequate” because it
fails to provide clear limits for “third-party ‘related-to’ bankruptcy jurisdiction.” As a result,
numerous circuit court opinions apply the test to facts “with countless instances of identical
factual and procedural postures producing diametrically disparate results” and creating
jurisdictional determinations that are essentially arbitrary.
The statutory list in the jurisdictional provisions of BAFJA provides “core proceedings, include,
but are not limited to” all “matters concerning the administration of the estate” such as the
allowance and disallowance of claims against the estate; claims against per- sons filing proofs of
claim against the estate; suits for the turn-over of property to the estate; avoidance of preferential
transfers; fraudulent conveyances; confirmations of plans; and sale of property of the estate. This
list is not exclusive.
In conclusion, this article argues that the Court should reconsider the current jurisdictional
structure of the bankruptcy system. In light of the recent mortgage crisis, the Court needs to
recognize that the bankruptcy laws and court are essential to the maintenance of the American
economy and social structure. An anthropological analysis of the bankruptcy legal field reveals
that the legal field hierarchy denying bankruptcy courts Article III powers and status is based on
cultural discourses founded, in a large part, on the Protestant ethic.
Ch. 1 – Overview of Bankruptcy
The Nature and Purpose
Legally, bankruptcy is the type of court proceeding designed to settle financial affairs of a
bankrupt debtor. The goals are (1) resolving completing claims of multiple creditors and (2)
freeing the debtor from its financial past.
Chapter 7 bankruptcy is a liquidation bankruptcy, where the debtor’s existing assets are sold
(liquidated) and the net proceeds are distributed to creditors. Any exempt property is returned to
the debtor rather than being sold for the benefit of creditors. The bankruptcy trustee
(independent party) supervises the process of collecting debtor’s assets, liquidating those assets,
returning exempt property, and making distributions to creditors.
With some exceptions, creditors are paid equally if the debtor’s estate won’t pay all its creditors
in full. The exceptions to equal treatment are (1) secured creditors are paid value of their
collateral before unsecured creditors are paid and (2) out of the residue of the estate after the
secured creditors are paid, some unsecured creditors have been awarded priority in payment by
Congress and must be paid before non-priority unsecured creditors.
A “discharge” of debts is when a debtor, in exchange for giving up its existing property for
immediate distribution, is relieved from any further legal obligation to pay prior debts.
State collection law is sometimes referred to as “grab law,” the creditor who acts first has the
sheriff seize debtor’s assets will be paid first. Grab law works well either when (1) the debtor is
solvent (has enough assets to satisfy all creditors in full), or (2) the debtor only has one creditor.
Rehabilitation Cases
If debtor has positive future earning capacity, it may make more sense to permit debtor to retain
its property and pay its creditors out of those future earnings.
Chapter 11 bankruptcy permits a reorganization of an enterprise. The purpose is to restructure
a business’s finances so that it may continue to operate, provide its employees with jobs, pay its
creditors, and produce a return for its stockholders.
 Issue: holdout may occur with a dissenting creditor, who may still pursue receiving
money, and in turn receives more than his fair share. The solution includes (1) dissenting
creditors must be enjoined from exercising state law collection and (2) dissenters must be
bound to the terms of the reorganization plan.
Chapter 13 bankruptcy, which is for individuals with regular income and less certain amount
of debt, allows adjustment of their debtor through a repayment plan of three to five years.
If an individual consumer debtor has sufficient projected future repayment capacity, such debtor
is barred entirely from chapter 7. This is an abuse test, which utilizes a complicated “means test”
to ascertain presumptive abuse. The test seeks to calculate debtor’s excess future income over
allowable expenses, and if the debtor appears to be able to pay, he is kicked out of chapter 7
unless he can demonstrate special circumstances.
Chapter 12 bankruptcy is similar to chapter 13 but is geared to help family farmers. Family
farmers are permitted to keep their land if they make payment under a three-to-five-year plan
that complies with the required code. Chapter 12 has a higher debt limit than chapter 13.
The History of Bankruptcy Legislation
English Antecedents
Early English law had a distinctly pro-creditor orientation, and was noteworthy for its harsh
treatment of defaulting debtors. Imprisonment for debt was the order of the day, from the time of
the Statute of Merchants in 1285,85 until Dickens’ time in the mid-nineteenth century.
The first comprehensive bankruptcy law was passed in 1571 during the reign of Queen Elizabeth
I. Over the next two centuries, Parliament periodically amended the bankruptcy laws, in each
instance enhancing the power of the bankruptcy commissioner to reach more of the debtor’s
assets, and increasing the penalties against debtors.
The most notable English bankruptcy law was the Statute of Anne in 1706, which introduced the
discharge of debts for the benefit of the debtor who cooperated in the proceeding. However, the
Statute raised the stakes for uncooperative debtors to the death penalty for fraudulent bankrupts.
Influenced by English, American law allowed a discharge for the debtor who cooperated and
death for the fraudulent debtor. Bankruptcy remained an involuntary proceeding available only
against traders.
The Constitution and American Bankruptcy Law Prior to 1898
Initially, bankruptcy law was controlled by the states, but moved to federal law to create
uniformity due to problems with commerce and nonresident creditors stemming from various
discrimination laws.
Voluntary bankruptcy came into being with the passage of the Bankruptcy Act of 1841. The
practice of imprisoning debtors was abolished federally in 1839.
the composition agreement allowed the debtor to propose payment of a certain percentage of his
debts over time in full discharge of those debts, while also keeping his property. If the proposed
composition was accepted by a majority in number and three-fourths in value of the creditors, it
was binding on all creditors, including dissenters.
Bankruptcy Act of 1898
Much of the 1898 Act, however, was directed not at debtor relief, but at facilitating the equitable
and efficient administration and distribution of the debtor’s property to creditors. Creditors
exercised significant control over the process through the power to elect the trustee and creditors’
committees.
The Chandler Act reworked the recently enacted reorganization provisions into the form that
prevailed for the next 40 years.
Bankruptcy Reform Act of 1978
When enacted, the 1978 Act was unique in the history of the nation’s bankruptcy legislation in
that it was the first that was not passed as a response to a severe economic depression.
The options for bankruptcy judges’ status were (1) to keep the bankruptcy judges as non-Article
III adjuncts to the federal district court judges, or (2) to make the bankruptcy judges Article III
judges in their own right, with the constitutional guarantees of life tenure and protection against
diminution in salary. Thereafter, under the Marathon ruling, bankruptcy cases were processed
pursuant to an “Emergency Rule” which used a bifurcated jurisdictional scheme: “core”
bankruptcy matters were heard by bankruptcy judges on reference from district courts, and
everything else was heard in district courts.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and Beyond
BAPCPA marked the culmination of almost a quarter century of feverish and well-funded
lobbying efforts by the consumer credit industry to crack down on consumer debtors.
The central effort, then, was to impose a “means test” as a gatekeeping device to chapter 7 for
individual consumer debtors. If, according to a strict formula, a debtor had the means to pay a
certain amount to creditors out of future income, then the court would be required to dismiss the
debtor’s chapter 7 case. While the debtor could not be required to file chapter 13, the only
choices such a debtor would be left with would be to forgo bankruptcy altogether or to
“voluntarily” convert to chapter 13.
The proposed new system was labeled “needs-based” bankruptcy, the idea being that only those
with the requisite need (measured by projected future net income available) should be eligible for
traditional chapter 7 bankruptcy relief.
The Sources of Current Bankruptcy Law
United States Constitution
Article I, § 8, clause 4 of the United States Constitution (the “Bankruptcy Clause”) gives
Congress the power to establish “uniform laws on the subject of bankruptcies.”
The first constitutional issues that arose concerned identifying the appropriate scope of the
Bankruptcy Clause itself. Thus, the courts have had to determine what comprises the “subject of
bankruptcies” within the constitutional grant. Secondly, the question has arisen as to whether a
bankruptcy law is a “uniform” law as required by the constitutional grant. A second set of
problems implicates federalism issues. Finally, courts have had to sort out the relationship
between the Bankruptcy Clause and other provisions in the Constitution.
The “Subject of Bankruptcies”
The first constitutional issue that arose in interpreting the Bankruptcy Clause was determining
what constituted the permissible limits of “the subject of bankruptcies.”
The first major expansion in the concept of a bankruptcy law came with the adoption of (1)
voluntary bankruptcy for (2) non-merchant debtors in the Bankruptcy Act of 1841.
Today virtually any law that addresses the relationship between creditors and a financially
distressed debtor, and readjusts the respective rights of those parties, is considered to fall within
the “subject of bankruptcies.” According to the Supreme Court, “bankruptcy” covers the “subject
of the relations between an insolvent or nonpaying or fraudulent debtor, and his creditors,
extending to his and their relief.”
Uniformity
“Uniformity” is problematic in the bankruptcy context because (1) most laws governing the
substance of the debtor-creditor relationship are state laws; (2) these state laws are incorporated
into and applied in the federal Bankruptcy Code; and (3) these state laws are not necessarily
uniform.
Thus, a bankruptcy law is uniform when (1) the substantive law applied in a bankruptcy case
conforms to that applied outside of bankruptcy under state law; (2) the same law is applied to all
debtors within a state and to their creditors; and (3) Congress uniformly delegates to the states
the power to fix those laws. The fact that debtors and creditors in different states may receive
different treatment does not render the law unconstitutional.
The Participants in a Bankruptcy Case
Debtor
The “debtor” is defined in the Code as the “person or municipality concerning which a case
under this title has been commenced.” In other words, the debtor is the subject of the bankruptcy
case. The mere fact that an entity is a “debtor” as defined in the Code does not guarantee that
they will be eligible for bankruptcy relief.
The term “person” is defined as including an “individual, partnership, and corporation, but does
not include [a] governmental unit.” The definition of a municipality is much broader, meaning a
“political subdivision or public agency or instrumentality of a State.”
Debtor in Possession
The debtor in possession is defined as “debtor except when a person that has qualified under
section 322 of this title is serving as trustee in the case.” § 1101(1). In plain English, that means
that the DIP is the chapter 11 debtor, but also must perform the duties of the bankruptcy trustee.
Creditor
The basic definition of “creditor” is an “entity that has a claim against the debtor that arose at the
time of or before the order for relief concerning the debtor.”
Only pre-bankruptcy claims are dealt with as part of the bankruptcy case. Any post-bankruptcy
claims are normally excluded. The creditor must have a “claim,” and “claim” itself is a carefully
defined term of art. § 101(5). The essence of the definition of “claim” is that the creditor must
have a “right to payment.”
Trustee
There are actually several different types of “trustees” in cases under the Code, with the type of
trustee depending on the chapter the case is under.
Most centrally, trustees are representatives of the bankruptcy estate, § 323(a), and as such are
fiduciaries. To qualify a person must post a bond in favor of the United States, “conditioned on
the faithful performance of [their] official duties.” § 322(a). As the estate representative, the
trustee has the capacity to sue and be sued.
The core duties of a chapter 7 trustee are to collect the assets of the estate, liquidate those assets,
object to any improper claims of creditors, and file a final report and accounting so that the
liquidated estate assets can be distributed on a pro rata basis to creditors.
In chapter 7 creditors retain a measure of control over the trustee, in that they have the right to
elect the trustee. § 702. This right, however, goes unexercised in the vast majority of cases, in
which instance a trustee is appointed by the United States trustee from a panel of prospective
private trustees.
In chapter 11, a trustee is not appointed in every case. Retention of the debtor as debtor in
possession is the standard. Cause for the appointment of a trustee must be shown. § 1104(a). If a
trustee is appointed, the trustee takes over the role of the debtor in possession. As such the
trustee has two overriding responsibilities: operate the debtor’s business during the pendency of
the chapter 11 bankruptcy case, and formulate and file a plan of reorganization. § 1106(a). In
order to perform these duties, the trustee may investigate the debtor’s business and financial
affairs.
In chapters 12 and 13, the United States trustee normally appoints a single individual to serve as
“standing trustee” in all cases under that chapter in the entire judicial district. §§ 1202(a),
1302(a). The primary function of the chapter 12 or 13 trustee is to serve as the disbursing agent
for monies paid by the debtor under the plan. In other words, the debtor makes their monthly
plan payment to the trustee, who then turns around and makes distribution to each individual
creditor. §§ 1226, 1326. The trustee also is called upon to ensure that the debtor begins making
timely payments and to advise and assist the debtor in performance under the plan. The chapter
12 or 13 trustee does not, however, take possession of the debtor’s property, run the debtor’s
business, or propose a plan.
United States Bankruptcy Judge
The United States Bankruptcy Judge is the judicial officer that presides over a bankruptcy case.
Bankruptcy judges are not Article III judges with lifetime tenure, but instead “serve as judicial
officers of the United States district court.” The bankruptcy judges are appointed for fourteenyear terms by the court of appeals for the circuit.
The function of a bankruptcy judge is to serve as a judge. The referee presided over the meeting
of creditors, met with parties throughout the case, and assumed an active posture in the
management of the case. While referees were often able to “move cases along,” concerns were
expressed that the neutrality of the referee as judge might be compromised by their active
administrative role, as well as over the practical difficulties inherent in adequately carrying out
both administrative and judicial functions as caseloads increased. A conscious decision thus was
made in the reform of the 1970s to separate the judicial and administrative roles, with the
bankruptcy judge assuming the judicial mantle and the office of the United States trustee
carrying out the administrative functions.
United States Trustee
United States trustees are a part of the Department of Justice and are appointed by and under the
supervision of the Attorney General. 28 U.S.C. §§ 581(a), 586(c). The activities of the United
States trustees are coordinated by the Executive Office for United States Trustees, under the
leadership of the Director.
The core duty of U.S. trustees is to carry out the administrative functions connected with
bankruptcy cases. Among the duties given to U.S. trustees are: to establish panels of private
trustees that can serve in bankruptcy cases; appoint those trustees, and appoint standing trustees
in chapters 12 and 13; review fee applications; ensure that reports are filed and fees are paid;
monitor plans in reorganization cases; appoint and monitor creditors’ committees; monitor the
progress of bankruptcy cases; conduct required bankruptcy audits, and so on.
Committees
Committee of unsecured creditors fill the need for an independent entity to function as a
counterweight to the debtor in chapter 11 cases, and to represent directly the interests of
creditors.
The duties of a chapter 11 committee are broad. § 1103(c). The committee may consult with the
debtor or trustee, and has standing to appear and be heard on any issue in the case. § 1109(b).
The committee plays a particularly important role in the formulation and confirmation of a
reorganization plan. The committee negotiates directly with the debtor (or trustee if one is
appointed) over the terms of a plan on behalf of the class of creditors or equity holders
represented. The committee then corresponds with the class members about the plan and collects
votes. The class normally follows the committee’s recommendation on whether to accept or
reject a plan.
Committees are not used in chapters 12 and 13. The plan in those chapters is neither negotiated
nor voted on, so there is no role for a committee to play regarding the plan.
Overview of Types of Bankruptcy Cases
Chapter 7: Liquidation
In chapter 7, the bankruptcy trustee liquidates (sells) the debtor’s nonexempt assets and
distributes the net proceeds of those assets to creditors holding allowed claims. The debtor is
allowed to keep exempt assets, and, if the debtor is an individual, is usually discharged from prebankruptcy claims.
Chapter 7 is commenced by filing a petition, and in almost all cases, the petition is filed by the
debtor (making the bankruptcy “voluntary”). In a voluntary case the filing of the petition
operates automatically as an “order for relief.” Once the petition is stamped by the clerk of the
court, the relief is ordered by operation of law (no participation by the judge is required but has
the force/effect of a court order).
An involuntary case is commenced by the filing of an involuntary petition by creditors of the
debtor. Normally, at least three creditors must join and must prove the statutory grounds for the
involuntary relief. The filing does NOT constitute an order for relief.
Filing of the petition has two legal consequences: (1) The filing of the petition creates the
bankruptcy “estate” comprised of all the debtor’s property, meaning the property no longer
belongs to the debtor. (2) There is an imposition of an “automatic stay” against collection
actions, which stops all creditor actions to collect prepetition debts from the debtor or proceed
against any estate property.
After filing for chapter 7, debtors must pass an initial screening for “abuse,” with a presumption
of abuse being raised if the debtor fails a “means test” that calculates the debtor’s debt repayment
capacity. If the debtor passes the means test, the trustee collects the property of the estate, which
is facilitated by statutory directives. Before liquidating the estate, the trustee will remove any
exempted property that would be returned the debtor or any property that has a valid lien. The
sale of property will proceed without a formal hearing so long as no creditors object to the sale.
To hold an allowed claim a creditor must file a proof of claim with the clerk in the bankruptcy
case. §§ 501, 502. To be timely, the proof of claim must be filed within 90 days after the date set
for the first meeting of creditors. A proof of claim is a written statement that sets forth the basis
and amount of the creditor’s claim. Rule 3001(a). The trustee then must review all filed claims
and object to any that appear improper. If there’s an objection, the dispute is resolved by the
court.
Statute sets out the order in which unsecured creditor’s claims are paid. Priority claims are
strictly statutory, and the court has no power to create new priority categories.
The distribution of the assets of the bankruptcy estate to creditors on an equitable basis by a
neutral agent (the trustee) is one of the core functions of bankruptcy. The other primary function
of bankruptcy law, applicable to individual debtors, is to afford “honest but unfortunate debtors”
a chance at a fresh start in life, free from the burden of their debts.
Not all debtors receive a complete discharge, and some debtors are denied discharge entirely.
Complete denial is based on the commission of some act by the debtor that undermines the
purpose and function of the bankruptcy case.
A complaint objecting to the discharge must be filed (or an extension of time sought) fairly soon
after the beginning of the case, i.e., within 60 days after the first meeting of creditors. Rule 4004.
The trustee is required to investigate the debtor’s financial affairs and object to the debtor’s
discharge “if advisable.” § 704(a)(4), (6). Creditors or the United States trustee also may object
to the discharge. § 727(c). If no objection is filed, the rule directs the court to grant the discharge
“forthwith.” Rule 4004(c). Thus, the debtor may well receive his discharge long before the
liquidation and distribution of the estate has been completed.
The debtor may waive his or her discharge, in full or in part. A complete waiver of discharge
may only be done in a writing executed by the debtor after the commencement of the bankruptcy
case and with the approval of the bankruptcy court. Partial waiver of discharge usually comes in
the form of a reaffirmation agreement, in which the debtor agrees to pay a debt that otherwise
would be discharged.
§1.24 Chapter 11: Reorganization
Chapter 11 is the general business reorganization chapter of the Bankruptcy Code. The goal of
chapter 11 is to confirm a plan for working out the debtor’s financial obligations.
While the primary function and purpose of chapter 11 is to reorganize business entities, the reach
of the chapter is broader, on two scores. First, chapter 11 relief is not limited to business entities;
individual debtors are eligible for chapter 11 relief. Second, liquidation of the debtor’s assets
may be effectuated in chapter 11, which would allow the debtor to retain control of the
liquidation process.
To initiate a chapter 11, the debtor files a voluntary petition, or at least three unsecured creditors
may file an involuntary petition. Reorganization may entail the restructuring of both the debtor’s
business itself and the financial obligations of the debtor.
Ch. 2 – Invoking Bankruptcy Relief
Generally Applicable Requirements
Eligibility Debtors – Chapter Requirements
In all cases except chapter 9 and 15, two threshold requirements for eligibility must be satisfied:
(1) The debtor must be a “person”
(2) The debtor must have some connection to the U.S. (a domicile, place of business, or
property)
“Person” is defined under the Code as to include “individual, partnership, and corporation.”
Excluded from this list is a government unit, which may only file under chapter 9, if eligible, and
estates and trusts, which are included in the broader definition of “entity.” Though not defined,
an individual is a natural person. Corporation is defined to include almost every type of limited
liability organization with corporate-like powers other than limited partnerships.
Chapter 7 Eligibility. All persons with a sufficient nexus to the United States are eligible for
bankruptcy relief under chapter 7, excepting only certain narrowly defined classes of debtors.
Railroads, domestic/foreign insurance companies, banks and similar regulated financial
institutions are ineligible for chapter 7 relief.
Chapter 9 Eligibility. Under chapter 9, the debtor must be a municipality, which is defined as a
political subdivision or public agency or instrumentality of a state. Because of the special
sovereignty interests of the state, the debtor also must be specifically authorized by state law to
be a bankruptcy debtor. Insolvency is required before filing, and the debtor must have the
intention to adjust its debts and have negotiated with its creditors to that end.
Chapter 11 Eligibility. In almost all cases, a person who files under chapter 7 can file under
chapter 11. The only statutory divergences between chapter 7 and 11 is that a stockbroker,
commodity broker, or clearing bank may file under chapter 7 but not under chapter 11, and a
railroad may file under chapter 11 but not chapter 7.
Chapter 13 Eligibility. The eligibility of chapter 13 is that only individuals are eligibly
(excluding partnerships and corporations), and stockbrokers and commodity brokers are
excluded. Second, the individual debtor must have regular income—individual must have
income that is sufficiently stable and regular to enable such individual to make payments under
the plan. Lastly, ceiling restriction for chapter 13 debtors is less than $419,275 and secured debts
of less than $1,257,850. Only noncontingent and liquidated debts are counted.
Chapter 12 Eligibility. Chapter 12 eligibility extends to debtors who qualify as a family farmer
or family fisherman, and who have regular annual income. The annual income is taken into
account the given nature of the farming/fishing business. A family farmer/fisherman may be a
partnership or corporation, unlike in chapter 13.
Chapter 15 Eligibility. A debtor is an entity that is the subject of a foreign proceeding. A
foreign proceeding is one of two types: (1) foreign main proceeding, which is pending where the
debtor has its “center of main interests” or (2) a foreign nonmain proceeding, which is pending in
country where the debtor has an establishment. Chapter 15 doesn’t apply to individual debtors
who have debts in the chapter 13 limits, and who are either U.S. citizens or lawful residential
aliens. Chapter 15 also doesn’t apply to entities identified by exclusion (railroads, banks,
domestic insurance companies), foreign insurance companies are NOT excluded. Chapter 15
doesn’t apply to stockbrokers, commodity brokers, or entities subject to proceeding under
Securities Investor Protection Act.
Eligible Debtors – Serial Filings, Credit Counseling
Serial Filings. The first limitation of debtor eligibility is serial filings. No individual or family
farmer debtor is eligible for bankruptcy relief if (1) they were a debtor in a case pending within
the prior 180 days, and (2) the case was dismissed by the court for the debtor’s willful failure to
abide by court orders or to prosecute the case, or was dismissed voluntarily by the debtor after
the creditor moved for relief from the stay. The debtor’s ineligibility is generally held to be not
jurisdictional. Only after the bankruptcy court makes a determination that the statutory test was
breached can the case be dismissed. the bankruptcy court has the power to annul the stay with
retroactive effect and thereby validate a foreclosure that occurred after the filing but prior to
dismissal.
Credit Counseling. The second behavioral limitation on debtor eligibility is the credit
counseling requirement. Under § 109(h), an individual debtor must receive credit counseling
from an approved nonprofit budget and credit counseling agency “during the 180-day period
preceding the date of filing of the petition by such individual.” Under this rule, a debtor is barred
from filing any chapter if he doesn’t obtain the pre-bankruptcy counseling, unless the court
waives the requirement. Group counseling is sufficient, it doesn’t have to be individual.
Another puzzle is what has been called the problem of the “lost day.” The issue is whether a
debtor can obtain the required filing on the day of the petition, but before the time of filing.
Debtors are forbidden from completing the credit counseling and filing for bankruptcy on the
same day because the debtor must be counseled in the 180-day period preceding the date of filing
the petition. Furthermore, a debtor who obtains the counseling too soon (before the 180-day
period) falls short of the requirement.
The four grounds for waiver of the credit counseling are (1) the debtor demonstrates exigent
circumstances that merit a waiver, (2) the debtor can’t complete the requirement because the
debtor is incapacitated or disabled, (3) the debtor is on active military duty in a military combat
zone, or (4) the U.S. Trustee determines that such counseling services aren’t reasonably available
in the individual’s district. The most common/important is the exigent circumstance waiver.
Noncompliance is not jurisdictional. When a debtor files a petition, he does invoke jurisdiction
of the federal courts, commencing a bankruptcy cases, and an automatic stay goes into effect.
The waiver elements based on exigent circumstances are (1) the debtor describes exigent
circumstances that merit a waiver; (2) the debtor requested credit counseling services from an
approved agency but was unable to get those services within the next seven days; and (3)) the
debtor’s certification is satisfactory to the court.
The ignorant debtor who files bankruptcy blissfully but fatally unaware of the counseling
requirement cannot obtain a waiver, no matter how meritorious his exigent circumstances might
be.
Voluntary Cases
Mechanics of Filing
A debtor commences a voluntary bankruptcy case by filing a petition and paying the filing fee
(subject to two exceptions). The debtor must file the petition with a bankruptcy clerk for the
district. The bankruptcy courts are deemed to be “always open” which means that a petition may
be filed at any time, day or night. If the clerk’s office is closed, the petition may be filed with the
bankruptcy judge.
The petition must either be verified or contain an unsworn declaration. Thus, the debtor must
sign the petition and declare under penalty of perjury that the provided information is true and
correct. The debtor’s attorney can’t make the declaration because he doesn’t have personal
knowledge of the information in the petition. However, the debtor’s attorney does have to sign
the petition as the attorney on record.
The petition must be accompanied by a filing fee with two exceptions: (1) an individual debtor
may apply for permission to pay the filing fee in up to four installments; and (2) the rule that the
petition must be accompanied by a filing fee is that a voluntary chapter 7 petition filed by an
individual debtor will be accepted if accompanied by a waiver request.
For a corporate or partnership debtor, an authorized agent ofthe debtor must sign the petition on behalf
of the debtor, stating that the information provided is true and correct and that the signatory has authority
to act on behalf of the debtor. Authorization for such a debtor to file bankruptcy must be obtained in
accordanee with state corporation or partnership laws. For a partnership, a voluntary petition requires the
consent of all the general partners. Rule 1004. If any general partner does not consent, the ease must be
commenced as an involuntary petition by the consenting partners and the dissenters are permitted to
contest the flling. $ 303(bx3).
The required fees are specified in 28 U.S.C. $ 1930(a) and the Miscellaneous Fee Schedule, and
they differ by chapter. Including trustee fees and administrative fees,
as of June 1,2014, the flling fee totals by chapter are: chapter 7
$335; chapter 9 same as chapter 11; chapter 11 $1,717; chapter 12 $275; chapter 13 $310.
-an individual debtor must now attend mandatory credit counseling prior to filing to be eligible
for relief ($ 109(h)), the real cost of filing bankruptcy actually
- he was deniedCOMMENCEMENT OF AVOLUNTARY CASE
could be higher than the filing fees reflect in the case of an individual. Note that the credit
counseling prior to bankruptcy still would be required regardless of a debtor's income, unless
the debtor obtains an "exigent cireumstance" waiver und
The documents required for all debtors include:
 List of creditors, filed with the petition
 Schedules of assets and liabilities, filed within 14 days of the petition
 Schedules of executory contracts and unexpired leases, within 14 days of the petition
 Statement of financial affairs, within 14 days of the petition
 Schedule of current income and current expenditures, within 14 days of the petition
 In chapter 9 or 11, list of creditors holding 20 largest unsecured claims, with the petition
 In chapter 11, list of equity security holders, within 14 days of the petition
In addition, individual debtors must file the following:
 Statement of current monthly net income, within 14 days of the petition
 Statement disclosing any changes in income or expenses reasonably expected to occur in
the 12 months following the filing of the petition
 Schedule of property claimed as exempt, with the schedule of assets, within 14 days of
the petition
 Statement of intention with respect to property securing a consumer debtor, within the
earlier of 30 days of the petition, or the date of the meeting of creditors
 With the statement of the debtor, if applicable, debtor must file certificate of either an
attorney that delivered appropriate notice or of debtor that such notice was received and
read by debtor in case no attorney indicated, and no bankruptcy petition preparer signed
the petition.
 Certification of approved nonprofit budget and creditor counseling agency
 Copies of all payment advices or evidence of payment received from employer in 60 days
preceding filing date, within 14 days of the petition
 Copy of Federal income tax return for the most recent year preceding filing, no later than
7 days before date first set for first meeting of creditors, to trustee,
 At request, tax return with case pending, tax return filed for 3 years preceding filing, any
amendments to returns
 At request, debtor’s photo identification
 Statement regarding completion of course in personal financial management, within 60
days of first date set for meeting of creditors in chapter 7 and no later than last payment
in chapter 13 case.
Effects of Filing
Several immediate consequences are triggered by the petition filing: (1) creation of the estate, (2)
petition for automatic stay, (3) protection from termination of utility services, and (4) extends
certain time periods.
1. Creation of the Estate. First, the estate is created, which is composed of all the debtor’s legal
and equitable interests in property at the time of filing the petition. The estate is a separate legal
entity, and the trustee acts as the estate representative. (In chapter 11 cases, the debtor in
possession serves the function of the trustee unless displaced by court order.) This applies to
voluntary and involuntary cases. The district court has exclusive jurisdiction over the property of
the estate (exercised by the bankruptcy court).
A case is “commenced” by filing a bankruptcy petition. In voluntary cases, the petition filing and
the order for relief occur simultaneously. In involuntary cases, the petition is filed before the
order for relief is entered.
2. Petition for Automatic Stay. Upon filing, an automatic stay is effectuated, which is federal
statutory injunction that halts all collection efforts on pre-bankruptcy debts immediately and
automatically. The stay also protects the estate property and debtor by preserving the status quo
during the pendency of the bankruptcy case to allow the orderly resolution of the debtor’s
financial affairs under court supervision. The stay is effective without personal notice.
3. Protection Against Loss of Utility Services. After the filing of a petition, a utility may not
cut off service unless the debtor fails to provide adequate assurance of future payment within 20
days. In chapter 11 cases, the 2005 law also empowered the utility to discontinue services within
30 days if it did not receive payment assurances that it judged to be satisfactory, thereby shifting
the burden to the debtor to get a court order compelling continued provision of services.
The balancing of the interests of the debtor, utility company, and other creditors is done in two
steps. First, the utility is precluded initially from altering, refusing, or discontinuing service to
the debtor or trustee or discriminating against the debtor or trustee solely because of the
bankruptcy filing or the failure to pay an outstanding pre-bankruptcy debt. Second, the rule
against termination refers to non-payment of prepetition services, not post-petition services.
There is the burden on the debtor or trustee to provide assurances of payment within 20 days.
The assurance should be in the form of a deposit or other security. For a deposit to be adequate,
the courts may require that it equal the amount of one or perhaps two average monthly bills.
4. Extends Certain Time Periods. Extension of certain time periods gives the trustee time to
assess the estate’s situation. Statutes of limitation that could’ve been brought by the debtor are
tolled; the trustee is given two years to bring the action on behalf of the estate. The trustee is
given a 60-day grace period to take any action other than filing a lawsuit. Any statutory
limitations for creditors to sue the debtor is extended until 30 days after the automatic stay is
terminated.
Section 108 of the Code extends the “legal” time for parties affected by the bankruptcy case to
protect their rights and discharge their duties. Subsection (a) tolls the statute of limitations for
actions that could have been brought by the debtor and gives the trustee two years after the order
for relief to bring the action on behalf of the estate. Subsection (b) allows the trustee 60 days
after the order for relief to take an action other than the bringing of a lawsuit, namely, to “file
any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other
similar act.” Finally, the statute of limitations for creditors to bring actions against the debtor is
extended by subsection (c) for 30 days after notice of the termination of the automatic stay.
Debtor’s Duties. These duties arise in voluntary and involuntary cases. First, in voluntary cases,
the debtor must file financial information pertinent to the bankruptcy case, such as list of
creditors; schedule of assets/liabilities; schedule of current income expenditures; schedule of
executory contracts/leases; and statement of debtor’s financial affairs. These must be filed with
the voluntary petition or within 14 days. In involuntary cases, the debtor doesn’t have to file the
papers with the petition but must only file the list if bankruptcy relief is ordered, giving the
debtor 14 days to file the papers. An extension of time in voluntary and involuntary cases may be
filed. The 2005 bankruptcy law required a number of new filings for the debtor to file.
Under chapter 7 and 13, sanctions for failing to file is automatic dismissal of the case of the 46th
day. The debtor can request a 45-day extension but must do so within the original 45-day period.
The court has the power to decline dismissal if it finds that the debtor tried in good faith to
comply and the best interests of the creditors would be served by administering the bankruptcy
case.
Chapter 7 debtors must file a statement of intention within 30 days of filing the petition. The
intention to be stated is “with respect to the retention or surrender of such property and, if
applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem
such property, or that the debtor intends to reaffirm debts secured by such property.”
The debtor also has the duty to cooperate with the trustee as necessary to enable the trustee to
perform his duties. If the debtor is uncooperative, the trustee may obtain a court order directing
the debtor to cooperate. If the debtor ignores that court order, her discharge may be denied.
Involuntary Cases
Limitations on Involuntary Relief: Available Chapters
An involuntary case can only be commenced under chapter 7 or 11, not under chapters 9, 12, or
13. A limitation on bankruptcy relief is the “substantial abuse” grounds for dismissing chapter 7
filings. The idea was that a debtor who could repay a substantial portion of his debts would be
denied access to chapter 7, leaving the debtor with the option either to proceed “voluntarily”
under chapter 13 or to forego bankruptcy relief altogether. A debtor who fails the abuse test will
either face dismissal of his chapter 7 case, or, “with the debtor’s consent,” conversion to chapter
11 or chapter 13.
Limitations on Involuntary Relief: Eligible Debtors
Not every debtor who is eligible for voluntary relief is a permissible target of an involuntary
case. Two types of debtors are immunized from involuntary petitions: (1) a farmer or a family
farmer, and (2) a non-profit corporation. § 303(a). For those types of debtors, the choice to file
bankruptcy is purely voluntary, no matter what the chapter.
Note, though, that most courts hold that a debtor must raise its exempt status as an affirmative
defense to the involuntary filing, or the defense is waived. In other words, the debtor’s status is
not jurisdictional.
In addition, an involuntary case may not be filed against joint debtors. If petitioning creditors
attempt to file a joint involuntary, the proper remedy is to dismiss the case as against the spouse.
However, some courts procedurally “cure” this defect by severing the joint involuntary case into
two individual involuntary cases.
Farmers (and family farmers) are excluded because of the practical concern that the cyclical
nature of a farmer’s business may expose even a relatively successful farmer to proof that the
farmer is not paying his debts as they come due, and thus to the threat of involuntary bankruptcy.
Eleemosynary institutions, such as “churches, schools, and charitable organizations and
foundations” (as the legislative history describes them),142 likewise have long enjoyed an
exemption from involuntary bankruptcy. Note, though, that the actual Code language (a
“corporation that is not a moneyed, business, or commercial corporation”) is not narrowly
restricted to charitable institutions, notwithstanding the legislative history. For example, a
country club would seem to qualify as an institution free from the threat of involuntary
bankruptcy.
A de facto exemption in involuntary cases exists for an individual debtor who had a case
dismissed in the prior 180 days in circumstances that would render the debtor ineligible to be “ a
debtor under this title.” The same issue is true for the counseling requirement. According to the
statutory language, the counseling requirement only applies for the 180-day period “preceding
the date of filing by such individual.” That trigger, by definition, can never occur in an
involuntary case.
Venue
Bankruptcy cases are filed and processed in the federal courts. The United States District Courts
are vested with “original and exclusive jurisdiction of all cases under title 11.” 28 U.S.C. §
1334(a). In addition, the federal district courts have “original but not exclusive jurisdiction of all
civil proceedings arising under title 11, or arising in or related to cases under title 11.” Typically,
the district courts refer the bankruptcy cases to the federal bankruptcy court.
The two distinct venues are (1) the venue of the bankruptcy “case and (2) the venue for
bankruptcy “proceedings.” The “case,” of course, is the entire bankruptcy matter involving the
debtor. “Proceedings” are particular matters that arise within the larger “case.”
Venue of Cases
The venue of a bankruptcy “case” is governed by 28 U.S.C. § 1408, which provides: a case
under title 11 may be commenced in the district court for the district— (1) in which the domicile,
residence, principal place of business in the United States, or principal assets in the United
States, of the person or entity that is the subject of such case have been located for the one
hundred and eighty days immediately preceding such commencement, or for a longer portion of
such one-hundred-and-eighty-day period than the domicile, residence, or principal place of
business, in the United States, or principal assets in the United States, of such person were
located in any other district; or (2) in which there is pending a case under title 11 concerning
such person’s affiliate, general partner, or partnership.
Thus, the two different venues for a debtor are direct venue and affiliate venue. Direct venue is
when the debtor has the option to commence a bankruptcy case in the district where any of the
following have been located for the greater part of 180 days before the filing: domicile,
residence, PPB in the U.S., or principal assets in the U.S.
If the debtor’s domicile, residence, principal place of business, or principal assets were located in
more than one district during the 180-day period, venue is proper in the district in which the
venue determinant was located for the longer portion of the 180 days. This rule prevents a debtor
from relocating shortly before filing bankruptcy and thereby obtaining the benefit of a preferred
forum.
For individual debtors, venue normally is the location of the debtor’s “domicile” or “residence.”
The place of the debtor’s employment usually is not considered a “principal place of business”
for venue purposes.
Importantly, a corporate debtor may choose any of the statutory alternatives.
 Domicile. Of the most significance is the rule that authorizes a corporation to file a
bankruptcy case where it is “domiciled.” A corporation is “domiciled” in the state of
incorporation.
 Residence. Under this rule, a corporation “resides” in any jurisdiction in which it is
incorporated or is licensed to do business or is doing business. However, § 1391(c) has
been held to apply only to corporate defendants, and not to corporate plaintiffs, who
instead reside only in the state of incorporation. If residence is given the same meaning in
§ 1408(1) as in § 1391(c) for corporate defendants, a corporation could file bankruptcy in
a jurisdiction in which it was licensed to do business or was doing business, even if it was
incorporated in another state and had its principal place of business and principal assets
elsewhere.
 Affiliate. Under 28 U.S.C. § 1408(2), a corporation may file in any district in which there
is pending a case under title 11 concerning an affiliate of the corporation. “Affiliate” is
defined in § 101(2) of the Code as (A) an entity that owns 20% or more of the voting
securities of the debtor, or (B) a corporation of which 20% or more of the voting
securities are owned by the debtor, or by an entity that controls 20% or more of the
debtor. Under this broad definition, virtually any other corporation in a corporate group,
be it a parent, subsidiary, or sister corporation, would be considered an “affiliate” for
venue purposes.
 File Anywhere. A final possibility for a corporate debtor to file in a desired location is to
ignore the venue rules, file in an improper venue, and hope that no one objects. Venue is
a waivable defect and is not jurisdictional, and a defect in venue may not be raised by the
court on its own motion.
For partnership debtors, the normal venue choice under § 1408(1) will be either the principal
place of business or the location of the principal assets. Although the preferred view is that a
partnership does not have a “residence” for bankruptcy venue purposes, it is possible to
analogize to the diversity rules and argue that a partnership resides in any judicial district in
which it is doing business. Domicile is not meaningful in the partnership context.
 Under § 1408(2), a partnership may file in a district where a case is already pending
concerning a general partner. Under the same section, a general partner may choose to
file in any district where a case concerning the partnership or any other general partner is
pending, in addition to the generally applicable venue rules under § 1408(1).
The venue of ancillary and other cross-border cases under chapter 15 is governed by a special
venue rule, 28 U.S.C. § 1410. A chapter 15 case may be commenced in the district court for the
district in which the debtor has its principal place of business or principal assets in the United
States. If, however, the debtor does not have a principal place of business or assets in the United
States, the chapter 15 case may be brought wherever there is an action pending in federal or state
court in the United States against the debtor. Lacking either of those venue grounds, venue may
be placed wherever “consistent with the interests of justice and the convenience of the parties,”
considering “the relief sought by the foreign representative.”
Venue of Proceedings
A “proceeding” is an individual lawsuit within the overall case. The district court has original but
not exclusive jurisdiction over all civil proceedings “arising under” title 11 or “arising in or
related to” a title 11 case.
That section provides for a “home court” default venue: the district court in which the case is
pending is a proper venue for a proceeding arising under title 11 or arising in or related to a case
under title 11. The home court rule is subject to two exceptions.
 Exception 1. The venue rules of § 1409(a) and (c) are subject to an exception for small
debts, to protect distant defendants. Under § 1409(b), as amended in 2005 and adjusted
for indexing in 2016, if the trustee is suing on a consumer debt of less than $19,250, is
suing a non-insider on a debt (other than a consumer debt) of less than $12,850, or is
suing anybody else for $1,300 or less, the trustee may file suit only in the district where
the defendant resides. In other words, “home court” suits are barred in such small-dollar
proceedings. This does not apply to credit claims brought by the trustee against a third
party nor to creditor claims against the estate.
case under
title 11 may be commenced in the district court for the
(1) in which the domicile, residenee, principal place of business in the United States, or principal assets in the
United States, of the person or entity that is the subject of sueh case have been loeated for the one
hundred and eighty days immediately preceding such coflrmencement or for a longer portion of such
one-hundred-and-eighty-day period than the domicile, residence, or prineipal place of business, in the
United States, or principal assets in the United States, of such person were located in any other district;
or (2) in which there is pending a case under title 11 concerning sueh person's affiliate, general
partner, or partnership.
Change of Venue
The district court has the power to change the venue of a case or a proceeding. Under that
section, the district court may transfer the case or proceeding to a district court for another
district, “in the interest of justice or for the convenience of the parties.” Though disputed, the
majority view is that a motion for venue transfer is a core proceeding that may be heard and
determined by the bankruptcy court.
If a case is filed in an improper venue, and a party in interest objects, the only options the court
has are to dismiss the case, or to transfer the case to another district. If no objection is filed, the
case still may proceed in the wrong venue. Improper venue can be waived. Even if a case is filed
in the proper venue, the court may transfer only if a party in interest files a timely motion.
Whether the venue was originally proper or improper, the court may transfer to “any other
district” if it is “the interest of justice and the convenience of the parties.” Factors the court might
consider include the proximity to the court of the debtor, the proximity of creditors, the
proximity of necessary witnesses, the location of the debtor’s assets, the economy and efficiency
of estate administration, and connections with related debtors.
When multiple cases are filed (involuntary and voluntary), the court in which the first petition is
filed has the power to determine the district or districts in which the cases should proceed. While
that court is making its decision, all proceedings on the other petitions are to be stayed.