I. Background
i.
Incentives
 Borrowerborrow more because can discharge in bankruptcy, incentives to over-leverage
 Lenderbeing taken advantage is curbed because of the information lenders are privy to
ii.
Secured vs. Unsecured Debt
1. Security interest:
 Gives creditor a property interest, a voluntary lien, in the debtor’s property personal property
 Secured credit gives leverage; creditors rely on their collateral to improve the chances that they
will get repaid
 Priority in bankruptcy proceedings
 When debtor defaults, secured creditor may repossess the collateral and sell it to pay off the
debt/foreclose on debtor’s continued ownership rights
o Security debt is reinforced by a right in rem acquired by Creditor in certain property of
Debtor
o Interest in property does not typically give creditor title to the property, but it is
characterized as a charge against it; the ownership remains with debtor, encumbered by
creditor’s interest
2. Enforcing unsecured debt
 Creditor will begin by asking for payment
 May then decide to hand the matter over to a collection agency or attorney who can make
further efforts to recover the debt by contacting the debtor
 State and federal law place limits on the tactics that a creditor/collection agency/attorney may
use in debt collection
o Overzealous collection could give rise to liability for actual and punitive damages
 Collection efforts depends on finding assets; but even if assets are found, creditor may be
prohibited from seizing them because the assets may be immune from execution or already
encumbered by another creditor’s claims
iii.
Role of the Law
 State Law and Federal Law
o Bankruptcy is not applicable unless debtor files for bankruptcy
o In the absence of bankruptcy, the rights of debtors and creditors are governed by state law
and any federal statutes that are applicable to enforcement of debt
 Leverage cabined by legal and social constraints
o Legally: restriction (no assault) and channeling (court order required for garnishment)
o Socially: Debtor may have emotional motivations (i.e., loyalty in paying back family members,
or fear that a doctor who is not repaid may withhold future service); moral beliefs re whether
debts “should” be repaid
 Legal limits on pressures
o Federal Debt Collection Practices Act (FDCPA)
 Prohibits unfair, deceptive, and abusive debt collection
 Prohibitions only apply to “third-party” debt collectors
 Prohibitions may apply to lawyer’s collection efforts
 Limited to collections on “debts”
 Forbids misrepresentation and unfair practices in debt collection; collection agencies
required to verify accuracy of debt information
o Credit Reporting System


iv.
Provides inexpensive accurate method of tracking and reporting debtor’s payment
behavior
Maximizes creditors’ leverage: power to refuse new credit to debtors who did not
repay prior debts
Terms
 Insolvency – two sorts
o (1) balance-sheet insolvent
 not enough assets
o (2) cash flow insolvent
 Not enough cash for liabilities immediately due
II. Debt Collection Under State Law
i. Leverage
 Different types
o Legal
 Can sue
o Reputational
 Can report debtor to credit reporting agency
o Commercial/transactional
 Can go after debtor’s employers
 Can refuse to extend future credit for services
 Increasing leverage
o Cost-benefit analysis
 Might be expensive to go to court
 Reputational damage (for example, reputation hit to bank if it sues consumer
debtor)
o Obtain other contractual rights to permit closer monitoring of the debtor
 For example, a negative covenant in its loan document
o Take a security interest
o Get a confession of judgment
 The vast majority of past- debt is collected without resort to formal legal action. What does this
tell us about state collection law and federal bankruptcy law?
ii.
Informal Remedies for Nonpayment of Debt
1. Creditors have leverage
 Demanding repayment persistently and regularly; seeking information about debtor and his
property from others; telling others about debtor’s default; take back collateral; fire debtor or get
debtor fired
 Harassing phone calls; public shaming; bad credit; high cost of credit
2. Debtors have leverage
 Pack of dogs; unlisted phone numbers; moving every few weeks; getting paid in cash
But, both creditors and debtors are cabined by social and legal constraints
iii.
Formal Remedies for Nonpayment of Debt
1. Self-help repossession (secured creditors only)
 Secured creditors have special collection remedies against consumers under UCC Article 9
 Fast and relatively cheap relief (no lawsuit); using secured status to seek a writ of replevin or
sequestration, which ends with the sheriff taking the property
2. Suing the Debtor: Judgment and Execution
 Unsecured creditors can sue to collect from a debtor that refuses to pay
 Collection process begins by procuring a writ [aka court order]
o After establishing in court that a debt is owed, plaintiff becomes judgment creditor and he
can seek writ of execution or attachment from the clerk
o Writ directs sheriff to look for non-exempt property of debtor, seize it, sell it, and pay
proceeds to judgment creditor until judgment is fully paid.
 Seizure process is a levy
o Sheriff must levy upon property.
 Whole process from writ issuance to seizure is the execution.
o Once sheriff levies on specific piece of property, lien attaches (and perfected
simultaneously) by operation of law; judgment creditor becomes judicial lien creditor
 Judicial liens
o As valid as voluntarily created secured interest; but more cumbersome. procedure.
 Because lien creditor has non-consensual property interest, it must sell the
property via formal procedure.
 States have exemption laws, exempting certain types of property from creditor execution.
o Only protect against sheriff levy, i.e., an involuntary seizure by unsecured creditor
3. Suing third parties: Garnishment
 To seize property held by a third party or intangible property requires a writ of garnishment.
 Creditor may garnish debtor’s wages by obtaining a writ directing the employer to pay the wages to
the creditor rather than to the employee (the debtor)
 Congress limits creditors’ ability to garnish wages  creates minimum protection
o Why? Enormous variation that existed among states: some prohibit garnishment
altogether, while other states have no restrictions.
Henson v. Santander Consumer USA, Inc. (2017)
 Rule: An individual that regularly purchases debts originated by someone else and then
seeks to collect the debts for its own account is not a debt collector
 Reasoning
o FDCPA defines debt collectors to include those who “regularly collects debts…
owed another”
 Doesn’t cover creditors’ collection on their own account (“originators”)
o Plain language focuses on the 3rd party agents working for a debt owner–not on
person seeking to collect debts for itself
 Congress did not write the statute to apply to anyone collecting any
debts; if Congress wants to amend the Act in address new business
models it may do so (not the judiciary’s role to amend the law)
McCollough v. Johnson, Rodenburg & Lauinger
 Rule: A debt collector’s service of false requests for admission in a debt-collection action
is a violation of the Fair Debt Collection Practices Act
 Reasoning
o JRL’s error was that its procedure was not “reasonably adapted” to avoid the specific
error at issue. JRL’s reliance on Collect America’s email was unreasonable.
o Bona Fide Error Defense: excuses liability under the FDCPA if debt collector shows that
(1) the violation was not intentional and (2) the collector maintains procedures
reasonably adapted to avoid such violations
 Bona-fide-error defense does not apply, because JRL relied upon Collect
America’s assertion that a partial payment had been made by McCollough and
intentionally ignored contrary information. The procedures in place were not
reasonably able to prevent the type of error that actually occurred
o When a debt collector knowingly requests that a defendant admit facts that are not true,
the debt collector has violated the FDCPA. Here, JRL knowingly requested that McCollough
admit facts that were not true. Thus, JRL violated the FDCPA.
o Legal principle: “we consider the debt collector’s conduct from the standpoint of the
least sophisticate debtor”
United States v. Ashcraft
 Facts
o Ashcraft (P) appeals district court’s order denying her objection to garnishment of
her disability payments. District court ruled that the disability payment were not
“earnings” within the meaning of the Consumer Credit Protection Act, which limits
garnishments of earnings. Government (D) argues that disability payments are not
“compensation paid or payment for personal services” as the Act requires, and that
the Act does not expressly include disability payments in its definition of “earnings”
 Rule: Disability payments through an employer are considered “earnings” for
purposes of the Consumer Credit Protection Act.
 Reasoning
o Act’s plain language makes clear that the character of the payment (i.e., payment
for personal services) is more important than its label
o Looking at precedent, SCOTUS considered what may be characterized as earnings
under the statute and found that the statute intended to regulate garnishment “in
its usual sense as a levy on periodic payments of compensation needed to support
the wage earner”
o “Whether or not the payments are labeled as wages is not the central issue; the
central issue is whether the disability payments are ‘compensation paid or
payable for personal services’”
o The disability payments from her employer functioned as wage substitutes, “a
direct component of the compensation” the employer provided to Ashcraft in
return for her personal services to the company.
III.
CONSUMER BANKRUPTCY
The Bankruptcy Estate and The Automatic Stay
i.
FILING FOR BANKRUPTCY
 If the harm/hurt from collection practices becomes too problematic, debtor can always get relief
by filing for bankruptcy
 How does an individual commence a bankruptcy case?
o 11 USC § 301
 It is not very difficult to commence on purpose; you literally just file a petition; the
petition is not very long, just need to allege “I am eligible to file”
 In contrast, other countries make you plead and prove your insolvency
o 11 U.S.C. § 109 just requires filing a petition and a showing that you are a debtor who may
be a debtor
 Show that you have property in the U.S. (which can just be an open bank account)
o What inhibits debtors from obtaining benefits of bankruptcy filing? If it is so easy, why
doesn’t everyone just file for bankruptcy?

ii.
There is a lot of stigma/embarrassment associated with filing for bankruptcy; it is
a public event; it is also costly
o What are the immediately benefits of a bankruptcy filing?
 The automatic stay, which acts as a toll on all collection action; puts a fence
around the “property of the estate”
 Individual debtor automatically commences a bankruptcy proceeding with the filing of the
bankruptcy petition under Ch 7, 11, 12, or 13 of the Code
o Some provisions in the Code narrowly apply only to “individuals whose debts are primarily
consumer debts” (i.e. consumers)
o Who is a consumer?
 Difference between collecting debts that accumulated for business purpose vs.
debts that accumulated by trying to get along (i.e., household debts for personal
consumption: credit card debt, car loan, etc)
 Upon filing, a trust is created; beneficiaries are the debtor’s creditors
 Trustee in bankruptcy (“trustee”) controls debtor’s estate
o Special obligation to unsecured general creditors
o Trustee assisted by a legal stay (injunction) that prevents creditors from trying to seize estate
property or otherwise pursue collection against the Debtor
 Four preliminaries when filing for bankruptcy
o (1) Debtor files petition to initiate case
 filed with clerk of court and automatic stay arises (in voluntary case)
o (2) Debtor must put together schedules
 in consumer cases, lawyer signs petition attesting to “reasonable investigation”
into accuracy of the information
o (3) Debtor must attend meeting of creditors
o (4) Consumer Debtor must decide whether to file for relief under chapter 7 or chapter 13
 Two primary purposes of bankruptcy
- (i) Protect property
- (ii) Get relief
 Ch. 7 liquidation
- Most debtors are insolvent – they don’t have enough assets to pay for
liabilities (aka have more debt than assets)
• Asset: recover and sell assets
• Liabilities: file proof of claim and resolve unliquidated and disputed
claims
- Point of Ch. 7 liquidation is for trustee to sell assets, recover assets,
distribute the proceeds to creditors who filed a proof of claim
 Only individuals get the policy benefit of the fresh start
AUTOMATIC STAY
 § 362(a) discusses scope of the automatic stay
o a stay is like an injunction or moratorium
o but no need for judicial intervention once petition is filed
o Stay arises by operation of law
 Purpose of the automatic stay
o To preserve the status quo

Not just about protecting the debtor, but also to protect the group of
creditors (“stopping the race to the courthouse” – where creditor who levies
first gets priority)
o Collective good  equitable distribution of the assets to the creditors
 Trustee has broad powers and can investigate a debtor’s assets
 Broad Scope
o The automatic stay is broader than property of the estate
 § 362(b) lists exceptions
o Carves away from the broad scope to give specific relief for overbreadth
o Does not operate as a stay if dealing with a criminal action
o Does not affect family law proceedings (divorces), depends on the public policy
City of Chicago v. Fulton
 Debtors filed for Ch 13 to get their impounded cars back
o This is a complete misuse of the federal court system
 § 362(a)(3): “exercise control of POE”
o Refusal to give the car back is itself a stay violation
 The Supreme Court overturns the lower court and appellate court’s decision. Why?
o If mere failure to turnover is a violation of the stay, then why do we need a turnover
provision in § 542
o Because they were “continuing to exercise control”/took the car before the filing, this
wasn’t a violation of the automatic stay
 Concurrence
o All of these fines and fees that the City of Chicago is laying on poor people is not
right…
o A turnover action is adding another expense
Nissan
 Why is this different than Fulton? When did the car get repossessed?
o Nissan repossessed after they filed for bankruptcy.
o Whereas in Fulton, they took the car before the debtor filed for bankruptcy
 Court to Nissan: you knew better, you have a professional legal department and are skilled
enough at addressing these matters and you knew you shouldn’t have sold the car. Not only is
that a violation of the stay, but it is a willful (intentional) violation of the stay, so the debtor is
entitled to actual damages as well as punitive damages. § 362(k)(1). Nissan knew of the filing
and this has happened before and could happen again, therefore punitive damages were
warranted.
Green
 ECU wouldn’t give transcript to former student because she filed for bankruptcy
 Court found this was a violation of the automatic stay
 ECU argued that this was a “technical” violation but not willful, but the Court says no you have
legal department. The court doesn’t want this happening again. There was enough of an act to
warrant damages. §362(k)(1).
 Bankruptcy judges are practical when they use 362(k)(1); they have a lot of discretion.
The automatic stay means the bankruptcy court is the gatekeeper of the property of the estate (POE)
 If Nissan was allowed to sell the car, it could recover more credit than debtor’s other creditors
 In Green, if ECU was told it wasn’t a violation, then they will continue doing it to other debtors
going forward. This creates leverage for these creditors so they are more likely to get paid
than other creditors

Why is this problematic?
o And one of the purposes of the automatic stay is facilitating the equitable distribution
among the creditors
What happened with the Sacklers?
 Section 105 says bankruptcy courts are courts of equity and have inherent jurisdiction to issue
injunctions (need to make a showing of irreparable injury)
 The Sacklers got a stay early on in the case by convincing the bankruptcy judge that it was
important to the bankruptcy
In re Green
 Facts
o Green (Debtor) filed for Ch 7. After receiving notice of the petition, ECU (Creditor)
attempted to collect Green’s pre-petition debt by sending letters and invoices.
o Creditor argued letters and invoices were unintentional due to miscommunication, not a
willful violation of the stay and shouldn’t be subject to sanctions
 Rule: An injured debtor may recover actual damages and possibly punitive damages
when the creditor willfully violates the automatic stay; willful violation requires intent
to commit the act that violates the stay, not intent to violate the stay itself.
 Reasoning
o ECU sent collection letters to Green after receiving bankruptcy petition. ECU willfully
violated the automatic stay because ECU intended to send the collection letters.
Green was eligible for actual and punitive damages
Nissan Motor Acceptance Corp. v. Baker
 Rule: A secured creditor must return to bankruptcy estate any collateral property taken
in violation of an automatic stay, regardless of creditor’s receipt of adequate protection
 Reasoning
o Automatic stay prevents Creditor from attempting to gain possession or exercise
control over property of the bankruptcy estate.
o Continuing to possess estate property after receiving notice of the bankruptcy petition
and the automatic stay qualifies as exercising control over the property. A creditor is
not allowed to help itself to estate property and effectively grant itself adequate
protection. This is a violation of the automatic stay.
o Creditor has obligation under § 542(a) to return any estate property to the bankruptcy
estate, unless property is effectively worthless. Bankruptcy estate has no obligation to
grant a creditor adequate protection in exchange for the property. Automatic stay is
willfully violated when a creditor has notice of bankruptcy petition and does not
return the estate property to the trustee.
o Nissan repossessed the truck after Baker filed his bankruptcy petition. Upon receiving
notice of the bankruptcy petition, Nissan’s failure to turn over the truck to the
bankruptcy estate constituted an exercise of control over the truck. The automatic
stay prohibited Nissan from exercising control over the property of the bankruptcy
estate. Nissan violated the automatic stay.
City of Chicago v. Fulton
 Facts
o City of Chicago towed and impounded Fulton’s vehicle for prior citation driving on
suspended license. Fulton filed for ch 13 bankruptcy. The City refused to return Fulton’s
vehicle, and Fulton filed a motion for sanctions against the City.
o
iii.
Bankruptcy court held City was obligated to return the vehicle under Thompson v.
General Motors, where Seventh Circuit had held that a creditor must comply with the
automatic stay and return a debtor’s vehicle upon her filing of a bankruptcy petition.
 Issue
o Does § 362 require that an entity that is passively retaining possession of property in
which a bankruptcy estate has an interest return that property to the debtor or trustee
immediately upon the filing of the bankruptcy petition?
 Rule: § 362 prohibits only affirmative acts that would disturb the status quo of estate
property at the time the bankruptcy petition was filed, not the mere passive retention
of possession of the debtor’s property.
 Reasoning
o § 362(a)(3) provides that filing of bankruptcy petition operates as a “stay” of “any act” to
“exercise control” over the property of the estate.
o Natural understanding of the language: prohibits affirmative acts that would affect the
estate property.
o Respondents’ reading would render superfluous § 542’s central command: that an entity
in possession of certain estate property “shall deliver to the trustee such property.”
o Also, Respondents’ interpretation would mean § 362(a)(3) requires turnover at the same
time that § 542 exempted it.
PROPERTY OF THE ESTATE
 POE created when bankruptcy petition is filed
 Deliberately expansive so all property owned by debtor becomes part of the estate
 POE defined in § 541(a)(1): all of debtor’s legal or equitable, wherever located and by whomever
held; this includes
o property rights
o contract claims (even contingent claims)
o tort claims
o exempt property
o collateral
o worthless property
o even property not in debtor’s possession
 Exceptions
o Post-petition wages (and the like)
 541(a)(6) “services performance by individual debtor after the
commencement of the case”
- wages, commissions, etc earned after petition is filed will not become POE
and does not have to be surrendered to creditors
o Spendthrift trusts (if protected under creditors under non-bankruptcy law)
 541(c)(1) property becomes POE notwithstanding any provisions that
restricts/conditions the transfer of the interest by the debtor
 541(c)(2) spendthrift trust – a restriction on transfer of a beneficial interest of
the debtor in a trust that is enforceable under non-bankruptcy law is
enforceable in bankruptcy (e.g., retirement account that can’t be touched)
- The law is most concerned with whether it is “really” a retirement account
(i.e., if debtor can freely revoke it and access those funds after filing for
bankruptcy, or if it was set up so that he could not touch it until
retirement)
o Contingent remainder, mere expectancies


541(a)(5) any property that would have been property of the estate if such
interest had been an interest of the debtor on the date of filing the petition
and that the debtor acquires or becomes entitled to acquire within 180 days
after such date
- “by bequest, devise, or inheritance…”
- Is the termination of the trust a “bequest, devise, or inheritance”?
• Must look at state law
POE central issues:
o What constitutes the debtor’s old, pre-commencement property (and thus the estate’s) and
what is new, post-commencement property (and thus the debtor’s)
o What constitutes a property interest of the estate is a matter of state law, unless some federal
interest dictates otherwise
 3 categories of disputes regarding whether to include certain expectancies in POE
o (1) future interest
 Timing (Prochnow)
- legal interests that are not enforceable at the date of bankruptcy but may be
enforceable at a future time
- the question is whether they are sufficiently matured and certain to be
included in the estate
- Mere expectations and hopes are not within POE
o (2) restrictions on transfer
 i.e., a deed contains restriction that debtor can’t sell cottage to someone outside
debtor’s family
- cottage is debtor’s property, but a valid restriction means the cottage
can’t pass to the trustee and hence to the bankruptcy estate
 such restrictions not favored in bankruptcy as a policy matter
 § 541(c)(1) make these restrictions unenforceable
 Congress has allowed only a few exceptions
- § 541(c)(2) protects bona fide spendthrift trusts validly created
o But even this is narrowly construed (In Re Chambers)
o (3) degree of legal entitlement
 Question is whether certain legal rights are sufficiently (in)alienable to qualify as
private property
 Issue usually arises as to new kinds of property (i.e., license to broadcast over the tv
airwaves)
 Mostly an issue in business context
Prochnow v. Apex Properties
 Facts
o Prochnow (Debtor) entered broker-relator contract with Remax, allowing Prochnow to
be paid on commission basis; under the contract, Prochnow was not to be paid until the
closing of the property was completed and after Remax got a commission. In 2009,
Prochnow filed for ch. 7 bankruptcy, but continued working with Remax until 2010.
o Prochnow claims commissions on property closings that occurred after he filed for
bankruptcy not part of the POE
 Rule: A future interest is POE if it was earned by services performed pre-petition, even if
interest did not vest until post-petition.
 Reasoning
o
State law determines debtor’s interest in property, while bankruptcy law determines
whether this interest is part of POE
o Because debtor’s services were performed pre-petition, debtor will have a future interest
in the commission even though the interest has not yet vested
 Prochnow performed all services pre-petition; he already did everything he had
to do to get the commission. Because he earned this property interest prepetition, it is part of POE
o Alternatively, because Prochnow chose to not disclose his assets during bankruptcy,
he is no longer allowed to acquire this asset after bankruptcy (doctrine of judicial
estoppel)
 Cf. Sharp v. Dery: Debtor’s annual bonus for the fiscal year completed pre-petition but
issued two months into the next year, was not POE b/c debtor had to remain employed in
“good standing” to be entitled to the bonus.
In re Chambers
 Facts
o Chambers (Debtor) was running for re-election when she filed for Ch 13. A creditor’s
garnishment order froze her bank accounts, including campaign-fund account which was
not incorporated. Chambers filed for bankruptcy to protect her campaign account from
Creditor.
 Rule: A property interest in a bank account, even one heavily restricted by state law (in
this case, a campaign account) is POE.
 Reasoning
o Anti-alienation provision § 541(c)(1)(A)
 eliminates restrictions on transferring property  allowing bankruptcy estate
to receive all of Debtor’s pre-petition property and making all alienation
restrictions unenforceable.
o Exception to anti-alienation provision is the spendthrift trust
 it is the only state-law property-transfer restriction that remains enforceable
and therefore protected during bankruptcy under § 541(c)(2)
o GA state law acts as a restriction on what a public-office candidate’s campaign funds
can be spent on, and provides that campaign funds cannot be used as personal assets
of the candidate. However, GA law doesn’t contain a restriction on accessing the
campaign funds, only a restriction on how the funds can be used by candidate.
o This lack of a restriction on access means that the anti-alienation provision overrides
state law under the Supremacy Clause. Spendthrift exception does not apply
because no spendthrift trust was created for Debtor’s account. Campaign-contribution
account, which was not incorporated, is included in POE
Chapter 7 Liquidation
i.
PROPERTY EXEMPT FROM SEIZURE
1. Exemptions
 Remember POE includes exempt property
 What property is available for distribution to creditors?
o Unencumbered, non-exempt property of the estate
 Unencumbered: not subject to a mortgage, security interest, judgment lien, or
any competing lien/property interest
 What is an exemption?
o
Property designated by statute as exempt from collection efforts
 Creditors cannot levy on exempt property in satisfaction of deft and trustee
cannot include it for distribution
 Policy reasons for identifying some property as free from the reach of creditors
o Making debtor’s fresh start a meaningful one
o Preventing debtors from becoming wards of the state as a result of financial
distress/being left totally destitute
o Protecting sentimental value
o Some assets are not worth selling; some items of personal property have little resale
value for creditors but a lot of value to debtor (and expensive to replace, i.e., clothing)
o Preventing shocks to income
o Fostering individual autonomy
 Procedure
o All debtor’s property becomes POE, and then exemptions are filed by the trustee or
debtor under § 522
 Basic structure of exemption statutes:
o Types of property – category approach
 Look at policy purpose behind statute when classifying
o Maximum value – dollar amount approach
 § 522(d) and many state exemption statutes have dollar limit
2. Federalism in Exemption Laws
 Does federal or state law govern exemptions?
o Both! Patchwork approach
o Debate during Bankruptcy Reform Act of 1978, re whether exemptions should be
governed by state law or federal law
 § 522 is product of congressional compromise
o 522(b) permits debtor to exempt from POE property listed in either 522(b)(1) or (b)(2)
o 522(b)(1) is the federal list
o 522(b)(2) refers to property exempt under state list
 §522(b) permits states to “opt out” of the federal exemptions listed in § 522(d)
o Majority (35 states, including NY) have opted out
o When the state has not opted out, debtor may choose between state and federal
exemptions (whichever is more favorable)
o Federal exemptions only applies unless the state legislature, in the state where you
reside, has opted out of the federal list of exemptions.
 If the state opted out, can only apply state law exemptions
 For applicable state law, there is a 730-day residency requirement under §
522(b)(3)(A)
o Note: state exemption statute applies even if the debtor hasn’t filed for bankruptcy
 Federal exemptions listed under § 522(d)
o Homestead; up to certain amount
o Car; up to certain amount
o Household furnishings, household goods, clothes, appliances, books, animals, crop
instruments; up to certain amount for each item or certain amount in total
o Jewelry
o Wildcard

If debtor doesn’t use all of his homestead exemption, he can use that money for
whatever he wants to exempt
 This is way of leveling the exemption protections that are provided to
homeowners to renters
o Tools of trade; up to certain amount
o Certain unmatured life insurance contracts and payments rights under those contracts;
up to certain amount
o Prescribed health aids
o Certain benefits and rights to payment, such as Social Security
o Certain compensatory payments, such as for wrongful death, personal injury or life
insurance
3. Classification of Property
 Disputes center on classification issues: debtor argues that property they intend to keep fits
within statutory classification, and creditor argues reverse
 Is a bus a “motor vehicle”? Is a Moped a “motor vehicle?
 Is a gun from the 1890s that hangs on a wall a “firearm” or an antique exempt as “home
furnishings”?
 Courts look at policy purposes
o In re Johnson: is bus an exempt “motor vehicle”?
 Yes, fits within motor vehicle category. Court noted the pastor didn’t own any
other vehicles, so this wasn’t about debtor living high on the hog; including
this was fully within the policy reasons for exemptions
o In re Hall: is debtor’s collection of antique firearms exempt as “home furnishings,”
despite TX’s limit of 2 exempt firearms?
 No, antique fir arms are not home furnishings. Court looked at language of
exemption statute in light of other state statutes to determine the meaning of
“home furnishings” and “firearms” in the TX exemption statute. Looking at the
general policy purpose of the penal code and property code to assist in
interesting the language.
 The overarching rule of statutory construction is about looking at the policy
purpose of the exemption statutes. Quoting In re Mitchell “exemptions are in
fact a limit on a creditor’s right to satisfaction of its claim out of the debtor’s
assets. The limitations are imposed for reasons of public policy. There is no
public policy served in preserving the lifestyles of the rich and bankrupt”
4. Valuation
 Always an issue whenever there is a dollar value approach
 Issues of valuation most likely to arise when there is a claim that exempt property is more
valuable than the maximum limit in the state exemption
5. Partially Exempt Property
 If there is a dollar limit on an exempt category, does property of a greater value cease to be
exempt? Exemption is up to the $ amount that is allowed
 Partially-exempt property will usually be levied on and sold by trustee in bankruptcy or by
sheriff outside, with proceeds going to the debtor and remainder to creditors
o Exemption attaches to the net proceeds after sheriff sale, rather than the property
itself, up to the dollar limit
o If there are extra proceeds after debtor’s exemption is paid off, it goes to the seizing
judgment creditor (at state law) or the trustee (in bankruptcy)
 So debtor will not able to retain the property itself, just the $
6. Proceeds and Tracing
 Exemptions are typically by category; so what happens if debtor sells exempt property? Is he
able to exempt the proceeds of exempt property?
o Three options
 State’s statute answers the question
 Court may conclude that it is only fair the proceeds should be exempt, at least
for a short period of time
 Court may conclude the money is not exempt (maybe b/c of where the money
came form)
 When the form of property changes, it raises issues about proceeds: whether property’s
former or current form is relevant for exemption purposes
 What are proceeds? How can they be traced?
o Proceeds are received upon distribution, usually a sale
o Not a clear-cut answer about whether the proceeds are exempt; would need to point
to language in the statute or some case precedent
o Federal law protects “recently deposited social security payments”
 In re Dasher: debtor cashed out exempt “retirement account” to buy nonexempt pickup truck on eve of bankruptcy filing and argued that the truck was
the “exempt” proceeds of the retirement account; court rejected this,
carefully distinguishing “retirement account” from “pickup truck”
 If you can trace/follow the money, there is an easier argument to make that the proceeds
should be exempt
o In re King: what is a tax refund? Does Indiana law protect a tax refund from the
reaches of the taxpayer’s creditor? What did King do with the tax refund before filing
for bankruptcy? what did the trustee argue about the commingling of these funds in
the bank account? The court found that this was exempt (an exempt intangible)
 Comingled accounts
o Harder to trace the money in this situation
o Usually, lowest intermediate balance rule applied; use forensic accounting tools to
examine the money in the account; assume the money drawn out of the account are
non-exempt proceed; but once it get below the value of exempt…
 Takeaway  possibility but not an assurance that proceeds of exempt property might also
be exempt
7. Avoiding Judicial Liens and Non-PSMI Liens
 § 522(f)
 Security Industrial Bank (SCOTUS 1982)
In re Wilkinson (Tx. 2009)
 Issue:
o Is debtor’s collection of antique firearms exempt “home furnishings” despite Texas limit
of two exempt firearms?
 Holding: antique firearms are not “home furnishings”
 Reasoning
o Debtor argued TX penal code exempts antique firearms under felony firearm possession
o But TX penal code cannot be used to analogize to TX property law, which governs
creditor-debtor relationships.
o The penal code and property code serve different public-policy functions
ii.
EXEMPTION PLANNING: HOMESTEADS, TRUSTS, AND MOVES
 Exemptions matter the most to a minority group of debtors  affluent debtors who retain assets
of high value and have the capacity to maximize legal protections
 Homesteads
o The real property the debtor occupies as a primary residence (have to own it; renting
doesn’t qualify); the Code gives special protection because it is the family home
o Homestead exemptions are available in a large number of jurisdictions, but typically
exempt only up to given dollar amount
o If there is a mortgage, a debtor doesn’t lose his exemption
 Example: 1 million home, with 850K mortgage, and state has 100K homestead
exemption
- 850 goes to mortgage lender first (the mortgage waives the exemption)
- 100K is exempt
- What is left is available for distribution to unsecured creditors
o Federal limits on homesteads
 522(o) – Reed
- Only applies to the extent an indivual debtor disposed of property with
intent to delay, hinder, or defraud a creditor
 522(p) – Enron
 522(q) – New McMansion
 Moving and homestead exemption
o At the very least, the debtor gets the federal exemptions
o Congress was concerned with people exemption planning by moving, so it decided to
include a federal residency requirement under the bankruptcy code, which specifies
whether you can claim that state’s exemption law
o Buried in 522(b)(3)(A)
 Test 1: Look at the petition date, we want to know the debtor has lived in that
place where they are filing for bankruptcy long enough so that that the state law
is actually applicable to the debtor (730 days, basically 2 years)
 Test 2: if no answer under test 1, where was debtor living for 180 days before that
o Can Kevin keep the condo in Chicago if he filed in Illinois? (Problem 5.1)
 Normally we ask what happen on the filing day, but the question here is what
exemption law, what state law do we look at it?
 He hasn’t lived continuously for 730 days in Illinois, so look at test 2 (180 days
before the two years before)  intentionally unclear, the statute requires a high
level of detail
o But what if he is in Florida on that day, does he just get the benefit of the unlimited
homestead exemption? But in Florida, you can’t just claim its state homestead exemption
because you used to live there, it has its own residency requirement…
 522(b)(3) directs you to the federal list, so you get some exemption even if you
are living in a state that has opted out
 Trusts
o Putting assets in a trust is a form of exemption planning, because these assets won’t be
touchable
o But can only do this to the extent it is not a fraudulent transfer § 548(e)(1)
 Requires an actual showing of intention to defraud
 But this is an incredibly difficult standard to meet
Two rules of exemption planning

(i) Mere conversion of property from nonexempt to exempt on eve of bankruptcy is not enough
to show fraud
 (ii) however, the conversion of nonexempt to exempt property will not be sanctioned if there is
extrinsic evidence of the debtor’s intent to defraud creditors
o What should count as extrinsic proof of fraud???
 Lying, misleading, concealing all count as satisfactory
 But what about just being very, very greedy…… this wouldn’t be enough
In re Reed (TX 1981)
 Rule: Nonexempt property may be converted into exempt real property prior to
bankruptcy
 Analysis
o Illustrates that some transaction, even if facially fraudulent, may survive debt collection
techniques.
o Case turns on perceived sanctity of the homestead and the court’s reluctance to establish
precedent, which would open the door to jeopardizing the exemption
th
In re Reed (5 Cir. 1983)
 Rule: Debtor may be denied discharge if he transfers property with intent to hinder,
delay, or defraud a creditor, or has failed to explain satisfactorily any loss of assets
 Reasoning
o Discharge of debts (def): release of debtor who is unable to pay his debts as they become
due from the obligation to pay his creditors
o The distinct issue here is whether or not Reed was doing this with the intention to
defraud his creditors
 If it is an actual fraudulent transfer and occurs within 2 years of the bankruptcy
filing, then the debtor gets no discharge
 5th circuit decides: we are just taking your discharge away, we aren’t taking your
homestead exemption away
 Analysis
o Debtor is not entitled to discharge as a matter of right
o But discharge will be granted unless challenged by trustee or creditor
o Trustee or creditors may object to the debtor’s discharge of particular debts under § 523
 § 523 denial of discharge renders only one debt non-dischargeable, while
under § 727 denial of discharge renders all of the debtor’s debts nondischargeable
iii.
CLAIMS AND DISTRIBUTIONS
1. Filing Claims
 A creditor will receive and complete a proof of claim. If no objection is filed by the trustee (or if
objection is overruled), the claim becomes an allowed claim under § 502(a)
o § 501 lays out procedure for filing a claim
o § 502 explains the mechanics of calculating it
 Claim is defined § 101(5): a right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured
 A right to payment
o Not limited to a contract claim
o Don’t need to be a lender; any right to payment
 Statutory acceleration of debt
o
It could be a car loan or mortgage with monthly payments that you have 30 years to
make the payment, when you filed for bankruptcy, it all becomes due. Why? Because we
don’t want a bankruptcy case staying open for 30 years
o Creditor has a right to payment regardless of whether it is reduced to judgment
 Matured vs. unmatured interest: distinction for allowed unsecured and secured claim
o Allowed unsecured claim does not include
 Liquidated (sum certain) vs. unliquidated (won’t know how much is owed until the court says, i.e.,
tort claims)
 Very broad definition of “allowed claim”
o this broad definition accelerates all unpaid principle owed under a long-term mortgage
debt for example
 Although unmatured interest claims are frequently disallowed, the breadth of
the definition of a claim accelerates principle
 502(b)(2) is an exception to the general rule of acceleration
 What’s the policy reason for defining claim in such a broad and counterintuitive way?
o Promoting fresh start of an individual debtor or the reorganization of a business debtor
because if something qualifies as a claim, it can be discharged in a debtor’s bankruptcy
 Debtor is hoping to include as many claims or obligations as possible in its
bankruptcy, so that when it emerges from bankruptcy those obligations have
been included in the bankruptcy plan and otherwise discharged
 Filing for bankruptcy helps debtor get discharge or stretch out payments on debt
o But if an obligation has not yet matured to the status of a claim, it will survive the case
and remain an obligation for the debtor
o But filing for bankruptcy only helps for debts that arose before filing
 Debts arising after the filing will still have to be satisfied in full, without regard to
the bankruptcy filing
 An “allowed claim” is outlined in 502(a) and 502(b)
o “deemed allowed” (prima facie part), unless there is an objection
 Proof of claim deemed “allowed” but may need written support in certain cases
 There may be grounds for disallowance under state law (including violation of
contract terms)
o 502(b) lists exceptions and points to other provisions in the subsection
 The court determines the amount of the claim and shall allow the claim in such
amount (If it is unliquidated amount, the bankruptcy court decides what dollar
amount is the claim) UNLESS
- (1) such claim is unenforceable outside of bankruptcy, other than because
such claim is contingent or unmatured
- (2) such claim is for an unmatured interest
o interest clock stops running as of the filing of the petition
In re Lanza
 Rule: The party objecting to a proof of claim, which is prima facie evidence of its validity
and amount, bears the burden of going forward with proof of the claim’s validity
 Reasoning
o How important is the burden of proof in an objection to a proof of claim?
 A proof of claim is prima facie valid (aka it’s valid until proved invalid)
o Why does this make sense as a policy matter?
 Making this a speedy process is important

If debtor is insolvent (there is not enough money to around; usually a no asset
case), we don’t care whether it is 100% accurate
o Why did the bank (creditor) prevail here?
 Bank prevailed on a number that they referred to in the documentation
 The court wasn’t happy about it, but debtor didn’t meet its burden of proving
that it didn’t owe at least 300K
 There needs to be some documentation
 Analysis
o Most claims presented for payment are paid pro rata (in proportion) by the trustee.
o Represents ratification of Creditor’s claim without the formal mechanism of adjudication
o Rare for trustee to object to a claim and conduct evidentiary hearing on its validity; and
even rarer, as here, for debtor to object to a claim
2. Calculating Claims
 § 506(a):
o “an allowed claim of a creditor secured by a lien on property in which the estate has
an interest…”
 Not about secured creditors with claims against other peoples’ property
o “is a secured claim to the extent of the value of such creditor’s interest in the estate’s
interest in such property…”
 Treat set off and secured claim as similar enough
 So secured creditor may have an allowed claim OR it may not….
 506(b)
o Creditor is allowed “interest on such claim, and any reasonable fees, costs, or charges
provided for under the agreement…”
 If it’s an allowed secured claim, creditor can get some “extra stuff”
 Compare 502(b)(2) to 506(b)
o Unlike an unsecured claim, a secured claim allows the creditor to get interest up to
the value of the collateral
 Unsecured Claim:
o Two ways claim is not allowed: (1) unmatured interest and (2) where not applicable
outside of bankruptcy
o Allowed unsecured claim
 does not include claims for unmatured interest
 but may include post-petition attorneys’ fees
 Secured Claim:
o Only secured up to the value of his collateral
 If creditor doesn’t have enough collateral to cover debt, creditor has a claim
secured for part of the debt (up to value of collateral) but unsecured for the
part that has no collateral (the deficiency claim)
 In this situation, the creditor has a bifurcated claim
 The more collateral, the more likely the creditor will recover claim in full,
with interest and fees
o Allowed secured claim includes fees and unmatured interest up to value of collateral
Unsecured Creditor claimed $3,000, plus (a) $200 in past due interest accrued prior to bankruptcy and
(b) $100 in interest accrued since the bankruptcy began (Problem 6.1)
 Is there anything that is unmatured interest?
o
(b) “another $100 interest accrued since the bankruptcy began” is an unmatured
interest, which is disallowed under 502(b)(2)
Secured creditor situation. To what extent is the bank’s claim secured? Is the bank over-secured or
under-secured? (Problem 6.2)
 Creditor in over-secured position, so he can get pre-petition interests and attorneys’ fees
 What is the bank’s collateral? Look at 506(a), (b)
o “that which they describe as collateral in the security agreement and financing
statement”  here the car worth $10K
o Collateral amount = $10K
o Principal amount of the Debt= $8K
o Past due interest = $500
o Post-petition interest = $300
o Attorneys’ fees = $1,000
 If security agreement provides for these things, Creditor can get it
o But there is federal limit; can only claim reasonable amounts
 What about the 15K MacroSoft stock?
o Not relevant because stock was not described in the security agreement (just stuff
debtor owes) because this creditor is over-secured, it doesn’t matter to them
o But this becomes relevant if the car is worth only 5K (Problem 6.3)
 Then the collateral is less valuable than the outstanding debt amount
 Collateral value is the secured claim, everything above is an unsecured claim
 Implication for the post-petition interest creditor won’t get post-petition
interest on the under-secured collateral
 Now creditor would care about the stock because he is alongside the other
unsecured creditors trying to get some value form this
3. Disputing Claims
Jones v. Wells Fargo (In re Jones) (La. 2007)
 Rule: Where a creditor assesses post-petition charges and fees without disclosure and
then diverts estate funds to their satisfaction without court approval, the creditor will
be required to return the amounts improperly assessed plus interest
 Analysis
o Because Wells Fargo collected both pre- and post-petition charges from the property of
the estate without authorization and in contravention of several court orders, including
the automatic stay and order confirming Debtor’s plan of reorganization, as well as
because it delayed returning Debtor’s property for over one year, failed to provide a
reasonable accounting of the loan history from which the correct amounts due could
have been ascertained, and improperly applied payments from the Trustee and Debtor
resulting in significant additional and unwarranted interest charges, the court held a
separate hearing to consider sanctions for these violations
 After the hearing, instead of granting punitive sanctions, the court ordered Wells
Fargo to revises its accounting procedures under court monitoring and review
o In Re Jones (con’t)
 Post-petition charges incurred prior to confirmation may be included in the
debts necessary to cure a default under a plan.
 Therefore, they must be disclosed and are subject to review by the
bankruptcy court for reasonableness. Such fees and charges must be
approved by the court as reasonable under § 506(b).
-
-
Fees and charges incurred post confirmation are not governed by §
506(b), which applies only from the date of filing through the
confirmation date
Therefore, the reasonableness of the fees and charges must be
determined under state law and the contracts between the parties
iv.
PRIORITY AMONG UNSECURED CREDITORS
v.
DISCHARGE
vi.
DEBTOR’S POSITION AFTER BANKRUPTCY
Chapter 13
A. Repayment
i.
SECURED CREDITORS
ii.
UNSECURED CREDITORS
B. The Consumer Bankruptcy System
i.
THE MEANS TEST
IV. BUSINESS BANKRUPTCY
A. Introduction
i.
Recovering from Business Debtors
ii.
Reorganizing Business
B. Operating in Chapter 11
i.
Running the Business
ii.
Financing the Reorganization
C. Reshaping the Estate
i.
Avoiding Liens
ii.
Preferences
iii.
Fraudulent Conveyances
iv.
Executory Contracts
D. Traditional Chapter 11: Confirming the Plan
i.
Best Interests
ii.
Feasibility
iii.
Special Rules for Small Business