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Bankruptcy Outline --Ole Miss Law Professor Czar
Bankruptcy (University of Mississippi)
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Bankruptcy Outline
I.
Introduction to Debtor and Creditor Law
a. Overview of Bankruptcy Law
i. BAPCPA (2005)
1. Bankruptcy Abuse Prevention and Consumer Protection Act
a. Wanted to increase the certainty that the creditors would receive at
least as much if not more than in a liquidation case.
ii. Bankruptcy law is Federal Law; therefore any conflicting State laws lose to the federal
law. [Supremacy Clause]
1. Debt collection
2. Consumer Law is our focus.
iii. Two models of Bankruptcy Law:
1. Liquidation Bankruptcy (older concept, until 1898 Bankruptcy Act)
a. Ch. 7 of the Bankruptcy Code
b. If the debtor cannot pay his/her debts, they file the bankruptcy case and
turn over their assets to a trustee who liquidates the assets and
distributes the assets to the debtor’s creditors. In exchange for that, the
debtor receives a clean slate [discharge], (although in Ancient Rome
they were to be drawn and quartered).
c. Debt Collection mechanism.
i. The debtors get the government to discharge their debts, and the
creditor gets the government to collect for them.
2. Reorganization Bankruptcy (US initiated model)
a. Several chapters (9, 11, 12, 13) deal with reorganization bankruptcy.
b. The debtor keeps his/her stuff, and the debtor gets a discharge of their
debts. In order for the debtor to keep their stuff and get a discharge, the
debtor has to present a plan of reorganization to the Court whereby for
a certain specified amount of time (3-5 years normally) during which
time the debtor is going to pay their creditors out of whatever
disposable income the debtor has. The creditors must receive at least
what they would get if we liquidated the debtor’s assets the day of the
official bankruptcy.
iv. Trustees:
1. US Trustee
a. An employee in the Department of Justice in the Office of the United
States Trustee Program. This person supervises bankruptcy cases, and
can appear in any bankruptcy case. Their primary administrative roles
are in Ch. 11 cases.
2. Bankruptcy Referees
a. Bankruptcy Judges under the old Bankruptcy Code
b. Most of the administrative jobs these people have, moved to the US
Trustees.
3. Bankruptcy Trustees
a. Work on Ch. 7, 11, and 13 bankruptcies.
v. Bankruptcy is a financial death.
1. The lead up to this death is almost all State law governed (contract/tort
law/debt collection)
vi. Important Vocabulary Terms:
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Unsecured Debt
a. No promise that any property will be given to them if bankruptcy occurs.
b. Self-help is not acceptable to get back money you lent under the law.
2. Secured Debt
a. A promise that property will be given to them if bankruptcy occurs.
b. Types of Creditors:
i. Lien Holders
3. Lien:
a. Property interest that a secured creditor obtains.
b. Types:
i. Security Interests [Mortgages]
1. Consensual Liens
ii. Statutory Liens
1. A lien that the legislature has granted to a creditor.
iii. Judgment Liens
1. A lien that an unsecured creditor gains once they have
received their judgment against the debtor. File/enroll
the judgment in the county or the federal judicial district
where he/she owns some property. [Full Faith and Credit
Clause] Creditor then asks the Court to direct the sheriff
to seize the debtor’s property. At some point State law
sees the creditor as having a judgment lien against the
debtor.
b. Creditors and Their Liens
i. Consensual Liens
1. Mortgages on your home or car.
ii. Judicial Liens (State law collection remedies)
1. Garnishment
a. This is a court proceeding ancillary to the original judgment by which a
writ is issued to the person having the debtor’s property (the garnishee
defendant), requiring this person to surrender to the court whatever
property of the debtor he or she currently holds.
b. Collecting property of a debtor in the hands of a third party.
c. Most common type is wage garnishment.
2. Receivership [Debtor’s Interrogatories]
a. Creditors summon debtors in an interrogatory-style to report their
assets.
b. There is a third party who is supervising the situation that has the
power to require the debtor to turn over their property.
3. Foreclosure and Repossession
a. Secured creditors can seize the real or personal property upon which the
creditor has a lean, liquidate the asset and receive the money from the
sale.
i. If there’s not enough money to cover the debt, there is a
deficiency [$1m- $200,000 house=$800,000 deficiency] that the
secured creditor can sue to obtain.
b. Unsecured creditors take the debtors to court and file the judgment in
an area where the debtor has real or personal property and requests the
sheriff to obtain the property for them.
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II.
III.
i. Filing immediately creates a lien on real property; the sheriff
coming for personal property creates a lien on personal property.
ii. If the sheriff breaks into the home and takes something that is
not the property of the debtor, the sheriff has now committed
conversion of personal property.
iii. Statutory Liens [Service non-payment liens]
1. Mechanic’s/Artisans’ Liens
a. The law in every state grants the auto mechanic [or any person that
works on another person’s property] the right to gain a lien on the
property on which the work was performed.
2. Tax Liens
a. The IRS and other government agencies have a statutory lien to get
their owed taxes from you.
3. Many Others
a. In KY, you can obtain a statutory lien on the sperm of thoroughbred
horse.
b. Landlords, hotels, etc. can be granted a lien against you for their
services.
iv. Bankruptcy Justice
1. Pro rata payment of creditors
v. State law Bankruptcy Justice
1. The first to get there wins.
vi. Equity Maxim:
1. “You must be just, before you’re generous.”
The Collection of Debts Outside of Bankruptcy
a. Fraudulent Transfers
i. When a debtor transfers property rights to another in an attempt to evade losing it to
their creditors. (Or sells their property for nothing so as to avoid it appearing as a
“gift.”)
1. Both of these situations are reversible by a court order in every state.
2. Creditors have to prove:
a. First Method [property transfer]:
i. Actual fraud
b. Second Method [sale]:
i. Did the debtor (when insolvent) convey property to a third party
for less than a reasonably equivalent value?
ii. 548 of the Code gives the Bankruptcy Trustee the ability to attack the bankruptcy
filing.
iii. 544(a) the bankruptcy trustee may also use state fraudulent conveyance law.
iv. 707(b) is important here. (“Dismissal of a Case or Conversion to a Case under Ch. 11 or
13”)
Commencement of the Case and Eligibility for Relief
a. Commencing Voluntary Proceedings
i. Mandatory Debtor Education
1. 109(h) forbids the filing of an individual debtor bankruptcy petition unless the
debtor has undergone credit counseling from what the statute calls an
“approved nonprofit budget and credit counseling agency.”
2. This briefing must outline the opportunities for available credit counseling and
assist the debtor in performing a budget analysis.
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Before a discharge can be granted, there must be a second round of credit
counseling teaching better money management skills.
ii. The “Means” Test (Section 707)
1. Calculate the debtor’s current monthly income (CMI). Does this debtor’s CMI
exceed/not exceed the average CMI for the debtor of this type in this area?
Subtract standard expenses, certain actual expenses [care of an elderly, ill or
sick parent; some children education expenses, some extra housing or utility
expense with reasonable excuse] and actual secured debt. Then ask the three
questions to find out whether or not the debtor should file Ch. 7 or Ch. 13.
a. CMI
i. Look at the debtor’s income from any source for the previous six
months before filing bankruptcy. Divide that number by 6.
Multiply this number by 12, and that will be the debtor’s median
annual income.
1. Bankruptcy Courts are split as to whether one-time
windfalls are included in this calculation.
b. If the debtor is BELOW median income, the means test DOES NOT apply.
i. The Bankruptcy judge has the discretion to decide if there is an
abuse.
c. If the debtor is ABOVE median income, the means test DOES apply.
d. Standard expenses
i. Here we do not calculate the debtor’s actual expenses, only the
standard expenses of a person in the same situation.
e. Example:
i. CMI: $3000
ii. STD Ex.: $1500
iii. CAE: $400
______________________
iv. Extra income: $900---Must file Ch. 13. (see 2(b) below)
2. If a debtor, based on their financial information, fails this test, they are deemed
to be abusing Ch. 7, and the bankruptcy claim will be dismissed or converted to
Ch. 13.
a. Three questions:
i. A debtor will not fail the means test if their extra income is less
than $128.33 ($7,700/12). They can therefore file Ch. 7
bankruptcy in addition to being able to file Ch. 13.
ii. If their extra income is more than $214.17 ($12,850/12), the
debtor MUST file Ch. 13.
iii. If their income is in between $128.33 ($7,700/12) and $214.17
($12,850/12), multiply the extra income by 60, and then
determine whether or not that number will pay off 25% of the
debtor’s total unsecured debt. If the creditor will receive more
than 25% of what they are owed, the debtor must file Ch. 13. If
not, the debtor may file Ch. 7.
3. BAPCPA introduced this test.
4. Statutory Interpretation
a. Absent a scrivener’s error, judges apply statutes as written; however,
when legislative intent is manifestly clear, the judge interprets the
statute accordingly.
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Ransom v. FIA Card Services, N.A. (USSC, 2011)
a. A debtor who owns his car clear-and-free, and therefore does not make
loan or lease payments, may not take the car-ownership deduction
under the means test.
The Bad Faith and Totality of the Circumstances Abuse Test
1. In re James (USBC [NDI], 2006)
a. If a debtor spends significant cash assets on unnecessary luxury items
with an intent to file bankruptcy and discharge existing indebtedness it
is considered bad faith within the meaning of 11 U.S.C. Sec. 707(b).
Paperwork at the Time of Filing
1. In re Acosta-Rivera (USCOA [1C], 2009)
a. When the missing information has become irrelevant or extraneous and
the court, in lieu of dismissal contained in section 521(i) [were] meant
to supplant the bankruptcy court’s discretion to order otherwise more
than forty-five days after the filing date.
The Attorney at Risk
1. One major concern for lawyers representing consumer debtors is the
prohibition in Section 526(a)(4) of the Code against advising a client to incur
more debt in contemplation of the client filing a bankruptcy case. (527 is also
important here.)
2. Bankruptcy Rule of Procedure 9011 is the equivalent of Rule 11 Sanctions.
3. If a debtor is found to be in abuse for Ch. 7, the attorney is on the hook for fees
and other sanctions for failing to correctly apply the Means Test.
4. Milavetz, Gallop & Milavetz, P.A. v. United States (USSC, 2010)
a. Attorneys are debt relief agencies, which means that the consumer
protections under Section 526, 527 and 528 apply. Among those
consumer protection statutes, the requirement that relief agencies not
instruct clients to incur more debt applies to attorneys, but they are
allowed to discuss it.
Other Matters
1. Joint Cases:
a. The Bankruptcy Code also provides for the filing of joint bankruptcy
petitions by married couples.
b. Under Section 302, an individual and that individual’s spouse may file a
joint bankruptcy petition, initiating a joint case, and the debtors will pay
only one filing fee.
c. The Courts have been strict in their interpretation of section 302 and
have refused to allow joint petitions filed by persons who are not
spouses under the applicable state law.
i. In re Villaverde
1. Domestic partners are not eligible to file a joint petition.
ii. In re Malone
1. Unmarried heterosexual couples are ineligible to file a
joint petition notwithstanding long-term cohabitation.
iii. In re Buechler
1. Parent and minor child cannot commence joint
bankruptcy case.
2. Foreign Bankruptcies
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iii.
iv.
v.
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a. Chapter 15 governs cross-border and ancillary cases.
b. The foreign representative of the debtor in a case pending in another
country can petition a United States Bankruptcy court for a recognition
order.
c. The Chapter anticipates concurrent proceedings governing the debtor
under the laws of more than one country, and the courts are directed to
communicate and cooperate with the foreign representative and foreign
courts.
3. Filing Fees
a. Administrative fees:
i. Chapter 7: $335
ii. Chapter 13: $310
iii. Chapter 11: $1,717
b. Waiver of fees is appropriate in some cases, which overturns the
previous rule from United States v. Kras (inability to pay the filing fee
bars debtors from obtaining bankruptcy relief).
b. Involuntary Cases
i. Involuntary cases are commenced either by creditors of the debtor or, in the case of a
general partnership, by fewer than all of the general partners. Involuntary cases are
available only under Ch. 7 and 11, and they may not be commenced against a “farmer,
family farmer, or a corporation that is not a moneyed, business or commercial
corporation.” The debtor must also be eligible for relief.
ii. Petitioning Creditors
1. Successful initiation of an involuntary bankruptcy case requires that the
petitioner be an eligible creditor and that the alleged debtor either is not
paying its debts or has already had a trustee or receiver appointed to take
control of its property.
2. Bankruptcy Rules 1010, 1011, and 1013 govern the procedure for the
commencement and resolution of involuntary cases. Section 303(b) requires
that at least three creditors join together to commence an involuntary
bankruptcy case unless the debtor has fewer than 12 creditors.
3. By requiring at least three creditors to commence cases in which the debtor has
a larger number of creditors, Section 303 furthers the collective as opposed to
individual creditor goals of bankruptcy law. Section 303 also limits the
category of eligible creditors to those who hold claims that are not contingent
as to liability or the subject of a bona fide dispute.
a. The claims must aggregate at least $15,775 more than the value of any
liens on property securing those claims.
4. Section 303(b) excludes holders of “contingent claims” from the list of creditors
eligible to commence an involuntary case, but the Bankruptcy Code contains no
definition of contingent claims.
a. A claim is contingent if some additional act or occurrence must take
place prior to the debtor becoming liable.
5. Section 303(h) says that if the petition is not timely controverted, the court
shall order relief against the debtor in an involuntary case under the chapter
under which the petition was filed. Otherwise, after trial, the court shall order
relief against the debtor in an involuntary case under the chapter under which
the petition was filed, only if—(1) the debtor is generally not paying their debts
when they’re due; or (2) within 120 days before the date of filing of the petition,
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a custodian, other than a trustee, receiver, or agent appointed or authorized to
take charge of less than substantially all of the property of the debtor for the
purpose of enforcing a lien against such property, was appointed or took
possession.
a. The debtor can get it kicked if the petition requirements or the elements
of the above insolvency test are not met.
6. Several not all of the Bankruptcy Code applies because the judge does not yet
have plenary authority.
a. Does apply:
i. Automatic stay
1. What stops creditors from taking debt collection actions.
7. Process:
a. Filing, automatic stay, order for relief entered.
b. District Court judges always have the right to withdraw the order of
reference to the Bankruptcy judge.
i. Fact-findings from bankruptcy judges are merely suggested
findings sent to the district judges.
iii. Grounds for Involuntary Bankruptcy Relief
1. In an involuntary case, on the other hand, the debtor does not desire any relief,
and the filing of an involuntary bankruptcy petition does not automatically
constitute an order for relief.
a. First, if the alleged debtor does not timely controvert the petition, an
order for relief shall be entered.
b. Second, if the alleged debtor files a timely response to the involuntary
petition, relief may be ordered against it if a receiver has been
appointed in the previous 120 days to take control of substantially all of
the debtor’s assets.
c. Third, Section 303(h)(1) authorizes the entry of an order for relief if “the
debtor is generally not paying such debtor’s debts as such debts become
due unless such debts are the subject of a bona fide dispute.
2. Claims that are the subject of a bona fide dispute are excluded from eligibility to
commence an involuntary case; so, too, is the debtor’s nonpayment of those
claims excluded from a court’s determination as to whether the debtor is paying
the debtor’s debts as they come due under Section 303(h)(1).
3. In re Lough (USBC [EDM], 1986)
a. Because there was a bona fide dispute concerning both of the bank's
claims against Mrs. Lough, the bank was ineligible to file an involuntary
petition against her. 11 U.S.C. § 303(b).
iv. Impact of Involuntary Petitions on the Debtor’s Business
1. People may no longer want to conduct business with someone documented as
being poor stewards of money.
v. Penalizing Petitioning Creditors
1. Section 303(i) states that the Court has the power to order the petitioning
creditors of a dismissed petition to pay damages (sometimes punitive
damages).
c. Debtors’ Eligibility for Relief
i. Municipalities and Chapter 9
1. Chapter 9 relief is available only to insolvent municipalities that intend to
adjust their debts under a plan.
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Since the Great Depression, there have been fewer than 700 Chapter 9 filings,
and the courts have had to struggle with sparse case law to guide them.
ii. Family Farmers and Fishermen and Chapter 12
1. Section 109(f) provides that “only a family farmer with regular annual income”
may be a debtor under Chapter 12 and requires a consideration of “regular
annual income” rather than some other measure of financial wherewithal.
iii. Individuals and Chapter 13
1. Section 109(e) provides that Chapter 13 debtors must owe less than $394,725
of noncontingent, liquidated, unsecured debts and less than $1,184,200 of
noncontingent, liquidated, secured debts.
2. Must be an individual with regular income and sufficiently stable and regular
to enable such individual to make payments under a plan under Chapter 13.
iv. Most Everyone Else and Chapters 7 and 11
1. Chapter 7, which controls the liquidation of assets, is available to any person
other than railroads, domestic insurance companies and banks, and foreign
insurance companies and banks.
2. Small business debtors are persons engaged in commercial activities whose
total noncontingent and liquidated debts do not exceed $2,566,050.
3. Single asset real estate debtors
a. A Single asset real estate is a single property or project that generates
substantially all of the debtor’s income’ residential properties with fewer
than four units are excluded from the definition (as are family farmers).
4. Eligibility for relief under Chapter 7 and Chapter 11 can be described
algebraically as follows:
a. Chapter 7= (all persons)-(individuals who cannot pass the means test +
railroads + domestic insurance companies & banks + foreign insurance
companies & banks)
b. Chapter 11= All Chapter 7 debtors + railroads – (stockbrokers &
commodity brokers)
5. Conspicuously absent from the eligibility requirements for bankruptcy relief is
any need to make a showing of insolvency, and nothing prevents a solvent entity
from filing a petition.
6. Under 109(c)(3), a municipality must be insolvent to obtain Chapter 9 relief.
d. Limitations on Repeat Bankruptcy Filings
i. Section 109(g) renders debtors ineligible for bankruptcy relief for 180 days if the
debtor’s prior case was dismissed by the court for the willful failure of the debtor to
follow court orders or properly prosecute the case, or if the debtor requested and
obtained dismissal of the prior proceeding after a creditor had moved for relief from
the automatic stay in the initial case.
1. Section 109(g)(1) provides that debtors who fail to play by the rules must take
at least a 180-day breathing spell before they can obtain a form of bankruptcy
relief again.
2. Section 109(g)(2) prevents debtors from thwarting creditors’ legitimate efforts
to recover property subject to their claims.
ii. Montgomery v. Ryan (In re Montgomery) (USCOA [8C], 1994)
1. Where a section 109(g) issue is properly raised, the filing party must establish
that the failure to obey a court order was not willful.
iii. In re Sole (USBC [EDV], 1998)
2.
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On a motion to dismiss based upon Section 109(g)(2) we will look for a causal
connection between a motion for relief from the automatic stay and a debtor’s
subsequent request and receipt of a voluntary dismissal. Absent the causal
connection, section 109(g)(2) is not triggered and a debtor is not barred from
re-filing for 180 days.
iv. The automatic stay of 362, which we will consider in detail in a later chapter, stops all
creditor collection activity as of the moment the petition is filed.
v. Section 727(a)(8) and (9) provide that debtor cannot obtain a discharge in a Chapter
7 case commenced within eight years of the commencement of a prior Chapter 7 case
in which the debtor received a discharge.
1. No subsequent Chapter 7 discharge is available for six years if the debtor
received a discharge in a Chapter 12 or Chapter 13 case unless the debtor paid
either all of the allowed unsecured claims in the prior proceeding or at least 70
percent of those claims, using his or her “best efforts” to do so.
The Bankruptcy Estate
a. Bankruptcy estate definition
i. Under Bankruptcy Code Section 541(a)(1), the bankruptcy estate consists of all the
debtor’s “legal and equitable interests in property as of the commencement of the
case.”
ii. An estate arises by operation of law upon the filing of a bankruptcy case.
b. United States v. Whiting Pools, Inc. (USSC, 1983)
i. When property seized prior to the filing of a petition is drawn into the Chapter 11
reorganization estate, the Service’s tax lien is not dissolved nor its status as a secured
creditor destroyed. Section 542(a) simply requires the Service to seek protection of its
interest according to the congressionally established bankruptcy procedures, rather
than by withholding the seized property from the debtor’s efforts to reorganize.
ii. Right of Redemption is important here.
1. A common law right (now statutory) that allows debtors to tender payment in
full in attempt to retrieve their property from their creditors.
2. This exists up to the moment that the foreclosure sale is final.
c. If the interest comes into existence after the commencement of the case, it is not property of
the estate under Section 541(a)(1).
d. And interest in property that the debtor acquires post-bankruptcy by inheritance, through a
property settlement or a divorce decree, or as a beneficiary of a life insurance property is
property of the estate as long as the debtor “acquires or becomes entitled to acquire” that
property within 180 days after the commencement of the case.”
e. Property that is recovered during the bankruptcy by the trustee for the benefit of the estate
and the proceeds of property of the estate also are included in the reach of Section 541.
f. Under 541(a)(6), “earnings from services performed by an individual debtor after the
commencement of the case” are not property of the estate.
g. Ipso Facto Clauses
i. Restrictions that are frequently thrown into contracts, deeds, security agreements, etc.,
that’s supposed to circumvent bankruptcy proceedings against the property.
ii. The Bankruptcy Code condemns such bankruptcy clauses and invalidates them in a
number of different sections.
h. Chicago Board of Trade v. Johnson (1924)
i. Established the fundamental Bankruptcy law precept:
1. Property of the estate is taken with any burdens or benefits.
1.
IV.
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i. In re Chris-Don, Inc. (USDC [DNJ], 2005)
i. License
1. A permission, accorded by a competent authority, conferring the right to do
some act which without such authorization would be illegal, or would be a
trespass or a tort.
ii. This applies similarly to all kinds of government issued licenses.
iii. In New Jersey a liquor license is not property, it is only a license, and therefore it does
not become property of the estate.
iv. Other states adopt the functional argument that if the debtor and the marketplace
treats a particular license as if it were merely property, functionally speaking, then the
bankruptcy court will treat the license as property as well.
1. “Functional Test” = Is his type of license routinely traded between private
parties? If yes, then many states argue that that type of license should be
treated as property to be included in the estate.
j. Post-Petition Earnings from Personal Services
i. Section 541(a)(6) contains an important exclusion from property of the estate.
1. It says “earnings from services performed by an individual debtor after the
commencement of the case” are not property of the bankruptcy estate.”
k. Limits on Property of the Estate
i. Under 541(a)(1), all of the debtor’s legal and equitable interests in property become
property of the estate. 541(d) says that if the debtor holds only legal title to property
and has no equitable interest in the property, only the legal interest and not the
equitable interest becomes property of the bankruptcy estate.
ii. In re Omegas Group, Inc. (USCOA [6C], 1994)
1. For the most part (95% of the time) a constructive trust is not enforceable in
bankruptcy, because it is not a genuine trust.
2. A trust is when a settlor gives property to a trustee to administer that property
to the benefit of the beneficiaries of that trust.
3. There is a remedy in civil cases where there is an allegation that a defendant
has obtained property through fraud where a defendant has that property and
the plaintiff can identify that the property is there. The plaintiff can request
that the property be placed in trust
4. If a creditor/plaintiff alleges that the debtor has defrauded them and pleads
with the court to impose a constructive trust on some of the debtor’s property
(property of the estate), then what is the status of the constructive trust, given
that if it were a valid trust the court would recognize and protect it.
a. Remedies for when FRAUD is found:
i. 541(d) = a constructive trust that can be fully satisfied before the
rest of the creditors
ii. 523(a)(2)(A) = a nondischargeable debt that gets in lines with
the other unsecured creditors and is at risk of being left with an
unsatisfied debt.
l. Exclusions from Property of the Estate
i. 541(b) and (c) include powers that the debtor may exercise only for the benefit of
another entity, and any interest that a debtor may have as a lessee of a nonresidential
lease that was properly terminated prior to the filing of the bankruptcy case.
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ii. Parties may attempt to avoid the generally broad reach of 541(a)(1) by drafting
provisions that would limit the access of a debtor’s creditors to the property.
Nevertheless, 541(c)(2) provides that “a restriction on the transfer of a beneficial
interest of the debtor in a trust that is enforceable under applicable nonbankruptcy
law is enforceable in a bankruptcy case.”
iii. A spendthrift trust is one created in such a fashion that neither the beneficiary of the
trust nor his creditors can reach the property in the trust until distributions are made
to the beneficiary (thus keeping so called spendthrifts from dissipating their
inheritances).
iv. Patterson v. Shumate (USSC, 1992)
1. ERISA-qualified retirement plans are spendthrift trusts; which means that they
cannot be part of the bankruptcy estate under 541(c)(2).
m. Exemption Choices
i. Both state and federal law have always exempted some minimal assets of debtors from
the reach of creditors, and these exemption statutes must be given effect in the debtor’s
bankruptcy.
ii. In conjunction with a discharge, the debtor’s exempt property is intended to enable the
debtor to become a productive person as quickly as possible. Dependents of the debtor
may claim exemptions on behalf of the debtor, should the debtor fail or refuse to do so.
iii. Under 522(b) a debtor may claim as exempt either the property set out in 522(d) or
“any property that is exempt under Federal law other than 522(d) or applicable State
or local law, and any interest in property in which the debtor had, immediately before
the commencement of the case, an interest as a tenant by the entirety or joint tenancy
to the extent that such interest…is exempt from process under applicable
nonbankruptcy law.”
iv. Under 522(b)(1) the federal exemptions are not available to debtors if the applicable
state law “specifically does not so authorize debtors to choose the exemptions set out in
522(d).
v. 522(d) allow for federal exemptions unless state legislature opts out of federal
exemptions. (About 36 states have opted out of federal exemption law.)
vi. In re Sullivan
1. The Seventh Circuit found that the opt-out system of 5229b) met the
requirement of uniformity under the Constitution. Moreover, the courts have
held that 522(b) does not constitute an improper delegation of congressional
authority to the states.
vii. Many states that opted out not only took the opportunity to update their own
exemptions, but actually patterned their new exemption systems on the scheme set out
in 522(d) of the Bankruptcy Code.
viii. It should be noted that whether or not a state has opted out of the federal exemptions,
522(n) allows the debtor to claim up to $1,283,025 in an individual retirement
account.
ix. Both the Federal Trade Commission and the Federal Reserve Board have issued
regulations forbidding creditors from taking nonpossessory security interests in
household goods unless they are purchase money security interests.
x. 522(f) of the Bankruptcy Code permits the debtor in bankruptcy to avoid such security
interests.
xi. In re Short (USBC [SDI], 1994)
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Tracing Rule
a. The second transaction retains its purchase money characteristic to the
extent of the purchase money obligation that was not satisfied. Many
courts will hold that a court can trace the initial purchase money
transaction into the new transaction.
xii. Article 9 provides that in non-consumer goods cases, the “dual status” rule prevails,
and creates methods of allocating the payments so as to ascertain what portion of the
purchase money debt survives.
n. Claiming the Exemption
i. Section 522(i) directs the debtor to list the property that he or she claims as exempt.
1. “Unless a party in interest objects, the property claims as exempt on such list is
exempt.”
ii. Taylor v. Freeland & Kronz (USSC, 1992)
1. If a party in interest does not object to an exemption, then such property
claimed is exempt.
a. the debtor listed a lawsuit as property, but listed it as exempt for an
“unknown amount” and since the trustee failed to object, the 30d later
won $110k was considered exempt.
iii. Schwab v. Reilly
1. Because the $1 claimed exemption was within the value that the debtor could
have claimed as exempt, then no objection was necessary from the trustee.
iv. In re Drenttel (USCOA [8C], 2005)
1. Permitting the exemption of the Arizona homestead is consistent with the
general rule of liberal construction in favor of the debtor, and furthers the
Minnesota policies underlying the exemption. The statute itself does not
preclude use of the homestead exemption for an out-of-state property.
The Automatic Stay
a. The filing of a bankruptcy petition (involuntary or voluntary) leads to the automatic stay
being in place (regardless of the actions of any party).
b. Section 362(a) outlines the automatic stay that pertains to:
i. The commencement or continuation of a judicial, administrative, or other action or
proceeding against the debtor that was or could have been commenced before the
commencement of the case, or to recover a claim against the debtor that arose before
the commencement of the case.
ii. The enforcement against the debtor or against property of the estate, of a judgment
obtained before the commencement of the case.
iii. Any act to obtain possession of property of the estate or of property from the estate or
to exercise control over property of the estate.
iv. Any act to create, perfect, or enforce any lien against property of the estate.
v. Any act to create, perfect, or enforce against property of the debtor any lien to the
extent that such lien secures a claim that arose before the commencement of the case
under this title.
vi. Any act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title.
vii. The setoff of any debt owing to the debtor that arose before the commencement of the
case under this title against any claim against the debtor.
1. Set off is an ancient common law idea where two parties owe each other
mutual debts. The law permits the creditor/debtors to set-off the debts (Debtor
1.
V.
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A owes $50 to Debtor B. Debtor B owes $10 to Debtor A. Set off is when Debtor A
just pays Debtor B $40.)
2. In re Strumpf
a. Administrative freeze of a bank account is not a violation of the
automatic stay.
viii. The commencement or continuation of a proceeding before the United States Tax Court
concerning a tax liability of a debtor that is a corporation for a taxable period the
bankruptcy court may determine or concerning the tax liability of a debtor who is an
individual for a taxable period ending before the date of the order for relief under this
title.
c. Consequences of violating the stay:
i. Any damages that flow from the violation
ii. If appropriate, and in some circuits always, the bankruptcy court will undo any action
in violation of the stay.
d. 362(b) exceptions to automatic stay:
i. Criminal prosecutions
1. Without court permission on a bouncing check charge during a bankruptcy
case, the DA cannot settle the case by allowing the defendant to pay off the debt
owed.
ii. Domestic relations proceedings
1. Paternity
iii. Domestic support obligations
1. An obligation to anyone that arises from a domestic relations order in the
nature of: alimony, maintenance, or child support (*does not include property
splits*)
iv. Child custody proceedings
v. Domestic violence proceedings
vi. Police or regulatory exception.
1. Are they exercising their police power to de facto trying to collect a debt?
vii. A lawsuit by the tax authorities to establish tax liability or to demand tax returns or
assessment.
viii. An action by an accrediting agency regarding the accreditation status of the debtor as
an educational institution
ix. An action by a State licensing body regarding the licensure of the debtor as an
educational institution.
e. 362(d) lifting the stay “for cause”
i. Void vs. voidable
1. 5th circuit follows the voidable rule:
a. An unwitting violation of the automatic stay will be undone by the court
if:
i. The creditor had come to the bankruptcy judge and asked
permission to ask to lift the automatic stay
ii. And if the court would have lifted the stay.
iii. The court will not undo the violation of the stay.
ii. On request of a party in interest and after notice and a hearing, the court shall grant
relief from the stay provided under subsection (a) of this section, such as by
terminating, annulling, modifying, or conditioning such stay—
1. (1) For cause, including the lack of adequate protection of an interest in
property of such party in interest;
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2.
VI.
(2) With respect to a stay of an act against property under subsection (a) of
this section if—
a. (a) The debtor does not have an equity in such property; and
b. (b) Such property is not necessary for an effective reorganization.
Claims
a. Section 101(5) of the Code defines a claim as a right to payment. That payment right is a
claim even if it is contingent, unliquidated, umatured, or disputed. Expanding the definition of
“claims” in this manner increases the number of claims that are eligible to receive a
distribution out of the bankruptcy case.
b. Section 101(10) defines a creditor generally as “an entity that has a claim against the debtor
that arose at the time of or before the order for relief concerning the debtor.” Creditors also
include some holders of claims that arose after the commencement of the case, but only in
limited circumstances.
i. There are three types of claims with which you must become familiar:
1. Secured
2. Priority
3. Unsecured
c. Allowance of Claims
i. When debtors commence bankruptcy cases, they must file schedules listing their assets
and liabilities. They must also provide a list of their creditors’ names and addresses so
that notice of the bankruptcy proceeding can be sent to those parties. Creditors must
submit proof of their claims against the debtor in order to share in the distribution of
assets at the end of the case.
ii. For Chapter 11 only, claims that are listed by the debtor as liquidated and undisputed
are automatically allowed without the need for the filing of a proof of claim form by
the creditor. In all other cases, including cases converted from Chapter 11 to another
Chapter of the Bankruptcy Code, a proof of claim form must be filed.
iii. In the absence of an objection to the proof of clam the claim is allows, meaning that the
claimant may participate in the bankruptcy process, (502(a)).
iv. Under 502(b)(1), al of the nonbankruptcy defenses to claims are available in
bankruptcy.
v. In re Miller (USCOA [10C], 2012)
1. Because the creditor failed to produce the required promissory note, it has
failed to establish its status as a transferee and therefore the evidence was
deemed insufficient that the creditor was a party in interest entitled to seek
relief from stay.
2. Essentially if you’re going to file a claim, you need to be able to prove that you
are a creditor.
vi. Section 502(b)(2) disallows any claim for unmatured interest. It only cuts off the
interest, while the remaining unpaid principal of an installment debt is still fully
allowed under Section 502. In fact, the definition of a claim in Section 101(5)
specifically includes unmatured claims.
1. This applies to unsecured creditors and over secured creditors.
vii. The definition of claim specifically includes equitable rights; however, it also limits
claims to those equitable rights or remedies that give rise to a right to payment for
breach of the debtor’s required performance.
viii. Notwithstanding this right to force the debtor to turn over the property as a matter of
state law, the equitable remedy of specific performance would be transformed into a
claim for bankruptcy purposes.
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ix. Injunctive claims will be estimated by judges as monetary claims. (p.247 IS
EXTREMELY IMPORTANT FOR EXAM.)
x. Section 502(b)(6)
1. If such claim is the claim of a lessor for damages resulting from the termination
of a lease of real property, such claim exceedsa. (a) The rent reserved by such lease, without acceleration, for the greater
of one year, or 15 percent, not to exceed three years, of the remaining
term of such lease, following the earlier of—
i. (i) The date of the filing of the petition
ii. (ii) The date on which such lessor repossessed, or the lessee
surrendered, the leased property; plus
b. (b) Any unpaid rent due under such lease, without acceleration, on the
earlier of such dates.
xi. Over secured creditors are entitled to post-petition interest. When they are over
secured, they file for their claim, plus post-petition interest accruing. If the case lasts
too long, the over secured creditor can become and under secured creditor.
xii. An under secured creditor (Bifurcation) once the secured collateral has been
liquidated, and there is unsecured interest leftover.
d. Estimation of Claims
i. Section 502(c) directs the bankruptcy court to estimate contingent and unliquidated
claims if it would take too long to finally determine the value of those claims.
ii. Contingent claims are those that are not fixed unless some future event occurs.
iii. The Court would consider the likelihood of the injured party’s success on the merits of
the case as well as the full extent of the party’s damages. Then the court would multiply
the likelihood of success with the amount of damages to arrive at the estimated claim.
e. Secured Claims
i. In addition to allowed unsecured claims, most bankruptcy proceedings include allowed
secured claims. A claim is secured if a creditor holds a lien on property in which the
estate has an interest or if the creditor has a right of setoff against the debtor. The
claim is secured to the extent of the lesser of the amount of the outstanding
indebtedness or the value of the collateral.
ii. Whether a creditor is over secured or under secured has significant consequences with
respect to the automatic stay. Another consequence of being under secured is that no
interest runs on that obligation during the bankruptcy.
iii. Section 502(b) (2) disallows claims to the extent that they are for unmatured interest.
iv. Section 502(b) provides that “to the extent that an allowed secured claim is secured by
property the value of which…is greater than the amount of such claim, there shall be
allowed to the holder of such claim, interest on such claim, and any reasonable fees,
costs, or charges provided for under the agreement under which such claim arose.”
1. Payment of interest and related fees is available on over secured but not on
under secured claims in bankruptcy proceedings.
v. The right to set off is considered as a secured claim.
vi. In re Rash “replacement value” what value would the collateral bring with neither
party has to deal with the other and the seller is indifferent about the selling (opposite
of a fire sale).
vii. Secured claims receive significantly better treatment than unsecured claims in
bankruptcy proceedings. The holder of a secured claim is entitled to either a return of
the collateral or the full payment of the secured claim. If that payment is to take place
over time, then the “present value” of the payments to be received by the holder of the
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secured claim must equal the value of that secured claim. Any time the statute calls for
payment of “present value,” it means that if the claim is not being paid in full
immediately, interest must then be paid on the claim.
viii. The determination of the value of collateral is an important part of most bankruptcy
proceedings.
ix. Section 506(a) provides that “such value shall be determined in light of purpose of the
valuation and of the proposed disposition or use of” the collateral.
f. Priority Claims
i. Holders of secured claims have a right to receive either their property or its value
before any other distributions are made in the bankruptcy case. If there are any assets
remaining after the satisfaction of secured claims, a distribution will be made to the
holders of unsecured claims.
ii. Section 507(a) Congress made policy choices regarding the need for more favorable
treatment for certain kinds of unsecured claims.
iii. The Bankruptcy Code mandates that some worthy creditors be paid before others. In
most cases, the debtor’s assets are insufficient to pay all claims, so having a right to go
ahead of other creditors is extremely valuable.
iv. Section 507(a)(1) through (10) set out the categories of claims that have priority over
other unsecured claims. All 507(a)(1) claims must be paid in full before 507(a)(2)
claims receive anything, and so on down the line.
1. The 2005 Amendments to the Bankruptcy Code moved domestic support
obligations (alimony, child care, etc.) to the front of the line, reflecting a strong
policy in favor of protecting those who suffer financially from the dissolution of
a marriage.
a. Another important consequence of priority status, explored in Chapter 8,
is that these claims must be paid in full in reorganization proceedings.
The creditor may, but need not, accept less favorable treatment.
2. Next in priority, pre Section 507(a)(2) are the expenses of the bankruptcy itself.
3. The third category of priority claims is the so-called involuntary gap claims,
which arise after the filing of an involuntary bankruptcy petition but before the
entry of an order for relief.
4. The next two categories of priority claims protect the debtor’s employees whose
recent wages and benefits have not been paid.
5. Section 503(b) of the Code defines administrative expenses. This expansion
resulted in an increase in claims having priority under Section 507(a)(2).
a. Section 503(b)(9)
i. Includes within administrative expenses of a bankruptcy case
and claim for the value of goods received by a debtor in the 20
days before the commencement of the case.
ii. Because priority claims generally must be paid in full in Chapter
11 cases, a debtor’s decision regarding when to file a voluntary
petition may turn on the amount of goods received by the debtor
in the immediate past.
b. The bankruptcy judge must approve administrative expenses in
advance, and the judge has the power to cut the expenses. The standard
is what is reasonable.
6. Use Section 507 to determine whether and to what extent these claims have
priority.
g. Equitable Subordination
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VII.
i. Section 105 broadly authorizes the judge to do whatever is “necessary or appropriate
to carry out the provisions of this title…”
ii. Finish
h. Future Claims
i. Future claimants are discharge by establishing a trust.
Discharge
a. Section 727
i. (a)(4) The debtor knowingly and fraudulently, in or in connection with the case—
1. (a) Made a false oath or account;
2. (b) Presented or used a false claim;
3. (c) Gave, offered, received, or attempted to obtain money, property, or
advantage, or a promise of money, property, or advantage, for acting or
forbearing to act;
4. (d) Withheld from an officer of the estate entitled to possession under this title,
any recorded information, including books, documents, records, and papers,
relating to the debtor’s property or financial affairs;
ii. (a)(5) The debtor has failed to explain satisfactorily, before determination of denial of
discharge under this paragraph, any loss of assets or deficiency of assets to meet the
debtor’s liabilities;
iii. (a)(6) The debtor has refused, in the case—
1. (a) To obey any lawful order of the court, other than an order to respond to a
material question or to testify;
2. (b) On the ground of privilege against self-incrimination, to respond to a
material question approved by the court or to testify, after the debtor has been
granted immunity with respect to the matter concerning which such privilege
was invoked; or
3. © On the ground other than the properly invoked privilege against selfincrimination, to respond to a material question approved by the court or to
testify;
iv. (a)(7) The debtor has committed any act specified in paragraph (2)(3)(4)(5)(6) of this
subsection, on or within one year before the date of the filing of the petition, or during
the case, in connection with another case, under this title or under the Bankruptcy Act,
concerning an insider;
v. (a)(8) The debtor has been granted a discharge under this section in a case
commenced within 8 years before the date of filing of the petition
vi. (a)(10) The court approves a written waiver of discharge executed by the debtor after
the order for relief under this chapter;
vii. (a)(11) After filing the petition, the debtor failed to complete an instructional course
concerning personal financial management described in section 11.
b. Taking the 5th amendment does not protect you from bankruptcy fraud. This is the difference
between rights and privileges. Bankruptcy is considered a privilege.
c. Section 523
i. (a) A discharge under 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not
discharge an individual debtor from any debt
1. (1) For a tax or a customs duty—
a. (a) Of the kind and for the periods specified in section 507(a)(3) or
507(a)(8) of this title, whether or not a claim for such tax was filed or
allowed;
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b. (b) With respect to which a return, or equivalent report or notice, if
required—
i. (i) Was not filed or given; or
ii. (ii) Was filed or given after the date on which such return, report,
or notice was last due, under applicable law or under any
extension, and after two years before the date of the filing of the
petition or
c. (c) With respect to which the debtor made a fraudulent return or
willfully attempted in any manner to evade or defeat such tax;
2. (2) For money, property, services, or an extension, renewal, or refinancing of
credit, to the extent obtained by—
a. (a) False pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition;
3.
4.
5.
6.
i. Husky
1. Not congruent to the actual legal definition of fraud;
therefore is includes constructive frauds.
b. (b) Use of a statement in writing—
i. (i) That is materially false;
ii. Respecting the debtor’s or an insider’s financial condition;
iii. (iii) On which the creditor to whom the debtor is liable for such
money, property, services, or credit reasonably relied; and
iv. (iv) That the debtor caused to be made or published with intent
to deceive; or
c. © (i) for purposes of subparagraph (A)—
i. (I) Consumer debts owed to a single creditor and aggregate more
than $675 for luxury goods or services incurred by an individual
debtor on or within 90 days before the order for relief under this
title are presumed to be non-dischargeable; and
(3) Neither listed not scheduled under section 521(a)(1) of this title, with the
name, if known to the debtor, of the creditor to whom such debt is owed, in time
to permit—
a. (A) If such debt is not of a kind specified in paragraph (2)(4)(6) of this
subsection, timely filing of a proof of claim, unless such creditor had
notice or actual knowledge of the case in time for such timely filing; or
b. (B) If such debt is of a kind specified in paragraph (2)(4)(6) of this
subsection, timely filing of a proof of claim and timely request for a
determination of dischargeability of such debt under one of such
paragraphs, unless such creditor had notice or actual knowledge of the
case in time for such timely filing and request;
(4) For fraud or defalcation while acting in a fiduciary capacity, embezzlement,
or larceny;
(5) For a domestic support obligation;
(15) To a spouse, former spouse, or child of the debtor and not of the kind
described in paragraph (5) that is incurred by the debtor in the course of a
divorce or separation or in connection with a separation agreement, divorce
decree or other order of a court of record, or, a determination made in
accordance with State or territorial law by a governmental unit;
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(6) For willful and malicious injury by the debtor to another entity or to the
property of another entity;
8. (7) To the extent such debt is for a fine, penalty or forfeiture payable to and for
the benefit of a governmental unit, and is not compensation for actual
pecuniary loss, other than a tax penalty—
a. (A) Relating to a tax of a kind of not specified in paragraph (1) of this
subsection; or
b. (B) Imposed with respect to a transaction or event that occurred before
three years before the date of the filing of the petition;
9. (8) Unless excepting such debt from discharge would impose an undue hardship
on the debtor and the debtor’s dependents, for –
a. (A)(i) An educational benefit overpayment or loan made, insured, or
guaranteed by a government unit, or made under any program funded
in whole or in part by a governmental unit or nonprofit institution;
i. (ii) An obligation to repay funds received as an educational
benefit, scholarship, or stipend; or
b. (B) Any other educational loan that is qualified educational loan as
defined by the IRS.
10. (9) For death or personal injury caused by the debtor’s operation of a motor
vehicle, vessel, or aircraft if such operation was unlawful because the debtor
was intoxicated from using alcohol, a drug, or another substance;
11. (13) For any payment of an order of restitution issued under title 18, United
States Code;
12. (14) Incurred to pay a tax to the United States that would be nondischargeable
pursuant to paragraph (1);
a. (14a) Incurred to pay a tax to a governmental unit, other than the
United States, that would be nondischargeable under paragraph (1);
b. (14b) Incurred to pay fines or penalties imposed under Federal election
law;
13. (17) For a fee imposed on a prisoner by any court for the filing of a case,
motion, complaint, or appeal, or for other coasts and expenses assessed with
respect to such filing, regardless of an assertion of poverty by the debtor.
ii. Taxes are not always dischargeable; only if the taxing authorities have ignored them
and they are older than 3 years.
iii. With regard to priority claims, you must assume the taxing authority will have priority
for any unpaid taxes that are not dischargeable.
d. Effect of Discharge
i. Debtors are no longer responsible for past debts.
e. Reaffirmation
i. Creditors want the debtor to enter into a reaffirmation agreement that will survive the
bankruptcy discharge and be enforceable personally against the debtor in the future,
The Code allows such agreements only if they comply with the requirements of Section
524© and (d) of the Bankruptcy Code.
ii. New Section 524(k) created a complicated form that the debtor must fill out, warning
the debtor of the problems with reaffirmation, and requiring the debtor to
demonstrate that his or her monthly income will be sufficient to service the
reaffirmation agreement. If the debtor cannot do this, “undue hardship” is presumed,
and the court will not approve the reaffirmation agreement. This “judicial protection”
7.
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does not apply, however, if the creditor seeking the reaffirmation is a credit union
under 524(m)(2).
iii. Settlement of dischargeability litigation
1. Rather than incur the cost of defending the action, the debtor instead agrees to
pay the creditor an amount that may nearly equal the amount of the
outstanding indebtedness.
2. Many courts have held that legitimate efforts to negotiate a reaffirmation
agreement do not run afoul of the stay.
iv. In re Jamo (USCOA [1C], 2002)
1. Section 524(c) envisions reaffirmation agreements as the product of fully
voluntary negotiations by all parties.
v. If a creditor violates the provisions of Section 524, the debtor can defend against the
reaffirmation agreement and avoid having to repay the obligation.
1.
Besset v. Avco Fin. Serv., Inc.
a. Held that Section 105 of the Bankruptcy Code provides authority for the
debtor to recover from creditors who fail to abide by the dictates of
Section 524 (c).
f. Redemption
i. Reorganization is essentially considered redemption.
ii. Where a debtor’s property is exemptible, the debtor should have the opportunity to
redeem the property, like they would outside of bankruptcy.
iii. Section 722
1. (Permits the debtor to redeem property subject to a security interest in their
Chapter 7 bankruptcy.)
2. An individual debtor may, whether or not the debtor has waived the right to
redeem under this section, redeem tangible personal property intended
primarily for personal, family, or household use, from a lien securing a
dischargeable consumer debt, if such property is exempted under Section 522 of
this title or has been abandoned under Section 554 of this title, by paying the
holder of such lien the amount of the allowed secured claim of such holder that
is secured by such lien in full at the time of redemption.
iv. Section 522
1. (a) Except as provided in the Perishable Agricultural Commodities Act, the
Packer and Stockyards Act, and Section 1 of the Act entitled, “An Act making
appropriations for the department of Agriculture for the fiscal year ending June
30, 1944, and for other purposes,” a governmental unit may not deny, revoke,
suspend, or refuse to renew a license, permit, charter, franchise, or other similar
grant to, condition such a grant to, discriminate with respect to such a grant
against, deny employment to, terminate the employment of, or discriminate
with respect to employment against, a person that is or has been a debtor
under this title or a bankrupt or a debtor under the Bankruptcy Act, or another
person with whom such bankrupt debtor has been associated, solely because
such bankrupt or debtor is or has been a debtor under this title or a bankrupt
or debtor under the Bankruptcy Act, has been insolvent before the
commencement of the case under this title, or during the case but before the
debtor is granted or denied a discharge, or has not paid a debt that is
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dischargeable in the case under this title or that was discharged under the
Bankruptcy Act.
2. (b) No private employer may terminate the employment of, or discriminate
with respect to employment against, an individual who is or has been a debtor
under the Bankruptcy Act, or an individual associated with such debtor or a
bankrupt, solely because such debtor or bankrupt—
a. (1) Is or has been a debtor under this title or a debtor or bankrupt under
the Bankruptcy Act
b. (2) Has been insolvent before the commencement of a case under this
title or during the case but before the grant or denial of a discharge; or
c. (3) Has not paid a debt that is dischargeable in a case under this title or
that was discharged under the Bankruptcy Act.
g. Protecting the Discharge
i. Section 525 forbids discrimination against bankrupts in the granting of government
entitlements and private employment, and Section 366 regulates rights between the
debtor and utility services.
VIII.
ii. Section 366
1. (a) A utility may not alter, refuse, or discontinue service to, or discriminate
against, the trustee or the debtor solely on the basis of the commencement of a
case under this title or that a debt owed by the debtor to such utility for service
rendered before the order for relief was not paid when due.
2. (b) Such utility may alter, refuse, or discontinue service if neither the trustee
nor the debtor, within 20 days after the date of the order for relief, furnishes
adequate assurance of payment, in the form of a deposit or other security, for
service after such date. On request of a party in interest and after notice and a
hearing, the Court may order reasonable modification of the amount of the
deposit or other security necessary to provide adequate assurance of payment.
3. (c)(1)(a) For purposes of this subsection, the term “assurance of payment”
means—
a. A cash deposit,
b. (ii) A letter of credit;
c. (iii) A certificate of deposit;
d. (iv) A security bond;
e. (v) A prepayment of utility consumption or
f. (vi) Another form of security that is mutually agreed on between the
utility and the debtor or the trustee.
Avoidance Powers
a. Three primary avoidance actions (ask these three questions on exam):
i. Strong Arm Clause
ii. Preferences
iii. Fraudulent Conveyance
1. Actual
2. Constructive
b. Lien-Stripping
i. Does not apply in Chapter 7
ii. Liens ride through bankruptcy, unless the bankruptcy code avoids the lien. They are
enforceable after bankruptcy.
iii. Dewsnup v. Timm (USSC, 1992)
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There is no lien stripping Chapter 7 bankruptcy. The unsecured, discharged lien
amount lays dormant until the value of the property increases. (A $100,000
mortgage on a $25,000 valued property turns into a $25,000 secured claim that
is paid at the time of bankruptcy, and a PERSONAL LIABILITY DISCHARGE TO
$75,000. The lien of $75,000 stays attached to the property, so whenever the
property value increases, the right to the lien increases. If there is a $2,000
increase to the property, the lien holder is entitled to $2,000.)
c. The Strong Arm Clause
i. 544(a)(1-3)
1. Any unperfected interests (security interest that is flawed) of any party in
property of the estate as of the bankruptcy filing, the bankruptcy trustee
defeats.
a. The trustee takes the property that was an unperfected security interest
and puts it in the pot to be shared with unsecured creditors.
2. Secured creditors must be properly perfected; if not they become unsecured
creditors and the security interest gets divided up by the other unsecured
creditors.
3. The way the bankruptcy code implements this, is it gives the bankruptcy trustee
the status of a hypothetical lien creditor and a bona fide purchaser of real
property without notice.
a. A perfected lien creditor defeats and unperfected security interest.
b. A bona fide purchaser for value defeats all unperfected security interest.
d. Preferences
i. Section 547
1. We are going to do everything we can to deter debtors from taking actions
before bankruptcy that permit either the debtor or the debtor’s creditors to opt
out of bankruptcy or avoid the consequences of bankruptcy.
2. If the debtor has made any pre-bankruptcy payment to existing creditors within
90 days (to a year) of filing bankruptcy, that bankruptcy court can avoid
(undo) the payment to the pre-paid creditors when the debtor was insolvent.
ii. Example:
1. $100 in assets
2. Mom: $400
3. Light bill: $100
4. Credit Card: $500
5. Preference: pay my mom the $100/
6. In bankruptcy this is unacceptable. Instead, the $100 should have been
distributed pro rata. The court will sue the paid creditor for the amount paid to
be returned to the estate (mom is sued for $100).
iii. The Basic Definition
1. If money has been paid within 90 days, it might be considered preferences if it is
not within the ordinary course of business.
2. By not having scienter, the statute is over-inclusive because it could draw in
regular bills. The solution is the exceptions.
iv. Anytime you see a pre-bankruptcy transfer from the debtor within 2 years, ask if it is a
fraudulent transfer.
1. Including trusts, people, etc.
2. A preference can also be a fraudulent transfer.
e. Fraudulent Transfers
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i. Section 548
1. A transfer of debtor’s property for less than the property’s value (reasonably
equivalent value) is a constructive fraudulent transfer if the debtor is insolvent.
ii. Additionally, a bankruptcy trustee can use 544(b) to bring a fraudulent conveyance
action under State law.
1. There are enough differences that sometimes it makes sense to use both or one
or the other.
a. Statute of limitations variations
iii. Involuntary transfer can still be a fraudulent conveyance
1. A properly conducted foreclosure sale is not a fraudulent conveyance of any
type, regardless of how much the sale yields.
IX.
iv. Gambling:
1. Does the debtor get adequate consideration from casinos?
a. In gaming, the debtor does receive an intangible consideration and
because that intangible benefit is too hard to value, the court will not
value it. Therefore, there is not a constructive fraudulent transfer.
v. Charity Donations:
1. Not preference, only a gift
2. Not an actual fraudulent conveyance.
3. Constructive fraudulent conveyance:
a. Most courts find that churches are liable because charitable
contribution includes no consideration to the debtor.
b. Church Defense:
i. Section 548
1. As long as the church can prove that the contributions to
the church fit the pattern of the debtor’s long time
practice, or as long as the gifts did not exceed 15% of the
debtor’s gross assets.
Chapter 13 Cases
a. If debtors can pay their debts, they should pay them rather than simply discharge them under
Chapter 7. From the Debtor’s perspective, Chapter 13 also offers the opportunity to retain
possession of their homes and other assets that may not be exempt from creditor claims.
b. In a Chapter 13 case, the debtor’s purpose a plan to pay their debts over time without having
to liquidate any assets. They pay some money to a Chapter 13 trustee who then pays those
funds out to the debtor’s creditors according to the terms of a plan that the court has
approved. This applies even to property that is subject to mortgages and security interest
without the need to pay the current value of that property by way of a redemption as would be
necessary in a Chapter 7 case under Section 722.
c. A co-debtor stay is available to protect those who may have cosigned loans to help the debtor
get credit in the first place.
i. Section 1301 has a co-debtor stay.
d. The Bankruptcy Code limits eligibility for Chapter 13, and the case is subject to dismissal if the
debtor can’t come up with a viable repayment plan.
e. Eligibility for Relief
i. Who may be a debtor?
1. Section 109
ii. A creditor cannot file an involuntary Chapter 13 petition against a debtor.
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iii. To be a Chapter 13 debtor, one must be an individual with regular income. Section
101(30), in connection with Section 101(41), provides that only natural persons whose
income is sufficiently stable and regular to make payments under a Chapter 13 plan
may obtain Chapter 13 relief.
iv. Chapter 13 debtors must owe noncontingent, liquidated, unsecured debts of less than
$394,725 and noncontingent, liquidated, secured debts of less than $1,184,200 in order
to be eligible for relief. Under Section 104 of the Code, these amounts are adjusted
every three years. These protect against any erosion in the availability of Chapter 13
relief both for consumer and business debtors.
v. Aggregate amount of their debts must likewise fit under these same limitations. The
debt limits are not doubled for them if they file a joint case.
vi. First, the debts are determined as of the date of the filing of the petition; and second,
contingent and unliquidated claims are excluded from the calculation for eligibility
purposes.
1. Disputed claims are not excluded explicitly from the Section 109 debt limits, but
they are excluded from the category of claims that can commence an
involuntary bankruptcy case.
2. Simply asserting a dispute over a particular claim will not cause that claim to
be subtracted from the debtor’s outstanding obligations to reduce them below
the maximum allowed amounts in Chapter 13.
vii. Chapter 13 debtors also must complete a credit counseling briefing prior to filing their
Chapter 13 petitions.
viii. Source and Sufficiency of Income
1. Under Section 109(e) the debtor’s income must be “sufficiently stable and
regular to enable the debtor to make payments under a plan under Chapter 13.
2. Under current Chapter 13 wage earners, worm farmers, and welfare recipients
are all eligible for relief.
f. The Co-debtor Stay
i. The codebtor stay terminates by operation of law once the Chapter 13 case is closed,
dismissed, or converted to a case under Chapter 7 or Chapter 11. At that point, the
creditor cold initiate action against the codebtor to collect any unpaid amounts. The
claim against the debtor, on the other hand, would be discharged if the debtor had
made all payments under the Chapter 13 plan.
g. The Chapter 13 Plan
i. Section 1321 provides that only the debtor may file a plan. Under Rule 3015(b) the
debtor is directed to file a plan either with the petition or within 15 days thereafter.
ii. There means test now enters the picture and ad debtor whose income is above the
state median for a household of comparable size must commit all disposable income to
the plan for five years under Section 1325(b)(1)(B) and (b)(4). That disposable income
will be determined under the means test formula set out in Section 707(b). Debtors
with a lower income will continue to be eligible to file plans without a specific
duration, but if the trustee or a creditor objects, the plan will have to last for at least
three years.
iii. Fundamentals of Bankruptcy
1. Best interest of creditors test
a. Chapter 13 plan must give creditors at least what they would get in a
Chapter 7 liquidation today.
b. A plan cannot be confirmed if this is not true.
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c. Priority creditors must all be paid in full (Section 507 creditors); if this
does not happen, the debtor must be converted to a Chapter 7 or
dismissed.
2. Disposable Income test
a. The debtor must devote all of their disposable income to funding the
Chapter 13 plan (even if that means that creditors will receive all if not
more than they would get in a Chapter 7 case).
b. A plan cannot be confirmed if this is not true, and creditors object.
iv. Mandatory Plan Provisions
1. Under Section 1322(a), the debtor’s plan must provide for the submission of
future earnings or income sufficient to fund the plan, it must provide for the full
payment, over time, of priority claims unless the priority creditor agrees to less
favorable treatments, and if the debtor’s plan classifies claims as every plan
does, the plan must provide for the same treatment of each claim in a
particular class.
2. Alimony or child support are entitled to priority status under Section 507(a)(1),
and thus have to be paid in full under the terms of the Chapter 13 plan. They
are still also nondischargeable, even in Chapter 13 cases; Section 1328(a)(2).
3. If the debtor owes a significant amount of alimony and child support, he or she
may not be able to obtain confirmation of a plan without the agreement of the
ex-spouse to accept some lesser payment.
a. Without confirmation of a Chapter 13 plan, the ex-spouse might have an
even lesser chance of receiving any payment on those past-due amounts.
4. The priority status for these claims combined with the requirement that all
priority claims be paid in full in Chapter 13 cases significantly shifts the
leverage available to those creditors in Chapter 13 cases.
5. Almost always, each secured creditor will be in a class of their own because
secured creditors are going to have radically different interests.
6. Section 507 unsecured creditors can be in a class together, because all of them
must be paid in full. (They could potentially be classified in their subsections but
that is wholly unnecessary.)
7. General unsecured creditors can all be put in the same class even though their
claims may arise from different things.
8. A plan may not unfairly discriminate between unsecured creditors.
9. Czar’s important mandatory provisions:
a. (a)(1) The debtor must be able to fund the plan
b. (a)(2) Priority claims must be paid in full unless the creditor agrees to
different treatment
c. (a)(3) If the plan classifies claims, it shall provide the same treatment
for each claim within a particular class
v. Permissive Plan Provisions
1. Section 1322(b) contains a long list of provisions that debtors may include
within their Chapter 13 plans.
2. The remaining portions of Section 1322(b) authorize plan provisions setting
out the classification of claims, the timing and amount of payments to creditors,
the curing of pre-bankruptcy defaults and reinstatement of the terms of the
obligation, the treatment of executory contracts, and the vesting of property in
either the debtor or another entity.
3. The Court shall confirm a Chapter 13 plan if
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a. (1) It complies with the Bankruptcy Code,
b. (2) Appropriate fees have been paid,
c. (3) It has been proposed in good faith,
d. (4) It meets the best interest of creditors test
e. (5) Secured claims are properly paid or satisfied
f. (6) The plan is feasible
4. If the trustee or the unsecured creditor objects to the debtor’s plan, the plan
must provide either that the objecting creditor’s claim will be paid in full or
that the debtor will submit all of his disposable income into the plan for three
years.
5. Above median debtors will be 5 years, below median debtors will be around 3
years, but may be extended to 5.
6. Czar’s most important permissive plan provisions:
a. May modify the rights of the creditor
i. Exception:
b. Cure the debtor’s pre-bankruptcy defaults and decelerate payments
c. May classify claims (different plans to pay different amount to certain
types of creditors).
vi. Treatment of General Unsecured Claims
1. Since creditors in Chapter 13 cases do not get to vote on a debtor’s plan, Section
1325(a)(4) protects their interest by requiring that the property to be
distributed under the plan to those creditors must be at least as much as they
would receive in a Chapter 7 case.
a. The best interest of creditors test
2. Most consumer bankruptcy cases are either no asset or nominal asset cases; it is
not very difficult to meet the best interest of creditors test in most Chapter 13
cases.
3. The present value of that stream of Chapter 13 payments must equal or exceed
the value of the assets that would be distributed in a hypothetical Chapter 7
case.
4. The plan must be proposed in good faith under Section 1325(a)(3).
5. If creditors object to the debtor’s proposed Chapter 13 plan, the debtor must
submit all disposable income into the plan in order to obtain confirmation.
a. If the debtor’s current monthly income exceeds the state’s median family
income, the same calculations we did in Chapter 3 are used to define the
amount that debtor must commit to funding the Chapter 13 plan.
6. The debtor can sidestep the requirement of paying all disposable income into
the plan for three years by paying the claim of the objecting creditor in full,
Section 1325(b)(1)(A).
a. A plan that would pay the objecting creditor in full while other creditors
with similar claims receive lesser payments arguably does not meet the
anti-discrimination provision of Section 1322(b)(1).
b. Section 1322(a)(3) provides that if the debtor’s plan classifies claims
into different classes, all of the claims within a particular class must
receive identical treatment.
c. Section 1322(b)(1), however, provides that if the debtor’s plan classifies
claims, the plan may not discriminate unfairly against any class.
d. Debtors also are interested in proposing more favorable treatment to
claims that are otherwise nondischargeable in Chapter 13 such as those
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for student loans, as compared to unsecured claims that will be
discharged at the conclusion of the case.
e. Such a claim does not have to be paid in full in Chapter 13, though
debtors would prefer to do that even if it will necessarily reduce the
amounts other unsecured creditors will collect.
7. Czar on 1325
a. (a) The Court shall confirm a plan if:
i. (1) The plan complies with all the provisions of CH.13 and the
Bankruptcy Code
ii. (2) Any fees have been paid
iii. (3) The plan has been proposed in good faith, and not by any
means forbidden by law
iv. (7) The action of the debtor in filing the petition was in good
faith.
v. (4) Best interest of unsecured creditors
1. The value as of the effective date of the plan of property
to be distributed under the plan on account of each
allowed unsecured claim is not less than the amount that
would be paid on such claim if the estate of the debtor
were liquidated under Chapter 7 of this title on such date.
2. Check for interest; the judge needs to measure what the
risk is that the creditor would not get paid (that’s how
interest is judged).
3. What would the creditor receive in a Ch. 7 and are the
payments in the plan equal to that value plus interest?
vi. (5) Best interest of secured creditors
1. The best interest of the creditor test is met if the secured
creditor agrees to the plan.
a. They may take less than they are allowed.
2. The debtor can merely surrender the collateral to the
secured creditor.
a. Courts are split as to whether this extinguishes all
rights of the creditor (especially under secured
ones).
3. The creditor is entitled to a stream of payments equal to
the secured amount plus interest in today’s dollars even
though it is being paid over 3-5 years.
4. In re Rash
a. Filed chapter 13 and attempted to keep their truck
for their trucking business. An under secured
creditor had a lien on the truck. The Supreme
Court said the valuation standard for valuating
property on Ch. 13 bankruptcies is: replacement
value. What would this exact truck sell for with
apathetic parties?
vii. (6) A plan must be feasible
1. Unpaid DSOs that occur during a bankruptcy case.
a. A Ch. 13 plan may not be confirmed if these debts
are not paid in full under the plan.
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b. (b)(1) If the trustee or the holder of an allowed unsecured claim objects
to the confirmation plan, then the court may not approve the plan unless
as of the effective date:
i. The value of the property to be distributed under the plan on
account of such claim is not less than the amount of such claim
1. They’re getting 100% of their claim
ii. The plan provides that all of the debtor’s disposable income will
be used to pay the under secured creditors under the plan.
1. Means test:
a. Disposable income calculation step one:
distinguish between above and below median
income debtors.
i. What is their income? (6 months of income,
divide by 6, multiply by 12, and then divide
by twelve.)
ii. For purposes of calculating disposable
income, if there is some reason to take into
account the future, the Bankruptcy Code
can take into account the future and
modify the numbers. (Promotions, job less,
etc.)
b. Look at average expenses for similar people in
similar geographic areas.
c. Exempt certain allowable costs (including secured
creditors)
Exceptions:
a. Secured creditors have two major exceptions:
i. A secured creditor that holds a home mortgage on the debtor’s
principle residence (only a residence not an office), the rights of
that mortgage holder cannot be modified in anyway in the
chapter 13 plan.
1. The bank must get what the mortgage terms are.
2. They are entitled to insist upon precisely the same terms
they were entitled to pre-bankruptcy.
ii. The defaults will be spread out over 3-5 years and the ability to
accelerate payments will be removed from the hands of the
creditors.
9. Possible question:
a. Debtor’s sole purpose in filing bankruptcy is to try to hold onto their
house. They have had trouble making payments and have missed 6
payments pre bankruptcy. Is there any real benefit to filing a Chapter 13
over a Chapter 7?
i. They’re fairly the same, but the debtor can make up the defaults
over the 3-5 year plan. It will decelerate and cure the defaults.
vii. Disposable Income
1. Hamilton v. Lanning
8.
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a. For purposes of calculating disposable income, if there is some reason to
take into account the future, the Bankruptcy Code can take into account
the future and modify the numbers. (promotions, job less, etc.)
2. In re Cleary
a. Below median income debtors, we don’t use government statistics; the
judge looks at their actual expenses and looks to see what costs are
reasonable for the debtor and their dependents.
b. The Court held that parochial school tuition is reasonable because Mrs.
Cleary testified that if they could not send their kids to parochial school,
Mrs. Cleary has no reason to work. It would be better for their family
economically for her not to work. The family got credit for the
$500/month for the tuition.
viii. Treatment of Secured Claims
1. Automobiles and the “Hanging Paragraph”
a. 1325(a)(9) the paragraph has an additional paragraph that is not
related to (9) it is usually cited as (*).
i. For purposes of paragraph (5) [treatment of secured creditors],
section 506 [calls for bifurcation of under secured claims] shall
not apply to a claim described in that paragraph if the creditor
has a purchase money security interest securing the debt that is
the subject of the claim, the debt was incurred within the 910 day
period preceding the date of the filing of the petition, and the
collateral for that debt consist of a motor vehicle acquired for the
personal use of the debtor, or if collateral for that debt consists of
any other thing of value, if the debt was incurred during the 1
year period preceding that filing.
ii. Depreciation of vehicles and chapter 13 filing. Essentially if you
buy a car and then file for Ch. 13, the under secured creditor does
not have to bifurcate their claims. (Otherwise an $80,000 car
could end up only being paid for about $40,000 over the 3-5 year
bankruptcy plan).
iii. The Chapter 13 plan has to provide for the car payments (the
pre-bankruptcy $1000/mo. payments must be the same after the
bankruptcy filing if within the 910 day period)
iv. Any other personal property purchased by the debtor with
financing from a secured creditor within a year the same rule
applies.
ix. Treatment of Home Mortgages
1. See above for exceptions.
h. Modification
i. What if Ch. 13 debtors’ situations change?
1. Court approval can modify the plan.
ii. Once the plan is confirmed, it is much more difficult to change and modify even when
the debtor has suffered new circumstances, because the creditors are bound by the
plan.
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