Bankruptcy Outline
1. Basics of Article 9 (attachment, perfection, basic
priorities, PMSI)
With a secured interest (s/i), before default, a creditor has a
contractual interest to get paid and a property interest against
the debtor, so that they do not have to go through the levy and
sale process need to have the debtor grant property interest at the
outset Advantages: Can repossess without the state and have your
own private sale Have a property interest at the outset Have an
interest in personal property or fixtures which secures payment or
performance of an obligation (UCC 1-201(37)) Having collateral
means the property is subject to a s/i
Unsecured creditors have contractual rights, but once they get a
judgment, they will have to go through a process where they turn
the contractual right into a property interest
Attachment of the s/i creates the property interest UCC 9-203(b)
a s/i is enforceable against D and third parties with respect to
the collateral only if: (1) Value has been given value is generally
given by C to D (this creates the obligation) (2) D has rights in
the collateral or the power to transfer rights in the collateral to
a secured party; and Assures that D cannot just steal property and
use it as collateral or use property in an unauthorized way (3)
Agreement Plus D has authenticated (signed) a security agreement
that provides a description of the collateral, OR The collateral is
in possession of the secured party under UCC 9-313 pursuant to Ds
security agreement Note: A secured party cannot get attachment of a
s/i in property that D has not yet acquired. Ex.: Suppose the
security agreement covers after acquired equipment, attachment of
the s/i in the after acquired equipment does not occur until D gets
rights in the after acquired equipment By itself, attachment is not
enough against other lien creditors and secured parties. Also need
to have the perfection step
Perfection (creates priority) Have to have this in addition to
attachment To have a s/i that is enforceable against D and all
other parties, the secured party has to take a step to give people
notice of their interest in the property Otherwise, this interest
would be invisible To have perfection of a s/i, need to have
attachment and then meet the applicable requirements for perfection
File a financing statement with the secretary of state (most common
way) Indicates names of D, secured party, and collateral in
question Anyone who wonders if a particular property is encumbered
can go to the filing system and look at the name of D to find out
Take possession of the collateral pursuant to the agreement
(alternative)
Basic Priorities Secured Party v. Lien Creditor (Executioner or
Trustee) Clause (h) UCC 9-317(a): An unperfected security interest
is subordinate to the rights of .. a person who becomes a lien
creditor before the earlier of the time the security interest is
perfected or a financing statement covering the collateral is filed
(governs contest between secured party and lien creditor)
Unperfected secured party is a creditor who has yet to get their
lien subordinate to someone who has gotten perfection Mission is to
achieve perfection of their security interest before JC becomes a
LC (getting sheriff to levy upon the property) Did SP perfect
security interest, or at the very least file a financing statement,
before JC became a LC (before levy occurred) Filing a financing
statement stakes a claim covering the collateral A SP can file a
financing statement before giving out a loan (could be a race
against time), but has to subsequently go through with the
attachment First in time wins! 1 files a f/s covering collateral
(perfection step) 2 LC collateral 3 SP attachment (completed
perfection) SP would win here. Secured Party v. Secured Party
Clause (m) UCC 9-322(a): Priority among conflicting security
interest in the same collateral is determined according to the
following rules: Conflicting perfected security interests rank
according to priority in time of filing or perfection. Priority
dates from the earlier of the time a filing covering the collateral
is first made or the security interest is first perfected SP1 files
financing statement SP2 attachment p/s SP1 completes attachment
(financing statement will lapse in a period of 5 years unless an
amendment or continuance is filed) Secured Party 1 beats out SP2,
because they perfected first
PMSI liens used to furnish the credit necessary for the purchase
of the collateral Allows for D with limited funds to be able to
purchase something on credit and grant a s/i in the very thing D is
purchasing Under UCC 9-317(e), in regard to PMSI, if a person files
a financing statement with respect to a PMSI before or within 20
days after D receives delivery of the collateral, the s/i takes
priority over the rights of a buyer, lessee, or lien creditor which
arise between the time the s/i attaches and the time of filing.
Situation where secured party has not filed before judgment
creditor becomes lien creditor, but gives secured party additional
time NEED A PMSI FOR THIS TO HAPPEN Describes a situation where a
person has not filed financing statement before lien creditor comes
into being and still win out To take advantage, secured party needs
to have a PMSI and the creditor also has to file the financing
statement within 20 days from the time the debtor receives
possession of the collateral Tricky party: debtor purchases the
property, but it takes some time before the debtor receives
possession of the collateral Remember that the clock does not begin
to run for the secured party until the debtor receives possession
of the collateral
Post-judgment remedies (execution (personal property),
garnishment, judgment liens by recordation (real property), basic
priorities)
When a C pursues collection in a court, the first step is to
establish that a debt is owed (may involve a trial w/factual
determination). Once this determination is made, the judgment
debt-collection process begins. The following is an outline of the
general procedure involved in collection efforts of the
Judgment-Creditor (J-C)
Execution (Involuntary liens): The judgment gives no rights to
the J-C per se, but instead makes the claim undisputable
(liquidated). The J-C remains an unsecured creditor until an
execution is obtained on the judgment. Execution applies to the
property of the debtor Definition the enforcement of a judgment by
the seizure and sale of nonexempt property of the debtor Collection
Process: WRITS (writ of attachment, writ fi.fa.) The process begins
with a writ which is simply a court order that orders the sheriff
to go and seek non-exempt property of the Judgment-Debtor for
attachment (ordinarily, the J-C lawyer will tell the sheriff where
to look) LEVY (seizure, physical or otherwise, on property of
Judgment-Debtor) the sheriff will either take physical or symbolic
possession of any personal property of the J-D that is nonexempt.
Real property is seized by posting since it cannot be taken into
possession physically. Once the sheriff levies upon the J-D
property, the s/i of the J-C in that property is perfected and no
other creditor later in time may defeat J-Cs rights to the proceeds
from the sale of such perfected property. (J-C becomes lien
creditor) JUDICIAL SALE (of assets seized via writ) After the levy,
the sheriff will advertise the property for public sale and sell to
the highest bidder. The proceeds will be used to satisfy the debt,
and the remainder will be returned to the debtor. If the proceeds
are insufficient, the sheriff will seize more property via a new
writ and sell that.
Garnishment: one of the most important assets a J-C can reach is
an asset held for the J-D by another person (e.g., wages owed, bank
accounts, payments owed to J-D on installment plan, any debt of
money or property owed to J-D by a 3rd party). The key element is
that the 3rd party owed the J-D money, goods, or an obligation.
Here, the J-C attempts to reach the debt owed by the 3rd party to
J-D through a lawsuit known as a garnishment. Garnishment is a
separate lawsuit that requires three parties: D, Garnishee, and
Garnishor. It also requires at least two debts: one from the J-D to
the J-C/Garnishor, and one from the Garnishee to the J-D.
Definition a creditors (garnishors) levy on property of the debtor
in the possession of a third party (garnishee), or on a debt or
obligation due by the garnishee to the debtor. Liabilities of the
Garnishee If the garnishee fails to comply with any aspect of the
writ (willfully), it may be liable to the J-C for the amount of the
property, or even the entire amount of the judgment Defenses of the
Garnishee to the garnishment Set-off When, for example, the
garnishee owes the J-D money, but the J-D owes the garnishee money
back, the garnishee may set-off the amount it is owed by J-D
against what it owes to the J-D in the garnishment. Timing is
crucial, where in some jurisdictions, the bank must set-off before
the writ of garnishment hits. Unenforceable Debt garnishee may
assert the defense to the garnishment that the debt the garnishor
is attempting to collect is unenforceable, such as a gambling debt,
or loan sharking Debt Already Paid garnishee may assert the defense
to the garnishment that its debt the J-C has already been paid to
the J-D Restrictions on Wage Garnishment If the garnishor were
allowed to seize the entire wage of the garnishee, the garnishees
ability to survive would be seriously jeopardized. It would also
give the J-C excessive leverage in the bargaining with the J-D
(e.g., a J-D facing garnishment of his entire wage might give up
exempt property to the J-C to stave off having his entire wage
taken.) Maximum Allowed Garnishment the maximum amount of aggregate
disposable earnings that may be garnished is the lesser of: 25% of
disposable income for the week; OR Up to an amount that would leave
the J-D with disposable income equal to 30 times the minimum
Federal Wage Restrictions do not apply to the following
garnishments: Child support or alimony Chapter 11 or Chapter 13
payments to the Trustee under a Plan of Reorganization Any Federal
tax due No employee may discharge any employee by reason of the
fact that his earnings have been subjected to garnishment, and if
that employer does, he can be fined and/or imprisoned
Judgment Liens by Recordation: In almost all states, special
procedures exist to obtain a lien of J-Ds property quickly without
going through the full blown execution process. For instance, a
judgment lien against real property is obtained by filing a lien
with the County Deed Office. Advantages Cost effective the process
is extremely cost effective, because the J-C does not have to go
out and physically seize the J-Ds assets Leverage acts as an
effective leverage device because no one wants to purchase property
from a J-D with this sort of encumbrance attached
Basic Priorities: Which J-C will get to collect from the J-D
first? The usual rule is that First in Time, is First in Right, so
the J-C that perfects first will have priority of the J-Ds assets
Definition the ranking of liens and other interests in the same
property Unsecured J-C vs. Unsecured J-C An unsecured J-C must
first get a judgment and then levy. The levy perfects the judgment
lien on the particular piece of property, therefore, between the
two J-Cs, the first to levy (i.e., perfect) will win. Unsecured J-C
vs. Secured Creditor The priority here is determined again by who
perfected first. The critical issue then is what constitutes
perfection for a S-C? The secured creditor perfect when it records
its consensual lien according to the statutory rules. If the J-C
perfection is later than this, it loses to the S-C, but if the J-C
perfection is sooner than this, it wins. Unsecured J-C and S-C vs.
Buyers The general rule is again First in Time, is First in Right,
and is again measured by perfection with J-C (levy on lien), S-C
(proper recordation), and Buyer (proper recordation) vying for
perfection. Statutory Lien/Trust Priority Sometimes, statutes will
mandate that certain trusts or liens will get priority over other
creditors, even if those creditors were First in Time; this has to
do with public policy and the lobbying efforts of certain groups
(e.g., Artisans Liens, etc.) Unsecured J-C and S-C vs. the TIB
Consenual (S-C) and J-C creditors will face rigorous tests as to
the validity of their debts from the TIB; more often than not, J-C
liens will be avoided in Bankruptcy.
2. Basics of prejudgment remedies Common situation if debtor has
demonstrated willingness to hide assets or transfer them away and
plaintiff is confident that they will prevail on the merits
plaintiff can go to court and request authorization of creation of
a lien as a way of ensuring that property will be available once
the plaintiff prevails Can be problematic, because liability hasnt
even been established yet More controversial than getting a post
judgment remedy because of constitutional protections Limitations
Certain procedural hurdles need to be crossed Creates leverage Writ
is sometimes called a lien attachment or writ of attachment
3. Fraudulent conveyances under UFTA
J-D may attempt to avoid the consequences of the J-C levying on
his property by conveying it to another (e.g., a friend or
relative) with the understanding that the property will eventually
be returned to him after his credit troubles have ended. Typically,
J-D will transfer non-exempt property which otherwise would have
been subject to sale and seizure by the J-Cs.
The purpose of the Uniform Fraudulent Transfer Act is to
determine whether the J-D has shown sufficient intent to delay,
hinder or defraud creditors, such that what J-D has done is
fraudulent. The UFTA developed the concept of constructive fraud.
Constructive Fraud & Quasi-Constructive Fraud: Permits a J-C to
set aside a transfer even though the J-D was entirely innocent of
any fraudulent intent. Such a transfer is regarded as unfairly
disadvantageous to the J-Cs regardless of intent UFTA 5(a) -
Constructive Fraud Permits J-C to avoid any transfer made by J-D at
a time when: the exchange was made for an unfairly low
consideration, AND when the J-D was insolvent UFTA 4(a)(1-2)
Quasi-Constructive Fraud The J-D has a blameworthy intent, but no
specific intent to defraud can be shown. 4(a)(1) sets forth the
actual fraud provisions (badges of fraud), and 4(a)(2) sets forth
the quasi-constructive provisions.
Basic Provisions of the UFTA: UFTA 1 Definitions Page 269-70 of
Statutory Supplement. (Affiliate, Asset, Claim, Creditor, Debt,
Debtor, Insider, Lien, Person, Property, Relative, Transfer, Valid
Lien) 1(2)Asset: means property of a debtor, but does not include
1(2)(i) property to the extent it is encumbered by a valid lien
1(2)(ii)property to the extent it is generally exempt under
nonbankruptcy law or 1(2)(iii)an interest in property held in
tenancy by the entirety to the extent it is not subject to process
by a creditor holding a claim against one tenant 1(3)Claim: means a
right to payment, whether or not the right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured.
1(12)Transfer: means every mode, direct or indirect, absolute or
conditional, voluntary or involuntary, of disposing of or parting
with an asset or an interest in an asset, and includes payment of
money, release, lease, and creation of a lien or other encumbrance.
UFTA 2 Insolvency J-D is insolvent when: (a) total liabilities >
total assets at FMV (b) J-D is not paying bills as they come due is
presumed to be insolvent (c) for partnerships, if aggregate of
partnerships debts > aggregate of partnerships assets at FMV (d)
assets do not include property that has been transferred
fraudulently (e) debts do not include those debts that are secured
by a valid s/i UFTA 3(a) Value Value is given for a transfer or an
obligation if, in exchange for the transfer or obligation, property
is transferred or an antecedent debt is secured or satisfied, but
value does not include an unperformed promise made otherwise that
in the ordinary course of business to furnish support to the debtor
or another person UFTA 4 Transfers Fraudulent as to Present and
Future Creditors (a) A transfer is fraudulent whether claim of the
J-C was incurred by J-D before or after the questionable transfer
if: (1) J-D made the transfer with the actual intent to hinder,
delay, or defraud; OR To determine actual intent, the Court may
look to the Badges of Fraud (4b): J-D made transfer to an insider
(bad) J-D retained possession or control after transfer (bad) J-D
disclosed (good) or concealed (bad) the transfer to J-C J-D was
threatened with suit or sued before the transfer was made or debt
incurred J-D transferred substantially all of his assets J-D
absconded J-D removed or concealed assets J-D got reasonably
equivalent value for asset transferred or debt incurred (good) J-D
was insolvent or became insolvent shortly after the transfer was
made J-D made transfer shortly before or shortly after a
substantial debt incurred (2) J-D made the transfer without getting
reasonable equivalent value in exchange, AND (i) was engaged in a
business for which the remaining assets of the J-D would make J-D
insolvent after the transaction, OR (ii) intended to incur or
reasonably believed he would have incurred debts beyond his ability
to pay as they came due (i.e., makes J-D insolvent) UFTA 5
Transfers Fraudulent as to Present Creditors As to J-Cs whose claim
arose before the transfer in question the J-Ds transfer is
fraudulent if the J-D made it: (1) without receiving reasonably
equivalent value in exchange AND (2) the J-D was insolvent at the
time, or became insolvent as a result of the transfer As to J-Cs
whose claim arose before the transfer in question the J-Ds transfer
is fraudulent if the J-D made the transfer: (1) to an insider for a
pre-existing debt, (2) the J-D was insolvent at the time, AND (3)
the insider had reason to believe that J-D was insolvent and bought
the stuff, or let J-D incur the debt to the insider anyway UFTA 7
Remedies of Creditors If a fraudulent conveyance is found, a J-C
may obtain: (1) Avoidance of the transfer or obligation to the
extent necessary to satisfy the creditors claim (2) Attachment
against the asset transferred (3)(i) Injunction against further
disposition by the J-D or a transferee, or both, of the asset
transferred or of other property; (3)(ii) Appointment of a Receiver
to take charge of the asset transferred or of other property of the
transferee; OR (3)(iii) Catchall any other relief the circumstances
may require (b) Levy the J-C may levy execution on the asset
transferred or its proceeds UFTA 8 Defenses, Liability, and
Protection of Transferee What a person who buys from J-D can assert
as his defense, and to what extent such a transferee is liable is
covered here: (a) Transfer or obligation is not voidable under
4(a)(1) [actual intent] against a person who took in good faith and
for an reasonably equivalent value (b) the J-C may get judgment for
the value of the asset transferred, as adjusted under (c), or the
amount necessary to satisfy the J-Cs claim, whichever is less. The
judgment may be entered against: (1) the first transferee of the
asset or the person for whose benefit the transfer was made; or (2)
any subsequent transferee other than a good-faith transferee or
obligee who took for value or from any subsequent transferee or
obligee (c) if the judgment under (b) is based upon the value of
the asset transferred, the judgment must be for an amount equal to
the value of the asset at the time of the transfer, subject to
adjustment as the equities may require (d) A good faith transferee
or obligee is entitled, to the extent of the value given to the J-D
for the transfer or obligation, to: (1) a lien on the asset (or
right to retain an interest in the asset), (2) enforcement of any
obligation incurred, OR (3) a reduction in the amount of liability
on the judgment (set-off), equal to the amount he spent for the
asset
4. State collective remedies (assignment for the benefit of
creditors, compositions, extensions, and receiverships)
A way for the interests of the collective to be represented
outside of bankruptcy law. Each of the following devices are a
response to the recognition that grab law does not solve
everything, and some sort of collective method that vindicates the
collective of the creditors and maximizes return to those creditors
and also allows for the most economically maximal outcome whole
allowing the company to continue for the benefit of everyone is
needed.
Assignments for the Benefit of Creditors: D assigns non-exempt
assets to an assignee and now, rather than going against D, C files
claims against the assignee who, as an officer of the court,
manages all the claims and pays them out Creditors are paid back in
a more equitable way A major limitation of this is that it does not
discharge D from unpaid portions of outstanding debts, since
Constitutionally, only federal law can discharge debts
Compositions: Agreement between D and all of Cs that the Cs will
accept a stated partial payment in full satisfaction of their debts
Sometimes, an ABC is the vehicle for a composition Generally
subject to the rules and principles of K law, and since it is a K,
it is only binding on Cs who assent to it Important to get everyone
on the same page
Extensions: A K between D and C or Cs, under which D is allowed
an extension of time in which to pay outstanding debts. Often runs
in conjunction with compositions.
Receiverships If D mismanages property (e.g., trying to escape
jurisdiction), under common/statutory law, you can get an officer
of the court to take charge of Ds finances or in a business their
business operation in a way that preserves the assets. Grounds for
the appointment of a receiver must be shown, including a
probability of success on the underlying action and a likelihood
that the property will suffer harm if it is not placed under the
control of an impartial administrator A limitation is that if a
receiver is appointed for mismanagement, they only have some
powers
a. Trustee Stuff Misc
323 Role of trustee as representative of the estate(a) Trustee
in a case under title is representative of the estate(b) Trustee in
a case under title has capacity to sue and be sued
326(a) Guidelines on Trustees CompensationIn a case under
chapter 7 or 11, the court may allow reasonable compensation under
330 to trustee for services, payable after rendered, such services,
not to exceed 25 percent on the first $5,000 or less, 10 percent on
any amount in excess of $5,000 but less than $50,000, 5 percent on
any amount in excess of $$50,000 but less than $1 million and
reasonable compensation not to exceed 3 percent of such moneys in
excess of $1 million, upon all moneys disbursed or turned over in
the case by trustee to parties in interest, excluding the debtor,
but including holders of secured claims
330 Compensation of officers(a)(1) after notice to parties in
interest and trustee and after hearing, a court may award to
trustee, consumer privacy ombudsman appointed, examiner or
professional person(A) reasonable compensation for actual,
necessary services rendered and(B) reimbursement for actual,
necessary expenses. (a)(2): Court may on its own or by motion of
trustee award less than amount requested(a)(3): reasonable
compensation to be awarded under chapter 11 based on relevant
factors(A) time spent on services(B) the rates charged for such
services(C) whether the services were necessary to administration
of or beneficial at the time at which the service was rendered to
the completion of a case under this title(D) whether the services
were performed within a reasonable amount of time(E) with respect
to a professional person if they are board certified etc(F) whether
the compensation is reasonable based on the customary compensation
of comparably skilled practitioners in same field.
5. Basic structure of Chapter 7
In a Chapter 7 liquidation, the D gives up all nonexempt assets,
the Trustee in Bankruptcy sells these assets, the proceeds are
distributed pro rata to Cs, and D is then discharged from all
pre-existing (unsecured) debts. This achieves two goals: fair
distribution of Ds assets and a fresh start for the D.
Basic Structure: Once D files (surrenders nonexempt assets and
gets a discharge of debts), 362 Automatic Stay is triggered where
Cs cannot act unilaterally against property of the estate Under 541
Property of the Estate, all legal and equitable interests are
property of the estate. A Trustee is appointed and gathers assets
Eligibility to file for Chapter 7 - 707 D has a right to get
exemptions D ultimately wants a discharge of its pre-petition
debts. If D gets a discharge, provided that there is no
reaffirmation of debt, there is a total fresh start. There are two
ways in which the D might not get this: Disaster strikes and D is
denied the discharge under 727 D loses part of the discharge under
523 when certain debts are rendered non-dischargeable
6. Property of the estate ( 541) (Step 1: Get everything into
property of the estate and then sort things out)
At the moment a bankruptcy petition is filed (voluntary or
involuntary commencement of the case under 301, 302, 303), an
estate is created by operation of law. All the property owned by
the D becomes property of the estate which is a deliberately vague
definition, designed to be as inclusive as possible. The estate is
a legal entity distinct from the D.
541(a) lists what is included in the estate: (1) all legal or
equitable interests of the D in property as of the commencement of
the case (5) Any interest in property that would have been property
of the estate if such interest had been an interest of the debtor
on the date of the filing of the petition, and that the debtor
acquires or becomes entitled to acquire within 180 days after such
date by: (AFTER CREATION OF ESTATE) Bequest, devise, or inheritance
As a result of a property settlement or divorce decree with spouse
As a beneficiary of a life insurance policy or of a death benefit
plan (6) Proceeds, product, rents, or profits of or from property
of the estate, EXCEPT post-petition wages (earned, not received)
(basis for the fresh start) (7) any interest in property that the
estate acquires after the commencement of the case
541(b) lists the exceptions; Property of the estate does not
include: (1) - any power that the D may exercise solely for the
benefit of an entity other than the debtor;
541(c) Ipso Facto Clauses are restrictive clauses relating to an
interest in property that provides within its own terms that the
interest in question may not be included in the Bankruptcy Estate.
(1) any provision in an agreement that restricts or conditions the
transfer of a Ds assets in the event of a bankruptcy, or that is
conditioned on the insolvency or financial condition of D is
invalid Intended to protect the estate from ipso facto clauses
Congress has permitted a few specific restrictions on alienation to
be effective to keep property out of the bankruptcy estate (2) 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 case Spendthrift trust exception a device by
which a parent or other benefactor may preserve the interest of a
minor, spouse, or another beneficiary who may need financial
protection; the benefactor wants to be certain the trust will
continue to perform this function. Has also been expanded to
retirement accounts that are ERISA qualified, or plans protected
under state law
541(d) Property in which D holds, as of the commencement of the
case, only legal title and not an equitable interest, such as a
mortgage secured by real property, or an interest in such a
mortgage, sold by D but as to which the D retains legal title to
service or supervise the servicing of such mortgage or interest,
becomes property of the estate under (a)(1) or (2) only to the
extent of Ds legal title to such property, but not to the extent of
any equitable interest in such property that D does not hold.
a. Filing
521(a)(1) Debtors duties.(a)(1)(a) debtor must file, list of
creditors(a)(1)(b) unless the court orders otherwise (i) a schedule
of assets and liabilities; (ii) a schedule of current income and
current expenditures (iii) statement of debtors financial
affairs
521(b)(1) Debtor must also file a certificate from an approved
non-profit budget and credit counseling service under
109(h)521(b)(2) Debtor must file a copy of the debt repayment plan,
if any, developed under section 109(h) through the approved
nonprofit budge and credit counseling agency referred to in
(b)(1).
521(a)(2) Debtor must state intention with respect to
collateral.(a)(2) if individual debtors schedule of assets and
liabilities includes debts which are secured by the property of the
estate(a)(2)(a): within 30 days after date of filing of petition in
chapter 7 or on or before the date of the meeting of creditors,
whichever is earlier, or additional time for cause, a statement
regarding the intention with respect to the retention or surrender
of such property and, if applicable, that property is claimed as
exempt, the intention to redeem or reaffirm; and(a)(2)(b): within
30 days after the first date set for the meeting of creditors, or
additional time court grants for cause, perform his intention with
respect to such property as specified in A.
521(e)(f) additional duties and paperwork required(e)(1) in
Chapter 7 or 13 and an individual and if creditor files with court
at any time a request to receive copy of petition, etc, the court
must make available(e)(2)(a): debtor shall provide:(e)(2)(A)(i) a
tax return for the most recent tax year not later than 7 days
before date first set for first meeting of creditors(e)(2)(A)(ii):
must provide to any creditor who requests in a timely
fashion(e)(2)(b): failure to comply with A means court shall
dismiss the case unless debtor demonstrates that the failure to so
comply is due to circumstances beyond control of debtor.(e)(2)(c):
same as b except if fails to provide tax return.(e)(3): under
chapter 13 court must make available to a creditor a copy of the
plan, at a reasonable cost and within 7 days.(f): at request of
course, the trustee, or party in interest in a case under 7 11 or
13 who is an individual shall file with the court(f)(1): if case is
still pending any tax returns filed during must be provided to
court.(f)(2): if tax returns not filed for prior 3 years, then any
returns filed after petition for preceding years must be
provided.(f)(4): in chapter 13:(f)(4)(a): on the date that is
either 90 days after the end of such tax year or 1 year after the
date of the commencement of the case, whichever Is later, if a plan
is not confirmed before such later date; and(f)(4)(b): annually
after the plan is confirmed until the case is closed, not later
than the date is 45 days before the anniversary of the confirmation
of the plan, showing the income and expenditures of the debtor
during the tax year of the debtor most recently concluded before
such statement is filed, and of how the monthly income of the
debtor, that shows how income, expenditures and monthly income are
calculated.(J)(1) if debtor fails to file tax return that becomes
due after commencement of case or to properly obtain an extension,
the taxing authority may request the court enter an order
converting or dismissing the case.(j)(2): if debtor doesnt file
required return in (j)(1) within 90 days after the request is filed
by taxing authority, court shall dismiss or convert the case,
whichever is in the best interests of the creditors and estate.
1108(b) Extension of time, (tolling on nonbankruptcy time
periods)Except as provided in a, if applicable nonbankruptcy law,
an order entered in a nonbankruptcy proceeding or an agreement
fixes a period within which debtor or individual file any pleading
or similar acts and such period has not expired before the date of
filing of the petition, the trustee may only file, cure or perform
as the case may be before the later of(1) The end of the
nonbankruptcy period, including suspension of such period occurring
on or after the commencement of the case or(2) 60 days after the
order for relief.
7. Automatic Stay
Under 362, the Automatic Stay is imposed to prevent Cs from
enforcing their claims against D. It is a fundamental protection of
D provided by the Bankruptcy Code. The Automatic Stay prevents the
Cs attempts to continue to collect from the D or the Ds property.
It is likened to closing the windows and locking the doors to
prevent property from leaving the newly formed estate. Until the
stay is lifted by court order or discharge, Cs must refrain from
their collection activities. The primary intention of the stay is
to permit the parties to sort things out. The stay comes into
effect upon the filing of the petition The stay is binding on all
entities individuals, corporate entities of all kinds, and
governmental units The stay generally remains in effect until the
case is closed or dismissed The stay generally applies only to
property of the estate The stay applies regardless of the Cs
knowledge it is in place (i.e., that C is still bound by it)
Sections 362(a) and (b) set out what activity is stayed and what
is not. If a particular act is not mentioned in either subsection,
and 362(a) cannot be interpreted to encompass it, the act is not
subject to the stay. To prevent it from occurring, the debtor or
trustee must convince the court to use its injunctive powers under
105.
Under 362(a), there are eight instances where the automatic stay
applies: (a)(1) the Automatic Stay applies to the commencement or
continuation of any action or proceeding that (1) was or could have
been begun against the D before the petition was filed; or (2) is
to recover a claim that arose before the petition. (a)(2) a
judgment obtained before the case cannot be enforced against the D
or the Estate property (a)(3) any act to obtain possession of
property of the estate, or to exercise control over the property of
the estate is halted (a)(4) - a lien against property of the estate
may not be created, perfected or enforced after the stay is imposed
(i.e., after filing) (a)(5) Cs may not enforce, perfect, or create
a lien against the property of the D once the petition is filed (as
opposed to (a)(4) above which applies to property of the estate);
this protects Ds exempt property from attachment once the stay is
imposed (a)(6) the Automatic Stay applies to any act to collect,
assess, or recover a claim against the D that arose before the
commencement of the case (a)(7) If D owed money to C before Ds
petition is filed, C is stayed from setting off debt that C owes to
D (e.g., a bank owed money by D may not, once the stay is in place,
set off any checking accounts or savings accounts in Ds name
against the debt owed the bank) (a)(8) A special provision applies
the automatic stay to proceedings before the Tax Court; Bankruptcy
Code trumps the Internal Revenue Code in this instance
Under 362(b), there are a number of situations in which the
automatic stay does not stop pre-filing actions: (b)(1) the
Automatic Stay does not affect criminal actions or proceedings
against D (e.g., Before the bankruptcy, D gives C a bad check; as
long as a criminal prosecution arising from this is not motivated
by C trying to collect the debt the stay will not prevent the
prosecution.) (b)(3) of any act to perfect, or to maintain or
continue the perfection of, an interest in property to the extent
that the trustees rights and powers are subject to such perfection
under 546(b) or to the extent that such act is accomplished with
the period provided under 547(e)(2)(A) (when transfer occurred is
what this covers) Translation: the C may perform acts to perfect or
to maintain or continue perfection if that action is recognized by
546 or 547 as binding on the estate The stay does not affect
certain specified actions taken by a creditor under nonbankruptcy
law to perfect or consolidate rights against the debtor of the
estate. Rationale: these are merely legal procedures that the
creditor is entitled to take under nonbankruptcy law to validate a
legitimate claim.
Under 362(c), the duration of the Automatic Stay is as follows:
(c)(1) the stay of an act against property of the estate under (a)
continues until such property is no longer property of the estate;
Property may be released by the estate for different reasons:
trustee may sell it in the course of liquidation; it may be
abandoned to a claimant because neither the D nor the estate has
any equity in it; it may be abandoned to the D as exempt (c)(2) the
stay of any other act under (a) continues until the earliest of:
The time the case is close; The time the case is dismissed; The
time a discharge is granted or denied
8. Relief from the Stay
Under 362(d), on request of a party in interest and after notice
and a hearing the court shall grant relief from the stay provided
under (a), such as terminating, annulling, modifying, or
conditioning such stay (1) for cause, including the lack of
adequate protection of an interest in property of such party in
interest; Confined to claimants such as secured creditors, lessors
who have leased property to the D, co-owners of Ds property, and
other with a valid interest in property Adequate protection is
designed to reduce the SCs risk of loss from the stay by requiring
the trustee to take action to protect the collaterals value Factors
to consider: Present value of the property in relation to debt
Calculations of the rate of increase or decrease of the debt and a
comparison to the future value of the collateral Likelihood of a
successful rehabilitation (2) with respect to a stay of an act
against property under (a), if (A) the D does not have an equity in
such property; and (B) such property is not necessary to an
effective reorganization Under Chapter 7, this is automatic, since
there is no reorganization Termination: Lifting of the stay so that
the applicant can commence or resume the suspended activity
Annulment: Terminates the stay retroactively, so the stay is
treated as if it was never in effect, prior acts in violation of
the stay become valid (only used in exceptional circumstances)
Modification: Appropriate when court decides to permit some
activity but not to allow the applicant full rights to proceed with
the enforcement of the claim Conditioning: Leaves the stay in
effect, subject to the D or trustee satisfying some condition
361 examples of adequate protectionWhen adequate protection is
required under 362, 363, 364, adequate protection may be provided
by(1) Requiring trustee to make a cash payment or periodic cash
payments to entity, when results in a decrease in the value of
entitys interest in property(2) Providing to an entity an
additional or replacement lien to extent that such stay, use, sale,
lease or grant results in decrease in the value of entitys interest
in such property(3) Granting such other relief, other than
entitling such entity to compensation allowable under 503(b)(1) of
this title as an administrative expense, as will result in the
realization of such entity of the indubitable equivalent of such
entitys interest in such property.
Under 362(e)(1), thirty days after a request for relief from the
stay, such stay is terminated with respect to the party in interest
making such request, unless the court, after notice and a hearing,
orders such stay continued in effect pending the conclusion of, or
as a result of, a final hearing and determination.
Under 362(h)(1), for individuals, the stay is terminated with
respect to personal property of the estate or of D securing in
whole or in part a claim, and such personal property shall no
longer be property of the estate if D fails within the applicable
time set by 521(a)(2) (A) to file timely any statement of intention
required under 521(a)(2) with respect to such personal property (B)
to take timely the action specified in such statement, as it may be
amended before expiration of the period for taking action, unless
such statement specifies Ds intention to reaffirm such debt on the
original contract terms and C refuses to agree to the reaffirmation
on such terms
Under 362(k), an individual injured by any willful violation of
a stay shall recover actual damages, including cost and attorneys
fees, and, in appropriate circumstances, mat recover punitive
damages
9. Eligibility under Chapter 7
707 Dismissal of a Case or Conversion to a Case under Chapter 11
or 13
Under 707(a), a court may dismiss a case after notice and a
hearing provided that there is cause for doing so. Cause can be
shown by the presence of: (1) unreasonable delay by D that is
prejudicial to Cs; (2) nonpayment of any fees or charges requires
under 28 USC 123; AND (3) failure of D in a voluntary case to file,
within 15 days or such additional time as the court may allow after
the filing of the petition commencing such case, the information
required by paragraph (1) of 521(a), but only on a motion by the
U.S. trustee. List of creditors, schedule of assets and
liabilities, schedule of current income and expenditures, statement
of financial affairs
Petitions can be dismissed if it is found that there was
substantial abuse of its provisions. Sometimes, courts, based on Ds
income, will close off Chapter 7 even if there was no substantial
abuse or wrongdoing to force D to file Chapter 13 Reorganization
instead.
The 2005 Amendment to the Code created a semi-automatic analysis
to determine whether there exists a presumption that D is abusing
the system by looking at Ds income if they have a lot of income,
want to see how much they have left over after given reasonable
expenses to pay back pre-petition Cs. If they have a fair amount
left over, D should not be in Chapter 7.
101 (10A) Current Monthly Income: the average monthly income
from all sources that D receives during the 6 month period ending
on the last day of the calendar month preceding the filing Does not
matter whether or not the income is taxable, and it includes
regular payments made by another entity to D for household expenses
Ds average monthly income is then multiplied by 12 to get Ds
average annual income, which is then compared to the median family
annual income If Ds income is greater, any party in interest can
move for dismissal of the case, and the formula set out in (b)(2)
most be used to decide if the presumption applies. If Ds income is
lower, the standing to move for relief is narrowed under (b)(6).
Also, if Ds income is less than the family median, D falls within
the safe harbor of (b)(7)
101 (39A) Median Family Income the median family income as
calculated and reported by the Bureau of the Census for the most
recent year.
707(b)(1) states that after notice and a hearing, a court, on
its own motion or on a motion by the U.S. trustee, trustee, or any
party in interest, may dismiss a case filed by an individual D
whose debts are primarily consumer debts, or with Ds consent,
convert to a Chapter 11 or Chapter 13, if it finds that the
granting of relief would be a substantial abuse of Chapter 7.
Consumer debt ( 101(8)) means debt incurred by an individual
primarily for personal, family, or household purpose.
707(b)(2) The Means Test Makes it easier to establish abuse by
creating a presumption of abuse under prescribed circumstances,
which arises if, based on the formula set out in this provision, Ds
disposable income would be sufficient to support a payment plan
under Chapter 13 If D is shown to have a disposable income in
excess of that prescribed by the formula, a presumption arises that
D is abusing the provisions of Chapter 7. Unless D can rebut the
presumption, grounds for dismissal under 707(b)(1) are established
Formula as set out in 707(b)(2)(A)(i) Calculate Ds current monthly
income as defined in 101(10(a)) Average of the monthly income that
D derived from all sources within 6 months before filing the
petition Deduct from this monthly income Ds monthly expenses, which
are determined by adding together the amounts allowed under
707(b)(2)(A)(ii), (iii), (iv) This will provide a figure for Ds net
monthly income (disposable income) (ii) Monthly expenses Reasonably
necessary health insurance, disability insurance, and health
savings account expenses Does not include payments for debts Also
includes Reasonably necessary expenses incurred to maintain the
safety of D and family of D If reasonably necessary, an additional
allowance for food and clothing up to 5% of the food and clothing
categories as specified by the National Standards issued by IRS
Reasonably necessary expenses for care and support of elderly,
chronically ill, or disabled household member or member of Ds
immediate family Administrative expenses for Chapter 13 up to
amount of 10% of projected plan payments Actual expenses of each
dependent child up to $1,175 per year per child to attend public or
private school need detailed explanation as to why reasonable
Allowance for housing and utilities (iii) Ds average monthly
payments on account of secured debts shall be calculated as the sum
of Total of all amounts scheduled as contractually due to secured
creditors in each month of the 60 months following the date of the
petition; and Any additional payments to secured creditors
necessary for the D in filing a plan under Chapter 13 to maintain
possession of Ds primary residence, car, or other property
necessary for the support of D and Ds dependents, that serves as
collateral for secured debts; divided by 60 (iv) Ds expenses for
payment of all priority claims (including priority child support
and alimony claims) shall be calculated as the total amount of
debts entitled to priority, divided by 60 Disposable income is then
multiplied by 60 to provide a 5 year total figure for D/s net
disposable income This 60 month disposable income figure is then
compared to the prescribed standards. Abuse is presumed if the
figure is not less than the lesser of: 25% of Ds non-priority
unsecured claims in the case, or $7,025, whichever is greater; or
$11,725. Note: If disposable income is high enough (above $200),
you know a presumption of abuse will arise. Conversely, if the
disposable income is low enough (below $200), you know a
presumption of abuse will not arise.
Rebutting the Presumption of Abuse If the presumption of abuse
arises because Ds 60 month disposable income exceeds the limits set
out by 707(b)(2), D has an opportunity to rebut the presumption (If
the presumption is rebutted, the court must decide whether to
dismiss the case under the considerations set out in 707(b)(3))
707(b)(2)(B) sets out what D must show to rebut the presumption (i)
provides that the presumption of abuse may only be rebutted by
demonstrating special circumstances, such as a serious medical
condition or a call to active military duty, and only to extent
that the special circumstances justify an increase in expenses or
an adjustment to current monthly income for which there is no
reasonable alternative (ii) places the burden on D to provide full
itemization, documentation, and an explanation of any claim of
adjustment (iii) requires D to attest under oath to the accuracy of
the information (iv) provides that the presumption of abuse may
only be rebutted if the adjustments established by D have the
effect of reducing Ds disposable income to a level below that which
gave rise to the presumption in the first place Presumption is only
rebutted if the ultimate figure, as adjusted, shows a low enough
60-month disposable income to pass the means test
707(b)(3) Even in a situation where a presumption does not arise
under the mechanical test, a court might still find abuse if D
filed under bad faith or if under the totality of the
circumstances, Ds financial situation demonstrates abuse. In cases
where the presumption of abuse does not arise or is rebutted, the
court may nevertheless dismiss the Ch. 7 case for abuse under
707(b)(1) if the applicant for dismissal establishes, or the court
on its own motion determines, that the filing is abusive. 707(b)(3)
provides guidelines on what the court should consider in deciding
if there has been abuse in the absence of the presumption
(B)(3)(A)Bad faith - covers situations in which Ds conduct shows
improper motives for filing the petition Absence of any attempts to
pay creditors Failure to reduce living expenses to a reasonable
level Manipulation of assets and finances Lack of candor in dealing
with creditors or the court Ability to make substantial payments to
creditors under Ch. 11 or Ch. 13 (B)(3)(b)Totality of the
Circumstances allows the court to consider a variety of factors to
decide if, on balance, the filing constitutes an abuse of the Code.
Whether petition was a response to sudden illness or calamity
Whether D made excessive consumer purchases or racked up debt
before filing Whether Ds budget is reasonable Whether D made
attempts to deal with creditors through negotiation or state law
remedies Whether Ds schedules are accurate
707(b)(6) Only the court (judge or U.S. trustee) can bring a
motion under 707(b) if the current monthly income of D is equal to
or less than the median debtor. Motion to dismiss may not be made
be made by the other parties in interest who would otherwise have
standing to move for dismissal Even though the below median D is
not subject to the Means Test, there are certain parties that can
use 707(b)(3) to find actual abuse
707(b)(7) If Ds current monthly income is equal to or less than
the median income, then no one can file a motion to dismiss the
petition based upon the means test. Safe harbor precludes
application of the presumption of abuse where Ds current monthly
income (for this purpose, combined with that of his spouse, even if
the petition is not a joint petition) is less than the applicable
median family income Below median D is not subject to the Means
Test
10. Exemptions under state law and the Bankruptcy Code
Once the Bankruptcy Estate has been created, and is in
protection of the Automatic Stay, the TIBs process of assembling
the Estate for eventual liquidation and distribution to Cs begins.
The first step for the TIB is to divide the property in the estate
between that reserved for Ds fresh start, and that available for
liquidation for the benefit of the Cs. The property reserved for D
is exempt property, and all property not listed as exempt is
denominated as non-exempt and will be sold by the TIB so that the
proceeds can be distributed to the C.
The Bankruptcy Code provides for federal exemptions, so that D
can choose either state or federal exemptions, depending on Ds
circumstances. States, however are authorized to opt out if they
want from the federal scheme under 522(b) if they want to make the
state exemption the only one available to D. 522(b) is known as the
opt-out clause.
Under 522(a)(2), value means FMV as of the date of the filing of
the petition or, with respect to property that becomes property of
the estate after such date, as of the date such property becomes
property of the estate. Some courts say liquidation is the correct
valuation
Under 522(d), the following are exempt: (1) Ds aggregate
interest in real or personal property that D uses as a residence up
to $21,625 (2) One motor vehicle, not to exceed $3,450 (3) Ds
interest in household furnishings, household goods, wearing
apparel, appliances, books, animals, crops, or musical instruments,
held for primarily personal use of D or his dependent family up to
$11,525 in aggregate, but only $550 in each item (4) Ds interest in
jewelry held for family use not to exceed $1,450 **(5) WILDCARD Ds
interest in any property, not to exceed $1,150 PLUS up to $10, 825
of any of the unused Residence Exemption ( 522(d)(1)) (6) Ds
interest in tools of the trade not to exceed $2,175 (7) Ds interest
in an unmatured life insurance K in any amount (8) Ds interest in a
Dependents unmatured life insurance K up to $11,525 (9)
Professionally proscribed health aids up to any amount (10) Ds
rights to receive (A) SS Benefit; (B) VA Benefit; (C) Disability
Benefit; (D) Alimony, support maintenance to extent necessary to
support D; (E) Pension or Death Benefit (11) Ds right to receive
(A) an award under a crime victims reparation law; (B) payment to D
for an award of wrongful death of someone upon whom D was
dependent; (C) payment under a life insurance K to D for someone
upon whom D was dependent; (D) payment up to $21, 625 for bodily
injury actions; (E) payment for lost future earnings owed to the
individual (12) retirement funds to the extent that those funds are
in a fund or account that is exempt from taxation under the
Internal Revenue Code
Wildcard Exemption - 522(d)(5) is an exemption in ANY PROPERTY,
not just listed in 522(d), and the amount is determined by the
extent to which the debtor uses up the homestead exemption under
522(d)(1) up to $10,825.
Under 522(l), D files a list of property that D claims as exempt
under (b) and unless a party in interest objects, the property
claimed as exempt on such list is exempt.
Under 522(m), subject to the limitation in (b), this section
apples separately with respect to each debtor in a joint case.
11. Debtors avoidance power under 522(f)
Under 522(f), D is granted limited rights to avoid certain types
of liens on property to the extent that it impairs an exemption to
which D would otherwise be entitled.
522(f)(1)(B) is a very limited exception to the general rule
that consensual liens take priority over an exemption in the
collateral A non-possessory (i.e., C has not taken possession of
the collateral as part of the agreement), non-purchase money s/i
upon any of the following is avoidable for policy reasons:
Household Furnishings, Household Goods, Wearing Apparel,
Appliances, Books, Animals, Crops, Musical Interests, or Jewelry
held for family purposes Tools of the Trade Professionally
Proscribed Health Aids for D or dependents
Policy rationale: The reason that D can avoid such liens is that
traditionally, they were used by Cs as arm-twisting measures to get
D to pay other loans, since there is really not much market value
in any of these items; they are simply garnered by C for leverage
against D.
Essentially, rather than the s/i coming first and the remainder
going back to D, the outcome is such that the exemption is
preserved in total and the secured party only has a s/i to the
extent that it can assert it with respect to this. The s/i is
avoided, but only to the extent necessary to fully protect the
exemption.
12. Claims (bifurcation and treatment of claims for interest and
attorneys fees)
101(5) Claim: means101(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 or101(5)(B): right to an equitable
remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy
is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, or unsecured.
Once it is clear what property belongs to Ds estate and what
property D may properly exempt, the TIB begins assembling any
nonexempt property for sale in satisfaction of Cs claims. The
proceeds will be distributed pro rata to the Cs.
If proof of claim or interest is properly filed by C under 501,
it is deemed allowed under 502(a), unless a party in interest
objects to Cs claims. If a TIB objects, most often the argument is
that there was no valid debt under state law (502(B)(1)), or that
the amount of the debt was lower than the C claimed.
Under 502(b)(2), no post-petition interest is allowed on
unsecured claims, because that would be an interest unmatured on
the date of the Bankruptcy If you have an unsecured claim, you get
no post-petition interest, but you can get pre-petition interest to
the extent in the contract. Also, you cannot, as a general rule,
get post-petition attorneys fees. A holder of an unsecured claim
cannot get that on account of their unsecured claim.
If Cs debt arises post-Bankruptcy, the interest can be claimed
as a 503 administrative expense
506(a) sets forth the special rights of Secured Cs in making
claims. A valid secured claim is an allowable secured claim. An
allowed secured claim will be equal to (1) the amount of the debt;
or (2) the value of the collateral, whichever is less.
Bifurcation many claims made by Secured Cs are actually both
secured claims and unsecured claims: If the collateral is worth
less than the total debt owed, then Cs debt to the extent of the
value of the collateral is secured, while the amount that the debt
exceeds the collateral is unsecured If the collateral is worth more
than the total debt owed, then Cs debt is recovered to its full
extent, and the remainder goes into the general fund for
distribution to the unsecured Cs
506(a)(2) Valuation of the collateral determines the extent of
Cs claim. Determined by Replacement Value price a retail merchant
would charge (considering age and condition) Only applies to
individual debtors under chapter 7 or 13.
Under 506(b), if the secured C is oversecured (i.e., if the
value of the collateral exceeds the debt is secures, including
pre-Bankruptcy interest), then the secured C can receive
post-Bankruptcy interest at its contract rate, until the value of
the collateral is exhausted. Once the collateral runs out, they can
no longer post-petition interest on account of their claim, because
they have used up their secured claim and are trying to get
post-petition interest on their unsecured claim.
Creditor Ability to Claim Attorneys Fees (Both Pre and Post
Petition) Attorney fees incurred prior to the filing of the
bankruptcy petition are treated the same as pre-petition interest:
if a C, secured or unsecured is entitled to pre-petition attorney
fees either by K or state law, then the attorney fees are simply
part of the C total secured or unsecured claim Post petition
attorney fees situation is much less clear: Secured Cs who are
oversecured clearly entitled to post-petition attorney fees, until
the value of the collateral is exhausted ( 506(b)) Unsecured Cs
should not be able to claim post-Bankruptcy attorney fees because
they cannot claim things like post-Bankruptcy interest, and
interest and attorney fees are both akin to administrative expenses
which are controlled by 503. 503 only permits recovery of attorney
fees in special circumstances.
13. Priority claims
After the Secured Cs have been satisfied by the sale of their
collateral, the unsecured Cs being the process of dividing the
remaining assets. The unsecured Cs (to the extent that the sale of
the collateral did not satisfy their allowed secured claims) join
in the process.
Under 507, there is a system of priorities under which some
obligations are deemed of greater social importance than others,
and as such, those claims will be paid ahead of others. Ex.
Payments to a former spouse will precede those paid to the general
creditors. Note: The priority claims of 507 only deal with
unsecured Cs.
Order of Priorities under 507(a): (1) unsecured claims for
domestic support obligations that, as of the date of the filing,
are owed to or recoverable by a spouse, former spouse, or child of
D administrative expenses of the trustee allowed under (1), (2),
and (6) FIRST PRIORITY (2) - administrative expenses allowed under
503. These are expenses of the Estate, and arise post-Bankruptcy,
and generally cover wages of employees or the Estate, rent paid on
leases in the Estate, repayment for money borrowed by the Estate,
etc. (4) unsecured claims to the extent of $11,725 (does not mean
recovery is limited to this, any remainder owed will be placed into
the unsecured general fund for distribution with the other Cs) for
each individual or corporation earned within 180 days before the
date of the filing or the date of the cessation of Ds business,
whichever occurs first, for: (A) - Wages, salaries, or commissions,
including vacation, severance, and sick leave pay earned by an
individual; or (B) - sales commission earned by an individual or a
corporation with only one employee, is and only if, during the 12
months preceding, at least 75% of the amount that the individual or
corporation earned by acting as an independent contractor in the
sale of goods or services was earned from the debtor. (7) unsecured
claims of consumers who made deposits before the bankruptcy case in
connection with a security deposit, other leases, property, for
goods or services, etc. that were not performed or satisfied. The
amount of these claims is limited to $2,600 per person. (8)
unsecured claims of governmental units, only to the extent that
such claims are for: (A) a tax on or measured by income or gross
receipts for a taxable year ending on or before the date of the
filing of the petition For which a return is last due after 3 years
before the date of the filing of the petition Assessed with 240
days before the date of the filing of the petition (B) a property
tax incurred before the start of the case and last payable without
penalty after one year before the date of the filing of the
petition (C) a tax required to be collected or withheld and for
which the debtor is liable in whatever capacity (D) an employment
tax on a wage, salary, or commission of a kind specified in (4)
earned from D before the date of the filing of the petition,
whether or not actually paid before such date, for which a return
is last due, under applicable law or under any extension, after
three years before the date of the filing of the petition.507(b)
failure of adequate protection:If the trustee, under 362, 363, 364,
provides adequate protection of the interest of a holder of a claim
secured by a lien on property of the debtor and if, notwithstanding
such protection.362 363 364(d) Then such creditors claim under such
subsection shall have priority over every other claim under such
subsection.
14. Exceptions from discharge under 523
Discharge in general From Ds perspective, the purpose of a
liquidation bankruptcy is almost always to discharge outstanding
debt. Once all Cs claims have been paid to the extent possible, D
anticipates discharge from all remaining debts. However, D is not
entitled to discharge as a matter of right, but the discharge will
be granted unless it is challenged by the TIB or any C TIB or Cs
may object to Ds discharge in particular debts ( 523) or in all of
the debts ( 727) 523 if granted, renders only the debt objected to
non-dischargeable (applies to all Chapters of Bankruptcy) 727 if
granted, renders all of Ds debts non-dischargeable (applies only to
Chapter 7 liquidation)
523(a) (Marksmans Approach) lists a series of debts that are not
dischargeable for various reasons, including public policy and the
behavior of D at the time when he incurred the debts. If a
particular claim is non-dischargeable under 523, once the
Bankruptcy is finished (i.e., D is discharged on other debts, or if
no other debts discharged, Cs are paid to the fullest extent), C
may pursue the collection of that debt as if the Bankruptcy never
occurred. (1) Tax and customs duty debt that are excluded form
discharge include: Those arising in the ordinary course of Ds
business during the Gap period; Gap period time period between the
filing of the petition and the order for relief date Taxes for
which returns were due (whether or not filed) for three years
before the Bankruptcy petition filed; Taxes due as to which a
return was not filed or was fraudulently filed (with no time limit)
(2) Fraudulent Representations in Gaining Credit: Upon application
to the Court by C claiming non-dischargeability, debts which D
obtained from C in money, property, services or extension of credit
can be made non-dischargeable if obtained through fraud.
Requirements For a fraudulent credit statement to be excepted from
discharge, the credit statement must: Be materially false; AND Have
been reasonable relied upon (C must in face have relied upon the
false statement itself and not have discovered it later in an
effort to avoid discharge); AND Have been made by D with the intent
to deceive (D did not make a reasonable and good faith attempt to
disclose his financial condition) Presumption of Fraud In two
cases, 523(a)(2) creates a presumption of fraudulent conduct on the
part of D that will cause those debts to be non-dischargeable
unless D can rebut the presumption; those cases are where: D (1)
aggregated debts of more than $600; (2) to a single C; (3) for
luxury goods or services; (4) within 90 days before the order for
relief; OR D obtained cash advances under an open end credit plan
(e.g., credit card, overdraft on bank account) of more than $875
within 70 days before the order for relief (4) Fraud, Defalcation,
Embezzlement, Larceny Upon Cs application for the Court to
determine whether the debt is non-dischargeable, a debt will be
denied dischargeability if it was incurred through fraud, etc.,
while D was in a fiduciary capacity. (5) Obligations for Support or
Alimony If a debt is for alimony, maintenance or support stemming
from a separation agreement, divorce decree, or a court order, it
will not be discharged (6) Willful and Malicious Injuries Debts
resulting from Ds willful and malicious injury of another (or
anothers property) will not be discharged. (15) Further Limitations
on Dischargeability of Alimony/Support If D has divorce or
separation obligations incurred in connection with an agreement or
a court proceeding, they are generally not dischargeable
15. Global denial of discharge under 727
D has a right to discharge unless any one of the reasons below
for denial is proved. Presence of any one of the reasons will cause
a discharge to be denied in full. If an individual is denied
discharge under 727(a), all of Ds debts remain intact except to the
extent the Cs have already been satisfied by the liquidation of Ds
assets. 727(a) should be distinguished from 523(a) which denies
discharge for particular debt. (a)(1) D is not an individual: As
state above, discharge is limited to individuals; corporations are
disallowed from getting a discharge (a)(2) Fraudulent Transfers by
D: a discharge will be denied if either D or TIB transfers,
removes, destroys, mutilates or conceals property (or has permitted
these things to occur) with intent to hinder, delay or defraud Cs.
This provision applies both to transfers of Ds property made within
one year before the filing and to transfers of the Estate property
after the filing. Intent is Key: the intent to hinder, delay or
defraud is an essential ingredient of the act of preventing
discharge. There is no constructive fraud provision. It is usually
impossible to prove fraudulent intent other than by proving the
facts to the court and demonstrating that no other motive can
explain Ds actions. (a)(3) Inadequate Records: Discharge may be
denied if F has concealed, destroyed, mutilated or falsified or
failed to keep or preserve any recorded information from which Ds
financial condition or business transactions may be ascertained,
unless such failure of D was justified. (a)(4) Crimes or Bad Acts
Committed during a Bankruptcy Case: D knowingly made and
fraudulently, in or in connection with the case Made a false oath
or account; Presented or used a false claim; Gave, offered,
received, or attempted to obtain money, property, or advantage, for
acting or forbearing to act; or Withheld from TIB any recorded
information relating to Ds property or financial affairs (a)(5)
Inadequate Explanation of Losses: Discharge will be denied if D has
failed to satisfactorily explain any loss of assets or the reasons
for his inability to meet liabilities.
Scope:
Under 727(b), a discharge under (a) discharges D from all debts
that arose before the date of the order for relief, and any
liability on a claim that is determined under 502 as if such claim
had arisen before the commencement of the case, whether or not a
proof of claim based on any such debt or liability is filed under
501, and whether or not a claim based on any such debt or liability
is allowed under 502.
524 Effect of Discharge524(a)(1): a discharge in a case under
this title voids any judgment at time obtained, to the extent that
such judgment is a determination of the personal liability of the
debtor with respect to debt discharged under 727 whether or not
discharge is waived.
524(a)(2): a discharge operates as an injunction against the
commencement or continuation of an action, the employment process,
or an act, to collect, recover or offset any such debt as a
personal liability of the debtor, whether or not discharge of such
debt is waived.
524(f): voluntary repayment Nothing in subsection (c) or (d)
prevents debtor from voluntarily repaying the debt.
16. Post-discharge discrimination against bankruptcy debtor
Once the Bankruptcy court discharges the D, the effects of the
bankruptcy on D may still linger. To reaffirm the positive effects
of discharge, certain acts are set forth in 525 that may not be
executed against a discharged D.
Simply because an individual is or has been a debtor, has been
insolvent, or has not paid a debt that is dischargeable: 525(a)
Prohibitions Applicable to Governmental Units: governmental units
may not deny, revoke, suspend, or refuse to renew a license or
similar grant, or discriminate with respect to a grant.
Governmental units also may not discriminate with respect to
employment. 525(b) Prohibitions Applicable to Private Employers:
private employers may not terminate the employment of, or
discriminate against. Note: if there are other factors which may
explain the employers decision, then it is not solely based upon
the prior bankruptcy and not in violation of this provision
Broad Application of 525: Congress has accompanied 525 with its
caution that it be read broadly and that the list of examples of
discrimination is not exhaustive. The courts are encouraged to
expand 525 to prevent behavior that unduly interferes with Ds fresh
start.
17. Redemption, reaffirmation, and the possibility of
ride-through
The financial position of D post-discharge is often surprisingly
tangled with some of the same debt that forced them into bankruptcy
the first time around. The important thing to note is that
discharge rids D of the unsecured obligations, but leaves the
secured creditors (and their liens) intact. This principle is
expressed in 524, which expressly emphasizes that a discharge voids
personal liabilities, but not liens. This means that all unsecured
debts are effectively vaporized, but a secured debt remains
attached to its collateral after bankruptcy, even though D cannot
be sued for any deficiency should the property by sold and C turn
out to be undersecured.
If D does not does not wish to surrender his secured debt to C,
D has only 3 options under the Code with respect to this secured
debt: Redemption, Reaffirmation or Ride-Through
Redemption of Assets by D - 722: Redemption is the right of an
individual D to procure the release from lien and return of
property that is intended primarily for personal, family, or
household use. To take advantage of redemption (and keep the
collateral), under Chapter 7, the property that D seeks to redeem
will have to be either: Fully exempt, (if partially exempt, must
pay off the estate for the deficit between the exemption amount,
and the FMV minus the lien amount if TIB has not abandoned) OR
Abandoned by the TIB under 554 554 After notice and a hearing, the
TIB may abandon any property of the Estate that is burdensome to
the Estate or that is of inconsequential value and benefit to the
Estate 722 provides that D may keep the collateral by paying the
amount of the allowed secured claim, which is always the value of
the collateral, not the value of the original debt
Breaking down 722 Redemption: 722 requires that property subject
to redemption be: Personal or Household Use Property property
subject to redemption must be tangible personal property intended
primarily for personal , family or household use (no stocks, bonds,
bank accounts, etc) Property Must be Secured Property subject to
redemption must be subject to a lien Property Must be Fully Exempt
or Abandoned as either burdensome or of inconsequential value to
the estate Making a Redemption - Assuming the asset has been
properly valued, the D is given the right of first refusal to
purchase the property from C. The purchase price is determined as
follows: Fair Exchange the amount of the allowed secured claim is
the same as the amount of debt Oversecured Claims If C is
oversecured (collateral > debt), the amount of the allowed
secured claim is also the same as the amount of the debt, so D pays
the amount of the debt Undersecured Claims If C is undersecured
(collateral < debt), the amount of the allowed secured claim is
equal to the value of the collateral, so D only pays the value of
the collateral
Reaffirmation of Debts by D - 524(c) Under 524, a reaffirmation
is an agreement with a C that D will become once again legally
bound to pay a pre-bankruptcy debt notwithstanding the discharge.
Either a secured or unsecured debt may be reaffirmed. Many Cs
decided that it makes more sense to let D keep the property and
continue the payments on it rather than foreclose or demand
repossession of that property in the event of default. Requirements
of Reaffirmation under 524: A reaffirmation agreement must: Be made
before the discharge Contain a statement that D can rescind it at
anytime before the discharge or within 60 days after the agreement
is filed with the Court, whichever occurs later Be filed with the
Court, together with an affidavit of Ds lawyer that the agreement
is voluntary and does not impose undue hardship on D, that D is
fully informed, and the lawyer has advised D of the effects of the
reaffirmation (Note: If D is not represented by a lawyer, the Court
must then approve the reaffirmation agreement unless it concerns a
consumer debt secured by a lien on real property) Under 524(d)
governs what happens if the individual is not represented by a
lawyer in a reaffirmation.
Voluntary repayment of debt after discharge:There are a number
of reasons as to why D might forego the advantages of discharge of
unsecured debts. For instance, D might have concern about a
relative who cosigned, and will be held liable if D doesnt pay or D
might have concern about being socially perceived as a deadbeat. D
does not have to go through the reaffirmation process to pay back
debts on unsecured claims. Under 524(f), it is clear that D who has
been discharged may voluntarily repay any debt. The difference
between voluntary payments and reaffirmation is that under
voluntary repayments, there is no formal agreement to continue to
make those payments, and D may stop doing so at any time without
adverse consequences.
Ride-Through!As an additional way for D to keep property subject
to a security interest, if D has not defaulted on payments on the
secured debt, some courts have allowed D to retain the collateral
while continuing to pay installments to the secured party as
required by the K. This is known as a ride-through because the
secured transaction rides through the bankruptcy without being
formally administered and dealt with as part of the estate. If D
later defaults, the creditor can foreclose on the collateral, but
any deficiency would be discharged. De Facto Ride Through
Essentially, if there has not been a default and if C assents, D
can continue to pay on collateral, keep it, and ride through the
petition.
18. Basic Structure of Chapter 13
Chapter 13 provides a form of reorganization that is
considerably simpler than a Chapter 11, but is restricted to an
individual, or an individual and his spouse with regular income.
Chapter 13 is never involuntary, and the individual can never be
forced into an involuntary Chapter 13. Chapter 13 is usually most
appropriate for Ds who have many non-exempt assets that they wish
to keep.
The major difference between Chapter 7 and Chapter 13 is that in
Chapter 7, D finances the process by way of pre-petition assets and
gets to keep future assets, while in Chapter 13, the source of
financing is in a large extent financed by future earnings and
discharge does not occur until after D completes payments under the
plan. Under the plan, D keeps its assets, but in exchange, must
propose a plan subject to restrictions that pays Cs a certain
amount over a 3-5 year period.
Provisions that carry over from Chapter 7: 362 Automatic Stay
541 Property of the Estate 522(d) Exemptions 522(f) Avoidance
Powers 507 Priority Claims 506(a) Bifurcation
1302(b) - Duties of the TIB: The main duties of the TIB are in
connection with confirmation of the plan and distribution of
payments unlike in Chapter 7, the TIB acts more like Ds agents (1)
perform all the duties specified in 704(a) (2) appear and be heard
at any hearing that concerns: Value of property subject to a lien;
Confirmation of a plan; or Modification of the plan after
confirmation (3) dispose of moneys received or to be received in a
case under Chapter 8 (4) advise, other than on legal matters, and
assist D in performance under the plan (5) ensure that D commences
making timely payments (6) if with respect to D there is a claim
for a domestic support obligation, provide the applicable notice
specified in (d)1303 Rights and Powers of Debtor:Subject to
limitations on a trustee under chapter 13, the debtor shall have,
exclusive of the trustee, the rights and powers of a trustee under
sections 363(b), 363(d), 363(e), 363(f), and 363(l)
Commencement of a Chapter 13 Case: The following are the basic
steps in the commencement of a typical Chapter 13 case: Filing of a
Petition: D (and only D) files a petition under 301; there is no
provision or C to file an involuntary Chapter 13 against D Creation
of an Estate: The filing of the petition creates an estate of all
legal or equitable interests of D in the property (541), and
property acquired after commencement of the case, with D remaining
in possession of the assets (DIP). The Estate includes income
earned by D while under the Plan. 1306 Property of the Estate (in
chapter 13) (a) Property of the estate includes, in addition to 541
(a)(1): all property of the kind specified in such section that
debtor acquires after the commencement of the case, but before the
case is closed, dismissed or converted, whichever comes first
(a)(2): earnings from services performed by the debtor after the
commencement of the case but before the case is closed, dismissed
or converted to a case under chapter 7 or 11, whichever occurs
first (b) except as provided in a confirmed plan or order
confirming a plan, the debtor shall remain in possession of all
property of the estate. The confirmation of the plan vests all of
the property of the Estate in the DIP ( 1327(b)) Operation of the
Automatic Stay: 362 restricts the actions of Cs against the
property of the Estate or of D, prohibiting most acts against or
attempt to collect from D, by Cs or third parties Filing of the
Plan: D constructs a plan under 1321, 1322, and the TIB or C will
recommend approval , denial, or modification of the plan. The plan
is put forth for approval at Cs meeting, and the TIB will
thereafter make his recommendations as to whether or not to confirm
the plan.
The Plan - 1321 & 1322: The following elements are required
by the Bankruptcy Code for an acceptable plan Under 1321, D is
required to file a plan Under 1322(a), the Plan (1) shall provide
for the submission of all or such portion of future earnings or
other future income of D to the supervision and control of the
trustee as is necessary for the execution of the plan Binds D to
pay future earnings in an amount sufficient to execute the plan (2)
shall provide for the full payment of priority claims under 507,
unless the holder of the priority claim agrees otherwise Has to be
cash payments, which can be deferred (3) while the plan is not
required to classify claims, if the plan does so, then each claim
within a class must receive the same treatment (4) may provide for
less than full payment of all amounts owed for a priority claim,
only if the plan provides that all of Ds projected disposable
income for a 5 year period beginning on the date that the first
payment is due under the plan will be applied to make payments
under the plan If there is no disposable income, then D does not
have to pay full amount of debts owed 1322(b) indicates what a plan
may do (flexibility). The plan may - (1) designate a class or
classes of unsecured claims, but may not discriminate unfairly
against any class so designated, but, it may treat claims for a
consumer debt of D is an individual is liable on such consumer debt
with D differently than other unsecured claims (2) modify the
rights of holders of secured claims, except for a claim secured
only a by a s/i in real property that is Ds principal place of
residence (deals with short term debt and extends it to be
completed in 3-5 years) Option 2: modify rights of holders of
unsecured claims Option 3: leave unaffected the rights of holders
of any class of claims (3) plan may provide for the curing or
waiving of any default; Includes de-acceleration (5)
notwithstanding (2), may provide for the curing of any default
within a reasonable time and maintenance of payments while the case
is pending on any unsecured claim or secured claim on which the
last payment is due after the date on which the final payment under
the plan is due. Long term debt not limited to 3-5 years No
discharge of this particular debt until payments have been
completed Generally dealing with mortgages 1322(c)(2)
notwithstanding (b)(2) and applicable nonbankruptcy law, in a case
in which the last payment on the original payment schedule for a
claim secured only by a s/i in real property that is the debtors
principal residence is due before the date on which the final
payment under the plan is due, the plan may provide for the payment
of the claim as modified pursuant to 1325(a)(5) Situation is more
common with second mortgages or equity loans D can modify whereas
otherwise they couldnt
1322(d) - Length of the Plan If the combined current annual
income of D and spouse is less than the median family income for a
household of Ds size, the plan cannot go beyond 3 years without the
courts approval for cause If the combined current annual income of
D and spouse is higher than the median family income for a
household of Ds size, the plan may extend to 5 years
1325 Confirmation of Plan 1325(a) requires the court to confirm
a plan if it meets the criteria set out in the section and if
confirmation is not precluded by 1325(b) Under 1325(a), the
following are criteria for confirmation (1) The plan must comply
with Chapter 14 and all other applicable provisions of the Code (3)
(7) D must both have filed the petition and proposed the plan in
good faith, and the plan must not violate the law GOOD FAITH TEST
(4) The distribution to be paid to each unsecured claimant under
the plan must be at least equal to what it would have received had
the estate been liquidated under Chapter 7. Because the payments
under the plan will be made over time, interest must be added to
the amount distributed to each claimant so that the claimant
receives the present value of its hypothetical Chapter 7
distribution BEST INTERESTS TEST (5) Unless a secured claimant
accepts different treatment, the plan must either provide for the
collateral to be surrendered to the claimant, or it must preserve
the claimants lien and provide for full payment of the present
value of the secured claim. Present value is determined by adding
interest to the face amount of the claim MINIMUM VALUE TEST Lien
stripping (gives secured creditor a hair cut) Under this provision,
the holder of the secured claim, if you modify, (assuming the
secured creditor isn't getting the collateral) still must be paid
in the amount of the present value of the allowed secured claim.
Here, you can also follow through on the bifurcation, and pay only
the allowed secured claim rather than the full obligationthis is
known as lien stripping. To the extent the debtor can strip the
lien, it can limit the amount they have to pay on the claim. It is
a follow through on 506(a)the debtor essentially modifies the claim
and the rest of the claim, that isn't secured by the collateral
(which is burned up) is unsecured. How to determine present value
of collateral Rash Replacement Value Till Formula rate/riskless or
prime rate and add for risk Bifurcating the 1325(a)(5) claim under
506(a) is limited in some instances by 1325(a)(9.5)--and you MUST
PAY the full obligation rather than bifurcating (The HANGING
PARAGRAPH!!!) This applies when there is a PMSI in collateral for a
debt that was incurred in the 365 day period prior to filing for
bankruptcy. THEN, it cannot be bifurcated and the secured claim
must be paid in full. If the collateral for the PMSI is a motor
vehicle and the debt was incurred 2.5 year prior to bankruptcy, you
cannot bifurcate the claim--you must pay the secured claim in full,
even if the secured creditor is undersecured.
19. Treatment of secured claims under Chapter 13 plan
(modification, cure/reinstatement, and minimum payment
requirements)
One of the most common reasons why D would choose a Chapter 13
is Ds desire to keep property that is subject to a s/i. The secured
C in a Chapter 13 is better protected than his unsecured
counterpart. There are two concerns of the secured C that are
provoked by a Chapter 13 filing: (1) Adequate Protection of the
collateral while D is in possession; and (2) Adequate Payment of
Value to the Secured Party as measured by the present value of the
collateral C can move to have the Automatic Stay lifted under
362(d), claiming that the collateral is not adequately protected OR
C can object to the Plan and ask that it not be confirmed on
inadequate payment of value grounds.
Adequate Protection - 362(d)(1): Since D will keep the property
under a Chapter 13 plan, the secured party is naturally concerned
about the risk that the collateral will lose its value over the
life of the plan. Cs concern is that if D defaults under the
Chapter 13 plan, and C is compelled to repossess, C could be left
with property that has seriously declined in value since the
initial filing of the bankruptcy. The two principle risks are that
(1) the collateral will be destroyed; and (2) the collateral will
seriously decline in value Under 362(d)(2), a secured C can get the
stay lifted in a reorganization if: (1) D has no equity in the
property (i.e., he owes more than the property is worth to the C);
or (2) The property is not necessary to an effective
reorganization
Adequate Payment - 1322(b)(2) & 1325(a)(5): The Adequate
Payment of the secured C under the Plan is another point where
litigation occurs. This issue focuses on the amount the secured
party is entitled to receive under Ds plan if D succeeds in making
all of the payments.
1322(b)(2)gives D the power to modify the original K between
parties. Many Ds will structure their plans around saving their
homes to avoid foreclosure, but the D in Chapter 13 does not have
the freedom to create a new payment schedule or principal amount
due for the home mortgage even if the home is worth less than the
outstanding mortgage. Basically, this means that the plan must
anticipate payment of the loan balance in full (not just to the
value of the home) if D wishes to keep the home. The only relief in
Chapter 13 for D as to his mortgage is to Cure and Maintain The
power to cure any default in 1322(b)(3) & (5) is not limited by
the ban against modifying a home mortgage in 1322(b)(2) because
curing defaults is not a modification of the terms of the mortgage
By curing a past default on a mortgage, and then continuing to make
the regularly scheduled payments, D is able to keep the collateral
from foreclosure.
20. Treatment of unsecured claims under Chapter 13 plan (good
faith, best interests, and disposable income tests)
To save secured property, D must make special accommodation for
secured C in Chapter 13, but this is not so for unsecured Cs in
Chapter 13. The on