Table of Contents

I. Introduction

II. Commencement of the Case & Eligibility for Relief

Voluntary Proceedings

Voluntary Proceedings - Means Test

Voluntary Proceedings - Other Elements

Involuntary Bankr Proceedings

Debtors Eligibility for Relief

Limitations on Repeat Bankr Filings

III. The Bankr Estate

Property of the Bankruptcy Estate

Post Petition Earnings from Personal Services

Limitations on Property of Estate

Exclusions from the Bankr Estate

Exemptions and Lien Avoidance

Claiming the Exemption

IV. The Automatic Stay

Nature of the Stay

Exceptions to the Automatic Stay

Violation of the Stay

Lifting the Stay

V. Claims

Filing Claims

Secured claims

Priority Claims

Future Claims

VI. Discharge

Discharge Generally & Extent of Discharge

§523 - Rifle Exceptions

§727 - Global Discharge Exceptions (no discharge at all)

Reaffirmation

Reaffirmation/Redemption

VII. Chapter 13 Cases

Eligibility for Relief

Codebtor Stay

The Chapter 13 Plan

Disposable Income

Nuts & Boltsof Chap 13

Treatment of Secured Claims

Treatment of Home Mortgages under Chap 13

Modification of Confirmed Plan

Discharge under Chap 13

Conversion & Dismissal of Chap 13 Cases

VIII. Avoidance Actions/Powers of Trustee

Avoidance Actions Introduction

Strong Arm Power - §544(a)

Preferences - §547

Fraudulent Conveyances - §548

Statutory Liens - §545

I. Introduction

Structure of Bankruptcy Law

Historically

  • Originated as a creditor’s remedy
  • Strict penalties historically for being a debtor (i.e., drawn & quartered; debtor’s prison)
  • U.S. Const. art. I, § 8 - Empowerment to create uniform Bankr law

Bankr Code Today

  • Bankr Code enacted in 1978 (replaced Bankr Act from 1898, rev’d 1930s)
  • Organization
  • Divided into chapters (originally all odd; chap 12 later added)
  • Course focus: chaps 7 & 13 (also 1, 3, & 5); not addressing chap 11 (although shared principles)

Models of Bankruptcy law

Liquidation (more ancient form) embodied in chap 7

  • Model/Procedure
  • Debtor turns over all his/her/its property to trustee
  • Trustee sells/liquidates debtor’s assets
  • Distributes proceeds from liquidation of assets to debtor’s creditors (who have made claims)
  • If insufficient assets for all creditors, then assets shared pro rata among creditors (orderly distribution)
  • Bankr Discharge (relatively recent addition to liquidation Bankr)

If debtor behaves properly (not hiding assets)

Then receives discharge of all pre-Bankr debts; incentive for debtors to come forward before all assets are exhausted

  • Theoretical Balance
  • Creditors get orderly distribution
  • Debtors get discharge of pre-Bankr debts

Reorganization

  • Goal: Capture going-concern value of company
  • The intangible value of a company beyond the plain sum of its total assets (name value)
  • Chaps 9, 11, 12, & 13 - Reorganization chapters
  • Model/Procedure
  • Debtor keeps assets and at the end of the Bankr the debtor receives discharge of pre-Bankr debts
  • Debtor must present plan (details determined by type of Bank Reorg.)

Over the next months/years

Debtor will make a stream of payments to the creditors

Equal to at least what those creditors would receive if debtors assets was liquidated today

I.e., equal in today’s dollars; thus interest must be provided for the time taken to repay

  • Theory
  • Win-win situation: debtor gets to keep running business and paying employees; creditors get paid

Congress believes creditors will see greater returns than liquidation.

  • Essentially given an opportunity to redeem your assets (i.e., article 9 pre-sale redemption)

State Law Discussion

Federal law supremacy - Bankr law and discharges preempt state law and other creditors

Lien - A Security Interest that a creditor has in property of a debtor to secure repayment of a debt

  • Types of Liens: Consensual Security Interests; Judicial Lines; Statutory Liens
  • Consensual Security Interests / Lines: I.e.: Article 9 (pledge of property) or mortgages
  • Debtors voluntarily accept money from creditor in exchange for security interest in property
  • Statutory Liens: State (sometimes federal) laws, mechanics, lawyers
  • Automatic liens under state law (mechanics, innkeepers, dry cleaners)
  • Mechanics liens are often not just for auto mechanics; also people who work on your house, etc.

They have a security interest in the property they work on / improve securing repayment for the debt owed

  • Judicial Liens: Liens that unsecured creditors obtain in enforcing their debt (after going through state law process)
  • Someone who has extended money without giving a security interest in exchange
  • To recover, unsecured creditor must go through process beginning with going to court and get a judgment

Otherwise not entitled to repossess property for nonpayment of debt

Then they are entitled to go through the debtors assets and try to attach their lien to it

Example: take judgment and enroll it in the land records - judicial lien is born

The unsecured creditor then becomes a judicial lien holder and can use the facilities of the state of to sell and liquidate the property (foreclose)

Debt Collection

Judgment Entry Examples

  • Real Property is Owned by Debtor
  • Home with mortgage on it, and if the home is worth more than the mortgage, means the home has equity in it
  • Could enter the a judgment lien into the property records for that property
  • Then could seek assistance from the state to foreclose the property
  • Attaching Personal Property (Apartment, but not real estate—property in the residence)
  • Minority rule for Personal Property: Some states enrolling the lien applies to real estate and all property in residence
  • Majority rule for Personal Property: Most states you don’t have a lien on personal property until the sheriff has gone out and seized the property

Sheriff arrives with a writ, and executes or levies the writ based on the judgment

What can Debtors do?

Sheriffs have some liability if they take property that isn’t the Debtors

Debtor or person on the property will often tell the sheriff this might be someone else’s property

Garnishments (or turn over debtor’s assets)

  • Cause of action brought against a third party that is holding assets of a debtor and the only defense to the action by the third party is “not in possession of debtor’s assets”
  • Ex: Debtor has bank account. You can sue the bank (need not sue the debtor) to require the bank to turn over those assets to the judgment creditor
  • Garnish-able Items: Accounts, wages (often smart enough to clear out accounts), tax refunds
  • Garnishment suit for wages would be against employer (they are holding asset of salary)
  • Limits on garnishment exist: typically 40-60% of salary

Receivership

  • Generally a state law remedy in existence since prior to Bankr Code
  • May also be available as a federal remedy
  • Procedure
  • Go to state court of equity and ask the judge to create a receivership because:

(a) You think they are looting the Corp, or

(b) You think they are so incompetent that they will undoubtedly run the Corp into the ground

Receiver would be appointed to protect how the business is run for the interest of the creditors

  • Uncommon presently because of Bankr Code (trustee gets appointed)

Assignment for the Benefit of Creditors

  • State law remedy that is no longer very popular
  • Debtor would ask court for an assignee to run the business (basically someone voluntarily giving up)

Debtor’s Interrogatories (different states call this different things)

  • Example:
  • Don’t know what the debtor has, and before you go and try to attach (or after unsuccessful attempt by sheriff)
  • You have a judgment but no idea what debtor has
  • Procedure
  • Enroll judgment
  • Have court issue writ/subpoena ordering debtor to come in for questioning about assets
  • Might be in lawyer’s office; might require presence of judicial officer
  • Debt Collection Technique
  • If they bring property to the debtor’s interrogatories then you can seize it then
  • Effect is if sentimental attachment to property (i.e., wristwatch), then they might be more amenable to a pro-creditor settlement

Note:

  • Debt collection techniques typically lead to a Bankr filing

II.Commencement of the Case & Eligibility for Relief

Overview

Bankr initiated by a filing of petition for relief

Issues are who can file one and whether it is voluntary or involuntary

Voluntary Proceedings

Initiated by: filing petition for relief under eligible Code chapter (typically under § 301)

  • Basically you can file under whichever Chap classifies you as a debtor
  • Filing constitutes and gives rise to an “order for relief” and creates an automatic stay (§ 362) & a Bankr estate (§ 541)
  • Order of Relief: Bankr court enters order saying they are granting relief to the Debtor under the Bankr Code
  • Filing Mechanics
  • Filing indicates the minute and sometimes second so that you know exactly when the debtors has been “granted relief” under the Code (timing is important for things like the Stay)

Great Debate in Bankr Law

  • Tension between protection for debtors and an interest in creditors being paid back as much as possible
  • Ultimately revised (but not rewritten) in 2005 (BAPCPA)
  • Principle review was to eligibility requirements for Chap 7 (enter: means test)
  • Changes in BAPCPA:
  • Before: Any individual/entity (with a few exceptions) could file a Chap 7
  • After: All individuals must pass “means test” to file Chap 7 (can still file Chap 13)

Idea is creditors will get more through Chap 13 (disputed as sometimes people in financial trouble can’t get out of it by funding a 5-year Chap 13 plan)

§ 707 - Dismissal of a Case or Conversion of a Case Under Chap 11 or 13

Restrictions on Filing

  • Bankr Abuse Prevention & Consumer Protection Act of 2005

Tightened requirements for filing Bankr

  • Modified many provisions, for example Chap 7 sometimes unavailable until Chap 13 first
  • § 109(h) - Debtor must first undergo approved credit counseling (§ 111(c)) in the past 180 days before filing (goal is credit counseling and budget discussions to avoid unneeded Bankr)
  • Means Test
  • Note:There is a pre-discharge educational requirement §§ 727(a)(11) and 1328(g)

Problem 2-1

  • Facts: Can negligent debtor who didn’t see notices file petition w/o credit counseling?
  • (a) His only hope (short of getting credit counseling) is to certify to the court there are exigent circumstances. But he effectively created his own exigent circumstances and may be barred. See §109(h)(3)
  • Court will need to find it “satisfactory”
  • Must at least be signed, but not necessarily sworn
  • Must have requested in prior 7 days
  • (b) the period if for 180 days, and beyond that debtor must return for more counseling (unless the intervening time can be construed as ongoing counseling)

Voluntary Proceedings - Means Test

Overview: Debtor barred from Chap 7 liquidation if enough net income to repay significant amount of debt under Chap 13 reorganization. See §707(b)

  • Barred from liquidated if current monthly income exceeds median household by certain amount
  • Fundamentally, is it an abuse of the Bankr Code to allow the Debtor to file Chap 7

Computation

  • 1) Calculate Debtor’s averagecurrent monthly income.
  • Define at § 101(10A). Includes avg. debtor income for prior 6 mos.

Average income from all sources over last 6 mos., including any amount paid by entity other than debtor for household expenses (and excluding some military and other things)

This includes the lottery winnings are big bag of money from “aunt”

Debtor relief is in 707(b)(2)(A)

Note: Higher amount is worse for debtor wanting to file

There also may be some discretion for the judge to reduce what gets included in the average monthly income

  • 2) Compare Annual Income (current monthly income multiplied by 12 for annual sum) with state’s median family income for comparable household size

Basically compare with the media income for that state for similar debtors

  • If equal or lower than Census Bureau median household figures, then can file. Safe Harbor provisions of §707(b)(7)
  • 3) Means Test (see Summary of §707(b) p. 42)

Failure of means test = presumption of Bankr abuse and barred from Chap 7 liquidation

  • a) Subtract Allowable Expenses (Debtor’s income adjusted for):

(i) IRS allowable “reasonable” expenses. §707(b)(2)(A)(ii)

(ii) Can include other reasonable and necessary expenses: support for elderly or disable in family, education expenses for children, extra housing or utility expenses that are reasonable and necessary

(iii) Secured and priority creditor payments considered, though spread over 5 yrs. / 60 mos.

Code basically just says you get to flat-out subtract these things

i.e., 12 monthly payments of $100 for appliance = $20 deduction (1200 / 60) or payments made to car payments (car is secured); Mortgage payments

  • b) Remaining amt. of average monthly income after the subtractions is multiplied by 60 to forecast the funding of a Chap 13 plan for 5 years (5 years x 12 months = 60)

Basically want to determine the total amount creditors could receive from the Debtor over 5 years

  • c) The Means Test is failed (Chap 7 barred) if sum is less than lesser of (1) $7,025 or 25% of non-priority unsecured debt (whichever is greater), or (2) $11,725

These are rather arbitrary figures: if you can pay above 11,725 then you must file Chap 13

  • 3.a) Alt View / Trigger Points
  • If adjusted monthly expenses less than $117.08 (= $7,025 / 60 mos), then cannot fail means test and may file Chap 7
  • If adjusted monthly income is greater than $195.42 (= $11,725 / 60 mos) then the Debtor fails the means test and cannot file Chap 7
  • Also between these two monthly figures ($117.08 & $195.42), multiply by 60 and if equaling 25% of non-priority unsecured debt then fails means test

Congressional Amendments

  • Rev’d Code to force people to file Chap 13 instead of Chap 7 when appropriate
  • Only going to force people out of Chap 7 if we think they could survive in a Chap 13 Bankr

Is a Debtor permitted to file Chap 7

  • If the calculated adjusted average income is below the mean household income for the area, then Debtor may file Chap 7
  • If the calculated adjusted avg income is above the mean household income then must perform the means test (see above)

S. Ct. Case - 2011

  • Issue: If Debtor doesn’t actually own a car, can they deduct the IRS scheduled amount for owning a car?
  • Held: Debtors are not allowed to deduct the amount for the car if Debtor doesn’t own a car

Means Test Problems

  • Problem 2-2
  • The lottery winnings, although a one-time event, probably cannot be excluded from avg. income
  • Math: 18K + 5K (lottery) = 23K. Divide by 60
  • Bankr Judge has discretion to reduce for some things in calculating the annual income
  • Problem 2-3
  • Avg. monthly income = $5417 [($6500 x 5) + 0 / 6]. Perhaps higher if he put $500 on his credit card during the month unemployed (either way I don’t think you can deduct the debt from the avg monthly income)
  • Problem 2-4
  • She is above the median income (we are told) so we know she must pass means test
  • $120 x 60 = $7200; greater of ($7025 or 25% of $20,000 = $5,000). Fails means test because she exceeds $7025.

Alternative approach

If b/t $117.08 & $195.42 then multiply by 60 and is it greater than the larger of $7025 or 25% of unsecured debt

  • Credit card debt of $35,000?

She does not fail the means test b/c 25% of $35,000 = $8,750 (which is greater than her average income — she can’t repay it and is eligible for Chap 7)

  • Theoretical Tension:

The more debt then the more likely you can get into Chap 7; so you could advise the client to incur additional debt prior to filing

Bankr Rule 9011 & § 526(b)(4) bars an advising additional debt in contemplation and prior to filing for Bankr (See infra)

  • Problem 2-5
  • I am not sure if vehicle expenses play into the deduction for avg. monthly income. Based on the case law, there does not appear to be a distinction between types of cars

There is a flat rate for the IRS amounts

You can also take out actual payments to secured creditors

When adjusted she would have negative cashflow b/c of the secured payment

There is also a tension here because there is an incentive to run-up your bills before Bankr

  • What does it mean that “monthly expenses of the debtor shall not include any payments for debts”; does this mean can’t deduct for interest rates / fees?
  • What if she intends to return it?

S. Ct. hasn’t resolved, but similar to case above - the statute can be read literally or for congressional purpose

Voluntary Proceedings - Other Elements

Documentation Requirements when Filing

  • § 521(a)(1), (b), (e)(2) - Debtor’s Duties (otherwise petition will be dismissed)
  • Must include w/ filing petition much financial information, pay stubs, creditors, etc.
  • Tax returns for past year before 1st meeting of creditors
  • Certification of receipt of credit counseling or attendance in credit counseling course

Can be conduct online

Automatic Dismissal on 46th day if filing documentation requirements not met. § 521(i)

  • Time can be extended if court “finds justification”. § 521(i)(3)
  • Trustee can also request no dismissal if debtor attempted in good faith, etc. § 521(i)(4)
  • Actual nature of automatic dismissal is disputed (need the court do anything?)

Some courts think they have discretion to retain the case beyond the time period

  • In re Acosta-Rivera
  • Issue: Whether Bankr court may excuse non-disclosure after 46th day has passed (held it could)
  • Facts: Debtors petitioned for Bankr and did not initially disclose pending cause of action against employer for back-pay etc., and once they did disclose they didn’t list the value. Trustee wanted to settle employment suit for low number (but good for Bankr), and debtors tried to get suit dismissed under automatic provision
  • Rule:

Provision requiring debtor documentation “unless the court orders otherwise” could be construed to waive the § 521(a)(1) requirements

If the hidden asset has a high enough value to cover all the creditor claims then the disclosure may be waived as a reasonable and pragmatic compromise to Congressional anti-abuse goals

Court performs this with a “nunc pro tunc” order which basically retroactively indicates that the “court order[ed] otherwise.” (nunc pro tunc - now for then)