Chapter 31: BLAW Bankruptcy Law
31-2a Chapter 7 Schedules What must the voluntary petition contain?
1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each. 2. A statement of the financial affairs of the debtor. 3. A list of all property owned by the debtor, including property that the debtor claims is exempt. 4. A list of current income and expenses. 5. A certificate of credit counseling. Proof of payments received from employers within sixty days prior to the filing of the petition. 6. A statement of the amount of monthly income, itemized to show how the amount is calculated. 7. A copy of the debtor's federal income tax return for the most recent year ending immediately before the filing of the petition.
What properties are the federal exemptions?
1. A portion of equity in the debtor's home (the homestead exemption). 2. Motor vehicles, up to a certain value (usually just one vehicle). 3. Reasonably necessary clothing, household goods and furnishings, and household appliances (the aggregate value not to exceed a certain amount). 4. Jewelry, up to a certain value. 5. Tools of the debtor's trade or profession, up to a certain value. 6. A portion of unpaid but earned wages. 7. Pensions. 8. Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account. 9. Damages awarded for personal injury up to a certain amount.
31-2d Estate in Bankruptcy What is in an estate in bankruptcy?
1. Community property (property jointly owned by married persons in certain states). 2. Property transferred in a transaction voidable by the trustee. 3. Proceeds and profits from the property of the estate.
What is a reaffirmation agreement?
An agreement between a debtor and a creditor in which the debtor voluntarily agrees to pay a debt dischargeable in bankruptcy. This is to family members, bank, or physicians.
31-1d Liquidation Proceedings What is a bankruptcy trustee?
It is a person appointed by the court to manage the debtor's funds.
What are preferences to Insiders?
The creditors receiving the preference is an insider. In this situation, the avoidance power of the trustee extends to transfers made within one year before filing. The trustee must, however, prove that the debtor was insolvent when the transfer occurred and that the transfer was made to or for the benefit of an insider.
What happens when the court deny discharge?
When a discharge is denied under any of these circumstances, the debtor's assets are still distributed to the creditors. After the bankruptcy proceeding, however, the debtor remains liable for the unpaid portion of all claims.
31-2a Order of Relief What is an order of relief?
A court's grant of assistance to a complainant. In bankruptcy proceedings, the order relieves the debtor of the immediate obligation to pay the debts listed in the bankruptcy petition.
31-2d Estate in Bankruptcy On the commencement of a liquidation proceeding under Chapter 7, what is created?
An estate in bankruptcy (sometimes called an estate in property) is created.
31-1b Bankruptcy Courts How long are bankruptcy court judges appointed for?
Bankruptcy court judges are appointed for terms of fourteen years.
31-1c Types of Bankruptcy Relief What does chapter 11 of the code contain?
Chapter 11 governs reorganizations.
Is court approval needed for procedures?
Court approval is required unless the debtor is represented by an attorney during the negotiation of the reaffirmation and submits the proper documents and certifications. Even when the debtor is represented by an attorney, court approval may be required if it appears that the reaffirmation will result in undue hardship to the debtor.
31-2a Means Test What factors are considered to determined whether the debtor will have income that could be applied to unsecured debt?
Factors such as if the debtor will have income that could be applied to unsecured debt, debtor's bad faith, and other circumstances indicating abuse
What happens when a secured creditor or other party in interest petition the bankruptcy court for relief from the automatic stay?
If a creditor or other party requests relief from the stay, the stay will automatically terminate sixty days after the request, unless the court grants an extension or the parties agree otherwise.
31-1d Liquidation Proceedings When is the bankruptcy voluntarily, and when is it not?
If a debtor files the petition, the bankruptcy is voluntary. If one or more creditors file a petition to force the debtor into bankruptcy, the bankruptcy is involuntary.
31-1d Liquidation Proceedings Liquidation is often known as
It is often referred to as an ordinary, or straight, bankruptcy.
31-1c Types of Bankruptcy Relief The bankruptcy code is contained in which title of the United States Code and has how many chapters?
The Bankruptcy Code is contained in Title 11 of the United States Code and has eight chapters.
31-1d Special Requirements for Consumer-Debtors What does the Bankruptcy code require the clerk of the court to do?
The Bankruptcy Code requires that the clerk of the court give all consumer-debtors written notice of the general purpose, benefits, and costs of each chapter under which they might proceed. In addition, the clerk must provide consumer-debtors with information on the types of services available from credit counseling agencies.
What are other situations that does not constitute a preference?
The Code also permits a consumer-debtor to transfer any property to a creditor up to a specified total value ($6,825 in 2021) without the transfer's constituting a preference. Payment of domestic-support debts does not constitute a preference.
What is the trustee's strong-arm power?
The Code provides that the trustee has rights equivalent to those of certain other parties, such as a creditor who has a judicial lien. This power of a trustee, which is equivalent to that of a lien creditor,
31-2e The Bankruptcy Trustee What is the basic duty of the trustee?
The basic duty of the trustee is to collect the debtor's available estate and reduce it to cash for distribution, preserving the interests of both the debtor and the unsecured creditors. The trustee is held accountable for administering the debtor's estate. The trustee has the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee
31-2b Involuntarily Bankruptcy If the court grants an order for relief, what will the debtor be required to provide?
The debtor will be required to supply the same information in the bankruptcy schedules as in a voluntary bankruptcy.
31-2d Estate in Bankruptcy What is an estate in bankruptcy?
The estate consists of all the debtor's interests in property currently held, wherever located.
While debtor cannot give preferences to one creditor over another, does the trustee have preference?
The trustee is allowed to recover payments made both voluntarily and involuntarily to one creditor in preference over another.
31-2e The Bankruptcy Trustee How should the trustee review for substantial abuse?
The trustee is required to promptly review all materials filed by the debtor to determine if there is substantial abuse. Within ten days after the first meeting of the creditors (discussed shortly), the trustee must file a statement indicating whether the case is presumed to be an abuse under the means test. The trustee must provide a copy of this statement to all creditors within five days.
31-2a Means Test How are living expenses calculated?
These are amounts allowed under formulas used by the Internal Revenue Service (IRS). The IRS allowances include modest allocations for food, clothing, housing, utilities, transportation (including a car payment), health care, and other necessities. (The U.S. Trustee Program's website also provides these amounts.) The allowances do not include expenditures for items such as cell phones and cable television service.
31-2e The Bankruptcy Trustee To enable the trustee to accomplish this duty, the Code gives trustee certain powers. How many years must the power be exercised?
These powers must be exercised within two years of the order for relief.
What's trustee's specific power of avoidance?
They enable the trustee to set aside (avoid) a sale or other transfer of the debtor's property and take the property back for the debtor's estate. These powers apply to voidable rights available to the debtor, preferences, and fraudulent transfers by the debtor. The debtor shares most of the trustee's avoidance powers. Thus, if the trustee does not take action to enforce one of the rights just mentioned, the debtor in a liquidation bankruptcy can enforce that right
How will a court decide to approve the reaffirmation?
When court approval is required, a separate hearing will take place. The court will approve the reaffirmation only if it finds that the agreement will not result in undue hardship to the debtor and that the reaffirmation is consistent with the debtor's best interests.
31-2e The Bankruptcy Trustee When there is a presumption of abuse, what must the trustee do? Is there is no abuse, what action must be taken? Does it have to be written?
When there is a presumption of abuse, the trustee must either file a motion to dismiss the petition (or convert it to a Chapter 13 petition) or file a statement explaining why a motion would not be appropriate. If the debtor owes a domestic-support obligation (such as child support), the trustee must provide written notice of the bankruptcy to the claim holder (a former spouse, for instance).
31-2c Automatic Stay If a creditor knowingly violates the automatic stay (a willful violation), any injured party,
including the debtor, is entitled to recover actual damages, costs, and attorneys' fees. Punitive damages may be awarded as well.
31-1d Liquidation Proceedings What is a petition in bankruptcy?
The document that is filed with a bankruptcy court to initiate bankruptcy proceedings.
31-2c The Adequate Protection Doctrine How can bankruptcy provide adequate protection by requiring the debtor or trustee to make
-periodic cash payments or a one-time cash payments -additional collateral or replacement liens to the extent that the stay may actually cause the value of the property to decrease.
31-2i Distribution of Property If the collateral becomes insufficient to cover the secured debt, the secured creditor
will becomes an unsecured creditor for the difference. The secured party normally has priority over unsecured parties as to the proceeds from the disposition of the collateral. Some limitations include certain unsecured creditors can sometimes step into the shoes of secured tax creditors in Chapter 7 liquidation proceedings. In such situations, when the collateral securing the tax claims is sold, the unsecured creditors are paid first. This exception does not include holders of unsecured claims for administrative expenses incurred in Chapter 11 cases that are converted to Chapter 7 liquidations.
What are some exceptions to discharge?
1. Claims for back taxes accruing within two years prior to bankruptcy. 2. Claims for amounts borrowed by the debtor to pay federal taxes or any nondischargeable taxes. 3. Claims against property or funds obtained by the debtor under false pretenses or by false representations. 4. Claims by creditors who were not notified of the bankruptcy. These claims did not appear on the schedules the debtor was required to file. 5. Claims based on fraud or misuse of funds by the debtor while acting in a fiduciary capacity or claims involving the debtor's embezzlement or larceny. 6. Domestic-support obligations and property settlements as provided for in a separation agreement or divorce decree. 7. Claims for amounts due on a retirement account loan. 8. Claims based on willful or malicious conduct by the debtor toward another or the property of another. 9. Certain government fines and penalties. 10. Student loans, unless payment of the loans imposes an undue hardship on the debtor and the debtor's dependents. (when paying the loan would leave the debtor unable to maintain a minimum standard of living, for instance). 11. Consumer debts of more than a specified amount ($725 in 2021) for luxury goods or services owed to a single creditor incurred within ninety days of the order for relief. 12. Cash advances totaling more than a threshold amount ($1,000 in 2021) that are extensions of open-end consumer credit obtained by the debtor within seventy days of the order for relief. 13. Judgments against a debtor as a result of the debtor's operation of a motor vehicle while intoxicated. 14. Fees or assessments arising from property in a homeowners' association, as long as the debtor retained an interest in the property. 15. Taxes with respect to which the debtor failed to provide required or requested tax documents.
31-3e The Reorganization Plan The plan must be fair and equitable and must do the following:
1. Designate classes of claims and interests. 2. Specify the treatment to be afforded to the classes of creditors. (The plan must provide the same treatment for all claims in a particular class.) 3. Provide an adequate means for the plan's execution. (Individual debtors are required to utilize postpetition assets as necessary to execute the plan.) 4. Provide for payment of tax claims over a five-year period.
31-2c The Adequate Protection Doctrine What are several exceptions to the automatic stay?
1. Domestic-support obligations, including any debt owed to or recoverable by a spouse, a former spouse, a child of the debtor, that child's parent or guardian, or a governmental unit. 2. Proceedings against the debtor related to divorce, child custody or visitation, domestic violence, and support enforcement. 3. Investigations by a securities regulatory agency (such as an investigation into insider trading). 4. Certain statutory liens for property taxes.
31-1d Liquidation Proceedings What happens in a liquidation proceedings?
A debtor in a liquidation bankruptcy turns all assets over to a bankruptcy trustee, a person appointed by the court to manage the debtor's funds. The trustee sells the nonexempt assets and distributes the proceeds to creditors. With certain exceptions, the debtor is then granted a discharge of the remaining debts and is no longer obligated to pay.
31-2a Tax Returns during Bankruptcy Who will request for tax returns during a bankruptcy?
A debtor may be required to file a tax return at the end of each tax year while the case is pending and to provide a copy to the court. This will be requested by U.S. trustee or any party in interest.
31-2a Means Test What is the basic formula to complete the means test?
A debtor wishing to file for bankruptcy must complete the means test to determine whether she or he qualifies for Chapter 7. The debtor's average monthly income in recent months is compared with the median income in the geographic area in which the person lives. If the debtor's income is below the median income, the debtor usually is allowed to file for Chapter 7 bankruptcy, as there is no presumption of bankruptcy abuse.
Can a discharge be revoked?
A discharge may be revoked within one year if it is discovered that the debtor acted fraudulently or dishonestly during the bankruptcy proceeding. If that occurs, a creditor whose claim was not satisfied in the distribution of the debtor's property can proceed with his or her claim against the debtor.
31-2a Tax Returns during Bankruptcy What is a U.S trustee?
A government official who performs administrative tasks that a bankruptcy judge would otherwise have to perform
31-3e The Reorganization Plan What is cram-down provisions?
A provision of the Bankruptcy Code that allows a court to confirm a debtor's Chapter 11 reorganization plan even though only one class of creditors has accepted it. Before the court can exercise the right of cram-down confirmation, it must be demonstrated that the plan does not discriminate unfairly against any creditors and is fair and equitable.
How can we make the reaffirmation agreement effective?
A reaffirmation agreement that is not accompanied by the original signed disclosures will not be effective.
31-3e The Reorganization Plan What is a reorganization plan?
A reorganization plan to rehabilitate the debtor is a plan to conserve and administer the debtor's assets in the hope of an eventual return to successful operation and solvency.
31-4a Individuals' Repayment Plans—Chapter 13 Who will make payments under the loan? Will the automatic stay take effect?
A trustee, who will make payments under the plan, must be appointed. On the filing of a repayment plan petition, the automatic stay previously discussed takes effect. Although the stay applies to all or part of the debtor's consumer debt, it does not apply to any business debt incurred by the debtor or to any domestic-support obligations.
31-2b Involuntarily Bankruptcy What is an involuntarily bankruptcy?
An involuntary bankruptcy occurs when the debtor's creditors force the debtor into bankruptcy proceedings. An involuntary case cannot be filed against a charitable institution or a farmer (an individual or business that receives more than 50 percent of gross income from farming operations).
31-3e The Reorganization Plan If the court accepts the plan, they must confirm it within
For small-business debtors, if the plan meets the listed requirements, the court must confirm the plan within forty-five days. In addition, even when all classes of creditors accept the plan, the court may refuse to confirm it if it is not "in the best interests of the creditors."
31-3d Creditors' Committees When will a committee not be needed?
Generally, no orders affecting the estate will be entered without the consent of the committee or after a hearing in which the judge is informed of the committee's position. As mentioned earlier, businesses with debts of less than a specified amount that do not own or manage real estate can avoid creditors' committees. In these fast-track proceedings, orders can be entered without a committee's consent.
31-4b The plan must be confirmed or denied within how many days?
Generally, the plan must be confirmed or denied within forty-five days of filing. The content of a plan under Chapter 12 is basically the same as that of a Chapter 13 repayment plan.
What is an insider?
An insider is an individual, partner, partnership, corporation, or officer or director of a corporation (or a relative of one of these) who has a close relationship with the debtor.
How many days is a confirmation hearing?
The hearing must be held at least twenty days, but no more than forty-five days, after the meeting of the creditors. The debtor must have filed all prepetition tax returns and paid all postpetition domestic-support obligations before a court will confirm any plan.
31-4a Individuals' Repayment Plans—Chapter 13 All debt will be discharged. Except for the:
1. Allowed claims not provided for by the plan. 2. Certain long-term debts provided for by the plan. 3. Certain tax claims and payments on retirement accounts. 4. Claims for domestic-support obligations. 5. Debts related to injury or property damage caused while driving under the influence of alcohol or drugs.
31-2b Involuntarily Bankruptcy What are the requirements?
1. If the debtor has twelve or more creditors, three or more of these creditors having unsecured claims totaling at least $16,750 must join in the petition. 2. If a debtor has fewer than twelve creditors, one or more creditors having a claim totaling $16,750 or more may file.
31-4a Individuals' Repayment Plans—Chapter 13 The court will confirm a plan with respect to each claim of a secured creditor under any of the following circumstances:
1. If the secured creditors have accepted the plan. 2. If the plan provides that secured creditors retain their liens until there is payment in full or until the debtor receives a discharge. 3. If the debtor surrenders the property securing the claims to the creditors. In addition, for a motor vehicle purchased within 910 days before the petition is filed, the plan must provide that a creditor with a purchase-money security interest (PMSI) retains its lien until the entire debt is paid. For PMSIs on other personal property, the payment plan must cover debts incurred within a one-year period preceding the filing.
31-2b Involuntarily Bankruptcy If the debtor challenges the involuntary petition, a hearing will be held, and the bankruptcy court will enter an order for relief if it finds either of the following:
1. The debtor is not paying debts as they come due. 2.A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of the debtor's property within 120 days before the filing of the petition.
What are some examples where a bankruptcy court may also deny discharge based on a debtor's conduct?
1. The debtor's concealment or destruction of property with the intent to hinder, delay, or defraud a creditor. 2. The debtor's fraudulent concealment or destruction of financial records. 3. The grant of a discharge to the debtor within eight years before the petition was filed. 4. The debtor's failure to complete the required consumer education course. 5. The debtor's involvement in proceedings in which the debtor could be found guilty of a felony. (Basically, a court may not discharge any debt until the completion of felony proceedings against the debtor.)
31-4a Individuals' Repayment Plans—Chapter 13 A plan for rehabilitation by repayment must provide for the following:
1. The turning over to the trustee of such future earnings or income of the debtor as is necessary for execution of the plan. 2. Full payment through deferred cash payments of all claims entitled to priority, such as taxes. 3. Identical treatment of all claims within a particular class. (The Code permits the debtor to list co-debtors, such as guarantors or sureties, as a separate class.)
31-1a Goals of Bankruptcy Law What are the two main goals of bankruptcy law in the US?
1. To protect a debtor by giving him or her a fresh start without creditors' claims. 2. To ensure equitable treatment of creditors who are competing for a debtor's assets.
31-2i Distribution of Property If the collateral is surrendered to the secured party, the secured party can either
1. accept it in full satisfaction of the debt or 2. sell it and use the proceeds to pay off the debt.
31-4b The plan must provide for payment of secured debts at the value of the collateral. If the secured debt exceeds the value of the collateral, then the remaining debt is unsecured. For unsecured debtors, the plan must be confirmed in either of the following circumstances:
1. the value of the property to be distributed under the plan equals the amount of the claim, or 2. the plan provides that all of the debtor's disposable income to be received in a three-year period (or longer, by court approval) will be applied to making payments. Completion of payments under the plan discharges all debts provided for by the plan.
A trustee may avoid fraudulent transfers or obligations if they
1. were made within two years prior to the filing of the petition or 2. were made with actual intent to hinder, delay, or defraud a creditor.
31-4a Individuals' Repayment Plans—Chapter 13 How is a chapter 13 petition filed?
A Chapter 13 repayment plan case can be initiated only by the debtor's filing of a voluntary petition or by court conversion of a Chapter 7 petition. Recall that a court may convert a Chapter 7 petition because of a finding of substantial abuse under the means test. In addition, certain liquidation and reorganization cases may be converted to repayment plan cases with the consent of the debtor.
31-2a Tax Returns during Bankruptcy What is the substantial abuse-means test?
A bankruptcy court can dismiss a Chapter 7 petition if the use of Chapter 7 constitutes a "substantial abuse" of bankruptcy law. The revised Code provides a means test to determine a debtor's eligibility for Chapter 7. The purpose of the test is to keep upper-income people from abusing the bankruptcy process by filing for Chapter 7, as was thought to have happened in the past. The test forces more people to file for Chapter 13 bankruptcy rather than have their debts discharged under Chapter 7.
31-2a Voluntary Bankruptcy What must a consumer-debtor who is filing for liquidation bankruptcy do?
A consumer-debtor who is filing for liquidation bankruptcy must confirm the accuracy of the petition's contents. The debtor must also state in the petition, at the time of filing, that he or she understands the relief available under other chapters of the Code and has chosen to proceed under Chapter 7.
At the time he filed for Chapter 7 bankruptcy, Terence Wolfe had not been consistently employed for twenty years. He had been fired from numerous positions for behavioral issues and had difficulty finding and holding a job. Wolfe had been diagnosed with personality disorders and ultimately was granted disability status by the U.S. government. He was living on disability payments of $1,126 per month at the time he filed for Chapter 7 bankruptcy. Among Wolfe's debts were more than $131,000 in student loan debts. Wolfe sought to have these debts discharged because repaying them would constitute undue hardship. Will the court grant his discharge?
According to the court, although Wolfe is intelligent, "he has been unable, for more than two decades, to maintain full-time employment for any meaningful length of time. He is living at a minimal standard of living and it is unlikely that he will ever be able to repay these loans.
31-4a Individuals' Repayment Plans—Chapter 13 Who is eligible?
Among those eligible are salaried employees and sole proprietors, as well as individuals who live on welfare, Social Security, fixed pensions, or investment income. Many small-business debtors have a choice of filing under either Chapter 11 or Chapter 13. Repayment plans offer some advantages because they are less expensive and less complicated than reorganization or liquidation proceedings.
31-1d Liquidation Proceedings Who may be a "person" in a liquidation proceeding?
Any "person"—defined as including individuals, partnerships, and corporations—may be a debtor in a liquidation proceeding. A husband and wife may file jointly for bankruptcy under a single petition.
31-2a Tax Returns during Bankruptcy What is a party in interest?
Any party in interest (a party, such as a creditor, who has a valid interest in the outcome of the proceedings) may make this request as well.
31-3d Creditors' Committees What are creditor's committees?
As soon as practicable after the entry of the order for relief, a creditors' committee of unsecured creditors is appointed. The business's suppliers may serve on the committee. The committee can consult with the trustee or the DIP concerning the administration of the case or the formulation of the plan. Additional creditors' committees may be appointed to represent special interest creditors.
31-2a Voluntary Bankruptcy What must attorneys representing consumer-debtors do?
Attorneys representing consumer-debtors must file an affidavit stating that they have informed the debtors of the relief available under each chapter of the Bankruptcy Code. In addition, the attorneys must reasonably attempt to verify the accuracy of the consumer-debtors' petitions and schedules (described next). Failure to do so is considered perjury.
What are distributions to unsecured creditors? Which class has the highest priority?
Bankruptcy law establishes an order of priority for debts owed to unsecured creditors, and they are paid in the order of their priority. Claims for domestic-support obligations, such as child support and alimony, have the highest priority among unsecured creditors, so these claims must be paid first.
31-1b Bankruptcy Courts Where are the bankruptcy courts held?
Bankruptcy proceedings are held in federal bankruptcy courts, which are under the authority of U.S. district courts. Rulings from bankruptcy courts can be appealed to the district courts.
What is the bankruptcy code?
Bankruptcy relief is provided under federal law. Although state laws may play a role in bankruptcy proceedings, particularly state property laws, the governing law is based on federal legislation. Article I, Section 8, of the U.S. Constitution gave Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States.
31-2a Voluntary Bankruptcy To bring a voluntarily petition in bankruptcy, what must the debtor file?
The law now requires that before debtors can file a petition, they must receive credit counseling from an approved nonprofit agency within the 180-day period preceding the date of filing. Debtors filing a Chapter 7 petition must include a certificate proving that they have received individual or group counseling from an approved agency within the last 180 days.
Case in Point 31.6 Anthony Mickletz owned a pizza restaurant that employed John Carmello. One night after Carmello had finished his shift, Mickletz called him back into the restaurant and accused him of stealing. An argument ensued, and Mickletz shoved Carmello, causing him to fall and injure his back. Because Mickletz did not provide workers' compensation coverage as required by law, the state prosecuted him criminally. He was ordered to pay more than $45,000 in restitution to Carmello for his injuries. Carmello also filed a civil suit against Mickletz, which the parties agreed to settle for $175,000. Later, Mickletz filed a petition for bankruptcy. Carmello argued that these debts were nondischargeable, what will the court decide?
Carmello argued that these debts were nondischargeable, and the court agreed. The exception from discharge includes any debts for willful (deliberate or intentional) injury, and Mickletz's actions were deliberate.
31-2d Estate in Bankruptcy What are the rules for property acquired prior to the filing of petition, and after filing of petition?
Certain after-acquired property to which the debtor becomes entitled within 180 days after filing may also become part of the estate. Such after-acquired property includes gifts, inheritances, property settlements (from divorce), and life insurance death proceeds. Generally, though, the filing of a bankruptcy petition fixes a dividing line. Property acquired prior to the filing of the petition becomes property of the estate, and property acquired after the filing of the petition, except as just noted, remains the debtor's.
31-1c Types of Bankruptcy Relief What does chapter 12 and chapter 13 contain?
Chapter 12 (for family farmers and family fishermen) and 13 (for individuals) provide for the adjustment of debts by persons with regular incomes.
31-4a Individuals' Repayment Plans—Chapter 13 What is chapter 13 individual repayment plans?
Chapter 13 of the Bankruptcy Code provides for "Adjustment of Debts of an Individual with Regular Income." Individuals with regular income who owe debts not exceeding specified amounts may take advantage of bankruptcy repayment plans. (The limit for fixed unsecured debts is about $420,000, and the limit for fixed secured debts is about $1.3 million.) Partnerships and corporations are excluded.
31-1c Types of Bankruptcy Relief What does chapter 7 of the code contain?
Chapter 7 provides for liquidation proceedings (the selling of all nonexempt assets and the distribution of the proceeds to the debtor's creditors).
31-1c Types of Bankruptcy Relief What does chapter 1, 3, and 5 of the code contain?
Chapters 1, 3, and 5 of the Code contain general definitional provisions, as well as provisions governing case administration, creditors, the debtor, and the estate.
31-3e The Reorganization Plan What is confirmation of the plan?
Confirmation is conditioned on the debtor's certifying that all postpetition domestic-support obligations have been paid in full.
31-4b Family Farmers and Fishermen—Chapter 12 Who does chapter 12 protects?
Congress created Chapter 12 of the Bankruptcy Code to help relieve economic pressure on small farmers. In 2005, Congress extended this protection to family fishermen, modified its provisions somewhat, and made it a permanent chapter in the Bankruptcy Code.
31-3 Reorganizations What are the fast-tracks for reorganizations?
Congress has established a "fast-track" Chapter 11 procedure for small-business debtors whose liabilities do not exceed a specified amount (about $2.7 million) and who do not own or manage real estate. The fast track enables a debtor to avoid the appointment of a creditors' committee and also shortens the filing periods and relaxes certain other requirements. Because the process is shorter and simpler, it is less costly.
31-2b Involuntarily Bankruptcy If the petition was filed in bad faith?
Damages can be awarded for injury to the debtor's reputation. Punitive damages may also be awarded.
What is disposable income?
Disposable income is all income received less amounts needed to support the farmer or fisherman and his or her family and to continue the farming or commercial fishing operation.
31-2a Means Test How will disposable income calculated?
Disposable income is then calculated by subtracting living expenses and secured debt payments, such as mortgage payments, from monthly income.
31-2a Additional Grounds for Dismissal When might a court dismiss a debtor's voluntary petition for chapter 7 relief?
Examples include substantial abuse or for failure to provide the necessary documents within the specified time. If the debtor has been convicted of a violent crime or a drug-trafficking offense, the victim can file a motion to dismiss the voluntary petition. Also, if the debtor fails to pay postpetition domestic-support obligations (which include child and spousal support), the court may dismiss the debtor's petition.
When can a trustee not make a recoverable preferential payment?
If a preferred creditor (one who has received a preferential transfer) has sold the property to an innocent third party, the trustee cannot recover the property from the innocent party. The preferred creditor, however, generally can be held liable for the value of the property.
31-3e The Reorganization Plan What is the filing plan for small businesses?
If a small-business debtor chooses to avoid a creditors' committee, the time for the debtor's filing is 180 days.
31-4a Individuals' Repayment Plans—Chapter 13 What happens if the debtor fail to make timely payments?
If the debtor fails to make timely payments or to commence payments within the thirty-day period, the court can convert the case to a Chapter 7 bankruptcy or dismiss the petition.
If the debtor had two or more bankruptcy petitions dismissed during the prior year, will the automatic stay go into effect?
If the debtor had two or more bankruptcy petitions dismissed during the prior year, the Code presumes bad faith. In such a situation, the automatic stay does not go into effect until the court determines that the petition was filed in good faith.
31-2a Means Test If the debtor's income is above the median income, are there further calculations?
If the debtor's income is above the median income, then further calculations must be made to determine the debtor's future disposable income. As a basis for the calculations, it is presumed that the debtor's recent monthly income will continue for the next sixty months.
Distribution to Unsecured Creditors If there are insufficient proceeds to fully pay all the creditors in a class, how are the proceeds distributed?
If there are insufficient proceeds to fully pay all the creditors in a class, the proceeds are distributed proportionately to the creditors in that class. Classes lower in priority receive nothing.
31-3c Debtor in Possession What is a debtor in possession?
In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations.
31-2c The Adequate Protection Doctrine What is the adequate protection doctrine?
In bankruptcy law, a doctrine that protects secured creditors from losing their security as a result of an automatic stay. In certain circumstances, the bankruptcy court may provide adequate protection by requiring the debtor or trustee to pay the creditor or provide additional guaranties to protect the creditor against the losses suffered by the creditor as a result of the stay.
31-2c Automatic Stay (Voluntarily and Involuntary) What is an automatic stay?
In bankruptcy proceedings, the suspension of almost all litigation and other action by creditors against the debtor or the debtor's property. The stay is effective the moment the debtor files a petition in bankruptcy. The automatic stay prohibits creditors from taking any act to collect, assess, or recover a claim against the debtor that arose before the filing of the petition.
31-4a Individuals' Repayment Plans—Chapter 13 What are allowable expenses?
In putting together a repayment plan, a debtor must apply the means test to identify the amount of disposable income that will be available to repay creditors. The debtor is allowed to deduct certain expenses from monthly income to arrive at this amount, but only if they are appropriate.
31-3a Workouts What are workouts?
In some instances, to avoid bankruptcy proceedings, creditors may prefer private, negotiated adjustments of creditor-debtor relations.
Example 31.9 Five years ago, APT Corporation leased an office building for a twenty-year term. Now, APT can no longer pay the rent due under the lease and has filed for Chapter 11 reorganization.
In this situation, the debtor in possession can cancel the lease, and APT will not be required to continue paying the substantial rent due for fifteen more years. Cancellation of executory contracts or unexpired leases can be of substantial benefit to a Chapter 11 debtor.
What are state exemptions in regards to the property?
Individual states have the power to pass legislation precluding debtors from using the federal exemptions within the state. A majority of the states have done this. In those states, debtors may use only state, not federal, exemptions. In the rest of the states, debtors may choose either the exemptions provided under state law or the federal exemptions.
What is a confirmation hearing?
Interested parties (such as creditors) may object to the plan
Who is a family fisherman?
It is someone whose gross income is at least 50 percent dependent on commercial fishing operations and whose debts are at least 80 percent related to commercial fishing. The total debt for a family fisherman must not exceed a certain amount (about $2 million in 2021). As with family farmers, a partnership or close corporation can also qualify.
31-4b Family Farmers and Fishermen—Chapter 12 Who is a family farmer?
It is someone whose gross income is at least 50 percent farm dependent and whose debts are at least 50 percent farm related. A partnership or close corporation that is at least 50 percent owned by the farm family can also qualify as a family farmer
31-2c Automatic Stay (Case in Point 31.2) Stefanie Kuehn filed for bankruptcy. When she requested a transcript from the university at which she had obtained her master's degree, the university refused because she owed more than $6,000 in tuition. Is this a violation of the automatic stay?
Kuehn complained to the bankruptcy court, which ruled that the university had violated the automatic stay by refusing to provide a transcript in an attempt to collect an unpaid tuition debt. The decision was affirmed on appeal.
31-1c Types of Bankruptcy Relief Does a debtor have to be insolvent to file for Bankruptcy relief under the Bankruptcy code?
No, anyone obligated to a creditor can declare bankruptcy.
What are transfers that do not constitute preferences?
Not all transfers are preferences. Most courts generally assume that payment for services rendered within fifteen days before the payment is not a preference. In addition, if a creditor receives payment in the ordinary course of business from a debtor, such as payment of last month's cell phone bill, the bankruptcy trustee cannot recover the payment.
31-3a Workouts What are the pros of workouts?
Often, these out-of-court workouts are much more flexible and thus more conducive to a speedy settlement. Speed is critical because delay is one of the most costly elements in any bankruptcy proceeding. Another advantage of workouts is that they avoid the various administrative costs of bankruptcy proceedings.
31-3e The Reorganization Plan What is the acceptance of the plan?
Once the plan has been developed, it is submitted to each class of creditors for acceptance. For the plan to be adopted, each class must accept it. A class has accepted the plan when a majority of the creditors in the class, representing two-thirds of the amount of the total claim, vote to approve it. If the debtor fails to procure creditor consent of the plan within 180 days, any party may propose a plan.
31-1d Special Requirements for Consumer-Debtors What is a consumer-debtor?
One whose debts result primarily from the purchase of goods for personal, family, or household use.
31-3e The Reorganization Plan What is the filing of the plan?
Only the debtor may file a plan within the first 120 days after the date of the order for relief. This period may be extended, but not beyond eighteen months from the date of the order for relief. If the debtor does not meet the 120-day deadline or obtain an extension, any party may propose a plan.
What property are not exempt under federal law?
Property that is not exempt under federal law includes bank accounts, cash, family heirlooms, collections of stamps and coins, second cars, and vacation homes.
31-1d Liquidation Proceedings Who may NOT be a "person" in a liquidation proceeding?
Railroads, insurance companies, banks, savings and loan associations, investment companies licensed by the Small Business Administration, and credit unions cannot be debtors in a liquidation bankruptcy.
31-4a Individuals' Repayment Plans—Chapter 13 What is the good faith requirements?
The Bankruptcy Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition and the time of the filing of the plan. The Code does not define good faith, but if the circumstances on the whole indicate bad faith, a court can dismiss a debtor's Chapter 13 petition.
What are the limitations on the homestead exemption?
The Bankruptcy Code limits the amount of equity that can be claimed under the homestead exemption. In general, if the debtor acquired the homestead within three and a half years preceding the date of filing, the maximum equity exempted is $170,350, even if state law would permit a higher amount. In addition, the state homestead exemption is available only if the debtor has lived in a state for two years before filing the bankruptcy petition. Furthermore, a debtor who has violated securities laws, been convicted of a felony, or engaged in certain other intentional misconduct may not be permitted to claim the homestead exemption.
31-3b Best Interests of the Creditors Once a Chapter 11 petition has been filed, a bankruptcy court can dismiss or suspend proceedings at any time if dismissal or suspension would better serve the interests of the creditors. Give two examples of this.
The Code also allows a court, after notice and a hearing, to dismiss a case under reorganization "for cause" when there is no reasonable likelihood of rehabilitation. Similarly, a court can dismiss when there is an inability to effect a plan or an unreasonable delay by the debtor that may harm the interests of creditors. Before taking such an action, the court must give notice and conduct a hearing.
31-2i Distribution of Property What is distribution to secured creditors?
The Code requires that consumer-debtors file a statement of intention with respect to secured collateral. They can choose to pay off the debt and redeem the collateral, claim it is exempt, reaffirm the debt and continue making payments, or surrender the property to the secured party.
31-3c Debtor in Possession What is the DIP's role?
The DIP's role is similar to that of a trustee in a liquidation bankruptcy. The DIP is entitled to avoid preferential payments made to creditors and fraudulent transfers of assets. The DIP can also exercise a trustee's strong-arm powers. The DIP has the power to decide whether to cancel or assume prepetition executory contracts (contracts that are not yet performed) or unexpired leases.
Case in Point 31.10 Jason Ransom filed a Chapter 13 bankruptcy petition. Among his assets, he listed a Toyota Camry that he owned free of any debt. In his monthly expenses, he claimed a car-ownership deduction of $471 and a separate $388 deduction for costs to operate the car. He proposed a five-year plan that would repay about 25 percent of his unsecured debt. FIA Card Services, N.A., an unsecured creditor, objected to the plan. FIA argued that Ransom was not entitled to the car-ownership allowance because he did not owe money on the car. The court will rule in whose favor?
The United States Supreme Court ruled in FIA's favor. A deduction is appropriate only if the debtor will incur that expense during the life of the Chapter 13 plan. A debtor who does not make loan or lease payments may not take a car-ownership deduction.
If the debtor filed a bankruptcy petition that was dismissed within the prior year, when will the automatic stay on the secured debts be terminated?
The automatic stay on secured debts will terminate thirty days after the petition is filed. Any party in interest can request that the court extend the stay by showing that the filing is in good faith.
When does the automatic stay on secured property terminates after the creditors' meeting unless the debtor redeems or reaffirm certain debts?
The automatic stay on secured property terminates forty-five days after the creditors' meeting unless the debtor redeems or reaffirms certain debts. (Creditors' meetings and reaffirmation will be discussed later in this chapter.) In other words, the debtor cannot keep the secured property (such as a financed automobile), even if she or he continues to make payments on it, without reinstating the rights of the secured party to collect on the debt.
Case in Point 31.5 David Dearmond owned interests in several companies, including Briartowne, LLC, Hillside, LLC, and Bluffs of Sevier County, LLC. When Briartowne defaulted on a $623,499 promissory note, SmartBank filed an action against Briartowne, Dearmond, and others. Five months later, Dearmond sold a property to his fiancée, Patricia Harper, for $90,000, after having recently bought it for $400,000. Two days after that, Dearmond created two irrevocable trust agreements and transferred all of his interest in Hillside and Bluffs of Sevier County to those trusts. The trusts named Harper as the primary beneficiary. Although SmartBank obtained a judgment against Dearmond (and the other owners of Briartowne), it was unable to collect from these assets. A year and a half later, Dearmond filed a petition for bankruptcy. The trustee filed a motion seeking to avoid the fraudulent transfers made to benefit Harper. What did the court decide?
The court concluded that the transfers should be set aside because they were made with actual intent to hinder, delay, or defraud a creditor. The court entered a judgment for the trustee in an amount equivalent to the value of the fraudulent transfers.
Case in Point 31.11 An order granting discharge is final as to the debts listed in the repayment plan. Francisco Espinosa filed a petition for an individual repayment plan under Chapter 13 of the Bankruptcy Code. His plan proposed to pay only the principal on his student loan and to discharge the interest. United Student Aid Funds, Inc. (the creditor), had notice of the plan and did not object. The court confirmed the plan without finding that payment of the student loan interest would cause undue hardship (as required under the Code). Years later, United filed a motion asking the bankruptcy court to rule that its order confirming the plan was void because it was in violation of the rules governing bankruptcy. What did the court do?
The court denied United's petition and ordered the creditor to cease its collection efforts. The case ultimately reached the United States Supreme Court, which affirmed the lower court's holding that the student loan debt was discharged.
Case in Point 31.4 David Tidd operated a business performing small home repairs as well as house-building projects. Tidd and his son regularly purchased supplies for the business on credit from S. W. Collins. Eventually, Tidd filed for Chapter 7 bankruptcy. Within ninety days preceding his filing, Tidd had made four payments for materials to S. W. Collins, totaling $46,000. The trustee filed a motion seeking to avoid this transfer as a preference. How will the court decide?
The court, however, concluded that the transfer was a substantially contemporaneous exchange of value (current consideration) and not a preference. The payments were made in the ordinary course of business. Therefore, the court found in Tidd's favor and denied the trustee's motion.
31-3c Debtor in Possession When will the court appoint a trustee to operate the debtor's business?
The court, however, may appoint a trustee (often referred to as a receiver) to operate the debtor's business. The court will choose this action if gross mismanagement of the business is shown or if appointing a trustee is in the best interests of the estate.
31-4a Individuals' Repayment Plans—Chapter 13 How long should the plan be?
The length of the payment plan can be three or five years, depending on the debtor's family income. If the family income is greater than the median family income in the relevant geographic area under the means test, the term of the proposed plan must be three years. The term may not exceed five years.
Should the original disclosure documents be signed?
The original disclosure documents must be signed by the debtor, certified by the debtor's attorney, and filed with the bankruptcy court at the same time as the reaffirmation agreement.
31-2b Involuntarily Bankruptcy An involuntary petition should not be used as an everyday debt-collection device, and the Code provides penalties for the filing of frivolous petitions against debtors. If the court dismisses an involuntarily petition, the petitioning creditors may be required to
The petitioning creditors may be required to pay the costs and attorneys' fees incurred by the debtor in defending against the petition.
31-3e The Reorganization Plan Who can modify the plan?
The plan can be modified on the request of the debtor, the DIP, the trustee, the U.S. trustee, or a holder of an unsecured claim. If an unsecured creditor objects to the plan, specific rules apply to the value of property to be distributed under the plan. Tax claims must be paid over a five-year period.
31-3e Discharge The plan is binding on confirmation. Does it discharge an individual debtor? How is it different than other debtors?
The plan is binding on confirmation. Nevertheless, the law provides that confirmation of a plan does not discharge an individual debtor. For individual debtors, the plan must be completed before discharge will be granted, unless the court orders otherwise. For all other debtors, the court may order discharge at any time after the plan is confirmed. On discharge, the debtor is given a reorganization discharge from all claims not protected under the plan. This discharge does not apply to any claims that would be denied discharge under liquidation.
31-3e The Reorganization Plan Does the plan need to provide for full repayment to unsecured creditors?
The plan need not provide for full repayment to unsecured creditors. Instead, creditors receive a percentage of each dollar owed to them by the debtor.
31-2j Discharge What is discharge?
The primary purpose of liquidation is to obtain a fresh start through a discharge of debts. A discharge voids, or sets aside, any judgment on a discharged debt and prevents any action to collect it.
31-4b Filing the Petition How many days must the debtor file the plan?
The procedure for filing a family-farmer or family-fisherman bankruptcy plan is similar to the procedure for filing a repayment plan under Chapter 13. The debtor must file a plan not later than ninety days after the order for relief has been entered. The filing of the petition acts as an automatic stay against creditors' and co-obligors' actions against the estate. A farmer or fisherman who has already filed a reorganization or repayment plan may convert it to a Chapter 12 plan. The debtor may also convert a Chapter 12 plan to a liquidation plan.
What must the reaffirmation agreement disclose?
The reaffirmation agreement must disclose the amount of the debt reaffirmed, the rate of interest, the date payments begin, and the right to rescind.
31-4a Individuals' Repayment Plans—Chapter 13 When must be debtor begin to make payments?
The repayment plan may provide either for payment of all obligations in full or for payment of a lesser amount. T he debtor must begin making payments under the proposed plan within thirty days after the plan has been filed and must continue to make "timely" payments
31-2a Order of Relief Once a consumer-debtor's voluntary petition has been filed, when must the trustee and creditors be given notice of the order for relief by mail?
The trustee and creditors must be given notice of the order for relief by mail not more than twenty days after entry of the order.
Example 31.3 Ben sells his boat to Tara. Tara gives Ben a check, knowing that she has insufficient funds in her bank account to cover the check. Tara has committed fraud. Ben has the right to avoid that transfer and recover the boat from Tara. If Ben files for bankruptcy relief under Chapter 7, will the trustee have the same rights?
The trustee can exercise the same right to recover the boat from Tara, and the boat becomes a part of the debtor's estate. A trustee steps into the shoes of the debtor. Thus, any reason that a debtor can use to obtain the return of her or his property can be used by the trustee as well. These grounds include fraud, duress, incapacity, and mutual mistake.
31-2f Exemptions What are exemptions?
The trustee takes control of the debtor's property in a Chapter 7 bankruptcy, but an individual debtor is entitled to exempt (exclude) certain property from the bankruptcy.
31-3 Reorganizations What are reorganizations?
The type of bankruptcy proceeding most commonly used by corporate debtors is the Chapter 11. In a reorganization, the creditors and the debtor formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder. The debtor is allowed to continue in business.
What are the procedures for reaffirmation agreements?
To be enforceable, reaffirmation agreements must be made before the debtor is granted a discharge. The agreement must be signed and filed with the court.
31-2h Creditors' Claims What is the creditor's claims?
To be entitled to receive a portion of the debtor's estate, each creditor normally files a proof of claim with the bankruptcy court within ninety days of the creditors' meeting. A proof of claim is necessary if there is any dispute concerning the claim. The proof of claim lists the creditor's name and address, as well as the amount that the creditor asserts is owed to the creditor by the debtor. When the debtor has no assets—called a "no-asset case"—creditors are notified of the debtor's petition for bankruptcy but are instructed not to file a claim. In no-asset cases, the unsecured creditors will receive no payment, and most, if not all, of these debts will be discharged.
What are required disclosures?
To discourage creditors from engaging in abusive reaffirmation practices, the law provides specific language for disclosures that must be given to debtors entering into reaffirmation agreements. Among other things, these disclosures explain that the debtor is not required to reaffirm any debt. They also inform the debtor that liens on secured property, such as mortgages and cars, will remain in effect even if the debt is not reaffirmed.
How do a trustee make a recoverable preferential payment?
To have made a recoverable preferential payment, an insolvent debtor must have transferred property, for a preexisting debt, within ninety days before the filing of the bankruptcy petition. The transfer must have given the creditor more than the creditor would have received as a result of the bankruptcy proceedings. The Code presumes that a debtor is insolvent during the ninety-day period before filing a petition.
Case in Point 31.8 The owner of a seafood import business, Howard Lapides, signed a secured promissory note for $400,000 with Venture Bank for a revolving line-of-credit loan. Part of the collateral for that loan was a third mortgage on the Lapideses' home (two other banks held prior mortgages). Eventually, Howard and his wife filed for Chapter 7 bankruptcy protection, and their personal debts were discharged. Afterward, Venture Bank convinced the Lapideses to sign a reaffirmation agreement by telling them that it would refinance all three mortgages so that they could keep their house. The Lapideses made twelve $3,500 payments to Venture Bank, but when the bank did not refinance the other mortgages, they stopped making payments. Will the reaffirmation agreement be approved by the court?
Venture Bank filed a suit, but a court refused to enforce the reaffirmation agreement because it violated the Bankruptcy Code. The agreement had never been signed by the Lapideses' attorney or filed with the bankruptcy court.
31-2a Chapter 7 Schedules When must the official forms be completed accurately, sworn to under oath, and signed by the debtor?
With the exception of tax returns, failure to file the required schedules within forty-five days after the filing of the petition will result in an automatic dismissal of the petition. (An extension may be granted, however.) The debtor has up to seven days before the date of the first creditors' meeting to provide a copy of the most recent tax returns to the trustee. To conceal assets or knowingly supply false information on these schedules is a crime under the bankruptcy laws.
31-2g Creditors' Meeting What is the creditor's meeting?
Within a reasonable time after the order for relief has been granted (not more than forty days), the trustee must call a meeting of the creditors listed in the schedules filed by the debtor. The bankruptcy judge does not attend this meeting. The debtor is required to attend (unless excused by the court) and to submit to examination under oath by the creditors and the trustee. At the meeting, the trustee ensures that the debtor is aware of the potential consequences of bankruptcy and of the possibility of filing under a different chapter of the Code.
Transfers made for less than reasonably equivalent consideration are also vulnerable if the debtor thereby became insolvent or was left engaged in business with an unreasonably small amount of capital. When a fraudulent transfer is made outside the Code's two-year limit, creditors may
seek alternative relief under state laws. Some state laws may allow creditors to recover transfers made up to three years before the filing of a petition.