Bankruptcy

Repayment of Secured claims (excluding home mortgages)?

"Cram down" is not a term found in the Bankruptcy Code. Nevertheless, it often refers to a Chapter 13 bankruptcy plan provision that modifies the payment of a secured claim, which is usually objected to by the holder of that claim. In the case of nonconsensual modification, the court must apply section 1325(a)(5)(B) to determine the amount of compensation that a claim holder has a right to receive so that the present value of payments equals the holder's allowed secured claim. That amount would include valuing the risk of any delay in payment and loss of the use of funds. Most home mortgages are exempt from nonconsensual modification or cram down under section 1322(b)(2). However, a Chapter 13 plan may allow for cure of a default on a home mortgage "within a reasonable time."

Types of Relief for debtors?

(i) liquidation and (ii) reorganization or rehabilitation. a. Chapter 7 Chapter 7 (Liquidation) is the most common type of bankruptcy relief sought. Businesses and individuals seek relief under Chapter 7, which involves the potential liquidation or sale of the debtor's assets by a trustee to pay the claims of the debtor's creditors in accordance with the provisions of the Bankruptcy Code. b. Chapter 11 Chapter 11 (Reorganization or Rehabilitation) is the type of bankruptcy relief sought mostly by business organizations, such as corporations and partnerships, but sometimes by individuals. This type of bankruptcy relief typically permits debtors to retain their assets to generate earnings that are used to fund a plan of reorganization to pay their creditors. The creditors' debts are usually extended, reduced, or otherwise adjusted in the plan thereby allowing the debtors to avoid liquidation and the closure of their business. c. Chapter 13 Chapter 13 (Reorganization for Individuals) is the type of bankruptcy relief sought by individuals with regular income to retain their assets (and thereby avoiding liquidation) while generating earnings that are used to fund a plan to pay their creditors.

Trustee may avoid any transfer of property of the debtor if the trustee can establish...?

(i) the pre-bankruptcy transfer was to or for the benefit of a creditor; (ii) the transfer was made on account of an antecedent debt; (iii) the debtor was insolvent at the time of the transfer; (iv) the transfer was made within 90 days of the filing of the bankruptcy petition; and (v) the transfer has the effect of increasing the amount that a transferee would receive in a Chapter 7 case Exception: Transfer is intended as contemporaneous exchange for new value

Types of Actions for Bankruptcy Trustee?

1. Chapter 7 A trustee is appointed in every Chapter 7 case. The trustee's duties under section 704 may include the following: i) Collecting the property of the estate; ii) Contesting certain pre-bankruptcy and post-bankruptcy transfers of property of the debtor or of the estate; iii) Selling the property of the estate; iv) Objecting to improper creditor's claims; and v) If appropriate under section 704, objecting to the debtor's discharge. 2. Chapter 13 A Chapter 13 trustee handles all Chapter 13 cases in the judicial district and is known as the "standing trustee." Section 1302(b) outlines the Chapter 13 trustee's duties, which are similar to the duties of a Chapter 7 trustee. The major difference is that a Chapter 13 trustee does not collect and liquidate the debtor's property. Instead, the Chapter 13 trustee serves as the agent who collects the funds remitted by the debtor under the plan of repayment and disburses those funds to the creditors after the court has confirmed or approved the plan. 3. Chapter 11 A Chapter 11 case typically involves a business that continues operating after the petition is filed. A trustee is not usually appointed in Chapter 11 cases, and the debtor remains in control of the business as the DIP. A bankruptcy judge does not appoint a Chapter 11 trustee unless the court decides, after notice and a hearing, that there is "cause" or the appointment "is in the interests of the creditors, any equity security holders, and other interests of the estate." If a trustee is appointed, then the trustee will take over control of the business operations.

Chapter 7 Cases Process?

1. Debtor The debtor must be a "person," which includes individuals, sole proprietors, partnerships, and corporations. Excluded from this definition are railroads, insurance companies, and banking institutions. 2. Dismissal or Conversion In a consumer case, the court may dismiss or convert a Chapter 7 case to a Chapter 11 or 13 case on the grounds of abuse. 3. Property Distributed to Creditors The trustee is obligated to liquidate or sell the property of the estate under section 704(a)(1). 4. Order of Distribution Section 726 provides rules for distribution of proceeds to holders of claims. Proceeds must be distributed to claims entitled to priority in the order listed in section 507. 5. Priorities Under Section 507 Certain claims entitled to priority must be paid before other classes of claims. Section 507(a) lists ten such classes of claims in order of priority as follows: i) Domestic support obligations; ii) Administrative expenses; iii) Involuntary gap claims (post-petition operating expenses in an involuntary case); iv) Wages (earned within 180 days prior to filing; only $11,725 of the claim is given a priority); v) Contributions to employee benefit plans; vi) Claims against operators of grain or fish storage facilities; vii) Consumer deposits (pre-payments; only $2,600 of the total claim is given a priority); viii) Tax claims; ix) Capital requirements of insured depository institution; and x) Personal injury claims resulting from intoxicated vehicle operation. [Discharge]

Conversion or Dismissal of a Case?

1. Debtor's Right A debtor may convert a case to Chapter 7 at any time provided the debtor satisfies the Chapter 7 requirements. If the case has not been converted from Chapter 7, 11, or 12, then the debtor may dismiss the case. 2. Conversion to Chapter 7 or Dismissal for "Cause" Upon the request of any party in interest or the trustee, the court may convert a case to Chapter 7 or dismiss the case for cause. Examples of cause include nonpayment of fees in connection with the case and the failure of the debtor to make timely payments under the plan of repayment. 3. Conversion to Chapter 11 or 12 At any time prior to confirmation of the plan of repayment, the court may, on the request of any party in interest or the trustee, convert the case to a Chapter 11 or 12 case.

Statute of Limitations?

1. Two Years for Foreclosures The statute of limitations for foreclosures is two years. The statute of limitations applies to deficiency judgments. Deficiency judgments are obtained by creditors when a foreclosed property is sold for less than the balance of the debt. Deficiency judgments are limited to the difference between the fair market value of the property and the defaulted loan amount at the time of the sale. 2. Statute of Limitations Tolls When a Bankruptcy Is Filed When a creditor files for bankruptcy, the statute of limitations for foreclosures tolls until either the bankruptcy is dismissed or the creditor is granted bankruptcy.

Chapter 13 Cases Process?

An individual debtor with a regular source of income: i) Proposes a plan of repayment; ii) Obtains court approval or confirmation of the plan; and iii) Remits payments over a period time of between three to five years. 3. Plan Requirements a. Best interest test The unsecured creditors must receive as much as they would have otherwise received had the case been filed under Chapter 7. This is commonly referred to as the "best interest test" under section 1325(a)(4). b. Best efforts test The debtor must also pay all projected disposable income to creditors under a three- to five-year commitment period. This is commonly referred to as the "best efforts test" under section 1325(b). Disposable income is basically calculated subtracting living expenses from current monthly income, much like under the means test. c. Payment amount: floor These tests are used to establish the "floor," or minimum, payment to be remitted by the debtor under the plan. Although there is no requirement that priority claims be paid first, the priority claims must be paid in full over the life of the plan. Under section 1322(b)(1), a plan can divide unsecured creditors into more than one class and treat the various classes differently so long as the plan does not "unfairly discriminate" against them. As long as the best interests test of section 1325(a)(4) is satisfied, the plan is likely to be confirmed. A Chapter 13 case is terminated either when: i) The debtor receives a discharge; ii) The case is dismissed; or iii) The case is converted to a Chapter 7 case.

Commencing an Involuntary Bankruptcy Case?

An involuntary case can be initiated by the filing of a petition by a creditor or creditors against the debtor under Chapters 7 and 11. § 303(a). If the debtor has 12 or more creditors with non-contingent claims, then three or more such creditors with claims aggregating at least $14,425 must join in the petition. If there are fewer than 12 creditors, then any one with the same claim amount may file alone. The debtor has a right to answer (i.e., oppose) the petition. However, if the debtor does not answer, then the court may liquidate the estate. An involuntary liquidation may be filed if the debtor is "generally" not paying debts as they become due. Case law provides that the debtor must regularly miss a significant number of payments to creditors or regularly miss payments substantial in size when compared to the size of the debtor's operation.

Who is entitled to a discharge??

In Chapter 7 cases, corporations and other business entities (other than a sole proprietorship) cannot receive a discharge, but individuals can. Furthermore, Chapter 7 provides 11 separate grounds for denying an individual a discharge when the debtor has engaged in some form of pre-petition or post-petition misconduct. In Chapter 11 cases, section 1141(d) generally discharges the debtor upon approval (i.e., confirmation) of the plan. Actual payment to the creditors is not required for corporations and other business entities (other than a sole proprietor) to obtain a discharge. However, completed payments under the plan is required for individuals (including those who operate a business as sole proprietors) to receive a discharge. In Chapter 13 cases, individual debtors receive a discharge under section 1328 after the plan is confirmed, all payments are made under the plan (except in a hardship situation), and the debtor completes a course on personal financial management.

Exemptions to Property of the Estate?

Only individual debtors may retain exempt property under the Bankruptcy Code. Any such property exempted by these provisions is not available to satisfy the claims of the debtor's creditors. Section 522(d) sets forth the federal exemptions, which include small amounts of jewelry, a vehicle under $2,400, and a residence under $15,000. However, Texas has adopted its own exemptions, and debtors filing for bankruptcy in Texas may choose between federal and state exemptions. A debtor cannot elect to use some federal and some state exemptions; he must choose federal or state exemptions in their entirety. 1) Texas homestead exemption The Texas homestead exemption allows a person to exempt his home without limitation to value. However, a valid security interest in the property may overcome this right to exemption. 2) Texas exemptions for personal property In Texas, certain personal property is exempt from bankruptcy; however, like the homestead, a valid security interest may overcome the exemption. 3. Claims Effect of bankruptcy on lien holders (secured claims) Section 362, the automatic stay provision, has the following effects on secured claims: i) Delays enforcement of the lien; ii) Permits the debtor to continue to use the collateral; iii) Bars creditors from earning interest after the petition is filed except for over-secured creditors; iv) Permits the court to approve a post-petition lien on encumbered property, which will have priority over all pre-petition liens under Section 364(d); v) Bars the enforcement of after-acquired property clauses in security agreements (with a minor exception) under section 552(a); vi) Requires the holder of a secured claim to return any collateral taken prior to the filing of the petition under section 542(a); vii) Does not affect collateral due to a discharge; viii) Extinguishes the claim if the holder satisfies the claim with the collateral; and ix) If no valid tax lien is filed prior to bankruptcy, then the tax claim is unsecured.

Foreclosure Requirements??

Section 51.002 of the Texas Property Code lists the notice and posting requirements in order for a creditor to commence a foreclosure sale. i) Before proceeding with a foreclosure, the creditor must mail the debtor a letter of demand, informing the debtor that he has 20 days to become current on the loan, otherwise the creditor will begin the foreclosure process. ii) The sale must take place on the first Tuesday of the month between 10:00 a.m. and 4:00 p.m. at the county courthouse. iii) Notice must be given at least 21 days before the sale by posting notice on the courthouse door, filing with the county clerk, and written notice by certified mail to each debtor. Notice by certified mail is complete when mailed.

What is included in property of the estate?

Section 541(a)(1) provides that property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." This broad statutory provision includes real and personal property, whether tangible or intangible (such as an interest in a cause of action or lawsuit), and whether the property is in the debtor's possession or is being held by a third-party. Sections 301, 302, and 303 define "commencement of the case" as the filing of the bankruptcy petition. Accordingly, property acquired after the filing of the petition is generally not included in the property of the estate. However, certain property acquired after the commencement of the case does become property of the estate, including an interest in property acquired within 180 days after the filing by bequest, devise, inheritance, property settlement under a divorce decree, or as a beneficiary under a life insurance policy.

Can debtor seek relief under Chapter 7 or whether the debtor must seek relief under Chapters 11 or 13 because the debtor has the "means" to make meaningful payments to creditors.?

Section 707(b) allows dismissal of a petition filed by an individual with primarily consumer debts under Chapter 7 for "abuse." Abuse may be found under the means test or when there is bad faith filing, or based upon the totality of the circumstances of the debtor's financial situation. The means test is applied if the debtor's monthly income is more than the state median. Under the means test, the court presumes abuse exists if the debtor's current monthly income reduced by debts and expenses, multiplied by 60 is not less than the lesser of (i) 25% of the debtor's non-priority unsecured claims, or $7,025, whichever is greater; or (ii) $11,725. If the presumption of abuse does not arise or is not rebutted by special circumstances, then abuse may still be demonstrated by bad faith or by examining the totality of the circumstances

Avoidance Generally?

State fraudulent conveyance laws that invalidate transfers of property in non-bankruptcy situations are incorporated in section 544(b) of the Bankruptcy Code to invalidate the same transfers in bankruptcy. Chapter 5 avoidance provisions also invalidate certain payments, sales, exchanges, judicial liens, security interests, and other transfers valid under state law. The avoidance provisions apply to voluntary transfers, such as a gift, and involuntary transfers, such as a wage garnishment.

Pre-Bankruptcy Transfers to Which Avoidance Applies?

The avoidance provisions apply to pre-bankruptcy transfers of property of the estate that: i) Resulted in a decrease in the amount of the property available to pay the creditors; ii) Resulted in a larger recovery of one creditor over other creditors; iii) Were not recorded in violation of state recordation statutes requiring notice to third parties; or iv) Were not timely recorded.

Legal Consequences of Avoidance?

The loser is the transferee against whom recovery is obtained by the estate. Thus, the consequence of avoiding a transfer is an increase in the property of the estate. If the trustee establishes the basis to avoid the transfer but is unable to recover the payment from the creditor, then any remaining claim by the creditor in bankruptcy is disallowed under section 502(d). If the trustee establishes a basis to avoid a mortgage on property of the estate, then the creditor loses its lien and is relegated to a creditor with an unsecured claim (i.e., without any encumbrance on the property). Under section 550(a), the court can also order recovery of the "value of the property" transferred, rather than the property itself. This provision permits recovery not only from the initial transferee but also from later transferees or from a person not the transferee but who benefited from the transfer.

Legal Consequences of Filing a Petition?

The three most significant legal consequences of the filing of a bankruptcy petition are: i) Property of the debtor becomes the property of the estate; ii) The automatic stay protects the property of the estate and the debtor from collection actions by creditors; and iii) The date of filing is the legally operative date for the commencement of the case.

Chapter 11 Cases?

There are five stages in a Chapter 11 case as follows: i) The business continues operations; ii) The plan is prepared; iii) Creditor approval of the plan is sought; iv) Court approval or confirmation of the plan is granted; and v) A discharge is granted. Section 1102 authorizes the trustee to form a committee of unsecured creditors as soon as practicable after the filing date to centralize negotiations between the debtor and its creditors. a. Unsecured creditors' committee The unsecured creditors' committee meets with the trustee or DIP in the course of the administration of the case to consult, investigate debtor's financial condition, participate in drafting the plan, request the appointment of a trustee, and perform other services in the interest of the other creditors. b. Continuation of the debtor's business Section 1108 authorizes the continuation of the debtor's business unless the court orders otherwise. Typically, the DIP operates the business unless a request is made for a trustee to run the business and the court orders the appointment.

Policies of Bankruptcy Code?

There are three overarching policies under the Bankruptcy Code: (i) equality of distribution, (ii) adequate protection of an interest in property, and (iii) a fresh start for the debtor.

Types of Foreclosures in Texas?

There are two types of foreclosures in Texas: judicial foreclosures and non-judicial foreclosures. 1. Judicial Foreclosures Judicial foreclosures are used when there is not a "power of sale" clause in a mortgage or deed of trust. A creditor files a lawsuit and obtains a court order to foreclose. Generally, once a court declares a foreclosure, the property is auctioned off. 2. Non-Judicial Foreclosures Non-judicial foreclosures are used when a "power of sale" clause exists in a mortgage or deed of trust. A "power of sale" clause means a borrower pre-authorizes the sale of property to pay off the loan balance in the event the borrower defaults.

Discharge of Ch 7 Cases?

a. Parties entitled to discharge Section 727 denies a discharge to corporations and partnerships. Thus, only an individual may receive a discharge under Chapter 7. The 11 other objections to discharge apply to individual debtors and are aimed at fraud, dishonesty, or some form of improper conduct occurring either before or after the bankruptcy filing. For example, individual debtors are not entitled to a discharge when they (i) knowingly and fraudulently made a false oath or account in the case, (ii) fail to complete a course in personal financial management, and (iii) received a prior Chapter 7 discharge within the last eight years. b. Objections versus exceptions Section 523(a) lists 18 exceptions to debts otherwise permitted to be discharged, including taxes, domestic support obligations, and student loans. There is a difference between "objections to discharge" under section 727 and "exceptions to discharge" under section 523. If an objection to discharge under section 727 is granted by the court, then this objection benefits all creditors because the debtor does not receive a discharge at all. On the other hand, if an exception to discharge under section 523(a) is granted by the court, this exception to discharge generally benefits only the creditor who proves that its claim is excepted from discharge. c. Reaffirmation agreement A reaffirmation agreement may be entered into between the debtor and a creditor of the estate whereby the debtor agrees to pay a pre-petition debt that would otherwise be subject to discharge in bankruptcy. The most common reason a debtor would enter into a reaffirmation agreement is to retain encumbered property, such as an automobile.

Which debts are non dischargeable?

i) Tax claims; ii) Debts incurred by fraud; iii) Certain debts relating to luxury goods or services; iv) Non-dischargeable debts from a prior bankruptcy; v) Domestic support obligations; vi) Debts for willful or malicious injury by the debtor; vii) Debts for death or personal injury caused by the debtor's operation of a motor vehicle while intoxicated; viii) Governmental fines or penalties; and ix) Student loans, unless payment results in undue hardship. The debtor remains personally liable for these debts after the bankruptcy notwithstanding the discharge.