Bankruptcy Outline1

Bankruptcy Outline

I. Debtor/Creditor Relationships A.

B. C.

D.

Generally 1.Debtor/creditor law seeks to balance the creditor’s right to payment again the need to protect the debtor from unduly harsh or aggressive creditor conduct 2.Creditors must ask themselves before entering any transaction a. Is the prospective borrower likely to perform its obligations reliably? b. If the borrower does not pay, does the structure of the transaction and its contract terms protect me, or avoid or mitigate any of my loss? UCC Article 9 1.Rule of law over transactions between buyer and seller for tangible or intangible goods Credit process 1.Credit reporting can influence provider of goods and services to withhold future credit from a nonpaying debtor, the unpaid creditor has far greater leverage to put a debtor to repay 2.“credit worthy”- which debtors are most likely to repay their debts 3.Interest rates are now deregulated a. Only law- usury laws- if a creditor charged more than a pre-determined rate of interest, the loan would be deemed usurious, and the interest, and under some statutes the principal itself, are deemed uncollectible i. Consider Fair Debt Collection Practices Act- page 15 in book Debt collection remedies 1.Remember that when the debtor files for bankruptcy, all collection efforts are stayed 2.Self-help a. Attempts to collect the money without judicial intervention b. Most common type c. Threats to report to credit agencies or threat to take judicial action is common 3.Pre-judgment remedies a. Forms of relief available to an eligible litigant during the period between the commencement of suit and the final judgment in the case b. Designed to enhance the plaintiff-creditor’s chances of collecting on the ultimate judgment c. Have two characteristics: i. Ancillary in nature- underlying suit has to have already commenced and relief cannot be sought if the underlying suite has been dismissed or terminated ii. Are provisional and temporary in nature- designed only to last until the disposition of the underlying case on its merits d. Requires the plaintiff to make a substantive application showing reasonable prospects of success on the merits, have met procedural safeguards, bonding requirements, and plaintiff liability for misuse of the process. e. Due process requirements i. 14th amendment requires that a defendant receives 1.proper notice and 2.meaningful hearing 4.Judgment a. When a creditor pursues collection through the court system, the first step is to establish in court that the debt is owed

1

b.

Judgment gives the successful plaintiff (aka “judgment creditor”) no interest and no priority in any of the debtor’s property or income and remains an unsecured creditor until execution c. Improvement in the judgment creditor’s position because the owing of the debt is not indisputable by the debtor, it has become “liquidated” d. Judicial Liens i. Make up a small portion of actual collection remedies and usually only for real property ii. Judicial liens arise out of the court proceedings initiated by the creditor for recovery of the debt, both secured and unsecured iii. After judgment, to prefect the lien, must properly record or docket in the appropriate recording office in the county where the property is located iv. The judgment creates a lien on all of the debtor’s real property within the county 1.The property need not have been involved in the suit or identified in advance v. The lien is subject to any preexisting 3rd party interest recorded in the property, such as prior recorded mortgages and liens vi. When the lien is enforced, the lienholder follows a foreclosure procedure (execution) to sell the property and realize its proceeds 5.Execution a. Unsecured claims are not identified with any particular property, but their enforcement is dependent on property of the debtor being found and realized i. Debtor must have property that can be applied to payment of the debt 1.Must consider state law and whether there is a state statute that makes the property immune from execution 2.Public policy plays a role to prevent execution on property that the debtor values but has little inherent value to the creditor b. Execution Process i. Begins with a “writ” which is simply a court order- “execution writ” or writ fi fa or writ of attachment 1.Writ is issued by the court clerk upon request of the judgment creditor and is delivered to the sheriff for “execution” 2.The writ will specify that the sheriff must levy on specific, identified property 3.Debtor can apply for a stay of execution pending appeal, but must usually furnish bond ii. Sheriff will take physical possession of any property (aka “levy”) identified by the judgment creditor 1.If it cannot be seized immediately, the sheriff may tag it with notice of seizure 2.Real property is always seized by posting notice of seizure and a later sale 3.Because the sheriff could be liable for tort damages, the plaintiffcreditor must provide an indemnity when delivering the writ iii. After levy, the sheriff will advertise the property for public sale and sell it to the highest bidder 1.Value of property is usually depressed 2.Proceeds are realized and less the costs of execution, are remitted to the creditor 3.May allow for redemption where the debtor reaquires the property at the depressed price if they can raise the necessary funds 6.Turnover orders 2

a.

The judgment debtor is ordered to turn over property he possesses to the sheriff b. Debtor risks imprisonment for contempt if he does not comply c. Examination under oath of the debtor so that assets are found 7.Garnishment a. Used to levy on personal property of the debtor in the possession of someone else, or on an intangible obligation due to the debtor b. The debtor’s rights of due process requires that he is given notice of the garnishment that sets out his exemption rights, and must also have an opportunity to challenge the garnishment c. The 3rd party who owes something to the debtor is obligated to answer the writ and must surrender the property or state grounds for not doing so d. Upon payment to the court or sheriff, funds are sent to the creditor 8.Assignment for the benefit of creditors a. Voluntary transfer of property in trust by the debtor to another person with instructions to liquidate the property and to distribute its proceeds to those creditors who have elected to participate b. Does not operate as a discharge c. Cannot reserve some rights in the property or continue to use the property d. Cannot grant preferential treatment to a particular creditor e. Cannot stipulate that the participating creditors must discharge the unpaid balance of their claims f. Cannot include less than all of the debtor’s executable property II.

Secured Debt under Nonbankruptcy Law A.

B.

C.

Generally 1.Security agreements effective under 9-201 2.The personal obligation of the debtor to pay the debt is reinforced by a right in rem acquired by the creditor in certain property of the debtor. a. The debt is a personal claim against the debtor, the lien is a right in the property b. Property is defined as “goods” in 9-102(44) (must be movable) c. Once secured, the property is considered “collateral” defined in UCC 9102(12) 3.In a much strong position than an unsecured creditor, it has both a right of action against the debtor for the debt and a claim to property of the debtor to back up that right. 4.Only when the debtor defaults on the debt that the creditor becomes entitled to take action to terminate the debtor’s ownership and to sell the property or take transfer of it 5.Lien rights can be created in almost every kind of property, real or personal, tangible or intangible. a. A lien can be created in a piece of class of property before that property has come into existence or before the debtor has acquired rights in it. Purchase Money Security Interests (PMSI) 1.Governed by UCC 9-103 2.When a loan or credit is given to the debtor for the express purpose of enabling the debtor to acquire particular property and the property is itself used as collateral to secure the debt 3.Purchase money obligation is an obligation incurred by the debtor as all or part of the price of the collateral to enable the debtor to acquire rights in or use the collateral. a. Example: Loan to buy a car, if debtor defaults, bank can repossess car Attachment and Perfections 1.Attachment- when a lien is valid against both the debtor and 3rd parties 3

a.

D.

E.

F.

G.

If the creditor’s right to the property is enforceable only against the debtor, the creditor has no protection against the claim of 3rd parties who subsequently acquire rights in the property b. Governed by UCC 9-203(a) c. Attachment date is the date on which the lien become enforceable against the debtor 2.Perfection date is the date on which it becomes effective against 3rd parties Judicial Liens 1.Judicial liens arise out of the court proceedings initiated by the creditor for recovery of the debt 2.After judgment, must properly record or docket in the appropriate recording office in the county where the property is located 3.Are a consequence of a particular legal procedure 4.Make up a small portion of actual collection remedies Statutory Liens 1.Arise under the terms of the statute b/c the legislature has determined that a creditor of that class or a debt of that type is worthy of the protection of security 2.To assert a successful statutory lien there must be: a. A statutory basis- the transaction and the creditor must fall within the protected category for the lien to be claimed and the property must be lienable under the statute. b. Prescribed procedures are followed c. Attachment and Perfection- Some form of notice or possession is required to effectuate the lien against the debtor and to make the lien viable against 3rd parties Effect of a Valid Lien 1.Once the creditor has properly complied with the rules governing attachment and perfection of the lien, an interest is created in the property that is effective not only against the debtor but also against any 3rd party who thereafter acquires an interest in the property 2.Preexisting interests may be earlier perfected liens or other recorded (sometime unrecorded) rights that have been conveyed by the debtor or imposed on the property by law a. A prospective lien holder should check filing records and make other appropriate inquires before agreeing to give credit to the debtor on the strength of a security interest in property 3.If the debtor defaults on the secured debt, the lien holder is entitled to foreclose on the lien, and the interest of any subsequent transferee is confined to whatever surplus must be left after the lien has been fully satisfied. Oversecured and Undersecured Debt 1.Undersecured- when the value of the property, or the remaining value if there are already senior claims on record, is less than the amount of the debt, a portion of the debt will be unsecured a. This amount is called a deficiency b. If the value of the debtor’s equity just barely covers the debt, the lien holder has no margin of safety to accommodate possible depreciation of the property or to cover accumulation of interest or legal fees that may be incurred in trying to collect the debt i. A careful prospective lienholder must attempt to make a realistic appraisal of the property and an accurate prediction of likely decreases in its value. 2.Oversecured- when the value of the property is more than the amount of the debt, this overage resulted in a creditor being oversecured a. The excess is called an equity cushion 4

b.

H.

I.

The surplus equity can absorb any adverse change in the ratio of collateral to debt Enforcement of a Lien 1.Liens are enforced by a process known as foreclosure a. Can only be enforced per 9-203(b) if i. Value is given ii. Debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party iii. And one of the following considering is met: 1.Debtor has authenticated (usually by signature) a security agreement that provides a description of the collateral or 2.It is in the possession of the secured party (creditor) under 9-313 pursuant to the debtor’s security agreement 2.Realization of the collateral involves two steps a. Seizure of the property b. Application to satisfaction of the debt 3.Seizure of the property (levy or execution) a. Not necessary when a lien is perfected by possession, no seizure is needed b. Through self-help= accomplished by the lienholder on its own without assistance of the court i. Must do so without breach of the peace c. Other cases, or if the debtor resists, a court order or court officers are necessary 4.Sale of the collateral a. Are always subject to some form of regulation and standards to ensure that they are honest, properly conducted, and are likely to provide as reasonable a price as possible under the circumstances b. Commercially reasonable manner Lien priority rules 1.Ranks the liens, and the proceeds of any sale are applied to the full satisfaction of each lien in order of priority until the fund is exhausted a. Example: collateral worth $900 with 3 liens each securing a debt of $500. The senior lien is paid in full with the second ranking lien receiving the remaining $400, with an unsecured deficiencyof $100. The third and most junior lien receives nothing and becomes an unsecured claim. 2.Chronology- Most common method of ranking a. First in time, first in right rule b. Effective date is usually its perfection date c. Exception- found in statutes or court decisions or when a subsequent party acquires the property in good faith and in circumstance under which they are not expected to be concerned about other interests or to check public filing records 3.Summary: Issues to consider when dealing with priorities in collections a. Are all the liens and interests valid charges against the property? i. Must be valid and effective ii. Identify the liens or interests and the nature of the property in which they are asserted (consider statute) b. What is the effective date of each lien or interest? i. Usually perfection date ii. Consider exceptions c. Apply the rules of ranking

III.Fraudulent Transfers A.

Uniform Fraudulent Transfers Act (UFTA), from 1984 5

B.

C. D.

E.

F.

The action to avoid a fraudulent transfer is available to unsecured creditors 1.A secured lienholder or another person with a valid and perfected interest in property does not need fraudulent transfer law to protect those rights, since they are effective against the subsequent transferee “assets” § 1(2) include only property to the extent that it is nonexempt and not subject to a security interest and is not co-owned Actual Fraud- § 4(a)(1) 1.Available to both creditors whose claims existed at the time of the transfer and to those whose claims arose afterwards 2.Concerned with the state of the debtor’s mind 3.The creditor must prove that the debtor made the transfer with the deliberate motive of removing the property from the reach of creditors a. Proof of the debtor’s conduct in circumstances that show a dishonest motive 4.Consideration should be given to these listed in § 4(b) a. Transfer to an insider (family, close friend) b. The debtor retain possession or control of the property after the transfer c. Transfer or new debt exchange was concealed d. Before the transfer the debtor had been sued or threatened with suit e. The transfer was, or was close to, all of the debtor’s assets f. Debtor absconded (ran away and hid) g. Debtor removed or concealed assets h. The debtor was insolvent at the time, or became insolvent shortly after the transfer (§ 5b) i. Transfer occurred shortly before or shortly after a substantial debt was incurred j. Transfer to a creditor who then transferred to an insider k. Debtor incurred debts with the actual or imputed intent of not paying them when due Constructive Fraud- § 4(a)(2) 1.In deciding whether to proceed under actual or constructive fraud, must evaluate the degree to which they are clearly demonstrable and the existence of other indicia of fraud 2.Relies on specific objective criteria 3.Not presumptions, but are inferences that help to establish the creditor’s case unless the debtor offers a plausible explanation to the contrary 4.Debtor did not receive reasonably equivalent value in the exchange and either left the debtor with little assets to continue, or intended to incur (or reasonably should have figured) that they wouldn’t be able to pay their debts as they became due 5.Reasonably equivalent value a. The entire context must be examined i. Consider the relationship of the parties ii. Market environment iii. Apparent motive for the transfer b. Must know the value- § 3 to know if it was deficient or not Creditor remedies for fraud- § 7 1.Avoidance of the transfer- § 7(a)(1) 2.Recovery of the property from the transfer so that it can be subjected to levy and sold in execution- § 7(a)(2) or 3.Money judgment against the transferee (receiver) for the lesser of either the value of the property measured at the time of transfer or the amount of the debt due by the debtor- § 8(b) a. But remember: i. A good faith transferee, and subsequent transferee, who gave reasonably equivalent value for the property is fully protected- § 8(a) 1.No matter how guilty the debtor’s motive 6

G.

H.

2.If not reasonably equivalent value, but still good faith, only partial protection Leveraged Buyouts, LBO 1.A transaction in which the purchase of shares in a corporation is financed by the corp itself or secured by the assets of the corp a. Corp provides funding to the buyer of its shares 2.Expectation that reimbursement of the corp will come from future profits that the buyer will make from the operation of the corp’s business 3.Process a. Seller may give the buyer credit for the price of the shares and secured this credit by having the corp grant a security interest in its assets b. Corp may borrow money secured by its assets, and then it may lend this money to the buyer as an unsecured loan 4.Unsuccessful LBO a. If the business does not produce large enough profits, the debt will not be repaid and the assets will be foreclosed upon b. The risk of failure is borne not only by the corp, but also by its unsecured creditors who have lost the protection of recourse to unencumbered assets c. LBOs are manipulative devices that result in the plunder of corporate assets and the imposition of crippling debt on a formally viable corporation 5.LBO fraudulent transfer? Not per se a. However, when a corp fails to pay its debts after an LBO, creditor may look to fraudulent transfer law to avoid the transfer made by the corp in connection with the LBO b. Likely a constructive fraud case, basis for attacking LBO is constructive fraud i. The grant of a security interest in the corp’s assets increased its debt over its assets, rendering it insolvent Summary of evaluating Fraudulent transfers 1.Determine if it is a transfer- § 1(12) 2.Determine if the claim was in existence at the time of the transfer and therefore was a creditor- § 1(4) a. If so, look to § 5 which is a lower standard b. If not, look to § 4(a) 3.Check for actual fraud, if not, check for constructive fraud a. Five common law elements of fraud (five fingers of fraud) i. False representation of material fact ii. Party making the statement knows it to be false iii. Made within intent to deceive iv. The person hearing the representation justifiably relies on it v. The relying part is damaged b. Consider reasonably equivalent value 4.Good faith transferee? 5.Creditor’s recourse 6.Defenses of transferee?

IV.Background to Bankruptcy law A.

B.

General Policy 1.Remedial system, and collective remedy which encompasses the debtor’s assets and debts 2.Designed to fulfill two functions a. Affords relief to the debtor by resolving and settling current debts b. Protects creditors and guards their interests 3.Is federal law b/c the Constitution grants to Congress the power in Art. I, § 8 4.Uniformity a. Except when it bows to state law- example: exemptions in § 522(b) Goals of bankruptcy code 7

C.

V.

1.What Congress says 2.Fresh start for the bankrupt a. A rehabilitated individual debtor may once again become self-sufficient and productive member of society b. Apparent in the individual debtor’s exemptions c. Debtor discharge d. Policy favoring rehabilitation (learning their lesson) 3.Deal efficiently as possible with economic adversity a. Maximizing creditor returns b. Quick fresh start for petitioners 4.Preference for reorganization an debt adjustment 5.Manage financial distress and do the best job possible of preserving what can be saved 6.Balances creditor interests and debtor recovery 7.Evenhanded treatment of creditors 8.Preservation of the estate a. Trustee and DIP investigates the debtor’s affairs b. Recover disposition of property in fraud of creditors c. Reveal hidden assets d. Resolve the affairs of the debtor in a way that best enhances the value of the estate Structure and Organization of the Code 1.Chapters 1, 3, and 5 contain general provisions that are meant to apply to all bankruptcy cases under consideration unless irrelevant or there is some overriding provision 2.Chapters 7, 9, 11, 12, and 13 are for separate forms of bankruptcy, only one of these chapters is selected when a bankruptcy petition is filed a. Chapter 7- Liquidation b. Chapter 11- reorganizations c. Chapter 13- adjustment of debt by individual debtors

Debtor Eligibility for Different Chapters- § 109 A. B.

C.

Take note of whether the code speaks of “the debtor” or “individual debtor” 1.“Debtor” can be individual partnerships, corporations, etc. 2.“Individual debtor” is a regular human Consumer vs. Business debtors 1.An individual is not a consumer debtor unless the bulk of its debt is incurred in the course of domestic consumption (household and dependent expenses) a. Consumer bankruptcies often highlight social policies such as the prevention of homelessness, the protection of the common person and its dependents, and the social ills of the abuse of creditors b. The stereotypical consumer debtor is a person who earns income from employment and spends most of it on living expenses or on buying goods and services for personal use 2.Where an individual owns a business as a sole proprietorship, it incurs debts in the course of commercial or other activity unrelated to householder or personal purposes Limitation on Successive Filings – § 109(g) 1.If the individual debtor has had a case dismissed because of uncooperative or disobedient behavior, or voluntarily dismissed the case following a creditor’s application for relief from stay, the debtor may not become a debtor under the Code for 180 days after the dismissal 2.Rule is intended to make it difficult for a debtor to obstruct creditor’s collection efforts with the automatic stay 3.Section also applies whenever a motion for voluntary dismissal is make after a motion for relief from stay 8

D.

E.

F.

G.

Requirement of Credit Counseling- § 109(h) 1.Requires an individual debtor to receive credit counseling as a prerequisite to eligibility for bankruptcy relief even if the counseling does not avert the filing of the debtor’s current bankruptcy petition 2.Must be an approved nonprofit budget and credit counseling agency during the 180 days preceding the date of filing the petition 3.§ 109(h)(3) allows a temporary exemption so that the debtor may file the petition, but only under extraordinary circumstances where the debtor cannot obtain counseling soon enough a. Must describe exigent circumstances to the courts satisfaction b. Must establish that the debtor sought but could not obtain requires counseling within 5 days of requesting it Chapter 7 Eligibility 1.Anyone who may be a debtor under the Code may be a debtor under Chapter 7 except for banks, insurance companies, savings institutions, etc. 2.Subject to an important qualification- means test § 707(b) a. Where the individual debtor is an individual with primarily consumer debts, the court must dismiss the case if it finds that the granting of relief would be an abuse of chap 7 i. Abuse is presumed if an individual consumer debtor has disposable income deemed sufficient to make payments under a chap 13 plan 3.A debtor may be placed in Chap 7 voluntarily or involuntarily Chapter 11 Eligibility 1.A debtor may be placed in chap 11 voluntarily or involuntarily 2.An individual consumer debtor cannot avoid the means test required in chap 7 under chap 11 Chapter 13 Eligibility 1.Debtor must be an individual 2.Must have regular income, defined in § 101(30) a. An “individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chap 13 3.Total debt at the time of filing must not exceed the prescribed limit- § 109(e) 4.Only an individual with regular income whose debt falls within the limits of § 109(e) may be a debtor under chap 13 5.Cannot be placed in chap 13 involuntarily

VI.Getting a Bankruptcy case started A. B.

C. D. E.

Filing of the petition effects that automatic stay- § 362 The attorney needs a comprehensive understanding of the debtor’s economic history and current financial position to fulfill the role of counseling the debtor, attorney must consider 1.choice of relief 2.identify potential problems 3.plan appropriate course of action to remedy problems and get through bankruptcy quickly Filing of the petition operates automatically as an order for relief, that is, an as order placing the debtor in bankruptcy The debtor’s signature of the petition certifies the accuracy of the allegation in the petition and constitutes an assertion that it was filed in good faith and not for abusive purposes Supporting document required by § 521 1.Schedule of liabilities 2.Schedule of property 3.Schedule of claims properly categorized into secured and unsecured classes a. Identified as contingent, liquidated or disputed 4.Claim of exemptions 9

F.

G.

5.Schedule of income and expenses 6.Schedule of executory contracts 7.Summary of the debtors financial history and current financial position 8.State of intent by the debtor with regard to the proposed surrender of encumbered property or its retention by reaffirmation or redemption or the avoidance of liens on it 9.Copy of the debtor’s federal income tax return for the last year- § 521(d) 10.§ 521(b)- Certification from a nonprofit credit counseling agency consulted by the debtor under § 109(h) Dismissal or conversion of a Chapter 7 consumer case 1.§ 707(b)(1) sets out the basic rule that the court may dismiss a case filed by an individual whose debts are primarily consumer debts if the court finds that the granting of relief would be an abuse of chap 7 a. Only requires “abuse”, not “substantial abuse” 2.Only applies to individual debtors whose debts are primarily consumer debts a. Consumer debt is defined in § 101(8) to mean “debt incurred by an individual primarily for a personal, family, or household purchase” i. When the debtor’s total indebtedness is analyzed, consumer debt must predominate 3.In all cases except those in which the debtor has an annual income above the median family income, any party in interest can bring a motion to dismiss a. “median family income” is defined in § 101(39A) b. Requires the schedule of income and expenditures filed under § 521 4.No presumption of abuse, debtor satisfies means test in § 707(b)(2) a. § 707(b)(7) is a “safe harbor” that precludes application of the presumption of abuse if the debtor’s monthly income is less than the applicable median family income b. Assumed that debtors who earn less than the median family income do not earn enough to make any appreciable payment to creditors under chap 13 and therefore should be able to obtain chap 7 relief c. Can still dismiss for abuse if the debtor has filed the petition in bath faith 5.Presumption of abuse arises where the debtor fails to satisfy the means test in § 707(b)(2), unless the debtor can rebut it a. Presumption arises because, based on the formula, the debtor’s disposable income would be sufficient to support a payment plan under chap 13 b. Can only rebut if debtor demonstrates special circumstances, such as a serious medical condition, or a call to active military duty i. These justify an increase in the allowed expenses and has the effect of reducing the debtor’s disposable income to a level below that which gave rise to the presumption in the first place Means test- § 707(b) 1.Formula for determine the presumption of abuse as set out in § 707(b)(2)(A)(i) 2.Calculate the debtor’s current monthly income a. “current monthly income” is defined in § 101(10A) to mean the average monthly income from all sources that the debtor receives during the 6 month period ending on the last day of the calendar month preceding the filing b. A snapshot of the debtor’s earnings c. May not accurately represent real historic earnings or what will likely occur in the future 3.Determine if more or less than state average considering the household size 4.Deduct from this monthly income the debtor’s allowed monthly expenses, which are determined by adding together a. The monthly expense amount specified under the National and Local Standards and under Other Necessary Expenses that apply to the debtor b. Average monthly payments made on secured debts 10

c.

H.

I.

All average monthly payments for priority claims i. Add the total up and divide by 60 to get monthly amount d. All “reasonably necessary health insurance, disability insurance, and health savings account expenses” e. Also include cost of actual utilities if in excess of the allowance specified by the Local Standards f. Up to 5% more in food and clothing is debtor demonstrates that this increase is reasonable and necessary g. Cost of supporting an elderly or chronically ill or disabled household member of the family h. Does NOT include any payments for unsecured debts 5.This gives the monthly disposable income amount 6.This disposable income is then multiplied by 60 to provide a five year total figure for the debtor’s net disposable income for eligibility in chapter 13 bankruptcy 7.Then compare to the prescribed abuse standards, abuse is presumed if the average monthly income § 101(10A) in the previous 6 months disposable income figure is: a. Less than S109.58 per month, no presumption b. More than $10,950 or $182.50 per month, presumption kicks in and the debtor’s chapter 7 case is dismissed or converted to a chapter 13 case c. If between $109.58 and $182.50 per month then i. Calculate the total amount of the debtor’s nonpriority unsecured claims, then figure out what 25% of this amount is ii. If greater than $6,575, then abuse is presumed and case is dismissed or converted 8.Steps in test for abuse presumption/means test a. Is the debtor an individual? i. Yes, continue ii. If not, no means test b. Determine if debts are primarily consumer debts (tax debts not consumer) i. If not, then no presumption test c. If so, determine if the annual monthly income and compare to state average for size of household i. If less than average median, then no presumption d. If more than the average, apply the formula above i. Remember to deduct all allowable expenses 1.Found in the IRS’s National and Local Standards and others in § 707(b)(2) 2.Monthly payment on secured debts (unlimited) 3.Monthly payment on priority claims (total then divide by 60) 4.All others in previous page Sanctions 1.Sanctions against the attorney representing the debtor and party who improperly filed a motion to dismiss 2.§ 707(b)(4)(C) provides than an attorney’s signature on a petition or pleading constitutes a certification that the attorney reasonably investigated the debtor’s financial position; that the petition or pleading was well grounded in fact and warrant in law; and had no knowledge, after enquiry, that any information in the document was incorrect. a. Dismissed for abuse and attorney acted wrongfully 3.§ 707(b)(5) allows for an award of attorney’s fees and costs to the debtor where the debtor successfully contests a motion to dismiss and the party in interest (other than a trustee) acted unjustly in moving to dismiss the chap 7 case Creditors Meeting 1.Trustee must convene meeting under § 341 11

2.The meeting is held in all cases and must be held within 20 and 40 days after the order for relief in chap 7 or 11 3.Principle purpose of the meeting is the examination of the debtor under § 343 by creditors and the trustee. a. A debtor who fails to appear to answer truthfully can be penalized by dismissal of the case, denial of discharge or even criminal charges for perjury or fraud

VII.The Automatic Stay A. B.

C.

Provided in § 362, its effect is to impose a wide-ranging prohibition on all activity outside the bankruptcy forum to collect prepetition debts from the debtor or to assert or enforce claims against the debtor’s property or against estate property Purpose 1.Creditors can no longer seek an advantage by pressing on with enforcement measures 2.Creditors must channel their claims through the bankruptcy process Nature and Scope of Stay 1.Applies to all forms of bankruptcy a. In Chap 7, the stay is focused on preservation of the property and the protection of the debtor for the relatively short period during which the estate is collected, sold off, and distributed b. In chap 11, the ability to keep creditor at bay during the process of restructuring is vital to the success of the effort at rehabilitation i. However, creditor can be hurt when the debtor uses estate property during reorg 2.Binding on all entities (“entities” defined in § 101(15)) 3.Comes into effect upon the filing of the petition against all estate property- § 362(a) a. Upon filing the petition, an estate is created and applicable property is deemed “estate property” i. A postpetition creditor has no claim to property of the estate and has no right to try to reach estate property 1.However, postpetition transactions by the debtor not involving estate propertydo not give rise to the claims against the estate. They are enforced against the debtor through the normal collection methods of nonbanktrupcy law 4.Stay remains in effect for the duration of the case a. After the case there is usually a discharge so for many creditors the stay forever ends collection efforts under non-bankruptcy law 5.The effectiveness of the stay does not depend on creditor’s notice of the filing a. A creditor cannot seek to retain an advantage gained by violating the stay on the ground that it had no knowledge of the bankruptcy when committing the act b. Trustee or debtor can have the act set aside as voidable c. To willfully violate the stay puts the creditor liable to the debtor for any actual damages suffered and, if it’s really bad, punitive damages too i. Usually just held in contempt of court 6.Activity excluded from the stay- § 362(b) a. Fall into two broad groups i. When the activity is concerned with the enforcement by governmental units 1.Criminal proceedings against the debtor § 362(b)(1) 2.To enforce police or regulatory powers § 362(b)(4) ii. Under § 362(b)(4), a creditor may perform acts to perfect or to maintain or continue perfection if that action is recognized by § 546 or § 547 1.§ 546(c)(1)- goods sold to the debtor, while the debtor was insolvent, in the ordinary course of such seller’s business, the 12

D.

E.

seller can reclaims such goods within 45 days before the commencement of the case 2.§ 547(c) exceptions to trustee avoiding powers (contemporaneous exchange, payment of debt accrued in the ordinary course of business) b. Exception to the say under § 362(b)(2) that protects the support rights of the debtor’s spouse, ex-spouse and children i. Domestic support obligations can be paid from property that is property of the estate if under a court order or statute 7.Termination of the Stay a. § 362(c)(1)Continues against estate property until the property is no longer property of the estate i. However, if property is abandoned to the debtor as exempt, it still cannot be subjected to the claims of prepetition creditors who remain bound to the stay b. If the debt is discharged, the credit is permanently enjoined from collecting it under § 524(a)(2), so the stay is succeeded by the post discharge injunction c. If the stay terminates as a result of dismissal of a case or a debt is excluded from discharge, creditors are entitled to continue collection activity under nonbankruptcy law d. Under § 362(c)(3) if the debtor has filed a prior case that was pending within the year preceding the petition and that case was dismissed, the automatic stay in the current case will terminate “with respect to any action taken within respect to a debt or property securing such debt or with respect to any lease” 30 days after the petition is filed Violation of the stay 1.Any act in violation of the say, whether innocent or deliberate is immaterial 2.§ 362(k) Deliberate violation could result in an award of costs, attorneys fees, and compensatory and punitive damages or a sanction for contempt of court a. For an act to be willful, the action must be motivated by specific intent to violate the stay Relief from stay under § 362(d) 1.Grounds for relief from stay a. For cause § 362(d)(1) i. Applicant must allege cause and make out a prima facie case that cause exists, the burden of non-persuasion falls on the opposing party 2.Most common: lack of adequate protection a. The debtor has no equity in the property AND the property is not necessary for an effective reorganization § 362(d)(2) i. Applies only to the stay of action against property and cannot be used to obtain relief from say of acts against the debtor 1.When neither the debtor or the estate will obtain an economic advantage by keeping the property so the applicant’s right to enforce its claim to the property should not be further suspended ii. Under § 362(g), the applicant for relief bears the burden of proving that the debtor has no equity in the property 1.Must establish that the value of the property does not exceed existing valid encumbrances 2.Determined by valuing the property, usually by expert testimony iii. If the property is a necessary component of the debtor’s business operations, depriving the debtor of the ability to use the property will damage its chances of overcoming its financial difficulties 1.To rebut, the debtor must show that it is necessary AND that the proposed reorganization is feasible 13

2.Automatic in a business chap 7 case, because no property is necessary for a business that will not exist iv. Most common problem is the different values to use and conflicting expert testimony 1.Market value 2.Distress value 3.Liquidation value 4.Determine which one is more appropriate 3.Termination of the stay a. Lifting is so that the debtor can commence or resume suspended activity 4.Annulment of the stay a. Terminates the stay retroactively so that the stay is treated as if it was never in effect i. Prior acts in violation of the stay become valid ii. Used only in exceptional circumstances 5.Modification of a stay a. Appropriate when the court decides to permit some activity but not to all the persona applying for the lift full right to proceed with enforcement of a claim 6.Conditioning of a stay a. Leave the stay in effect, subject to the debtor or trustee satisfying some condition

VIII.Claims Against the Estate A.

B.

C.

Defined in § 101(5)- To qualify as a claim, the obligation must give right to a right to payment 1.Includes unliquidated, contingent and unmatured and disputed claims a. Unliquidated if its amount is not fixed and certain and cannot be calculated arithmetically from known data b. Contingent if the debtor’s liability is conditional upon the happening of a future uncertain event with the possibility of this contingency occurring when the parties formed their relationship c. Unmatured claim is when the time for payment has not arrives/lapsed d. Disputed if the debtor challenges the existence or the extent of the liability General rule 1.Only prepetition debts of the debtor are claims against the estate, any debt incurred by the debtor after the petition are charges against the debtor’s fresh start estate a. Exceptions- claims arising from the administration of the estate and § 1305(a)(2) that enables proof of claim by a person who extended credit to the debtor in a postpetition consumer transaction for the debtor’s purchase of “property or services necessary for the debtor’s performance under the plan” 2.Ranking of claims are the same in all chapters a. A senior class must be paid in full before the next class is entitled to distribution b. If the fund is insufficient to pay all claims in a class in full, it is shared pro rata in that class Process 1.A proof of claim is the creditor’s formal submission of a claim against the estate 2.In a chap 11 case, a creditor need not prove a claim unless its claim is listed as disputed, contingent, or unliquidated or the claim is unlisted and the creditor otherwise comes to know of the bankruptcy 3.Secured claims do not have to be proved because there is property to prove it. a. An undersecured creditor must prove a claim to receive a distribution on its deficiency 4.Unsecured creditor must prove their claims 5.Once a claim is proved, it is allowed automatically unless a party in interest files a timely objection to it 14

a.

D.

E.

F.

Most common is § 502(b)(1) that the claim is unenforceable against the debtor and the debtor’s property under an agreement or applicable law Secured claims in Bankruptcy Law 1.Secured claims are satisfied by the collateral or its proceeds a. If there is more than 1 lien on a piece of property, the secured claims are ranked in accordance with priority prescribed by nonbankruptcy law i. Lien is defined in § 101(37) ii. If the collateral is worth more than the debt, the surplus is applied to any junior claims, and if there is none, then the secured creditor has a right to interest and costs under § 506(b), but only up to the value of the collateral 1.Costs and fees are subject to the test of reasonableness and the court can reduce them if it considers them unreasonable b. § 506(a)(1) states that collateral must be valued in light of the purpose of the valuation and of the proposed disposition or use of the property i. Example: if the property is to be liquidated, liquidation value is used ii. Example: if the property is to be used by the debtor or sold on the market, market-value is used iii. Value is factual question on which experts can differ iv. When the property is personal property that is collateral for a secured claim in an individual debtor’s case under chap 7 or chap 13, the value of property must be based on the replacement value 1.The price that a retail merchant would charge for property of that kind considering its age and condition at the time of valuation 2.A lienholder is entitled to adequate protection of its interest and to ultimate full payment of its secured claim (value of the property) 3.Under § 506(a)(1) a claim is secured to the extent of the collateral’s value and is unsecured as to any deficiency a. If the deficiency is not paid and later discharged, the secured party would never be able to obtain more than the court-determined value in the bankruptcy case- called “strip down” Unsecured claim in Bankruptcy Law 1.§ 507(a) lists 10 priority classes of unsecured claims in descending order a. All except for chap 7 require § 507 priority claims to be paid in full unless the holders of such claims agree to the contrary 2.Followed by general unsecured claims Order of Claims Distribution in Bankruptcy 1.Trustee and lawyer are paid a. Or else no one would take a case 2.Secured claims a. Fully secured debts paid in full plus interest and costs (to the extent of any equity cushion) b. Partially secured debts i. Secured portion paid in full to extent of collateral ii. Deficiency becomes general unsecured claim 3.Priority claims- § 507(a) a. Domestic support obligations i. Defined in § 101(14A) b. Administrative expenses i. 1st rank- superpriority claims under § 364(c)(1) 1.Credit obtained by trustee for estate during pending case“postpetition financing” ii. 2nd rank- superpriority claims under § 507(b) 1.Expenses of the estate that are actual and necessary costs of preserving the estate 15

G.

◊ Include trustee compensation ◊ Fees for professional services ◊ Postpetition taxes due by the estate ◊ Performance under executory contracts 2.When adequate protection is not adequate enough iii. 3rd rank- other administrative expenses under § 503 1.For involuntary cases c. Wages and salaries with a $ cap- § 507(a)(4) i. With anything exceeding the limit becoming a general unsecured claim ii. Only covers prepetition earnings, if employees render services after the commencement of the case, these are admin expenses d. Employee benefits with a $ cap- § 507(a)(5) e. Grain producers and fisherman (ignore) f. Deposits for consumer goods or services with a $ cap g. Various taxes with a $ and type cap- § 507(a)(8) i. For income taxes for the 3 to 4 years prior to the petition and property taxes payable in the year before bankruptcy h. FDIC (ignore) i. Claims for wrongful death or personal injury resulting from the debtor driving while intoxicated 4.General unsecured claims a. Those timely filed or where the credit didn’t have proper notice b. Tardy claims 5.Claims for finds, penalties, forfeiture, or punitive damages, which are not compensation for actual pecuniary loss 6.Interest on priority and general unsecured claims 7.Any surplus remaining goes to the debtor Priority Claims- in General 1.To the extent that a claim exceeds the limit, it is a general unsecured claim a. Therefore, possible for a single debt to be partly a priority claim and partly a general claim 2.The policy of preferring admin expenses makes practical sense because if they were not given a high priority, it would be difficult to find people who would be willing to perform services for the estate 3.Because bankruptcy administration is supposed to benefit creditors of the estate, it is regarded as appropriate that the expenses involved in the preservation of the estate come out of the fund before it is distributed to creditors

IX.Adequate Protection A. B. C. D. E.

Is cause for relief from a stay under § 362(d)(1) 1.Permits relief from stay when the applicant’s interest in property lacks adequate protection Only available to holders of interests in property of the estate or the debtor and cannot be sought by unsecured creditors Confined to claims such as secured creditors, lessors who have leased property to the debtor, co-owners of the debtor’s property, and others with a valid interest in property of the estate. Trustee or DIP, as the party opposing relief from stay, bears the burden of proving that the interest is adequately protected When is it necessary? 1.When the stay creates a risk for the secured creditor a. Because the stay prevents immediate foreclosure, the creditor faces the risk that its collateral may decline in value while the stay is in effect so that if the property has to be sol, it will generate fewer proceeds 16

F.

G.

H.

2.In a chapter 11 or 13 case, if the debtor’s attempt toward rehabilitation fails, the estate ends up in liquidation and the secured creditor is left with property valued far less than before 3.If the relationship between the debt and the property value will change adversely during the period of the stay, the creditor is prejudiced in having to wait Factors to consider when lifting/not lifting a stay 1.If the stay is lifted and foreclosure proceeds, what is the claimant likely to receive? a. Requires a factual determination of the present value of the property in relation to the debt 2.If the stay is not lifted and the estate deals with the property as proposed, what is likely to happen to the value of the property in relation to the debt a. Compare future value of the debt, damage to the property through use, insurance coverage 3.What is the likelihood of a successful rehabilitation? a. Must consider the risk of eventual liquidation of the property under adverse circumstances i. Ie. Fire sale 4.The amount of equity cushion, that is, the surplus of the debtor’s equity in the property related to the secured claim When is there lack of adequate protection? 1.The debtor has no equity in the property AND the property is not necessary for an effective reorganization § 362(d)(2) a. Applies only to the stay of action against property and cannot be used to obtain relief from say of acts against the debtor i. When neither the debtor or the estate will obtain an economic advantage by keeping the property so the applicant’s right to enforce its claim to the property should not be further suspended b. Under § 362(g), the applicant for relief bears the burden of proving that the debtor has no equity in the property i. Must establish that the value of the property does not exceed existing valid encumbrances ii. Determined by valuing the property, usually by expert testimony c. If the property is a necessary component of the debtor’s business operations, depriving the debtor of the ability to use the property will damage its chances of overcoming its financial difficulties i. To rebut, the debtor must show that it is necessary AND that the proposed reorganization is feasible ii. Automatic in a business chap 7 case, because no equipment is necessary for a business that will not exist d. Most common problem is the different values to use and conflicting expert testimony i. Market value ii. Distress value iii. Liquidation value iv. Determine which one is more appropriate Ways to furnish adequate protection 1.Cash payments- § 361(1) a. if the state has sufficient income it can make payments to reduce the debt and maintain the ratio between the claim and the property value 2.Additional collateral- § 361(2) a. If there is unencumbered property of the estate, the trustee can grant a lien on this property or replace the existing lien with a lien on property of greater value b. Most common when the creditor is a secondary lienholder (junior lien) on the property 17

I.

3.Grant of “indubitable equivalent”- § 361(3) a. Any form of relief that measures the form of protection against the debt b. Expressly excludes the grant of an admin expense priority as a means of providing the protection Superpriority under § 507(b) 1.If realization of the property eventually becomes necessary, it may turn out that deterioration of the property to debt ratio was worse than anticipated, so that the interest was no adequately protected 2.Intended to provide relief to the secured creditor if the trustee provided adequate protection to the claimant, and that protection turned out to be inadequate a. The shortfall is treated as priority claim that ranks at the top of the admin expense priority category- just below domestic support obligations 3.Assures that if the trustee miscalculates the amount of protection needed, the claimant will be paid before anybody else (except DSO)

X. Property of the Estate A.

B.

C.

D.

Date of filing the petition is the crucial date for determining the debtor’s property interests that pass to the estate 1.§ 541(a) states what is included in the estate a. Must determine whether the debtor has an interest in property and the nature and extent of that interest 2.§ 541(b) and (d) are exclusions a. Covers property such as educational savings accounts, tuition benefit funds and contributions to employee benefit plans (covered under ERISA) b. Also funds that the debtor is holding in trust for someone else- legal title, not equitable title c. Ask whether the debtor has title to the property Property acquired after the filing of a petition 1.In a chap 7 and chap 11 case, the general rule is that all earning and property acquired by the debtor subsequent to the filing from sources that are not related to the prepetition property remain property of the debtor and do not become property of the estate a. § 541(a)(6) and (7) includes estate proceeds b. In a chapter 7 case, as soon as the debtor files for bankruptcy, the debtor begins to accumulate a new estate i. The new estate consists of earnings and property acquired after the filing as well as property that has been released to the debtor from the estate as exempt or abandoned by the trustee having no economic value 1.Part of the debtor’s fresh start 2.In a chap 13 case, the estate includes all property under § 541 owned at the time of the petition and property acquired up to the time the case is closed, dismissed or converted a. § 1306- Property and income of the debtor continue to enter the estate until the case comes to an either b. Trustee has supervisory power over them during the plan (legal, not physical) Trustee’s power to compel discovery of property of the estate (turnover) 1.Under § 542 any property of the debtor in the possession of other persons must be delivered to the trustee or its value accounted for a. Duty to deliver property of the estate is “turnover” b. Exception under § 542(a) if the property is of inconsequential value or benefit to the estate 2.Even a creditor with interest in the property is required to relinquish possession to the trustee Abandonment of the Property by the Trustee- § 554 1.Property that enters the estate is of no value or benefit to the estate can be abandoned 18

a.

E.

XI.

May be because it is fully encumbered and is not needed for the debtor’s rehabilitation b. Because it is fully exempt and cannot be liquidated for the benefit of creditors c. Because it costs more to maintain that it is worth d. It has no economic value 2.Allowed to abandon after notice and hearing a. Notice and hearing is defined under § 102 3.In a chapter 7 case, the retention of the property imposes an admin burden on the estate with no corresponding advantage when all the proceeds of the collateral are needed to satisfy a secured claim 4.Lack of equity in property is not dispositive in chap 11 or 13 if it is needed by the debtor to reorganize successfully Who does the property go to? 1.If the debtor has some right to the property, it is abandoned to the debtor a. This does not release the property from the stay of enforcement b. Example: property worth $1,000 is subject to a security interest of $800 and the debtor has an exemption of $400, the estate has no interest in the property (secured creditor’s interest is $800 and the debtors is $200), the property is abandoned to the debtor i. Unless the debtor successfully negotiates a reaffirmation agreement or makes some other arrangements with the secured creditor to retain the property, the secured credit has the right to apply for relief from stay, and if granted, the secured creditor can foreclose on the property and get costs with cushion 2.If the debtor has no rights to the property, it is abandoned to the party that holds an interest in it

Exemptions- § 522 A.

B.

Policy 1.Only available to individual debtors and available under all chapters 2.Goals of exemption is to insulate certain property from the claims of creditors so that the debtor is not rendered destitute by seizure or liquidation 3.Property released to the debtor as exempt forms part of the debtor’s new estate thereby helping the debtor gain a fresh start 4.Help the debtor because they are deducted from the liquidation value of the estate a. Obvious in chap 7, in chap 11 and 13 liquidation value is taken into account in determining the minimum level of pay required for plan confirmation 5.Because exemption detract from creditor interests, they should be limited and controlled so that they are no more generous than they need to be to accomplish their goal of preventing the debtor’s impoverishment 6.Assets that qualify for exemption are ordinary necessities such as household goods, debtor’s home and car and items of sentimental value and the property that debtor depends on for a livelihood such as tools of the trade or disability or pension payments Procedure/Process for exemptions 1.Exemption do not automatically take effect, debtor must file a list of exempt property under § 522(l) 2.The trustee or a creditor has the right to challenge the debtor’s claim of exemptions a. Rule 4003(b) requires the objection to be filed within 30 days of the creditor’s meeting 3.When the monetary limit is too small to enable the debtor to exempt the asset in its entirety (the exemption does not cover the debtor’s entire equity in the property, it is partially exempt) 4.Partially exempt property is NOT returned to the debtor

19

C.

D.

E.

F.

5.The trustee sells the partially exempt property, pays out the value of the exemption to the debtor, and places the balance of the proceeds in the fund to be distributed to creditors State Opt Out 1.§ 522(d) provides a set of uniform bankruptcy exemption, but § 522(b) allows a state to elect to substitute its own exemptions, known as “opt-out” 2.The state opt out of § 522(d) by enacting a statute the specifically does not authorize debtors domiciled within its jurisdiction to use the exemptions listed in § 522(d) a. Debtors are then confined to the exemptions provided by state law, together with any applicable federal nonbankruptcy exemptions 3.If the state has not opted out, a debtor domiciled in that state may choose to claim either the exemptions provided in § 522(d)or the applicable non-bankruptcy exemptions a. WI has NOT opted out Which state exemption law rules? § 522(b)(3)(A) 1.The state law that determines which set of exemption applies in a bankruptcy case is the state of the debtor’s domicile a. More than physical residence, but intend to remain b. Problems with forum shopping remedies in 2005 amendments 2.Provides that the law that governs the debtor’s exemption rights is the law of the state in which the debtor was domiciled for the 730 days (two years) immediately preceding the petition 3.If the debtor has not been domiciled in any single state for that 730 day period, the applicable exemption law is that of the state in which the debtor was domiciled in the 180 days immediately preceding the 730 day period a. Must look back to the period before the two years Homestead Exemptions 1.Bankruptcy exemption under § 522(d)(1) is $20,200 a. Means that the debtor cannot claim the house as exempt in full, debtor is limited to a relatively small portion of equity in the home 2.Some states have higher homestead exemptions, WI is $40,000 3.Some states provide for an unlimited homestead exemption- Texas and Florida, to control this Congress limits the exemption where the debtor has behaved dishonestly or manipulatively a. § 522(b)(3) prevent the debtor from moving to a state on the eve of bankruptcy to take advantage of desirable exemptions b. § 522(o) reduces the debtor’s homestead exemption under state law to the extent that the value of the debtor’s interest in the homestead is attributable to the disposition of the nonexempt property in the 10 years before the petition i. The idea being that if the debtor had sold nonexempt property in the 10 years before bankruptcy and had invested the proceeds in exempt homestead property, the exemption is reduced by the amount of that investment ii. Must prove that debtor had intent to hinder, delay or defraud creditors 1.Consider badges of fraud c. § 522(p) limits the debtor’s interest in a homestead exempted under state law to $136,875 if the debtor acquired the homestead within 1,215 days (3 years, 4 months) from the date of the petition i. But proceeds from prior home that went to new home is not included Debtor’s Power to Avoid Interests that Impair Exemptions 1.General Rule: a debtor’s exemption in property DOES NOT win against the holder of a valid consensual security interest in that property 20

2.If the debtor’s equity in the property exceeds the exemption, the lien or security interest remains a valid charge on the nonexempt portion of the equity 3.States cannot override this avoidance power in its “opt-out” statutes 4.§ 522(f)(1)A)- An exemption does take precedence over a judicial lien that attaches to the property, whether created by prejudgment proceedings, by recording the judgment, or post judgment proceedings such as execution- applies to all types of exempt property a. Only to the extent that the judicial lien impairs the exemption b. Exception- liens related to domestic support obligations 5.§ 522(f)(1)(B)- the debtor may avoid a nonpossessory nonpurchase money security interest in specified household or consumer goods, tools of trade, or professionally prescribed health aides to the extent that the security interest impairs an exemption in such property a. BUT, must meet three requirements i. Secured party must not have perfect the interest by taking possession of the collateral ii. The loan or credit must not have been provided to enable the debtor to acquire the collateral iii. Must relate to one of the three types of property specified 1.Household or consumer goods 2.Tools of the trade 3.Professionally prescribed health aids 4.Policy: in many cases, the property is likely to be worth more to the debtor than its realized value so that the threat of foreclosuregives the creditor great power over the debtor. Congress was concerned about abuses in these types of transactions, which it regarded as manipulative and unethical 6.To determine amount of impairment to be avoided as defined in § 522(f)(2)(A): a. Determine if security interest is avoidable i. Judicial lien or ii. Nonpossessory nonpurchase money security interest b. If so, determine what the value of the debtor’s interest in the property would be in the absence of liens- § 522(a)(2) uses market value c. Add together i. The lien to be avoid; plus ii. Other liens on the property; plus iii. The amount of the debtor’s exemption (don’t forget about wildcard exemption if still available- § 522(a)(5)) d. Compares i and ii, the exemption is impaired to the extent that ii is greater than i

XII.Reaffirmation and Redemption A.

Redemption- § 722 1.When property is subject to a lien that secures a dischargeable consumer debt, an individual debtor in chap 7 liquidation can redeem the property from the lien holder. 2.By redeeming the collateral, the debtor in effect buys it from the secured creditor for the amount of the allowed secured claim 3.Requirements: a. The property MUST be tangible personal property and b. intended primarily for personal, family, or household use , and c. The property MUST have been either fully exempted or abandoned (not necessary for reorganization or of any benefit to the estate) 4.Must pay the claim in full a. Redemption price is limited to the value of the collateral i. If the collateral is worth less than the debt (so that the creditor is undersecured) the allowed secured claim and hence the 21

b.

B.

No right to redeem by installments i. Must use reaffirmation 5.If the value is exactly equal to or less than the secured debt, the estate has no interest in the property, so it is likely to be abandoned, thereby allowing the debtor to redeem it by settling the secured claim. 6.If the property is worth more than the debt but the equity is fully exempt, the estate has no interest in it and redemption can be affected by paying the secured claim 7.If the equity exceeds the debtor’s exemption, the estate does have an interest in the property, and redemption is not possible unless the debtor first pays out the estate’s interests so that the trustee will abandon the property 8.Not needed in chaps 11 and 13 because the debtor is able to retain desired property upon confirmation of a plan which provides protection of the security interest and periodic payments on the debt Reaffirmation- § 524 1.An agreement between the debtor and the creditor under which the debtor agrees to pay a debt that would otherwise be discharged 2.An alternative to redemption where the debtor wishes to keep the property, but cannot find the cash to settle the secured claim or otherwise meet the qualifications of § 722 3.Requirements- § 524(c) and § 524(d) a. Can be both secured and unsecured debts and not confined to chap 7 cases, but is not really needed in other cases b. Must be made before the discharge is granted and must be filed with the court c. Set out in § 542(k), a lengthy standard disclosure must be provided to the debtor by the creditor at or before the agreement is signed d. If the debtor was represented by an attorney i. the attorney must file a declaration with the agreement stating that the debtor’s consent was informed and voluntary and ii. that the agreement does not impose an undue hardship on the debtor or a dependent and that the iii. Attorney fully advised the debtor of the legal effect and consequences of an agreement of that kind, and what happens if the debtor defaults e. If the debtor was not represented i. the agreement needs court approval and ii. is granted only if the agreement does not impose an undue hardship on the debtor or a dependent and iii. is in the debtor’s best interest f. Valid only to the extent that it is enforceable in non-bankruptcy law i. Doctrines such as unconscionability, fraud or duress make the agreement avoidable g. Debtor can rescind the agreement at any time before the discharge is granted, or within 60 days of the agreement having been filed in court, whichever is later 4.Creditors who solicit or offer a reaffirmation must be careful not to violate (or appear to violate) the automatic stay a. Most courts do not consider a mere suggestion of reaffirmation to a be a per se violation of the stay b. However, must still not appear to use § 524 as a pretext for trying to evade the strictures of the stay 5.Motivation for debtor a. Where the debt is secured, the debtor’s motive in entering a reaffirmation is the desire to keep the collateral, instead of losing it to liquidation and foreclosure

22

b.

C.

For unsecured debts, the advantage to the debtor is usually something suspect. Courts therefore approach the reaffirmation of unsecured debt with greater suspicion Ride-Through 1.Some courts have allowed the debtor to elect to retain the collateral while continuing to pay installments to the secured party as required by the original contract 2.A secured transaction “rides-through” the bankruptcy without being formally administered and dealt with as part of the estate 3.However, § 521(a)(6) makes is clear that redemption for cash or reaffirmationare the only courses available to a debtor where the creditor has a secured claim in personal property to secured that property (PMSI) a. If the debtor fails to make the election to redeem or reaffirm within 45 days after the first meeting of creditors, the property ceases to be property of the estate and the stay ends so that the creditor can proceed to foreclose under state law

XIII.Trustees Avoidance Powers- Generally A. B.

C.

D.

Remember that the debtor has the right under § 522(f) to avoid certain liens that impair exemptions Applicable to all chapters 1.Under chap 7, avoidance benefits the creditors by making the estate larger 2.Under chap 11 and 13, the debtor may benefit but it mainly benefits creditors by increasing the liquidation value of the estate which determines the minimum level of payment under the plan a. Leads to the weird result under chap 11 that the DIP is avoiding transfers that they themselves made a short time ago The avoidance powers enable the trustee to set aside certain transactions entered into by the debtor prior to filing the petition 1.Aimed at transfers of property by the debtor and obligations the debtor assumed a. Transfer is defined broadly in § 101(54) b. Transfer can be voluntary or involuntary and can be an outright disposition of property of the grant of an encumbrance or other interest in it 2.Most common is a creditor (initial transferee) who acquired the property in satisfaction of a debt. When the transfer is avoided, the previously settled indebtedness becomes an unpaid claim once again a. To encourage such creditor to surrender property to the estate following avoidance of a transfer, § 502(d) provides for the disallowance of the creditor’s claim unless the property is returned Policy 1.Part of the trustee’s function of collecting estate property and maximizing the estate’s value 2.By enabling the trustee to overturn certain prepetition transfers of the debtor, the Code allows the estate to recover property interest that the debtor had relinquished before bankruptcy a. In many cases, the debtor’s bankruptcy is preceded by a period of financial crisis in which creditor’s jostle for advantage by collection activity and the debtor responds to pressure by making payments to particular creditors or disposing (selling off) its property b. Some of the practices could be dishonest or manipulative 3.Exceed the powers available to creditors under nonbankruptcy law a. If it is understood that certain advantages given to a creditor are avoidable if the debtor becomes bankrupt, creditors will be discouraged from pursuing the debtor because the gains will be short-lived or completely worthless 4.Tries to avoid transactions that Congress deemed were irregular or illegitimate 23

E.

F.

G.

H.

5.When non-bankruptcy law requires an act of publicity to perfect a lien, failure to comply with the rules makes the lien avoidable Avoiding Statutes 1.Strong Arm Statute- § 544 allows the trustee to avoid transfers and obligations that could have been avoided under non-bankruptcy law (unperfected and fraudulent transfer, normally) by an actual or hypothetical unsecured creditor 2.§ 545 gives the trustee limited power to avoid certain kinds of statutory liens 3.§ 547 avoid preferential transfers that occurred within 90 days before the petition (1 year for insiders) 4.§ 548 power to avoid fraudulent transfers and obligations that occurred within a year before the petition 5.§ 553 avoid setoffs to the extent they involved disallowed claims within the 90 days prepetition period 6.§ 559 permits the trustee to avoid unauthorized postpetition transfers 7.§ 546 limitations on avoidance powers 8.§ 550 and § 551 the estate takes over the rights of the defeated receiver of transferred property so that it benefits the estate rather than the holders of junior interests in the property Process 1.If the avoidance action concerns an obligation incurred by, or an interest in property granted to the debtor, the court’s determination of avoidability results in either disallowance of the claim against the estate or an invalidation of the claim to the property. 2.If the action is aimed at the avoidance of a transfer of property by the debtor, judgment in favor of the trustee obligates the transferee to return the property or its value to the estate a. § 550(b)- However, the trustee does not have the right to recover from a subsequent transferee who takes the property for value, in good faith, and without knowledge of the voidability of the transfer (a bona fide purchaser) i. A bona fide purchaser is not liable to return the property or its value, any later transferee is protected b. § 550(e)- any transferee (initial and subsequent) who acquired the property in good faith but who is not entitled to protect under § 550(b) (likely because they had knowledge or didn’t pay what it’s worth) is given a lien on the property to secure the lesser of the its costs of any improvement to the property or the increase in value resulting from the improvement Statute of limitations on avoidance powers 1.The trustee can reach back only so far into the pre-bankruptcy period to avoid certain transfers 2.§ 546(a) limits avoidance to these, whichever is sooner a. the duration of the case (case closed, no avoidance); or b. the later of these i. 2 years before order for relief (filing of petition in voluntary case) ii. 1 year before the appointment or election of the first trustee 3.§ 550(f) when recovering property under avoidance, must be the earlier of a. 1 year after the transfer has been avoided; or b. By the time the case is closed or dismissed General limitation on avoiding powers 1.When a creditor can still perfect a. Under § 546(b) if the interest is unperfected at the date of the petition but the period prescribed by the non-bankruptcy law for perfection has not yet expired, the holder of the interest can perfect at any time between the expiry of the applicable period 2.Seller’s repossession rights- § 546(c) a. Sale must be in the ordinary course of business 24

b. c.

d.

e.

Demand from seller must be in writing A buyer is deemed to make an implied representation of solvency when purchasing goods; if the buyer was insolvent upon receiving the goods, and the seller was unaware of this, the seller may rescind the contract and reclaim the goods on grounds of fraud Confines the right against avoidance to sales in which delivery to the insolvent (§ 101(32)- balance sheet test) buyer occurred within 45 days before the petition i. Then seller has to make a demand for the property between 10 days and 45 days after the debtor receives the goods ii. If the 45 day period ends after the petition, the demand must be made no later than 20 days of the petition If goods delivered to the buyer within 20 days of bankruptcy, then the seller is able to claim the price of the goods as a priority admin expense under § 546(c) read with § 503(b)(9)

XIV.Trustee’s Avoiding Powers- Strong Arm Statute- § 544 A. § 544(a) is known as the “strong arm” statute because it confers 3 hypothetical roles on the trustee: 1.As a judicial lienholder a. § 544(a)(1) gives the trustee the power to avoid any transfer of property or any obligation incurred by the debtor that would be avoidable in nonbankruptcy law by a creditor who has a judicial lien on all of the debtor’s property at the time of the petition i. Used when some lien is not perfected, therefore a judicial lien over all the debtor’s property would take precedence over it 2.As an unsatisfied execution creditor, and 3.Bona fide purchaser of real property a. § 544(a)(3)- only for real property B. § 544(b)(1) states that the trustee may avoid any transfer made or obligation incurred by the debtor that is avoidable in prevailing non-bankruptcy law by a creditor holding an allowable unsecured claim 1.Does not create a hypothetical creditor- instead the trustee succeeds to the avoidance rights of an actual unsecured creditor 2.All the section requires is that the claim would be allowable if proved 3.Used when the debtor has transferred property fraudulently (fraudulent transfer)only time when an unsecured can void a transfer a. § 548 allows the trustee to avoid fraudulent transfers made within 2 years before the petition b. Therefore if the state law reaches back more than 2 years, the trustee applies § 544(b)(1) i. UFTA § 4 or § 5 has a statute of limitations of 4 years (Under UFTA § 9) C. Trustee’s Power to Avoid Statutory Liens- § 545 1.Statutory liens are defined in § 101(53) as liens “arising solely be force of a statute on specified circumstances or conditions” 2.General rule: If the lien is validly obtained and perfected under non-bankruptcy law, then it cannot be avoided UNLESS if fits into one of these 3 categories a. § 545(1)- if it is specifically created to take effect upon the debtor’s insolvency, bankruptcy or financial distress b. § 545(2)- if it is no perfected or enforceable against a hypothetical bona fide purchaser who is deemed to have purchased the property on the date the case was filed c. § 545(3)- statutory lien for rent XV. Avoiding Preferences- § 547 A. § 547 permits the avoidance of transfers in the 90 days (for insiders, one year) before the petition that give a creditor an advantage to which it is not entitled to in bankruptcy 25

B. C. D.

E. F.

G.

Not concerned with the state of the mind of the debtor or creditor Has no requirement of bad faith, knowledge, or deliberate advantage-taking Purpose 1.To identify transfers that illegitimately prefer the creditor thereby undermining the collective process of bankruptcy and offend the goals of evenhanded treatment of creditors and preservation of the estate Requires a hypothetical chap 7 liquidation to be calculated Requirements- § 547(b) 1.Must have been a transfer of an interest in property of the debtor to or for the benefit of the creditor a. Transfer is defined in § 101(54) b. Creditor is defined in § 101(10) c. Claim is defined in § 101(5) d. Debtor must have a right in the property 2.Transfer must have been for, or on account of, an antecedent debt a. Debt is defined in § 101(12) b. Antecedent= if the debt arose before the transfer was made c. Question of when the debt arose must be determined and is not necessarily when the debt is due i. when liability is fixed, matured and unconditionally payable 3.Debtor must have been insolvent at the time of the transfer a. Insolvent is defined in § 101(32)- balance sheet test i. Liabilities exceed assets at fair valuation ii. Not discounted if the debtor does not remain in business 4.Transfer must have occurred within the prepetition avoidance period a. 90 days before filing the petition b. For an insider, 1 year i. Insider is defined in § 101(31)- close relationship to, officers of a corp c. § 547(e)- date of transfer is the date on which it became effective between the parties under non-bankruptcy law (has it been perfected?) i. Transfer occurs on the date of perfection unless the act of perfection is completed within 30 days of the transfer taking place 5.Transfer must have improved the creditor’s position a. Must have enable the creditor to receive more than it would have received if the transfer had not been made and the debt had been paid under a chap 7 liquidation distribution Exceptions to avoidance- § 547(c) 1.A substantially contemporaneous exchange for new value a. New value is defined in § 547(a)(2) b. Intended to protect transfers from avoidance on the technicality that they were made subsequent to the debt, where the parties intended an immediate exchange and the delay between the creation of the debt and the transfer is inconsequential c. Involving a check i. If the parties reasonably understood this to be a cash transaction rather than a credit sale, the fact that a check was used does not matter 2.Ordinary course of business payments a. Must meet one of two requirements: i. The debt must have been created by a transaction that was in the ordinary course of business of both the debtor and creditor; or ii. Payment of the was in the ordinary course of business and made according to ordinary business terms 3.Purchase money security interests, when perfected a. Loan or credit used to acquire the very collateral subject to the interest (car loan) 26

b. c.

H.

Does not automatically dismiss avoiding PMSIs The holder of the interest has enabled the debtor to obtain property that secures the debt d. Special grace period for perfection i. Interest is unavoidable provided that it is perfected within 30 days from the date on which the debtor received possession of the collateral ii. If not made within 30 days, date of transfer is date of perfection that might fall within the 90 day period even if the transaction took effect between the parties prior to that period 4.New value rule a. If, after receiving an avoidable transfer, the creditor gives to the debtor new value that is not itself secured or paid for by a new transfer, the otherwise avoidable transfer cannot be avoided to the extent of the new value b. Policy i. A creditor who extended new credit or other value to the debtor after payment of an older obligation was probably motivated by that payment to deal further with the debtor 5.Floating lien in inventory and receivables 6.Statutory Liens a. Must be dealt with in § 545 7.Payment of debts for domestic support obligations a. Domestic support obligations defined in § 101(14A) 8.Small –value transfers (§ 547(c)(8) and (9) a. Where the debtor who is an individual whose debts are primarily consumer debts, this excludes a transfer from avoidance as a preference if the aggregate value of the property included in the transfer is less than $600 b. Where not primarily consumer debts, excludes avoidance of a transfer up to a total value of $5475 Form of Analysis 1.Determine if the transfer is avoidable under § 547(b) a. If not, the estate loses that value 2.If it is, consult § 547(c) to see if any of the exceptions should apply 3.Burden then shifts to creditor who must establish under § 547(g) that an exception is applicable

XVI.Avoiding Fraudulent and Postpetition Transfers A.

Fraudulent Transfers 1.The trustee may avoid fraudulent transfer in the prepetition period either by using state fraudulent transfer law or under § 548 2.2 year look-back period from date of petition, if state law is more, then trustee will consider state law 3.§ 548(c) grants lien rights in favor of good faith transferee for value 4.§ 550 protects good faith subsequent transferees 5.Uses the same badges of fraud that the UFTA uses 6.Equity insolvency creates a presumption of insolvency (generally not paying debts as they become due) 7.Requirements a. Actual intent to hinder, delay or defraud b. Debtor received less than reasonably equivalent value c. And one of these i. Was insolvent on the date of such transfer; or ii. Was engaged in business or a transaction for which any property remaining with the debtor was unreasonably small; or iii. Intended to incur debts beyond the debtor’s ability to pay as such debts matured (came due) iv. Made such transfer for the benefit of an insider 27

B.

8.Exempts charitable contributions to a qualified religious or charitable entity unless it exceeds 15% of the debtors gross annual income, or if in excess of 15% was consistent with the debtor’s practices in making such contributions Post-petition transfers- § 549 1.§ 549 gives the trustee the power to recoup estate property that has been transferred without authority after the petition has been file 2.Policy a. Preservation of the estate b. Debtor lacked authority to make the transfer

XVII.Use, Sale or Lease of Estate Property and Credit A. B.

C.

D.

E.

F.

Doesn’t really apply in chap 7 cases because the business is going to dissolve anyways Policy 1.To allow the trustee or DIP to conduct the affairs of the estate to its best advantage 2.Discretion to enter into ordinary business transactions without court approval streamlines the process making it easier to focus on the problems Distinction between Ordinary and Extraordinary Transactions 1.Trustee or DIP is able to maintain routine business operation with minimum interference but should not be able enter into extraordinary transaction without giving notice to creditors and other interested parties, making the trustee prove its reasons for this extraordinary transaction 2.Two-prong test for deciding if a transaction is in the ordinary course of the debtor’s business a. Vertical dimension- the reasonable expectations of parties in interest b. Horizontal dimension- looks more broadly at the commercial context in which the debtor’s business is operated 3.Whether parties in interest could reasonably have anticipated a transaction of this type, given the range and scope of the debtor’s business and the normal practices in the business environment in which the debtor participates When outside the ordinary course of business 1.Must have notice and hearing as defined in § 102 2.The court must determine whether it should be approved under § 363(b)(1) a. Will determine whether the transaction is advantageous to the estate b. Whether the transaction is compatible with the larger scheme of rehabilitation c. Whether the transaction is likely to further or hamper the debtor’s rehabilitation strategy 3.Creditors have an interest in protecting their property a. A creditor may seek adequate protection under § 363(e) When dealing with cash collateral 1.defined in § 363(a) a. not only includes paper money but also negotiable instruments, documents and securities b. Treated as cash equivalents because they can be liquidated easily 2.§ 363(c)(2) freezes the use of cash collateral even when dealing with it would be in the ordinary course of business a. Trustee must either obtain permission from the interest holder or get authority from the court 3.Cash collateral may not be dealt with by the trustee even in the ordinary course of business unless the holder of the interest in that collateral consents or the court authorizes the transaction after notice and hearing 4.Policy a. A creditor who has a security interest in such assets is in a much greater danger than other secured creditors because of how easy it is to sell such property Postpetition Credit- § 364 28

1.Credit transaction outside the ordinary course of business and the creation of secured debt must be authorized by the court following notice and hearing 2.Policy a. The assumption of new debt by the estate is potentially detrimental to an existing unsecured creditor b. If the debtor is allowed to secure new credit, its chances of a successful rehabilitation are improved, and prepetition unsecured creditors have a chance at receiving higher level of payments i. However, if the new credit is obtained that the debtor fails in rehab, then the estate’s assets are further encumbered 3.Debts incurred during administration are given the priority of an administrative expense that they will be paid before all unsecured claims 4.Order in which trustee (DIP) must seek credit a. Unsecured credit in the ordinary course of business- § 364(a) i. Do not require notice or hearing b. Unsecured credit outside the ordinary course of business- § 364(b) i. Must further the interests of the estate and not impose an unjustifiable burden or risk on the parties in interest c. Secured or superpriority credit- § 364(c) i. After notice and hearing the court approves a security or special priority for the debt ii. Places it ahead of administrative expenses d. Credit secured by a senior or equal lien on encumbered property- § 364(d) i. Infringes on the rights of existing secured claimants ii. Used only if credit is unobtainable by any other means and credit is desperately needed iii. Made after notice and hearing iv. Requires the existing interest to be adequately protected 5.Cross collateralization a. Not clear in some courts whether this is permissible b. Use an existing creditor for future advances by getting postpetition credit from it to the estate on the condition that the collateral securing the new credit also covers the unsecured and undersecured prepetition claim c. Why would a creditor do this? i. Existing creditor has a stake in the debtor’s rehabilitation and has incentive to provide new financing if it believes that the debtor’s reorganization may be successful ii. Collateral being secured has a present or an anticipated excess equity beyond the new debt so that when its value increases, the creditor benefits iii. Creditor can use its bargaining power in negotiating postpetition financing to improve the position of its undersecured prepetition debt at the expense of other unsecured creditors 1.However, this offends the bankruptcy policy of evenhanded treatment d. Debtor must be willing and able to provide collateral to secure both the new credit and the unsecured prepetition credit

XVIII.Executory Contracts A. B.

C.

Most common in chap 11 business cases, but can be applied in any chapter Goal of § 365 1.To empower the trustee to take best advantage of the rights and assets of the estate while according some protection to the countervailing interests held by other parties What is an executory contract? 1.Law review article by Professor Countryman: 29

a.

D.

E.

A contract is executory if the obligations of both parties are so far unperformed that the failure of either to perform would be a material breach b. In other words, a contract only qualifies as executoryfor bankruptcy purposes if at the time of the bankruptcy, both parties had material obligations outstanding. If either had fully or substantially performed, the count is no longer executor and should not be dealt with in § 365 2.Functional approach a. Looks at the materiality of the unperformed contract and takes into account the materiality of the contract and the impact on the estate of allowing the trustee to assume or reject the contract i. If focus is on mutual performs, then some contracts are unassumable b. Whether its assumption or rejection best serves the interest of the estate Is the contract assumable/assignable/rejectionable? 1.General rule of contract law that contractual rights and duties can be transferred a. Transfer of rights is called assignment b. Transfer of duties is called delegation 2.§ 365(c)(1) prevents the assumption of a contract if applicable law (nonbankruptcy law, state law) excuses the other party from accepting performance from or rendering performance to someone other than the debtor or the DIP a. Examples: i. Personal performance contracts ii. Contracts with the government 3.§ 365(c)(2) forbids the trustee from assuming a contract to make a loan, to extend other debt financing or financial accommodation to the debtor, or to issue a security of the debtor a. Only for loan and financing contracts i. Doesn’t include those in which the debtor was given credit 4.Ipso Facto Clause- A provision in a contract that allows the nondebtor to declare default or to terminate the contract on the grounds of insolvency, financial condition or bankruptcy a. Like the avoidance of statutory liens b. No cure for default of these clauses is necessary Reject or assume contract? 1.The trustee must always serve the best interests of the estate 2.Assumea. If the contract is advantageous and profitable, or if in rehabilitation it advances the debtor’s plans for economic recovery, the trustee should assume it b. Assumption must be approved by the court following motion by the trustee and notice to interested parties 3.Rejecta. If the estate could do better by using its resources elsewhere, or the contract imposes an unacceptable burden or risk on the estate, the trustee should reject it b. The trustee’s election to reject the contract constitutes a breach that is treated by § 365(g)(1) as a prepetition breach by the debtor i. The other party to the contract becomes a creditor and its claim for damages for breach of contract is classed by § 502(g) as a general unsecured prepetition claim 1.Paid at whatever fractional rate due such claims ii. Because of its unsecured creditor status in bankruptcy proceedings, the estate pays damages at the reduced rate and cannot result in excessive claims against the estate iii. The estate’s breach is a lot more profitable than the debtor would have if no bankruptcy existed 30

c.

F.

G. H.

However, courts sometimes refuse to approve a rejection unless it is clear that performance would place an undue burden on the estate i. Debtor’s good faith is relevant here, if the bankruptcy filing was motivated by the ability to use the rejection powers to escape and unwanted contract d. Rejection is automatic and does not require court approval, unless the court disagrees 4.Contract in default- § 365(b)(1) a. Trustee must comply with rule by curing the default, compensating for any loss caused by it, and giving the party adequate assurance of future performance under the contract b. Assurance is provided by showing that resources are likely to be available for the discharge of the contractual obligations and performance appears to be commercially feasible Assignment of contract 1.When the trustee assumes the contract and then sells it to someone else, the buyer of the contract takes assignment of it (both the debtor’s rights and duties) and the estate is able to realize the value of the debtor’s contractual rights without incurring the obligation to perform 2.§ 365(f)- trustee can assign an assumed contract, on the condition that the assignee (person assuming assigned contract) provides adequate assurance of future performance a. Intended to protect the other party from being forced into a contractual relationship with someone who is financially unstable or otherwise unlikely to provide performance that conforms to the contract b. Important because the other party has no recourse against the estate if the assignee breaches i. § 365(k) relieves the estate of all liability for post-assignment breaches Business Judgment Rule 1.The court will not interfere with the trustee’s decision if it was based on a good faith reasonable business judgment that appears beneficial to the estate Other party to terminate 1.Because the debtor’s contract rights are property of the estate, the other party must apply for relief from stay before exercising termination rights

XIX.Chapter 13 plan A. B.

C.

D.

Designed to enable the debtor to keep all or most of his or her property and to use part of future income over a period of years to pay creditor at least as much- and maybe more- that they would have received from liquidation of prepetition assets under chap 7 Policy 1.Policy favors rehabilitation under chap 13 over liquidation under chap 7 2.Code provides incentives to the debtor to choose chap 13 over chap 7 (carrot) 3.(stick) the means test in § 707(b) is intended to restrict chap 7 only to those who are deemed unable to afford a chap 13 plan Generally 1.Automatic stay is extended under § 1301 to any codebtor or surety of the debtor on a consumer debt 2.Includes postpetition earnings and all property of the debtor- § 1306 3.A trustee is appointed in all cases a. Monitors the debtor’s activities and payment to creditors 4.§ 1304 permits the debtor to continue to run the business after bankruptcy 5.Exemptions must be accounted for to determine how much the debtor must pay under the plan Requirements of Individual 1.Only an individual with regular income whose debts fall within the limitations of § 109(e) 31

E.

F.

G.

2.Must be commenced voluntarily 3.Must be filed in good faith Process of Chap 13 case 1.Filing Plan a. § 1321 requires the debtor to file a plan b. § 1323 allows the debtor to modify the plan before confirmation without court approval 2.Trustee is appointed 3.Meeting of creditors a. Rule 2003(a) requires the meeting of creditors to be called within 20 to 50 days after the petition 4.Preconfirmation payments a. § 1326(a)(1) requires the debtor to begin making payments within 30 days of the earlier of the order for relief or the filing of the plan b. Debtor makes payments to the trustee 5.Confirmation hearing a. § 1324 is the confirmation hearing that must take place between 20 and 45 days after the meeting of creditors 6.Payment under plan a. After confirmation debtor begins making payments under the plan- § 1326(a)(2) b. If necessary, garnishment is available to the trustee under § 1325(c) from the debtor’s employer 7.Distribution of payments under plan a. § 1326(b)(5) requires the trustee to ensure that the debtor makes the payments under the plan 8.§ 1327(a) effect of confirmation a. the plan binds the debtor and all creditors, whether or not their claims are provided for by the plan or whether they accepted or rejected the plan b. Confirmation does not act as a discharge c. Creditors do not vote on the chap 13 plan i. Only option is to object to confirmation of the plan on grounds that that the plan does not meet statutory requirements 9.Property disposition a. § 1327(b) and § 1327(c) upon confirmation all property of the estate is vested in the debtor free and clear of any claim or interest in it 10.Debtor default a. The debtor’s default in its performance of the plan is grounds for dismissal or conversion under § 1307 11.Modification a. may be applied for under § 1329 by the debtor, the trustee, or an unsecured claimant if the debtor’s circumstances change after confirmation Mandatory Provisions in a Chap 13 case- § 1322(a) 1.§ 1322(a)(1)- binds the debtor to pay future earnings in an amount sufficient to execute the plan 2.§ 1322(a)(2)- provide for the full payment of priority claims unless the creditors agree otherwise a. § 1322(a)(4)Domestic support obligations can be paid in less than full if they are assigned to or owned directly to a government unit- if 5 year plan and all debtor’s disposable income 3.§ 1322(a)(2)- if the plan classifies claims, it must treat claims in the same class equally Confirmation requirements- § 1325(a) and § 1325(b) 1.§ 1325(a)(1)- must comply with all of chap 13 and other provisions of the code 2.§ 1325(a)(2)- all fees required to be paid before confirmation must be paid 32

H.

3.§ 1325(a)(3) and § 1325(a)(7)- must have filed the petition and proposed the plan in good faith a. Considers the debtor’s state of mind in seeking chap 13 relief or in proposing that plan i. Will consider the accuracy and honest of the debtor’s financial disclosures, circumstances under which debts were incurred, reasons for financial distress, irresponsible dealings, and financial history 4.§ 1325(a)(4)- distribution to be paid to each unsecured claimant under the plan must be at least equal to what it would have received had the estate been liquidated under chap 7 a. Because payments made over time, interest must be added to the amount distributed to each claimant so that the claimant receives the present value 5.§ 1325(a)(5)- must either provide for the collateral to be surrendered to the creditor, or it must preserve the creditor’s lien and provide for full payment of the present value of the secured claim a. Present value is determined by adding interest to the face amount of the claim 6.§ 1325(a)(6)- plan must be feasible a. Must be apparent that the debtor will be able to make all payments under the plan 7.§ 1325(a)(8)- debtor must have paid all domestic support obligations required to be paid by the court or admin order or by statute that became due after the petition was filed 8.§ 1325(b)(1) if the trustee or an unsecured creditor object to the confirmation of the plan, the court can override objection and the confirm the plan unless a. The value of the property distributed under the plan is less than the amount of the claim i. A secured creditor is undersecured after property is given back b. The plan doesn’t provide for use of all the debtor’s disposable income c. Term of plan is 3 years if under median family income or 5 years if monthly income is i. Median family income is defined in § 101(39A) Treatment of Secured Claims in Chap 13 1.Debtor has 3 alternatives for secured claims a. Payment of the claim and preservation of the lien while payment is pending- § 1325(a)(5)(B) i. Lien remains on the collateral until the earlier of the discharge or the full contractual payment of the debt, so that if the debtor defaults on the plan and the secured claimant has to foreclose, the lien covers the full amount of the remaining debt ii. Installments are in equal monthly amounts iii. If the collateral securing the claim is personal property, the amount of the payments must be enough to provide the secured claimant with adequate protection during the plan iv. Value of claim is calculated by adding present value of claim and interest to its face value to compensate the holder for having to wait for its money instead of receiving it immediately as in a chap 7 liquidation v. Where a debtor proposes to keep personal property collateral in chap 13, the measure of value is its replacement value- § 506(a)(2) b. Surrender of the collateral- § 1325(a)(5)(C) i. Permits the debtor to surrender the collateral to the holder of the claim, thereby disposing of the secured claim and freeing the debtor of the obligation to pay it under the plan ii. If the collateral is worth less than the debt, the deficiency is provable as an unsecured claim 33

c.

I.

J.

K.

Consensual treatment- § 1325(a)(5)(A) i. Whatever the creditor and the debtor agree to 2.Cure of default of secured claims- § 1322 a. The debtor is motivated to propose a cure to retain property subject to a security interest b. The right to cure enables the debtor to reinstate the agreement by providing in the plan payments to remedy the breach i. Enables the debtor to extend contractual installment period that would otherwise have ended before the proposed period of the plan c. Ability to modify is limited by § 1322 and § 1325 i. Claimant (creditor) must agree ii. Mortgage on the debtor’s house 1.Default on a mortgage may be cured under § 1322(b)(3) and § 1322(c)(1) by providing in the plan for payment of the arrears by installments 2.The general prohibition on modification only applies to future payments Priority claims in Chap 13 1.§ 1322(a)(2) requires all priority claims to be paid in full by deferred cash payments unless the holder agrees to different treatment 2.Because priority claims must be paid in full, the order of priority is not as relevant in chap 13 as it is in a chap 7 case (see § 507) a. If the class of priority claims would have received nothing had the case been filed under chap 7, the plan need provide only for full payment of the face amount of the claims in that class b. If the chap 7 distribution plus interest is higher than the face value of the claim, this higher amount must be provided for in the plan to satisfy the best interests test Best Interest Test- § 1325(a)(4) 1.Requires that the amount paid on each allowed unsecured claim have a value as of the effective date of the plan that is no lower than what would have been paid on the claim had the estate been liquidated under chap 7 2.To determine present value a hypo chap 7 case must be calculated based on the value of the estate property at the petition date and add market interest rate for the period of payments under the plan a. The present value of an unsecured claim is confined to the chap 7 distribution plus interest 3.Example: if the debtor would have paid out nothing to unsecured creditors in a chap 7 case, then a plan that provides for no distribution to general creditors satisfies the test Disposable Income Test 1.§ 1325(b) forbids court approval of the plan unless the plan commits all of the debtor’s disposable income for a 3 or 5 year period 2.Determine annual family income by looking at the last 6 month period to get monthly then times by 5 years (60 months) and compare to median income for the state and family size a. Where the debtor earns more than the median family income, the court is limited to the same standardized formula for both income and expenses used for the means test under § 707(b) 3.The combination of the means test and the disposable income test could mean that some debtors are forced into chap 13 and are then required to commit to plans that turn out to be unmanageable 4.Steps for determining disposable income a. Calculate the debtor’s current monthly income- defined in § 101(10A) 34

i.

L.

M. N.

Calculated by taking the debtor’s actual earnings from all sources for the 6 months before bankruptcy, divided by 6 b. Ascertain the median family income for a household of the debtor’s size in the state of the debtor’s residence i. Obtained from the Census Bureau c. If the debtor’s current annual income is less than the median family income i. Take current monthly income and deduct from it the actual expenses reasonably necessary to support the debtor and its dependents, as well as postpetition expenses for domestic support , charitable contributions, and running a business ii. Multiply the debtor’s monthly disposable income by 36 (3 years) d. If the debtor’s current annual income is more than the median family income i. Deduct from current monthly income all those expenses allowed under § 707(b)(2)(A) 1.National and Local Standards, health insurance, actual utilities, etc (pp 339) 2.Secured claim monthly payments 3.Health insurance 4.Utilities 5.More above ii. Multiply the debtor’s monthly disposable income by 60 (5 years) Applicable commitment period- § 1325(b)(4) 1.Varies depending on the level of the debtor’s income 2.Period is 3 years unless the combined current annual income of the debtor and spouse exceeds the median family income for a household of the debtor’s size, in which case the period is 5 years Modification of Confirmed Plan- § 1329 1.Can be done at any time before completion of payments on request of the debtor, the trustee or an unsecured creditor Discharge- § 1328 1.Court is required to grant the discharge only after the debtor has completed payments under the plan 2.Under § 1328(a) must certify that all domestic support obligation that are due at the time of the discharge are paid 3.Under § 1328(g) must complete instruction court on personal financial management required by § 111 4.Can grant a hardship discharge (none on secured debts) under § 1328(b) if the debtor a. Can’t pay because of factors beyond its control b. The distribution already made to unsecured claims satisfy the best interests test c. Modification of the plan is impracticable

XX.Chapter 11 Reorganization A.

B.

C.

Policy 1.For creditors, a successful reorganization holds the promise of greater recovery on their claims 2.For the owners of the debtor (company), rehabilitation offers a chance of preserving some or all of an investment that would have been lost in liquidation 3.Society as a whole is benefits by the preservation of the profitable elements of the enterprise with its jobs and products Liquidation is still possible under chap 11 1.§ 1123(a)(5)(D) permits plans that include plans to liquidate assets a. Better than going through chap 7- more time to get affairs organized to get higher price for assets How to get a Chap 11 case started 35

D.

E.

F.

1.May be commenced either voluntarily or involuntarily 2.§ 1107 requires the debtor to file a a. schedule of assets and liabilities b. statement of financial affairs c. State of executory contracts d. A list of the 20 largest unsecured creditors (to appoint creditors’ committee) 3.The automatic stay goes into effect on commencement of the case and prepetition property enters the estate as in a chap 7 case a. Postpetition property does not automatically become property of the estate like in chap 13 Debtor in Possession (DIP) 1.Is usually the person who was in charge of the debtor 2.Operates the debtor’s business under § 1108 3.Trustee can be appointed if the court orders under § 1104 a. Usually because the DIP was dishonest or mismanaged the estate 4.In cases where the mismanagement is not so bad as to justify appointment of a trustee, but there is a question of competence or honesty, the court can appoint an examiner to conduct an investigation Creditors’ Committee 1.§ 1102 requires the US trustee to appoint at least one committee of unsecured creditors as soon as practicable after the order for relief (=filing of the petition in voluntary case) 2.Its purpose is to represent the creditor’s interest and to keep an eye on the debtor’s conduct in its management of the estate 3.It hires accountants and attorneys to investigate the business 4.Participates in the plan formulation 5.Ultimately approves or rejects the DIP’s proposed plan a. However, cram down may be possible The Plan 1.§ 1121 gives the debtor the exclusive rights to propose a plan in the 120 days after the order for relief a. If the debtor filed a plan within this period and it was accepted by each impaired class, no one else may file a plan b. Requires the debtor to negotiate- make sure everyone is happy enough c. If the plan was filed but not accepted by the end of the 120 day period, the debtor has a further 60 days to try to get the plan (or an amended version of it) accept d. If after this 180 day period, the debtor fails to get it accepted, then any party in interest may propose a plan 2.The possibility for competing plans gives creditors negotiating power and puts pressure on the debtor to devise an acceptable and feasible plan as quickly as possible a. Dissatisfied creditors may favor a plan the debtor does not want 3.Each class forms a voting block a. To approve plan, must have: the requisite majority of members of that class votes in favor of the plan and this majority includes at least 2/3 the amount of allowed claims b. A class that is unimpaired does not vote on the plan, it is presumed to have accepted the plan under § 1126(f) c. A class that will receive or retain no property under the plan does not vote and is presumed to have rejected the plan under § 1126(g) 4.Mandatory Provisions of Plan- § 1123 a. Designation of classes of claims - § 1123(a)(1) i. Classification of claim into secured, priority and general unsecured claims ii. rules for this in § 1122- requires that claims be substantially similar 36

b.

G.

H.

Specification of unimpaired classes of claims - § 1123(a)(2) i. Impairment means no alteration of the creditor’s rights- § 1124 ii. Getting their full claim and what they would have gotten under nonbankruptcy law c. Specification of the treatment of impaired classes of claims- § 1123(a)(3) i. How much they will get, how much on the dollar ii. Minimum treatment in § 1129 d. Equal treatment of claims in a class- § 1123(a)(4) e. Adequate means for the plans implementation- § 1123(a)(5) i. Requires the plan to set out the manner in which the plan will be funded and the course the will be followed to bring the reorganization to a successful conclusion Disclosure Statement- § 1125 1.Analogous to the prospectus published by a corp in connection with the issuance of stock a. but don’t have to follow SEC rules 2.Requires the proponent of the plan to draft a disclosure statement containing adequate information 3.Statement must be approved by the court after notice and hearing 4.Must be distributed to all creditors with a copy of the plan 5.Adequate Information a. Enough information must be given, as far as reasonably practicable in light of the debtor’s nature and history and the state of its records, to enable a hypothetical reasonable investor with attributes of the members of the call in question to make an informed judgment about the plan b. Typical adequate information i. Description of the business 1.Debtors role in the industry and consumers or clients ii. History of the debtor prior to filing 1.Reasons for filing iii. Financial information 1.Statement of assets and liabilities and profit and loss analysis iv. Description of the plan 1.To help creditors determine how their rights will be affected v. How the plan is to be executed vi. Liquidation analysis 1.To see if creditors are getting what they would under chap 7 vii. Management to be retained and the compensation of the personnel retained viii. Projection of Operations 1.To determine if the plan is feasible ix. Litigation 1.Pending or contemplated litigation x. Transactions with Insiders xi. Tax Consequences Confirmation- § 1129 1.Generally a. Requires a hearing - § 1128 b. Parties in interest can object to the plan- different than rejection which is motivated by a creditor’s preference- objection is based on legal grounds that the plan doesn’t fit the requirements c. Under § 1141(b) and (c) confirmation vests all the estate’s property in the debtor free and clear of all claims and interests, except as to the plan

37

d.

§ 1141(d)(1) discharges the debtor upon confirmation of the plan so that the debtor’s original obligations fall away and are replaced by the commitments under the plan 2.Requirements of Chap 11 plan a. Lawfulness and good faith- § 1129(a)(1), (2) and (3) i. Court has power to refuse confirmation if it is abusive b. Treatment of impaired claims- § 1129(a)(7) i. § 1129(a)(7)(a) imposes a best interest test (same as § 1325(a)) ii. If a class is impaired, each member of the class who did not vote to accept the plan must receive a distribution under the pan at least equal to the present value of what they would have received had the debtor been liquidated under chap 7 iii. Part of cramdown c. Acceptance by classes of claims- § 1129(a)(8) i. If even one impaired class does not accept the plan, § 1129(a)(8) is not satisfied and confirmation can only be achieved by complying with the additional requirements for cramdown confirmation under § 1129(b) d. Required treatment for priority claims- § 1129(a)(9) i. All priority claims must be paid in full (can be paid in installments if class accepted plan, but must equal the present value) e. Acceptance by at least one impaired class- § 1129 (a)(10) i. Part of cramdown ii. Ensures some creditor support for the plan f. Plan must have a reasonable prospect of success- § 1129(a)(11) i. The feasibility standard- places the burden on the proponent to satisfy the court that the plan has a reasonable prospect of achieving its goals and allows the court to refuse confirmation if the place is impracticable or over-optimistic 3.Cramdown- § 1129(b) a. Policy i. The purpose is to give the debtor a means of confirmation even through some (or most) classes of creditor have refused to accept the plan b. Requirements of Cramdown i. All the standards under § 1129(a) are satisfied, except for § 1129(a)(8) ii. The plan does not discriminate unfairly against any impaired class that has no accepted the plan 1.Discrimination is permissible if it is not unfair 2.Must evaluate the need and motive for the discrimination to determine bad faith iii. The plan is fair and equitable with respect to each impaired class that has not accepted the plan 1.Broader than unfair discrimination c. Fair and equitable for secured claims i. Must meet one of three tests- § 1129(b)(2)(A) 1.Liens of the claimants must be preserved to the full amount allowed of the secured claim and each claimant must receive deferred cash payments totaling at least the allowed amount of the value of its secured claim 2.If the debtor wishes to sell the property free and clear of liens so that the lien cannot be preserved, the claimant is allowed to bid at the sale 3.Some other treatment of the secured claim that assures the claimant of receiving the indubitable equivalent of the claim d. Fair and equitable for unsecured claims i. Must meet one of two tests- § 1129(b)(2)(B) 38

1.The plan must provide the each holder of a claim in the class receives property of value equal to the allow amount of the claim (present value test and paid in full) 2.No junior claim or interest receives or retains any property ◊ Known as the absolute priority rule I.

Prepackaged plans 1.When the debtor is able to work out a plan with creditors before filing the petition 2.§ 1121(a) allows the debtor to file a plan with the petition 3.§ 1125(g) allows for prepetition solicitation 4.§ 1126(b) treats prepetition acceptances and rejections as valid provided that proper disclosure was made under nonbankruptcy disclosure regulations or under the adequate information standard in § 1125(a) 5.If a prepackaged plan can be formulated, the reorganization usually proceeds must more quickly which reduces the risk of delay and uncertainty 6.Only good for debtors who can approach creditors without the protection of the stay

XXI.Discharge A. B. C.

D.

E.

The discharge is the statutory forgiveness of the balance of debts that are not paid in full in the bankruptcy case and is one of the important parts of the fresh start Each chapter has its own discharge provision- § 727, § 1141, § 1328 1.And § 523, § 524, and § 525 Effects of Discharge 1.The discharge only affects the debtor’s personal liability on the debt and does not terminate any lien on the debtor’s property which remains collateral to the extent of its determined value 2.The injunction created by the discharge succeeds the automatic stay that has been in effect during the case and turns the temp bar of the stay into a permanent prohibition on collection activity Reaffirmation is a waiver of discharge made between the debtor and creditor 1.§ 727(a) in chap 7 2.§ 1328(a) in chap 13 3.§ 1141(d) has the same effect by account for it in the plan Debts that CANNOT be discharged- § 523 1.Priority taxes- § 523(a)(1) a. Taxes that are entitled to priority under § 507(a) b. Under § 523(a)(14) if the debtor borrows money to pay a nondischargeable tax debt, that loan becomes nondischargeable 2.Obligations incurred fraudulently- § 523(a)(2) a. Subsection (A) Debts induced by the debtor’s false representations (NOT about the debtor’s financial condition), whether made orally or in writing b. Subsection (B) when the debt was induced by a materially false written financial statement i. Means that where an oral misrepresentation induces the debt, the question of whether the false representation relates to financial condition is significant c. Five Fingers of Fraud i. Debtor made a false representation ii. Representation was material iii. The debtor had knowledge of the falsehood and had intent to deceive iv. The creditor reasonably relied on the false representation in entering into the transaction v. The creditor suffered some injury as a result of the false representation from the debtor d. Subsection (C)- presumed when shortly before filing the petition the debtor when on a consumer spending spree (to disprove debtor must rebut presumption) 39

i.

When within 90 days before the filing of the case, the debtor incurred consumer debts for luxury goods or services (those not reasonably necessary for the support or maintenance of the debtor or dependent) aggregating more than $500 to a single creditor ii. When within 70 days before filing, the debtor obtained cash advances aggregating more than $825 and constituting an extension of consumer credit under an open-ended credit plan 3.Unlisted or unscheduled debts- § 523(a)(3) a. Protects creditors who did not know of the bankruptcy in time to file a claim 4.Debts arising out of the debtor’s dishonesty as a fiduciary or from embezzlement or larceny- § 523(a)(4) 5.Domestic support obligations- § 5239a)(5) 6.Debts for willful or malicious injury- § 523(a)(6) a. Discharged in chap 13 cases only b. Determination of discharge-ability must be requested c. Concerned with intentional rather than negligent behavior- must intend the act and consequences 7.Governmental fines, penalties, and forfeitures a. Includes penalties on taxes that are non-dischargeable under § 523(a)(7) 8.Educational loans and benefits- § 523(a)(8) a. If they were made, insured or guaranteed by the govt b. However, gives the court discretion to discharge the debt if exclusion from the discharge would cause an undue hardship on the debtor or its dependents c. Court must examine: i. Debtor’s financial resources and expenses ii. Efforts made to repay the loans iii. Efforts to obtain suitable employment and to control expenses iv. Debtor’s good faith in seeking bankruptcy relief v. Under § 105 court can discharge part of the debt to the extent necessary to relieve the hardship 9.Liability for driving while intoxicated- § 523(a)(9) 10.Debts from a prior case in which a discharge was waived or denied- § 523(a)(10) a. Does not prevent the debts that survived an earlier case because the discharge was denied under the 8 year rule in § 727(a)(8) or the 6 year rule in § 727(a)(9) b. In the debtor’s 3rd or later bankruptcy, old debt could be denied 11.Payments under an order of restitution in federal cases 12.Matrimonial debts that do not qualify as domestic support obligations- § 523(a)(15) a. Debts arising out of a property settlement on divorce or separation XXII.Discrimination Against Debtor- § 525 A. § 525(a) and § 525(b) prohibit discrimination against the debt by governmental units or by a private employer solely on the ground of the debtor’s bankruptcy, insolvency or nonpayment of a discharged debt B. The govt or employer can still justify adverse treatment by showing that it was based on grounds other than the debtor’s bankruptcy or the nonpayment of a discharged debt

40

$600, - 25 § 1(2), - 5 § 101(10), - 24 § 101(10A), - 10 -, - 31 § 101(12), - 24 § 101(14A), - 14 -, - 25 § 101(30), - 8 § 101(32), - 23 -, - 24 § 101(37), - 13 § 101(39A), - 9 -, - 30 § 101(5), - 13 -, - 24 § 101(53), - 23 § 101(54), - 21 -, - 24 § 101(8), - 9 § 109, - 7 -, - 8 -, - 9 -, - 29 § 1104, - 33 § 1121, - 33 -, - 35 § 1123, - 32 -, - 33 § 1123(a)(5)(D), - 32 § 1124, - 33 § 1129(b), - 34 -, - 35 § 1141, - 34 -, - 35 -, - 36 § 1304, - 29 § 1305(a)(2), - 13 § 1306, - 17 -, - 29 § 1325(a), - 30 -, - 31 -, - 34 § 1325(b), - 30 -, - 31 -, - 32 § 1327(a), - 29 § 1328, - 32 -, - 35 -, - 36 § 3, - 6 § 341, - 11 § 362(b), - 11 -, - 12 § 362(c)(3), - 12 § 362(d)(1), - 12 -, - 15 § 363(c)(2), - 26 § 365, - 27 -, - 28 § 4(a)(1), - 5 § 4(b), - 5 § 5, - 6 -, - 23 § 502(b)(1), - 13 § 506(a)(2), - 31 § 521, - 9 -, - 21 § 522(d), - 18 § 523(a)(2), - 36 § 523(a)(8), - 36 § 524, - 12 -, - 20 -, - 21 -, 35 § 544(a), - 23 § 544(b)(1), - 23 § 546(b), - 22 -

§ 547, - 12 -, - 22 -, - 23 -, 24 -, - 25 § 547(c), - 12 -, - 24 -, - 25 § 548, - 22 -, - 23 -, - 25 § 7, - 6 § 707(b), - 8 -, - 9 -, - 10 -, 11 -, - 29 -, - 31 -, - 32 § 722, - 20 § 727, - 35 -, - 36 -, - 37 § 8(a), - 6 180 days, - 8 -, - 18 30 days, - 12 -, - 18 -, - 24 -, - 29 3rd party, - 2 -, - 4 abandoned, - 12 -, - 17 -, 20 Abandonment, - 17 adequate assurance of future performance, - 28 Adequate Information, - 34 adequate protection, - 12 -, - 14 -, - 15 -, - 16 -, - 26 -, - 30 administrative expenses, 14 -, - 27 assignment, - 27 -, - 28 Assignment for the benefit of creditors, - 3 attorney’s fees, - 11 badges of fraud, - 19 -, - 25 balance sheet test, - 23 -, 24 Best Interest Test, - 31 bona fide purchaser, - 22 -, - 23 breach of contract, - 28 breach of the peace, - 4 burden of proving, - 12 -, 15 -, - 16 cash advances, - 36 cash collateral, - 26 charitable, - 25 -, - 32 Chronology, - 5 commitment period, - 32 compel discovery, - 17 concealed, - 5 confirmation, - 18 -, - 20 -, 29 -, - 30 -, - 34 -, - 35 constructive fraud, - 5 -, - 6 -

consumer spending spree, 36 contemporaneous exchange, - 12 -, - 24 contingent, - 9 -, - 13 cramdown, - 34 -, - 35 credit agencies, - 1 credit counseling, - 8 -, - 9 credit worthy, - 1 Creditors Meeting, - 11 curing, - 28 decline in value, - 15 deficiency, - 4 -, - 5 -, - 13 -, - 14 -, - 31 disclosure statement, - 34 discriminate unfairly, - 35 disposable income, - 8 -, - 9 -, - 10 -, - 30 -, - 31 -, - 32 disputed, - 9 -, - 13 domiciled, - 18 Due process, - 1 Educational loans, - 36 effective reorganization, 12 -, - 16 embezzlement, - 36 Employee benefits, - 15 equity cushion, - 4 -, - 14 -, - 16 estate property, - 11 -, - 12 -, - 21 -, - 25 -, - 31 examiner, - 33 execution, - 1 -, - 2 -, - 4 -, 6 -, - 19 -, - 23 expert testimony, - 12 -, 13 -, - 16 extraordinary transaction, 26 Fair and equitable, - 35 feasible, - 12 -, - 16 -, - 28 -, - 30 -, - 33 -, - 34 fi fa, - 2 First in time, first in right, 5five fingers of fraud, - 7 foreclosure, - 2 -, - 4 -, - 15 -, - 19 -, - 21 fresh start, - 7 -, - 13 -, - 17 -, - 18 -, - 35 Fresh start, - 7 garnishment, - 2 -, - 29 -

41

good faith, - 5 -, - 6 -, - 9 -, 22 -, - 25 -, - 28 -, - 29 -, 30 -, - 34 -, - 37 Homestead Exemptions, 18 impaired, - 20 -, - 33 -, - 34 -, - 35 indubitable equivalent, - 16 -, - 35 injunction, - 12 -, - 36 insider, - 5 -, - 24 -, - 25 insiders, - 22 -, - 23 insolvent, - 5 -, - 6 -, - 12 -, 23 -, - 24 -, - 25 insurance, - 8 -, - 10 -, - 15 -, - 32 intoxicated, - 15 involuntarily, - 8 -, - 32 Ipso Facto, - 28 judgment creditor, - 1 -, - 2 judicial lien, - 19 -, - 23 Judicial Liens, - 2 -, - 3 LBO, - 6 leverage, - 1 levy, - 2 -, - 4 -, - 6 liquidate assets, - 32 liquidated, - 1 -, - 9 -, - 14 -, - 17 -, - 26 -, - 30 -, - 31 -, - 34 liquidation value, - 14 -, - 18 -, - 21 litigation, - 34 luxury goods, - 36 Means test, - 9 mismanaged the estate, 33 -

National and Local Standards, - 10 -, - 32 New value rule, - 24 nonpossessory nonpurchase money security interest, - 19 notice and hearing, - 17 -, 26 -, - 27 order for relief, - 9 -, - 11 -, 22 -, - 29 -, - 33 ordinary course of business, - 12 -, - 22 -, - 24 -, - 26 -, - 27 oversecured, - 4 PMSI, - 3 -, - 21 postpetition, - 11 -, - 13 -, 14 -, - 22 -, - 27 -, - 29 -, 32 Postpetition Credit, - 26 Prepackaged plans, - 35 present value, - 15 -, - 30 -, - 31 -, - 34 -, - 35 presumption, - 9 -, - 10 -, 25 -, - 36 priority claims, - 10 -, - 14 -, - 30 -, - 31 -, - 34 -, - 35 pro rata, - 13 proposed plan, - 33 Purchase money security interests, - 24 reaffirmation, - 9 -, - 17 -, 20 -, - 21 reasonable prospect of success, - 35 reasonably equivalent value, - 6 -, - 7 -, - 25 -

redemption, - 2 -, - 9 -, - 20 -, - 21 Redemption, - 20 rejection, - 27 -, - 28 -, - 34 relief from stay, - 8 -, - 12 -, - 15 -, - 17 -, - 29 replacement value, - 14 -, 31 residence, - 18 -, - 32 Ride-Through, - 21 securities, - 26 Self-help, - 1 standard disclosure, - 20 state opt out, - 18 statutory lien, - 3 -, - 23 strip down, - 14 strong arm, - 23 subsequent transferee, - 4 -, - 5 -, - 6 -, - 22 superpriority, - 14 -, - 27 Superpriority, - 16 tax return, - 9 Turnover orders, - 2 Undersecured, - 4 undue hardship, - 20 -, - 36 Unliquidated, - 13 Unmatured, - 13 valuation, - 14 -, - 24 violate, - 11 -, - 12 -, - 21 voluntary dismissal, - 8 voting, - 33 Wages and salaries, - 15 wildcard exemption, - 20 writ, - 2 written financial statement, - 36 -

42

43

Table of Contents I.

Debtor/Creditor Relationships........................................................................................- 1 D. Debt collection remedies....................................................................................... .......- 1 7. Garnishment............................................................................................. ......................- 2 -

II. Secured Debt under Nonbankruptcy Law.....................................................................- 3 B. Purchase Money Security Interests (PMSI)...............................................................- 3 D. Judicial Liens............................................................................................................. ......- 3 E. Statutory Liens.......................................................................................................... .....- 3 I.

Lien priority rules................................................................................ ..........................- 5 -

III.

Fraudulent Transfers................................................................................. ....................- 5 -

D. Actual Fraud- § 4(a)(1)..................................................................................................- 5 E. Constructive Fraud- § 4(a)(2).......................................................................................- 5 H. Summary of evaluating Fraudulent transfers...........................................................- 6 IV.

Background to Bankruptcy law...................................................................................- 7 -

B. Goals of bankruptcy code................................................................................... ..........- 7 V. Debtor Eligibility for Different Chapters- § 109...........................................................- 7 E. Chapter 7 Eligibility............................................................................................ ...........- 8 G. Chapter 13 Eligibility................................................................................................ .....- 8 VI.

Getting a Bankruptcy case started.............................................................................- 8 -

F.

Dismissal or conversion of a Chapter 7 consumer case..........................................- 9 -

G. Means test- § 707(b).................................................................................................. ....- 9 8. VII.

Steps in test for abuse presumption/means test..........................................................- 10 The Automatic Stay.....................................................................................................- 11 -

E. Relief from stay under § 362(d).................................................................................- 12 VIII. Claims Against the Estate..........................................................................................- 13 D. Secured claims in Bankruptcy Law...........................................................................- 13 F.

Order of Claims Distribution in Bankruptcy............................................................- 14 -

IX.

Adequate Protection...................................................................................................- 15 -

G. When is there lack of adequate protection?...........................................................- 16 X. Property of the Estate............................................................................................... .....- 16 D. Abandonment of the Property by the Trustee- § 554.............................................- 17 XI.

Exemptions- § 522................................................................................................... .....- 18 -

F.

Debtor’s Power to Avoid Interests that Impair Exemptions.................................- 19 6.

XII.

To determine amount of impairment to be avoided as defined in § 522(f)(2)(A):........- 19 Reaffirmation and Redemption.................................................................................- 20 -

C. Ride-Through................................................................................ ................................- 21 XIII. Trustees Avoidance Powers- Generally....................................................................- 21 44

E. Avoiding Statutes........................................................................................................- 22 XIV. Trustee’s Avoiding Powers- Strong Arm Statute- § 544........................................- 23 C. Trustee’s Power to Avoid Statutory Liens- § 545....................................................- 23 XV.

Avoiding Preferences- § 547...................................................................................... .- 23 -

F.

Requirements- § 547(b)..............................................................................................- 24 -

G. Exceptions to avoidance- § 547(c)............................................................................- 24 XVI. Avoiding Fraudulent and Postpetition Transfers....................................................- 25 XVII. Use, Sale or Lease of Estate Property and Credit..................................................- 25 F.

Postpetition Credit- § 364...................................................................................... .....- 26 -

XVIII. Executory Contracts.................................................................................. ...............- 27 E. Reject or assume contract?................................................................................. .......- 28 XIX. Chapter 13 plan........................................................................................................ ....- 29 F.

Mandatory Provisions in a Chap 13 case- § 1322(a)..............................................- 30 -

G. Confirmation requirements- § 1325(a) and § 1325(b)............................................- 30 J.

Best Interest Test- § 1325(a)(4).................................................................................- 31 -

XX.

Chapter 11 Reorganization........................................................................................- 32 -

F.

The Plan..................................................................................................................... ....- 33 4.

Mandatory Provisions of Plan- § 1123...........................................................................- 33 -

G. Disclosure Statement- § 1125....................................................................................- 33 H. Confirmation- § 1129............................................................................... ....................- 34 2.

Requirements of Chap 11 plan.....................................................................................- 34 -

3.

Cramdown- § 1129(b)............................................................................................ .......- 35 -

XXI. Discharge............................................................................................ ..........................- 35 E. Debts that CANNOT be discharged- § 523...............................................................- 36 XXII. Discrimination Against Debtor- § 525.......................................................................- 37 -

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