Bankruptcy
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1. Debt Collection outside Bankruptcy[edit | edit source]
a. Informal Collection[edit | edit source]
i. Common Methods:
1. Debt collection letters (cordial or hostile);
2. Telephone calls;
3. Personal visits;
4. Threat of lawsuits;
5. Communications with neighbors, employers, family, etc;
6. Altering debtor’s credit score;
ii. Limitations on Creditors
1. Common law torts
a. E.g. defamation, invasion of privacy, and intentional infliction of mental anguish.
2. Fair Debt Collection Practices Act
a. Application:
i. Does not apply to commercial debts
ii. Applies only to “debt collectors.” See FDCPA § 1692a.
1. Debt collectors = Third parties
2. Debt collectors are not the debt holder.
3. Hanson v. Santander Consumers (2017) – One who purchases bad debt from another and attempts to acquire the debt from the debtor is not a debt collector.
b. Specific Provisions:
i. §1692d. Harassment or Abuse
ii. §1692e. False or Misleading Representations
iii. §1692f. Unfair Practices
1. (3) Postdated checks prohibited.
2. (6) Seeking to disable property use.
3. (7) Communication by postcard.
c. Debtor Remedies - §1692k
i. (1) actual damages (compensatory),
ii. (2) any other damages, punitive or otherwise, up to $1,000.
d. Debt Collector Defenses.
i. Bonafide Error Defense – Viewed from the standpoint of the least sophisticated debtor, the debt collector must show by a preponderance of the evidence that: (McCollough (9th Cir. 2011))
1. It violated FDCPA unintentionally;
2. The violation resulted from a bonafide error; and
3. It maintained procedures reasonably adapted to avoid the violation.
b. Formal Collection[edit | edit source]
i. Secured Creditors[edit | edit source]
Security Interest[edit | edit source]
a. Purchase-Money Security Interest (UCC 9-103)
i. Creditor gives money to debtor and the chattel is held as collateral.
b. Creation of a Lien
i. Unperfected Security Interest (UCC 9-317)
1. Provides that an unperfected security interest is “subordinate” to a judicial lien on the same property.
ii. Consumer goods are automatically “perfected” when it attaches on consumer goods other than motor vehicles or fixed fixtures. (UCC 9-309)
iii. Other goods, fixtures, or homes are perfected upon filing with public or state office. (UCC 9-311)
2. Real Property[edit | edit source]
a. Debtor must default; Bank must attempt collections; Bank must initiate foreclosure proceedings.
b. Bank can bid on the property as “credit bids”
3. Personal Property: “Self-help” provision (UCC 9-609)[edit | edit source]
a. Repossession - after default, a secured party may take possession of the collateral with or without the judicial process, so long as it does not commit “breach of the peace.”
b. Deficiency judgment – If the collateral does not cover the entire debt, the creditor may go after other property.
ii. Unsecured Creditors[edit | edit source]
1. Judicial Liens[edit | edit source]
a. Process
i. The creditor must file suit; (unsecured creditor)
ii. Judgment will be entered for creditor (Judgment Creditor)
iii. Creditor must locate an asset and direct the Court to issue a writ of execution (or attachment) to fulfill the judgment by the sheriff; (judicial lien creditor)
iv. Property is acquired, sold, and paid to the creditor + sheriff fees
b. NOTE:
i. (Majority Rule) By o completing a levy (removing personal property from the debtor’s property) a later article 9 security interest will prevail.
ii. (Minority Rule) Sheriff only have to lay hand on asset, does not need to physically remove it. (Note: Nebraska)
c. Damages
i. For unsecured creditors, the creditor MUST get a judgment before taking the property or else the creditor may be liable for conversion.
2. 3rd Parties: Garnishment[edit | edit source]
a. In general
i. Allows the creditor to reach assets held by third parties. E.g. banks, employers, etc.
ii. Some states prohibit garnishment of wages
iii. No employer may discharge any employee for having one garnishment order. 15 USC §1674(a)
b. Timing
i. Temporal Net – Time between service of writ and garnishee’s answer in which the creditor gets to “catch” all or most assets arising in the debtor’s account
ii. Spear Approach – the Writ only catches whatever is available at the moment of garnishment
c. Priority
i. Support order garnishment has priority over a creditor’s garnishment (Commonwealth Edison v. Denson (Ill. App. 1986))
ii. Garnishments of the same type = first in time, first in right.
2. The Beginning[edit | edit source]
a. The Bankruptcy Estate - §541[edit | edit source]
i. In General[edit | edit source]
1. The Bankruptcy Estate is created upon filing the petition. §541(a).
ii. Estate Property[edit | edit source]
1. “All legal or equitable interests of the debtor in the debtor “as of the commencement of the case” is property of the estate. §541(a)(1).
2. Chapter 7 – The Trustee acquires the entire estate with exceptions.
3. Chapter 13 – The debtor remains in possession of “property of the estate” as “debtor in possession”.
4. Chapter 11 – The debtor remains in possession of “property of the estate” as a “debtor in possession”
iii. Other Included Estate Property[edit | edit source]
1. If a future interest was earned by services performed pre-petitioner, then it is property of the estate. (Chapter 7)
2. “Proceeds, product, offspring, rents or profits of or from property of the estate.” §541(a)(6)
a. Post-petition income are property of the estate under a Chapter 13, but not a chapter 7. See §1306.
3. Property the debtor acquires or becomes entitled to within 180 days after the filing of the petition by bequest, divorce or as a beneficiary. §541(a)(5).
4. Any interest in property that the estate acquires after the commencement of the case. §541(a)(7)
5. In chapter 11s, licenses and other items become property of the estate. In re Burgess
iv. Anti-Alienation Provisions - §541(c)(1)[edit | edit source]
1. (A) An interest of the debtor in property becomes property of the estate in spite of any provision that restricts or conditions transfer of such interest by the debtor.
2. (B) Ipso facto Clauses are unenforceable. (Clauses that direct the property to be transferred upon insolvency or filing a bankruptcy petition).
v. Exclusions[edit | edit source]
1. Spendthrift Trust - §541(c)(2)
a. A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law.
2. ERISA Payments - §541(b)(7)
a. Payments pursuant to the Employee Retirement Income Security Act of 1974
3. Benefit of Another - §541(b)(1)
a. Any “power that the debtor may exercise solely for the benefit of an entity other than the debtor.”
4. Items which the debtor has no control over. (e.g. Tax Status) --- Chapter 11s
b. The Automatic Stay - §362[edit | edit source]
i. Creation - §362(a)[edit | edit source]
1. The stay arises upon filing of the petition. §362(a)
2. Effectiveness of the stay does not depend on creditor’s notice of the filing.
ii. Proceedings subject to the Stay- §362(a)[edit | edit source]
1. (1) “the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case.”;
2. (2) “enforcement . . . of a judgment” prior to bankruptcy;
3. (3) “Any act to obtain possession . . . [or] control over property of the estate”;
4. (4),(5) “Any act to create, perfect, or enforce any lien”
5. (6) “any act to collect”
iii. Exceptions - §362(b)[edit | edit source]
1. (1) Criminal actions and enforcement;
2. (2) Domestic support obligations;
3. (3) Action to perfect statutory liens
4. (4) Proceeding by gov’t units to enforce police or regulatory powers
a. If non-monetary judgment, gov’t may continue beyond the state of judgment.
b. If monetary judgment, the proceeding must cease, and further enforcement is stayed.
5.
iv. Termination - §362(c)[edit | edit source]
1. (1) The automatic stay ends as to particular property when the property ceases to be property of the estate.
2. (2) The automatic stay ends when either:
a. (A) the case is closed;
b. (B) the case is dismissed; or
c. (C) the debtor receives a discharge, and the discharge injunction is granted (§524(a)(2))
v. Relief from the Stay - §362(d)[edit | edit source]
***NOTE: This section is really only applicable to secured creditors in Ch. 13 and Ch. 11***
1. For Cause - §362(d)(1)[edit | edit source]
2. Lack of Adequate Protection - §362(d)(1)[edit | edit source]
a. Principle Risk to Secured Creditors:
i. Loss of the collateral during the repayment period/bankruptcy period
ii. Decline in value (depreciation/amortization)
b. Debtor can adequately satisfy creditor by: §361
i. (1) Cash Payments;
ii. (2) Providing an additional lien; or
iii. (3) Any other form of protection that provides creditor with an indubitable equivalent of its interest (In re Panther Mountain Land Dev.)
c. Factors:
i. Sufficiency of Equity Cushion (Most Significant)
ii. Periodic Payments
iii. Additional Liens
iv. A good prospect of a successful reorganization (ch. 11)
3. No Equity/Not Necessary - §362(d)(2)[edit | edit source]
a. For the stay to be lifted the party in interest must show:
i. (A) the debtor lacks equity in the property; AND
1. If the value of the property exceeds the value of the debt secured by the property then the debtor has equity in the property
ii. (B) the property is not necessary to an effective reorganization
1. Chrystler LLC.: Under the Code, the automatica stay may not be lifted if the property in question is necessary for the debtor’s effective reorganization.
vi. Timing – §362(e)[edit | edit source]
1. The Court must rule on a motion for relief from the stay within 30 days, or else the stay is automatically terminated with respect to that specific party
vii. Sanctions for Violations - §362(k)[edit | edit source]
1. “[A]n individual injured by any willful violation of a stay . . . shall recover actual damages, including cost and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” §362(k)
a. Not confined to debtor alone
b. Split on Whether Corporations can recover
i. In re Just Brakes Corporate Systems, Inc. (8th Cir. 1997)
1. The plain meaning of the word individuals prohibits corporations from receiving damages.
ii. In re APF Co. (Bankr. D. Del. 2001)
1. Remedy may extend to corporations.
2. “The court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title.” §105(a)
3. Sovereign immunity is abrogated with respect to §105 and §362. §106(a)
c. Fraudulent Transfers and Conveyances - §548[edit | edit source]
i. Uniform Fraudulent Transfers Act. §548 of the Code.
ii. The trustee may avoid any transfer that was made within two years before petition if debtor: §548(a)(1)
1. (A) made such transfer with “actual intent to hinder, delay, or defraud” or
2. (B)(i) received less than a reasonably equivalent value in exchange for such transfer.
3. Means and Dismissal[edit | edit source]
a. The Means Test – §707(b)[edit | edit source]
i. Overview[edit | edit source]
1. When filing a chapter 7, there is a “presumption of abuse” that the debtor must overcome.
2. ONLY applies to “individual debtors whose debts are primarily consumer debts.” §707(b)(1)
ii. Median Income - §707(b)(7)[edit | edit source]
1. Calculating “current monthly income” - §101(10A)
a. Average monthly income received from all sources during the preceding six months
b. EXCLUDES social security benefits
2. Calculating Household Size: Approaches
a. Heads-on-the-Beds Approach: Accounts for all people occupying a housing unit, without regard to relationship or financial contribution of the household members. (Yields highest numbers)
b. Income-Tax-Dependent Approach: Based on the number of dependents the debtor could include on a tax return.
c. Economic Unit Approach: Court utilizes a fractional approach and assigns the dependents a fraction to determine household size.
3. Overcoming the Presumption
a. If debtor’s current monthly income, relative to household size, is below median family income for the same size in debtor’s state, then à Presumption of Abuse is OVERCOME. Proceed to Chapter 7.
b. If debtor’s current monthly income, relative to household size, is above median income for the same size in debtor’s state, then à Presumption is Presumed.
i. Either take 13 for a 5 years period (§1325(b)(4)), or proceed to Disposable Income Bypass
iii. Disposable Income - §707(b)(2)[edit | edit source]
1. Process:
a. Calculate debtor’s current monthly income under §101(10A)(A)
b. Deduct monthly expesenses from current monthly income. §707(b)(2)(A)(ii)
i. Expenses include:
1. (I) National and Local Standards.
2. (I) Up to an 5% for food and clothing.
3. Actual expenses for
a. (II) care and support of elderly or sick household member;
b. (III) administrative expenses for ch. 13 trustee;
c. (IV) Up to $1,925 for private or public education SO LONG AS they are reasonable or necessary;
d. (V) Monthly expenses for housing and utilities in excess of standards
c. Creates monthly disposable income
d. Multiply by 60 to get “Five-Year” Disposable Income
2. Overcoming Presumption: If “5yr Disposable Income” is:
a. Less than $7,700 à Presumption is OVERCOME
b. Between $7,700 and $12,850 à is the D.I. less than 25% of “nonpriority unsecured debt” à If yes, presumption is OVERCOME. If no, presumption is present.
c. Over $12,850 à Presumption is PRESENT.
b. Other Grounds for Consumer Dismissals[edit | edit source]
i. Voluntary Dismissal – §1307(b)[edit | edit source]
1. No voluntary dismissal in chapter 7
ii. “For Cause” - §§ 707(a), 1307(c)[edit | edit source]
1. Due to unreasonable delay by debtor; nonpayment of fees; or failure to file information timely.
iii. Chapter 7 - Totality & Bad Faith - §707(b)(3)[edit | edit source]
1. §707(b)(3) In granting relief, the Court shall consider:
a. (A) whether the debtor filed the petition in bad faith; or
b. (B) the totality of circumstances.
2. Relevant Factors: In re Deutscher (Bankr. N.D. Ill. 2009)
a. Debtor’s ability to pay,
b. Whether debtor’s financial situation was caused by sudden misfortune or illness,
c. Whether purchased consumer goods exceeded debtor’s ability to pay (luxury goods),
d. Whether debtor’s budget was excessive, and
e. Whether the filings accurately reflects the debtor’s financial condition and a willingness to undertake financial sacrifices through the bankruptcy process.
iv. Chapter 13 – Bad Faith §1325(a)[edit | edit source]
1. (3) The plan must be proposed in good faith and not by any means forbidden in law.”
2. (7) “the action of the debtor in filing the petition was in good faith.”
3. Look to a totality-of-the-circumstances.
c. Re-Filing Limits[edit | edit source]
i. After Earlier DISCHARGE
1. 7 à 7 = Must wait 8 years to refile §727(a)(8)
2. 13 à 7 = Must wait 6 years from the date of the previous filing; however, wait time does not apply if the original 13 paid 100% of unsecured creditors or paid 70% under a repayment plan in good faith. §727(a)(9)
3. 13 à 13 = Must wait 2 years from the date of the original 13. Seldom issue because 13 is 3 or 5 years. §1328(f)(2)
4. 7, 11 à 13 Must wait 4 years after filing earlier case §1328(f)(1)
4. Chapter 7 – Liquidation[edit | edit source]
a. Exemptions - §522[edit | edit source]
i. Governing Law - §522(b)[edit | edit source]
1. State Opt-Out Provisions - §522(b)(1)[edit | edit source]
a. Debtor may choose to apply exemptions of their state and nonbankruptcy exemptions (e.g. social security payments (42 USCA §407), civil service retirement benefits (5 USCA §§729, 2265), or federal exemptions.
i. States may pass “opt-out” legislation and only allow state exemptions. §522(b)(1)
1. “Opt-Out” states – Nebraska, Wyoming, California, New York
2. Non- “opt-out” states – Texas, Penn., Michigan, Hawaii
b. Statute
i. Opt-out states are governed by §522(b)(3)
ii. Non-opt out states are governed by §522(b)(2)
2. Which state law applies? - §522(b)(3)(A)[edit | edit source]
a. Debtor’s Domicile
b. *No definition in code*
c. How to Determine Domicile:
i. First, look back 730 day to determine domicile,
ii. If multiple domiciles, them look at 180 day period prior to immediately preceding the 730 day period
iii. Finally, during this 180 day period, where was the debtor for the “majority” of the time.
d. Exam Tip
i. Counterarguments
1. No intent to stay
2. No change of banks, address, etc.
3. Joint Filing by Spouses – §522(b)(1)[edit | edit source]
a. Spouses must agree on whether to take state exemptions or federal exemptions; separate exemptions are prohibited.
b. If the spouses cannot agree, federal exemptions apply.
ii. Process and Valuation - §522(l),(a)[edit | edit source]
1. Process - §522(l)[edit | edit source]
a. Debtor files a list of property that the debtor claims as exempt.
i. Each debtor gets the exemption in joint cases. §522(m)
ii. If debtor fails to file, a dependent may file, or may claim exemptions on behalf of debtor.
b. Next, a party (creditor or trustee) may object to the exemption.
c. If no objection, the property claim is exempt
2. Valuation - §522(a)(2)[edit | edit source]
a. Fair Market Value
b. *A determination of the FMV should be made as if no bankruptcy were occurring, not based on a hypothetical liquidation-sale valuation. In re Sumerell (Bankr. E.D. Tenn. 1996)
iii. Federal Exemptions - §522(d)[edit | edit source]
1. (1) Homestead exemption up to $23,675.
2. (2) One motor vehicle up to $3,775
3. (3) Items with a specific value of less than $600 and up to an aggregate of $12,625. Includes:
a. Household furnishings/goods, wearing apparel, appliances, books, animals, crops or musical instruments
4. (4) Jewelry up to an aggregate of $1,600
5. (5) Wildcard Provision – Any property not to exceed specific value of $1,250 plus up to $11,850 of any unused amount in (1)
6. (6) Professional books or tools up to an aggregate of $2,375
7. (9) Professionally prescribed health aids
8. (10) Debtors right to receive (A) social security benefits; (B) veteran benefits; (C) disability, illness, or unemployment benefits; (D) domestic support to the extent reasonably necessary . . .
9. (11) Debtor’s right to receive
a. (A) an award under a crim victim’s reparation law;
b. (B) an award for wrongful death;
c. (C) payment under a life insurance contract;
d. (D) payment for personal bodily injury up to $23,675;
e. (E) payment for loss of future earnings (unlimited).
10. (12) Retirement funds
iv. The Homestead Exception[edit | edit source]
1. Federal Exemption - §522(d)(1)
a. Exempts up to $23,675 in real property or personal property used as a residence
2. State Law Varies Greatly
a. Lower homestead exemption states
i. E.g. Wyoming, Georgia
b. High homestead exemption states
i. E.g. California, Nebraska, New York
c. Unlimited homestead exemption states
i. E.g. Texas, Florida
v. Preventing Homestead Abuse - §522(o),(p)[edit | edit source]
1. Transfer Abuse - §522(o)[edit | edit source]
a. 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 transfer of nonexempt property into the homestead within 10 years before the petition, with intent to hinder, delay, or defraud creditors.
b. *NOTE*
i. This is the same as §548 Fraudulent Transfers and §727 Denial of Discharge
2. Purchase Abuse - §522(p)[edit | edit source]
a. “The Mansion Loophole” Amendment
b. Limits the debtor’s interest in a homestead under state law to $160,375 if the debtor acquired the homestead within 1,215 days of the petition.
i. Exception: (p)(2)
1. (A) Does not apply to family farmers;
2. (B) Does not apply to proceeds from the sale of a prior residence towards the new residence
b. Pre-Bankruptcy Planning[edit | edit source]
i. Characteristics[edit | edit source]
1. “when a pig becomes a hog it is slaughtered” – In re Zouhar (Bankr. D.N.M 1981)
2. “While a bankrupt is entitled to adjust his affairs so that some planning of one's exemptions under bankruptcy is permitted, a wholesale sheltering of assets which otherwise would go to creditors is not permissible.” In re Zouhar (Bankr. D.N.M. 1981)
3. Minority View –
a. Some states prohibit transfer non-exempt personal property into exempt personal property. The transfer can only be valid if transferred into the homestead exemption. See In re Reed (Bankr. N.D. Tex. 1981)
ii. Asset Protection Trust[edit | edit source]
1. Growing trend; adopted in Alaska, Delaware, etc. (16 total as of 2016). . . foreign as well.
2. Example: Person creates a trust and transfers property to trust. Person names himself trustee and beneficiary. Creditor attempts to collect. Person tells creditor the assets are property of the trust and not himself, personally. Thus, unable for creditor to access.
c. Continuing the Debt[edit | edit source]
i. Secured Debts: Keeping Collateral[edit | edit source]
1. Statement of Intentions[edit | edit source]
a. Within 30 days of the petition, the debtor must file a statement of intentions declaring his disposition of secured property. §521(a)(2)(A)
b. Failure to file a timely statement of intention may lift the automatic stay. §362(h)(1)(B)
2. Option 1: Surrender the Collateral[edit | edit source]
3. Option 2: Redemption - §722[edit | edit source]
a. Allows the debtor to keep “tangible personal property” intended for personal or family use so long as it is either exempted or abandoned by paying the full amount of the collateral.
i. Similar provision under UCC §9-623.
4. Option 3: Reaffirmation - §524[edit | edit source]
a. Debtor and Creditor(s) enter into a new binding agreement to waive the discharge on a given debt.
b. Aggressive disclosures are required under §524.
c. Restrictions on Reaffirmation - §524(c), (d), (k)
i. Agreement is enforceable only if : §524(c)
1. (1) such agreement was made before discharge;
2. (2) debtor received the disclosures in (k) at or before signing;
3. (3) If debtor has an attorney, then
a. (A) debtor is fully informed of rights and responsibilities of reaffirmation;
b. (B) such agreement cannot impose an undue hardship; and
c. (C) the Attorney fully informed debtor of consequences and effect
4. (4) the debtor does not rescind within 60 days after the agreement is filed with the court
5. (6) If unrepresented, the Court must determine the agreement does not
a. Impose an undue hardship; and
b. Is in the best interest of the debtor.
d. Note: Aggressive disclosures not required for credit unions. §524(m)(2)
5. Option 4: Ride Through[edit | edit source]
a. A debtor not in default, retains the debt and continues to pay.
b. Majority of courts hold that ride-though is not an optiton for most personal property
c. 8th Circuit does not recognize ride through.
ii. Unsecured Debts[edit | edit source]
1. Reaffirmation[edit | edit source]
a. See Above
b. Actions undertaken by the creditor in asking the debtor to reaffirm do not violate the stay so long as the letter is nonthreatening and non-coercive. In re Duke (7th Cir. 1996)
d. Claims – In General[edit | edit source]
i. Allowed Claims[edit | edit source]
1. A claim is deemed allowed unless a party in interest objects. §502(a)
2. Burden is on the debtor to prove invalidity. In re Lanza (Bankr. E.D. Pa. 1985)
ii. Disallowed Claims:[edit | edit source]
1. Disallowed by agreement or by law. §502(b)(1)
2. A claim for unmatured interest. §502(b)(2)
3. Disallowed claim if a transferee fails to return property to the estate after the transfer has been avoided. §502(d)
iii. Disputing a Claim[edit | edit source]
1. Disputes are resolved as a contested matter by mtion under Rule 9014 unless it requires a more adversary proceeding under Rule 7001, requiring service of process, a complaint, etc.
e. Secured Claims - §506[edit | edit source]
i. Determining the Value - §506(a)(2)[edit | edit source]
1. “If the debtor is an individual . . . such value with respect to personal property . . . shall be determined based on the replacement value . . . [which] shall mean the price a retail merchant would charge for property”
2. Allowed Claim Includes:
a. Principle
b. Prepetition costs, expenses, and interest
c. Reasonable postpetition costs, fees, and interest. §506(b)
ii. Bifurcation – §506[edit | edit source]
1. A creditor is secured up to the value of such creditor’s interest in the property. §506(a)
2. If the allowed secured claim is secured by property where the value is great than the claim, the interest and any reasonable fees, cost, or charges may be provided for. §506(b)
3. Bifurcation Example:
a. E.g.
i. If creditor has an interest worth $100. The value of the property is $80. The creditor has $80 worth of a secured clcaim, and $20 worth of unsecured claim.
ii. Reasoning: Only allowed a secured claim up to the value of the property.
4. If the claim is more than the property value, the creditor gets a secured claim up to the value of the property, and an unsecured remainder.
f. Unsecured Claims - §502[edit | edit source]
i. Determining Value - §502(b)[edit | edit source]
1. Creditor is entitled to assert the full amount as an allowed claim under §502.
2. Interest. §502(b)(2)
a. Prepetition interest – Allowed
b. Postpetition interest – Not Allowed
3. Attorney Fees.
a. If entitled by law or contract at the moment of filing of petition, then the fees are allowed.
ii. Calculation Example[edit | edit source]
1. Terms: Interest @ 12%, Atn’y fees, costs of collection @ 20%.
2. Scenario: $1,000 principal, 3 months in default, collections began and petition filed.
3. Allowed Claim = $1,000+$30 +200 = $1230
a. Interest = Principal x APR for 3 months
i. Interest = 30 1000x.12 = 120 for year /4 = 30 for 3 months
ii. Collection Cost = 200
4. After everything sold, if proceeds equal 10% of the total value of all allowed unsecured claims, trustee will send a check for $123 for unsecured claims
iii. Distribution - §726[edit | edit source]
*NOTE* Each category must be paid in full before the next category.
1. §507 Priorities. §726(a)(1)
2. Allowed unsecured claims which were timely filed or tardily filed by a creditor without knowledge of bankruptcy. §726(a)(2)
3. Allowed unsecured claims which were tardily filed by creditors with notice or actual knowledge of bankruptcy. §726(a)(3)
4. Fines and punitive damages. §726(a)(4)
5. Postpetition interest on prepetition claims. §726(a)(5)
6. To the debtor. §726(a)(6)
iv. Priorities - §507(a)[edit | edit source]
1. (1)(C) - Trustee Expenses
a. Superpriority claims under §503(b)(1)(A),(2), and (6)
i. (1)(A) “the actual, necessary costs and expenses of preserving the estate”
ii. (2) “compensation and reimbursement of officers”
iii. (6) “fees and mileage”
2. (1)(A) - Domestic Support Obligations
3. (2) - Administrative Expenses
a. Other fees under §503
4. (3) 502(f) claims
5. (4) Employee Wages
a. Time Limit – Earned within 180 days of petition
b. Amount Limit – Up to $12,850 per individual
c. EXAM NOTE = IS THE FACT PATTERN INVOLVING AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR?
6. (7) Deposits for consumer goods or services
a. Amount Limit – up to $2,850
7. (8) Certain Taxes
a. (A) Income taxes for previous 3 yrs ending on or before date of petitioner
i. E.g.
1. If D files on April 15, 2013. Years with priority include 2012, 2011, and 2010.
2. If D files on April 16, 2013. Years with priority include 2013, 2012
3. and 2011.
b. (B) Property taxes incurred before commencement and last payable w/o penalty within one year
i. Must be incurred before commencement
ii. Must be due within one year
iii. NOTE: This will always be one year’s worth only, if any.
c. (C) A tax required to be collected for which debtor is liable;
d. (D) An employment tax (Social Security, Medicaid);
e. (G) A penalty for actual pecuniary loss.
i. Not punitive, fees, or fines.
8. (10) Claims for wrongful death or personal injury resulting from debtor’s driving while intoxicated
g. Discharge[edit | edit source]
i. Discharge Injunction -§524 / §727[edit | edit source]
1. The court shall grant the debtor a discharge. §727(a)
2. A discharge discharges the debtor from all debts arising before the filing of the petition. §727(b)
3. A discharge operates as an injunction against the continuation or commencement of an action . . . or an act to collect. §524(a)
ii. Objections[edit | edit source]
1. Any party in interest may object to a discharge.
2. Party may object to a specific debt (§523) or may seek a total denial of a discharge. (§727)
3. A party must object within 60 days after the first §341 meeting. Rule 4007(d)
iii. Global, Discharge Denials - §727(a)[edit | edit source]
1. (1) Debtor is not an individual.
2. (10) Debtor waives the discharge.
3. (2)-(6) Improper conduct in or in anticipation of the Ch. 7 case.
a. (2) Denial to a debtor who transfers property “with an intent to hinder, delay or defraud” within 12 months immediately preceding the petition or after the filing of petition
b. (3) Unjustified failure to keep or preserve financial records
c. (4) (A)Making a false oath; (B) presenting or using a false claim; (C) receiving or giving consideration for action or inaction in the bankruptcy proceeding; and (D) withholding books and records from trustee.
4. (7) Improper conduct in relation to another case
5. (8) Successive bankruptcy filing within 8 years of commencement of ch. 7 or 11.
6. (9) Successive bankruptcy filing within 6 years of commencement of last ch. 13
7. (11) Failure to take required course on financial management
iv. Rifle Shot, Non-Dischargeable Debts - §523(a)[edit | edit source]
1. (1) - Priority Taxes
2. (2) – Obligations incurred fraudulently.
a. (A) false pretenses, false misrepresentations, or actual fraud, other than a statement respecting financial condition;
b. (B) Subparts: In re Hill (Bankr. N.D. Cal. 2008)
i. Written representation of debtor’s financial condition;
ii. The representation was material;
iii. Debtor knew it was false;
iv. Representation made with intent to deceive;
v. Creditor relied on misrepresentation;
vi. The reliance was reasonable; and
vii. The damage suffered by the creditor proximately resulted from the representation.
3. (3) Unlisted or unscheduled debts due to the debtor failing to list the debt;
4. (4) Debts arising out of the debtor’s dishonesty as a fiduciary, or from embezzlement or larceny;
5. (5) Domestic support obligations;
6. (6) Debts for willful or malicious injury;
7. (7) Gov’t fine, penalties, or forfeitures;
8. (8) Educational loans and benefits;
a. UNLESS the debtor can show “undue hardship”
b. Standards
i. Majority – Bruner Test (2nd Cir.)
1. Debtor cannot maintain, based upon current income and expenses, a minimal standard of living for self and dependents if forced to repay.
2. Additional circumstances exist that make current financial situation continue for a large part of the repayment period.
3. Debtor had made a good faith effort to repay so far.
ii. 8th Cir. – Totality of Circumstances Test
1. Consider the past, present, and reasonably reliable future financial resources of the debtor’s reasonable and necessary living expenses and other relevant factors and circumstances.
2. Debtor must show undue hardship by a preponderance of the evidence.
iii. Bankr. D. Neb. (Saladino)
1. Bankr. Ct. is willing to discharge student loan debt years after the initial discharge.
9. (9) Death or personal injury while driving under the influence;
10. (10) Debts from a prior case that was waived or denied a discharge;
v. Revoking a Discharge - §727(d),(e)[edit | edit source]
1. Upon complain by a party in interest, within 1 year, they may request the court to revoke a discharge. §727(e)
2. §727(d) allows the court to revoke a discharge. Generally, the grounds for revocation are based upon
a. fraud undiscoverable until after the discharge was granted,
b. the debtor deliberately withheld or concealed property that would have been property of the estate; or
c. the debtor committed an act specified in §727(a)(6), which is failing to obey a lawful order of the court.
h. Post-Bankruptcy in Ch. 7[edit | edit source]
i. Position[edit | edit source]
1. “Fresh Start”
ii. Discrimination - §525[edit | edit source]
1. The government is prohibited from discriminating against a person for a license, permit, charter, etc because of a bankruptcy proceeding. §525(a)
2. No private employer may terminate an employee or discriminate with respect to employment an individual who has been a debtor in bankruptcy. §525(b)
3. Student loans may not be denied because of a bankruptcy proceeding. §525(c)
iii. Credit Reporting[edit | edit source]
1. A bankruptcy filing may remain on a person’s credit score for up to 10 years. 15 U.S.C. §1681c(a)(1).
2. Most major credit agencies remove the negative treatment after 7 years.
5. Chapter 13 – Repayment[edit | edit source]
a. Eligibility - §109(e)[edit | edit source]
i. Only an individual;
1. No corporations
ii. With “regular income”;
1. Means an individual “who income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.” §101(30)
iii. That owes:
1. noncontingent, liquidated, unsecured debts of less than $394,725; and
2. noncontingent, liquidated, secured debt of less than $1,184,200;
a. Definition:
i. Noncontingent means that you are presently liable on the debt, not only liable if some event does or does not occur.
ii. Liquidated means that you owe a specific and determinable amount.
iv. Note:
1. Debtor and spouse may file a joint ch. 13, but there debts still may not exceed the limits (do not double the limits)
2. Stockbrokers and commodity brokers cannot file chapter 13.
b. Outline[edit | edit source]
i. Petition and Plan
1. First, the debtor files his petition for relief.
2. In addition, for a chapter 13, the debtor must file a plan to repay his or her debts. §1321
3. The plan must be filed with the petition or within 14 days thereafter unless extended by the court. Rule 3015(b)
a. CONTENTS OF THE PLAN, SEE BELOW NOW
ii. Modification on an Unconfirmed Plan
1. The debtor may modify the plan before confirmation without court approval. §1323
iii. Beginning
1. After the petition, a trustee is appointed. §1302. However, the debtor remains in possession of property of the estate. §1303.
2. At any time a secured creditor may move for relief from the stay.
a. RELIEF FROM THE STAY, INSERT NOW. ß especially adequate protection and adequate payment. See above.
iv. A meeting of creditors is called. §341
v. Begin Making Payments
1. The debtor must begin making payments within 30 days of filing the plan or the order of relief. §1326(a)(1)
2. Trustee retains payments until the plan is confirmed. §1326(a)(2)
vi. Confirmation Hearing:
1. The confirmation hearing takes place within 20-45 days of the meeting of creditors. §1324(b)
a. CONFIRMATION REQUIREMENTS, SEE BELOW NOW
b. . . . The confirmation hearing is to take place within 20-45 days of the §341 hearings. §1324. To get confirmed the plan must have the required contents laid out in §1322. Further, it must conform to the confirmation requirements of §1325 . . .
vii. Treatments of Claims
1. Secured à §1325(a)(5)
2. Unsecured à §1325(b)
3. “. . . §1325(a)(5),(b) details how claims are suppose to be treated. Under §1325(a), the creditor has three options . . . under §1325(b) unsecured creditors do not really have many obtains except . . .”
viii. Confirmation Results:
1. If not confirmed, the trustee refunds the payments less administrative costs.
2. If the plan if confirmed, it binds the debtor and all creditors regardless of whether they accepted or rejected the plan. (Cramdown) §1327(a)
ix. Distribution of Payments
1. Upon confirmation, the trustee distributes the debtor’s preconfirmation payments. §1326(a)(2)
x. Debtor begins the payments required by the plan.
1. If the debtor is above median income à 5-year plan. §1325(b)(4)(A)(ii)
2. If the debtor is below median income à 3-5 year plan. §1325(b)(4)(A)(i)
xi. Modification or Revocation
1. Finally, at any time, the plan may be revoked (§1330) if the party in interest can show fraud within 180 days after confirmation; or modified (§1329) after confirmation but before completion by the debtor, trustee, or unsecured creditor if circumstances change.
xii. Completion of Plan
1. If the debtor defaults, the plan may be dismissed or converted. §1307
2. If the debtor completes the plan, remaining debt is discharged. §1328
xiii. Revocation after Discharge - §1328(f)
1. Court may revoke a plan on motion by a party within 1 year of discharge if:
a. The discharge was granted through fraud; and
b. The requesting party did not know of such fraud until after the discharge.
xiv. Non-dischargable Debts under §523. See chapter 7 section.
c. Contents of the Plan - §1322[edit | edit source]
i. Mandatory Provisions - §1322(a)[edit | edit source]
1. (1) must bind the debtor to pay all of his future disposable income to the execution of the plan;
2. (2) must provide for the full payment or 507 priority claims unless the holder of the claim agrees otherwise; and
a. Priority claims do not get present value, but only nominal value w/o interest
3. (3) if the plan classifies claims, it must treat claims in the same class equally.
ii. Optional Provisions - §1322(b)[edit | edit source]
1. (2) may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence
2. (3), (5) may provide for the curing of any default
3. (11) include any other appropriate provision not inconsistent with this title.
d. Confirmation Requirements - §1325[edit | edit source]
i. Under §1325(a)[edit | edit source]
1. (1) The plan must comply with all provisions of chapter 13 and other applicable provisions of the Bankr. Code;
2. (2) All required fees before confirmation must be paid;
3. (3), (7) The petition (7) and the plan (3) must have been propose in good faith;
a. Relevant Considerations:
i. Accuracy and honest of debtor’s financial disclosures;
ii. Circumstances under which debts were incurred (e.g. tortious or dishonest conduct);
iii. Debtor’s prepetition dealing with creditors;
iv. Reason for debtor’s financial distress;
v. Financial history;
vi. Frequency of bankr filing; and
vii. Degree of effort to meet obligations.
4. (4) Distributions to unsecured creditor must not be less than the amount if a the estate was liquidated under ch. 7;
5. (5) The plan must provide protection for secured claims;
a. SEE BELOW.
6. (6) Debtor must be able to make able to make all payments and comply with the plan;
7. (8) Debtor must have paid all DSO that became payable after filing for relief;
ii. Under §1325(b)(1)[edit | edit source]
1. Note: Court cannot raise section, only the trustee or holder of an unsecured claim can object.
2. § allows objection to the plan on the basis that (A) the debtor pays unsecure claims in full, or (B) the debtor contributes all disposable income to the such payments for the “applicable commitment period.”
a. Above median income à 5 years
b. Below median income à 3 years
e. Secured Claims - §1325(a)[edit | edit source]
i. Debtor’s Three Alternatives for the Treatment of Secured Claims under §1325(a)(5)[edit | edit source]
1. (A) Consensual treatment as agreed to under the plan;
2. (B) Payment and Retention of the lien – THE CRAMDOWN SECTION - Lienstripping
a. In §1325(a)(5)(B). The plan provides for payment of the lien and retention of the lien until the allowed claim is paid in full, or it is discharged.
b. To calculate the allowed claims under the lien stripping section, under Rash, the Court calculates the present value of the collateral using the replacement value of the collateral as of the date of filing; however, unlike Rash, the value is not to be diminished by costs of sale or marketing under §506(a)(2).
c. Next, the Court calculates the dollar amount of the installment payments by adding the Rash value with the Till interest (Prime Interest Rate + Premium (riskiness) Interest Rate = Till)
d. Remainder of claim bifurcates and becomes an unsecured allowed claim. §506(a)
e. For example:
i. D owes C $60k on a collateral worth $30k.
ii. Court calculates replacement value as $30K as the present value of the claim. Court adds Till Interest for the period of the repayment. (Say 10k).
iii. Creditor now has a $40k repayment secured and $20k unsecured subject to penny’s on the dollar.
3. (C) Debtor surrender the collateral; extinguishing the claim.
ii. Restrictions - The Hanging Paragraph - §1325(a)(*)[edit | edit source]
1. Lienstripping section does not apply if:
a. Creditor has a PMSI securing the debt;
b. The debt was incurred within 910-days preceding petition; and
c. Collateral is a motor vehicle for personal use.
2. Alternatively, does not apply to:
a. Any other thing of value if acquired within 1-year of petition
3. If hanging paragraph prevents stripping of claim, then apply the replacement value and do not bifurcate. Secured claim wholly.
iii. Mortgages[edit | edit source]
1. Lien stripping is forbidden.
2. Adequate protection is rare. (Doesn’t depreciate that fast)
3. First lien may not be stripped but can be “cure[d] and maintain[ed]” under §1322(b)(5).
4. Majority Rule = When senior mortgages swallow all of the value of a home, inferior mortgages may be stripped.
f. Unsecured Claims[edit | edit source]
i. The Code’s “floor” protections to unsecureds[edit | edit source]
1. Priority is to be paid in full. §1322(a)(2)
2. The “best interests” test requires that creditors are to receive at least as much as the creditor would receive if ch. 7 liquidation was filed. §1325(a)(4)
3. Debtor must devote all of their disposable income to funding the unsecured payments over the course of the plan. §1325(b)
ii. **Tax Claims***[edit | edit source]
1. Clear advantage over ch. 7
2. Ch. 13 allows creditor to pay back some taxes over the course of the proceedings.
iii. Disposable Income Test[edit | edit source]
1. Debtor must commit all disposable income to satisfy unsecured claims for the length of the plan. §1325(b)(1)(B).
a. Disposable income means the current monthly income less amounts reasonably necessary . . . for the maintenance of support of the debtor. §1325(b)(2)(A)(i)
2. Determining Projected Disposable Income:
a. Calculate - Current Monthly Income, which is “the average income from all sources that the debtor receives without regard to whether such income is taxable. §101(10A).
i. Calculated by the using the prior 6 months before the last day of the calendar month and averaging it
b. Ascertain the median family income for household of debtor’s size in their state.
i. If CMI is less than Median à Determine disposable income for 3 years
ii. If CMI is greater than Median à Determine disposable income for 5 years
c. Subtract Expense from CMI
i. Expenses – Current or Future à Argue both
d. Either multiply by 36 months or 60 months for projected disposable income
3. Hamilton v. Lanning (2010) – In determining the debtor’s “projected disposable income” the court may apply “a forward looking approach” that considers known or virtually certain changes in debtor’s future income or expenses.
Consumer Policy Considerations[edit | edit source]
| Who should file a chapter: | ||
| 7 | 13 | |
| Property Amt | Little Property | Tons of Property |
| Employment Status | Unemployed | Employed (“regular income” requirement) |
| Type of Property | Unsecured credit cards, medical bills, personal loans, etc. | Tax obligation, domestic support obligations, student loan debt, other nondischargable debt |
| Mortgage/Car Loan | Up to date | Behind, plan allows you to catch up on mortgage |
| Nonexempt property | Little to None | Some thing nonexempt and debtor wishes to keep |
| Co-debtors? | No | Yes |
| Success Rate | High | Low – Less than 1/3 |
| Compare/Contrast | ||
| Ch. 7 | Ch. 13 | |
| Automatic Stay | §362 protects debtor from collection efforts. | §362 protects debtor from collection efforts; §1301 has add’l protections for co-debtors. |
| Loss of Property | Property of the Estate is sold and distributed to debtors. | Property of the Estate is retained by the debtor. |
| Effect on Future Ch. 7 Relief | Must wait for an add’l 8 years before another discharge in ch. 7 | Does not affect availability of discharge in a future ch. 7 if the ch. 13 was the debtor’s “best effort” and paid 70% of claims; or debtor paid 100% of claims --§727(a)(9) |
| Postpetition Earnings as Estate Property | No. §541(a)(6); unless earned before petition. §541(a)(5) | Yes. §1306 |
| Debtor’s Ability to Terminate | “Only for case” §707(a) | “On request of the debtor at any time” §1307(b) |
| Amt Required to be Distributed | Property of the Estate. §541 | Plan controls, creditors must receive at least as much as they would in a ch. 7 and commit all disposable income. §1325(a)(4), (b) |
6. Chapter 11 – Reorganization[edit | edit source]
a. Eligibility - §109(d)[edit | edit source]
i. Any “person that may be a debtor under chapter 7” can file a chapter 11.
ii. Individuals who exceed debt limit for chapter 13 may file for a chapter 11.
b. Commencement[edit | edit source]
i. Debtor files a petition WITH a schedule of assets and liabilities, a statement of financial affairs, and a statement of executory contracts. Further, the debtor must file a list of equity security holders and the 20 largest unsecured creditors for a Creditor Committee. Rule 1007
c. The DIP & The Estate[edit | edit source]
i. Debtor remains in possession of property of the estate with all powers and most duties attendant to the role of the trustee (with exceptions). §1107(a)
ii. Powers in Reshaping the Estate: §363
1. A DIP’s transactions must be authorized by a court, unless those transactions are in the ordinary course of business. If not, it can be avoided under §549(a)(2)(B)
2. Horizontal and Vertical Dimensions Test:
a. Horizontal inquiry is an objective test asking whether, from an industry wide perspective, the transaction is of the sort commonly undertaken by companies in that industry.
b. Vertical inquiry examines “the reasonable expectations of interested parties as to this particular debtor-in-possession.”
d. Operating the business[edit | edit source]
i. First Day Orders[edit | edit source]
1. Addt’l injunctive relief, beyond the stay;
2. Content required operating reports;
3. Authorization to buy or sell outside of ordinary course;
4. Authorization to pay wages;
5. Use of cash collateral;
6. Approval of post-petition financing; and
7. Employment of counsel for debtor and creditors committee
ii. Use of Cash Collateral - §363(c)(3)[edit | edit source]
1. DIP must ask court permission to engage in transactions outside of the ordinary course of business. §363(b)
2. If lien encumbered property is sold in bankr. then the lien automatically attaches to the cash. UCC 9-315
3. Must give adequate protection
iii. Setoff - §553[edit | edit source]
1. Allows a party who is both a creditor and debtor to automatically setoff any amount owed
2. Useful for banks
e. Financing the Business - §364[edit | edit source]
i. Financing in the Ordinary Course - §364(a)[edit | edit source]
1. Unsecured debt incurred in the ordinary course are treated as a §503/§507 administrative expense.
ii. Financing outside the Ordinary Course - §364(b)[edit | edit source]
1. Unsecured debt outside the ordinary course must get court permission. Approved creditor is given §503/§507 administrative priority. §364(b)
iii. Secured Credit - §364(c)[edit | edit source]
1. If trustee unable to obtain unsecured credit, the court may
a. authorize “superpriority” debt placing it ahead of 503 administrative expenses or
b. it may allow a lien on an unencumbered property or
c. it may grant a junior lien on an encumbered property.
iv. Super-Priority and Priming Lien - §364(d)[edit | edit source]
1. Only in compelling circumstance, the court may grant a priming lien thereby granting a senior lien on an encumbered property, but the court must give the secured creditor being encumbered adequate protection.
f. Trustee Avoidance Powers[edit | edit source]
i. Unperfected Interests and Liens - §544[edit | edit source]
1. “The Strong Arm Clause” à Trustee is known as the “Lien Creditor from Hell”
2. Trustee’s Status under §544(a):
a. Hypothetical judicial lien creditor;
i. Power to avoid any transfer of property or any obligation incurred by debtor that would be avoidable in nonbankruptcy law by a judicial lien creditor
ii. Basically, if a party fails to file an article 9 financing statement and never perfects interest, the lien is avoided because upon filing for bankruptcy the trustee becomes a judicial lien creditor.
1. Other party becomes unsecured.
b. Execution Creditor; and
i. Upon bankr. trustee becomes one who has obtained a nulla bona return on an execution.
c. Bona Fide Purchaser (real estate).
ii. Preferences - §547[edit | edit source]
1. Definition[edit | edit source]
a. Section 547 grants the trustee the power to avoid certain transaction (or preferences) before the commencement of bankruptcy where the creditor received more than he or she would have had in bankruptcy proceedings.
2. Requirements. §547(b)[edit | edit source]
a. Transfer of interest in property of the debtor to or for the benefit of the creditor.
b. Transfer made for or on account of an antecedent debt.
c. Debtor was insolvent at the time of the transfer.
i. Insolvent means “such entity’s debt is greater than all of such entity’s property, at a fair evaluation.” §101(32)
d. (Timing) Transfer occurred
i. Within 90 days before the filing of the petition; or
ii. Between 90 days and 1 year before petition, if the creditor was an insider
e. The transfer enables the creditor to receive more than such creditor would if:
i. The case was under a chapter 7; and
ii. Transfer had not been made
iii. ***Note **** A transfer to the creditor that eliminates or reduces its unsecured claim will easily be established as preferential.
3. Timing of Transfer. §547(e)[edit | edit source]
a. Transfer does not occur until the debtor acquires rights in the property. §547(e)(3)
b. Transfer is made when:
i. Between two parties when such transfer is perfected or within under the net value exception, within 30 days
4. Exceptions. §547(c)[edit | edit source]
a. (1) New Value: Where creditor and debtor make a “substantially contemporaneous exchange” for new value.
b. (2) Ordinary-Course Payments: Transfer was in payment for a debt incurred in the ordinary course of business. Look toward whether an ordinary person in the position would make the transfer and the debtor’s prior practices.
c. (3) Creates a Security Interest: Given by debtoed to secure a loan or credit used to acquire collateral. The lien must be perfected within 30 days from the date on which the debtor received possession of the collateral.
d. (4) Net Value Exception: If, after receiving an avoidable transfer, the creditor gives to the debtor new value that is not secured or paid for by a new transfer, the transfer cannot be avoided to the extent of the new value.
e. (5) Accts. Receivable & Inventory: Look at 90 days before petition and petition date. (“Snapshot”). Preference exist where there is a shortfall (debt has been reduced)
f. (9) Diminimous Exception: Where debt is not primarily consumer debt, the aggregate value of all property is affected by such transfer is less than $6,425.
iii. Executory Contracts - §365[edit | edit source]
1. Definition: An executory contract is a contract between a debtor and another party under which both sides still have important performance remaining.
2. Breach: If a party fails to perform, there will be a material breach thereby excusing the performance of the other.
3. Avoidance Power:
a. If the debtor breaches a pre-bankruptcy contract, the non-breaching party’s claim for damages becomes an unsecured claim, entitled to cents on the dollar.
b. Very powerful tool in bankruptcy
4. Breaches of Post-Petition Transactions are treated as 503 administrative expenses and are paid in full as 507 priorities.
5. Example:
a. Debtor sells goods for $100.
b. Debtor files bankruptcy.
c. Price Skyrockets to $200 and DIP refuses to sell.
d. Damages = $100.
e. Other party is entitled to cents on the dollar of the $100, while debtor gets to sell for $200 and add more money to the estate.
iv. Fraudulent Transfers - §548[edit | edit source]
1. See Above
g. The Plan - Process[edit | edit source]
i. Filing of the Plan - §1121[edit | edit source]
1. May be filed with the petition (pre-packaged plans). §1121(a)
2. By Debtor – Within 120 days of the order for relief unless the court grants an extension. §1121(a),(b),(d)(1)
3. By the Trustee, Creditor or Creditor’s Cmt – If debtor fails to file these may file a plan if (1) a trustee is appointed or (2) the 120 day period has lapsed. §1121(c)
ii. Plan Contents - §1123[edit | edit source]
1. See Below
iii. Required Disclosures - §1125[edit | edit source]
1. No solicitation of votes until required disclosures are given. §1125(b)
2. After notice and a hearing, the court must approve the required disclosures containing adequate information. §1125(b)
3. “Adequate Information” means enough information as is reasonably practicable in light of debtor’s history and state of its records to enable a hypothetical reasonable investor to make an informed judgment about the plan. §1125(a)(1)
iv. Voting Requirements - §1126[edit | edit source]
1. For confirmation, each class must vote by: simple majority of voting creditors, AND a 2/3 majority of voting debt. §1126(c)
2. Rejection or acceptance of a plan must be in good faith. §1126(e)
3. ***NOTE: The fact that there are 20 creditors in a class is irrelevant. If only one votes, the one wins***
4. At least one impaired class must vote in favor of the plan. §1129
v. Modification Before Confirmation - §1127(a)[edit | edit source]
1. Proponent of a plan may modify at any time before confirmation but may not modify the plan so that it fails the plan requirements. §1127(a)
vi. Confirmation - §1128[edit | edit source]
1. Hearing is to be held to confirm the plan where any party may object
2. See Confirmation Requirements Below
vii. Modification After Confirmation - §1127(b)[edit | edit source]
1. Plan may only be modified with court approval following notice and a hearing.
2. Must be made before “substantial consummation” of the plan.
viii. Effect of Confirmation - §1141[edit | edit source]
1. Binds all parties
2. If not an individual, the debtor is discharged upon confirmation. §1141(d)(1)
h. The Plan – Substance[edit | edit source]
i. Mandatory Provisions - §1123(a)[edit | edit source]
1. Must designate classes of claims and interest into “substantially similar” classes. §1123(a)(1)
2. Must specify unimpaired classes (classes that get full payment). §1123(a)(2)
3. Must specify treatment of impaired classes (how are they going to get paid: lump sum, overtime). §1123(a)(3)
4. Must treat claims in the same class equally. §1123(a)(4)
5. Must specify adequate means for the plan’s implementation (finance, the process, etc). §1123(a)(5)
ii. Permissive Provisions - §1123(b)[edit | edit source]
1. Anything.
i. Confirmation Requirements - §1129[edit | edit source]
i. Where all impaired have accepted - §1129(a)[edit | edit source]
1. Plan must comply with code and be in good faith. § (1)(2)(3)
2. (Best Interests Test) Debtor must show that each objecting creditor will receive at least as much under the plan as that creditor would had the business been liquidated. §(7)
a. (unlike a 13, a creditor can accept less)
3. §507 Priorities must be paid in full. §(9)
4. At least one impaired class must accept the plan. §(10), though §(8) requires all impaired to accept or else à Cramdown under §1129(b)
5. (Feasibility Test) The plan must have a reasonable prospect of success. §(11)
ii. Cramdown - §1129(b)[edit | edit source]
***Where one impaired class has rejected the plan****
1. One impaired class must accept. §1129(a)(10)
2. Requirements:
a. All confirmation requirements must be satisfied except for §1129(a)(8), which requires all impaired to accept.
b. The plan must not discriminate unfairly against any impaired class that did not accept.
c. The plan must be fair and equitable with respect to each impaired class that has nt accepted
3. Unfair Discrimination Bar – 1129(b)(1)
a. Factual determination
b. Good faith to give the objecting class comparable legal rights with respect to the other classes.
4. Fair and Equitable - §1129(b)(2)
a. The unsecured must either get paid in full; or
b. The unsecured must be protected by the absolute priority rule:
i. No parties “junior” to the objecting class gets a distribution
ii. ***Note*** a New Value Exception (some courts)
1. Exception to Absolute Priority Rule
2. If an equity holder contributes new capital that is equal or greater than the value of their interest, they can retain stock in the debtor in exchange for this new value.
Considerations Between 7, 13, 11[edit | edit source]
| Ch. 7 | Ch. 13 | Ch. 11 | |
| Involuntary Petitions | Not Allowed | Allowed | Allowed |
| Property of the Estate | Debtor’s Property at time of Petition | Post-Petition Property | Debtor’s Property at time of Petition |
| Disposition of Estate Property | Liquidated | Revested in Debtor | Revested in Debtor |
| Post-Petition Income | Not affected | Must be applied to payments under the plan | Depends on Plan |
| Administrator of Estate | The Trustee | Trustee has an investigative and supervisory role, but DIP continues to operate | DIP |
| Conversion to Another Chapter | Broad, but not absolute right. | Broad, but not absolute right. | Has a right with limitations |
| Dismissal | By the debtor or other party for cause | Debtor has broad, but not absolute right | By debtor or another party for cause |
| Duration | Quick | 3 or 5 years | Unknown |
| Discharge | No discharge for corps.
Discharge granted after liquidation for individuals |
Discharge granted at completion. | Discharge granted at confirmation |
