You are on page 1of 32

Bankruptcy- Dole 2001

Collection Without Methods

I. Nonjudicial Collection Methods A. Leveraging 1) Creditors tries to determine the lowest cost to get the debtor to pay money owed. 2) Examples: > harassing phone calls > formal collection process > suing very expensive B. Indirect Leverage in the Legal System 1) Creditors can report non-payment to the IRS (the non-paid debt would be seen as income by the IRS and would be taxed on it) C. The Credit Information Process 1) Refuse to extend credit until past bills are paid 2) Credit report: one creditor can influence other creditors to withhold goods and services. (inexpensive use of reporting services) 3) Fair Credit Reporting Act 605, 606, 611, 615, 616, 617: > debtors can see their credit reports > If creditors version is inaccurate, debtor can try and sue credit reporting agency (credit agency cannot use creditor misinformation as a defense). II. Restrictions on Nonjudicial Collection: Consumer A. Usury Laws 1) general rule.: if creditor charged more than a predetermined rate of interest, the loan is usurious. B. Common Law Remedies 1) creditor cannot use assault or slander to recover debt. 2) non-traditional methods of collection: > threats > harassment > overly aggressive collection tactics may result in a tort C. Federal Statutory Controls on Nonjudicial Collection 1) Heintz v. Jenkins (p.21) U.S. a) issue: whether the term debt collector under the Fair Debt Collection Practices Act applies to a lawyer who regularly tries to collect consumer debt through litigation. b) The FDCPA prohibits debt collectors from false representation of amount owed. She alleges that a lawyer wrote another lawyer that she owed an amount above the agreement creating the debt. c) court: says that the act applies to attorneys who regularly engage in consumer-debt-collection through litigation. 2) Other methods of collection: > creditors can try and freeze bank accounts > contempt for non-payment of child support

III. Restrictions on Creditors: Business A. Introduction to Lender Liability 1) lender liability: refers to lawsuits in which the debtor claims that the lender acted improperly in the course of the loan transaction. > debtor claims lender breach of contract, bad-faith conduct, or lender misrepresentations. 2) A successful lender liability claim results in the debtor becoming the creditor because the lender owes substantial sums in damages. 3) K.M.C. Co. v. Irving Trust (p.34) a) issue: debtor claims that the lender breached good-faith performance by not advancing additional funds pursuant to the agreement. b) lender claims that the debtors business was already tanking, and thus they refused to advance the rest of the $ pursuant to good-faith. c) court: finds for debtor says that the lender was unreasonable in not giving proper notice before he refused to advance funds 4) Courts have disagreed with the K.M.C. court they refused to find the lender culpable where its conduct was within the terms of the loan agreement.

State Law Debt Collection

I. Collection Remedies A. Post- Judgment Collection 1) Execution: > a judgment gives the creditor no interest & no priority in debtors property or income. *A judgment creditor remains unsecured (general) until execution is obtained on the judgment. > writ: simply a court order that begins collection process - execution writ (writ fi fa/ writ of attachment): orders the sheriff to look for non-exempt property of the judgment debtor, to seize it, to sell it, and to use the proceeds to pay the creditor. > ordinarily, the sheriff, once the writ has been delivered to him, takes possession of the non-exempt property and tags it with a notice of seizure. > The entire process of seizure is called a levy of execution. > *once sheriff has levied on the property, the creditor is now a judicial lien creditor as to that property. > The sheriff then sells property and pays the lien creditor in full. If there is surplus it is paid to the debtor (unless a subsequent creditor had symbolically levied on it). 2) Turnover Orders a) Statutes which demand that the debtor turn-over property he possesses, or any property subject to his control even if he does not posses it. > once property is traced to the debtor, he has the burden of showing that property is not in his possession or under his control. > statutes used to capture all far-flung assets of the debtor. 3) Other Writs 4) Judgment Liens by Recordation

a) special process which makes it possible to obtain a lien on the debtors property without going through the execution process. b) these recordation liens only apply to debtors real property. c) a judgment lien against real property is obtained by recording the judgment in the county land records. d) cannot get a lien on personal property by recordation in this way. e) UCC Article 9 filing process is the analogous way to recordation of personal property. f) Recording is the cheapest & fastest way to obtain lien. g) recordation is effective b/c debtor will not find a purchaser for property that has a clouded title or has a lien attached. h) *recordation ensures that a subsequent creditor cannot swoop in and get the property. i) **leverage: for a modest filing fee, the judgment creditor has the opportunity to exercise some leverage over debtor. 5) Debt Collection by Federal Government a) Federal Debt Collection Procedures Act similar to state law collection procedures. b) only applies to federal government creditors 6) Family Debts a) child support & alimony: there are other enforcement mechanisms for non-payment of these debts, including imprisonment & wage garnishment. 7) Voluntary Liens a) security interests: giving collateral b) mortgages: consensual liens on real property (sometimes called deed of trust) c) secured creditors: creditors who take security interests d) **perfected lien: consensual liens are given legal effect against third parties only if the secured party gives notice of its interest through public recordation. > for real estate: recordation is usually enough to perfect > for other types of collateral, notice is given when creditor takes possession of the item. > consensual liens guarantee that the creditor may force a sale of collateral to repay a debt owed. e) purchase-money liens: a consensual lien used to furnish credit necessary or the purchase of the collateral. 8) Statutory Liens & Trust Funds a) State law also creates liens by operation of law in favor of certain types of creditors. > artisans liens > landlords liens b) Trust fund statutes (p.56) 9) Asset Protection a) Self-settled trusts: allows assets to be placed in trust for the benefit of the

settlor & the settlors family. b) FTC v. Affordable Media: (p.57) Fraudulent scheme to protect assets by creating an offshore trust. B. Priorities Amongst Creditors 1) In general: > All validly secured debts have priority over all unsecured debts > As to secured debts: First in Time, First in Right The first creditor to levy on the property will have the right to be paid in full. The state law system provides for no sharing. a) Three types of creditors: secured creditors with consensual liens, unsecured creditors who have gotten judgments, & tax creditors. b) **Perfection: this is the key to priorities who perfected first. 2) Unsecured Creditor vs. Unsecured Creditor a) The levy perfects he judgment lien on the property the first to levy wins (not the creditor who got a judgment first). Or, in the case of real property it is the recordation. b) In most states no general levy, but an item-by-item execution c) If two creditors enjoy equal priority, and one is a taxing authority, the taxing authority generally trumps. d) In Re Robbins: (p.69) involves a N.Y. exception in favor of a statutory tax lien that was perfected subsequent to the date of perfection of a creditors judgment lien. 3) Unsecured Judgment Creditor and Secured Creditors vs. Buyers a) If buyer buys the car on Monday and the unsecured creditor or secured creditor does not record or levy until Tuesday, then buyer wins. First in time, first in right 4) Aging Judgment a) dormant judgment: a judgment upon which a writ of execution has not been issued for a prescribed period of time. b) A dormant judgment must be revived c) To prevent dormancy, regularly attempt to enforce the judgment 5) Execution a) Moninger case: (p. 74) what must the sheriff do to complete priority conferring levy? There is a conflict as to whether a sheriffs constructive seizure of non-exempt property is sufficient. While it may be enough to simply constructively record, it is prudent to actually physically seize property that is feasible for the sheriff to carry off. C. Other Collection Issues 1) Discovery (p. 78) 2) Collection in Other Jurisdictions (p.78) > common law > Uniform Enforcement of Foreign Judgments > Federal Judgments > Transnational Enforcement D. Garnishment: Seizure of Property from Third Persons 1) Texas: NO wage garnishment, unless for child support

2) In general: creditors must institute this ancillary lawsuit against the third party garnishee in order to seize property held by the third party (writ of garnishment). > If garnishee (e.g. employer) is found to owe money to the judgment creditor, then garnishee may have a judgment entered against him. > Webb v. Erickson (p. 83): What happens when a garnishee fails to answer in a garnishment proceeding. Garnishee can be liable not only for the debtors property in its control, but the entire judgment amount. Thus, it is bad for a garnishee to default. 3) What property can be garnished? The property that the garnishee controls at the time of the required answer. Garnishee cannot limit amount of lien that is attached by answering early. 4) Garnishor may claim priority over a creditor First in time first in right 5) A garnishment cannot attach to exempt property 6) restrictions on wage garnishment: a) Federal Consumer Credit Protection Act (15 USC 1671): > puts a floor on the garnishing of wages > crime to discharge an employee simply because his wages are garnished. But, if there are multiple garnishments, then okay to fire. b) Edison v. Denson (p.88): federal act does no pre-empt garnishment, simply says that where federal and state law disagrees, courts are to apply the law which garnishes the lesser amount. > Federal Act does not establish any order of priorities among garnishment. Same rule: First in time, first in right. > Courts generally give special priority to child support garnishment. 7) Garnishing New Property a) Network Solutions v. Umbro (p. 91) > Issue: can a contractual right to use an Internet domain name be garnished? > Court: says no b/c cannot garnish services, and sees domain names as a service by registration. E. Pre-Judgment Remedies (p.101) 1) Limited mechanisms to attach property prior to judgment 2) Since there are due process issues, state statutes require a showing of need. 3) Examples: bonds were wrongfully employed F. Abuse of State Collection Processes 1) A debtor can sue creditor for abusive collection tactics. > malicious prosecution > abuse of process II. Property Exempt from Seizure A. In General: exempt property cannot under state law be seized by general creditors to satisfy their judgments. > consensual arrangements: mortgages or other security interests are not constrained b/c the debtor is seen as having waived the exemption. > Exempt Property is commonly defined by dollar amount and type of property. B. Texas Exemption Statutes (p. 105-109)

1) Homestead is exempt: with the exception of consensual liens of taxes, mortgages, or home improvement debts contracted for in writing. Very broad homestead exemption. Not more than 10 acres for urban homestead, not more than 100 acres for rural homestead. No dollar limit. Do NOT need to declare a homestead. 2) Personal Property Exemptions: > exempts $60,000 fmv worth of personal property for one family. OR > $30,000 is single adult with no family > In addition to the dollar amount, the following property is also exempt: - current wages - professionally prescribed health aids - alimony support - certain unpaid commissions 3) Various categories of personal property that falls under the personal property dollar amount: - home furnishings - farming, ranching equipment - tools of the trade, including car - one motor vehicle for each member of the family - sporting equipment - certain livestock 4) Additional exemptions for retirement plan, pension plan, 401k plan 5) You must designate personal property to be levied upon. 6) Child support liens can attach to all exempt property 7) Insurance benefits are also exempt C. Delaware Exemption Statutes (p. 109-111) 1) Very stingy exemptions. 2) Personal Property exemptions: > family bible, school books, family library, family pictures, family pew in church, burial plot, all wearing apparel for family > each resident of family can exempt tools of the trade not exceeding $50 > sewing machines, pianos 3) Wage garnishment > 85% of wages are exempt from attachment (with the exception of any state taxes owed). Wages includes commissions. > Limits wage attachments to 1 4) exempts life insurance policies D. Property Exempt from Federal Tax Liens (p. 111-113) 1) wearing apparel and school books that are necessary (no luxury goods) 2) furniture & personal effects not exceeding $2500 3) tools of the trade not in excess of $1250 4) certain annuity and pension payments 5) workmens compensation 6) limited wage garnishment 7) principal residence, absent any approval or jeopardy (i.e. can even take house away) E. Classification of Property 1) In Re Johnson (p. 114)

> Court: says that a 60 passenger bus qualified as an exempt motor vehicle under KY law. 2) In re Pizzi (p.115) > An annuity to fund payments to a lottery winner are not exempt annuities under FL law. > Proceeds of exempt property that are not themselves exempt raise issues concerning the scope of this exemptions. 3) In Re Williams (p. 118) : Tracing: > Property acquired with exempt workers compensation payments is exempt in NH as the identifiable proceeds of the exempt property. > Car purchased with workers compensation payments is exempt 4) Holmes (p. 120) > FL exempts earnings by heads of family for personal labor or services. > The court now exempts for 6 months, wages that have been received and deposited in the bank. F. Partially Exempt Property 1) If there is a dollar limit on the exempt property, and some portion of the property exceeds this dollar amount it is considered partially exempt. 2) In most cases partially exempt property can be levied on and sold. > the exemption attaches up to the dollar amount, and the debtor gets the cash. The remainder of the sale goes to creditor. III. Fraudulent Conveyances and Shielding Debtor Assets A. Origins of Fraudulent Conveyance Law 1) Twynes Case (p. 127) a) Proof of debtors actual intent to defraud creditors has been sufficient to render the transfer voidable by a creditor. b) Badges of Fraud: circumstantial evidence of fraud have also played a role. These are facts that raise a rebuttable presumption of fraud. B. Uniform Fraudulent Transfer Act (UFTA): 1) Purpose: Protects creditors against debtors who obstruct collection efforts by conveying away all their property, usually with the intention of having it reconveyed to them at a later date. 2) Constructive or Presumptive Fraud: transfer can be set aside even though the debtor was innocent of any fraudulent intent. These transfers were deemed unfairly disadvantageous to the creditors. 3) Key Provisions: 1: Definitions: note that does not include exempt property as an asset 2: Insolvency: if the sum of the debtors debts is greater than all of debtors assets at fair valuation. Also, a debtor who is not generally paying her debts as they become due is considered insolvent 3: Value 4: Transfers Fraudulent as to Present AND Future Creditors > 4(a)(1): if transfer made with actual intent to defraud > 4(a)(2): if transfer made without receiving R.E.V. and debtor would incur debts beyond reasonable ability to pay. > 4(b): Badges of fraud: - transfer was to an insider

- debtor retained possession or control of property - transfer obligation was secret or undisclosed - the transfer was for substantially all debtors assets - see p. 1150 for others 5: Transfers Fraudulent as to Present Creditors > 5(a): if transfer was not for R.E.V. and the debtor was insolvent at the time or became insolvent as a result of the transfer. > 5(b): transfer to an insider for an antecedent debt when the debtor was insolvent and the insider transferee has reason to believe that the debtor was insolvent. 7: Remedies of Creditors 8: Defenses, Liability, and Protection of Transferee > 8(a) & (d): protect transferee from a creditors maximum recovery. > maximum recovery: 8(b) & (c): creditor may recover judgment for the value of the asset transferred, as adjusted by (c) which says that value is at the time of transfer. > Defenses: if transferee gave REV and was in good faith: total protection. If NO REV, but bought in good faith, the transferee is partially protected: retains an interest or lien in the asset; entitled to a reduced amount to pay. 4) ACLI Government Securities v. Rhoades (p.131) > issue: whether the conveyance of property by debtor to his sister the day before a judgment of over $1.5 million was entered against debtor was fraudulent. > Court: says it was fraudulent > creditor bears the burden of proof that transfer was fraudulent. > Here the there were badges of fraud such as lack of R.E.V., transfer to an insider, the presence of a pending lawsuit judgment. C. UTFA to Avoid Leveraged Buy-outs 1) LBO: financing device in which the assets of a corporation being acquired are used to secure the purchase price paid for those assets and the acquirer puts up little cash of its own. 2) UFTA is used to attack an LBO after the acquired corporation has been forced into bankruptcy by its inability to service the debt incurred in connection with its acquisition. 3) Bay Plastics (p. 137) > 544(b)(1) voiding power: entitles a bankruptcy trustee to void a transfer of an interest of a bankruptcy debtor in property that was voidable under nonbankruptcy law by an identifiable unsecured creditor. > Read hand-out!! D. UFTA in action: 1) Remember that recovery under 8 of UFTA depends not on the debtortransferor, but on the transferee. 2) It is a race to see which creditors can file an action to void first. 3) Step-by-step: > 1st question: is asset exempt? If item is exempt, then cannot void because

1 defines an asset as non-exempt. > 2 question: is transfer fraudulent under 4 or 5? > 3rd question: what is maximum recovery possible from transferee? > 4th question: to what extent is transferee protected from maximum recovery?

IV. State Collective Remedies A. Assignment for Benefit of Creditors (p. 152) B. Composition and Extension (p. 153) C. Receiverships (p. 154)


I. Basic Principles of Bankruptcy Code A. Chapter 7: liquidation plan 1) debtor gives up all his non-exempt assets, trustee sells them, and proceeds are distributed pro-rata to creditors. 2) debtor receives discharge of all pre-existing debt B. Chapter 13: pay-out plan 1) debtor keeps all assets 2) debtor pays creditors out over period of time from future income II. The Estate A. Property of the Estate (POE): 1) estate created the minute the petition is filed (DOP, or commencement of the case) 2) 541: defines POE and its few exceptions 3) exceptions: > 541(a)(6): services performed by an individual debtor after the commencement of the case. i.e. wages, commissions are NOT surrendered as part of POE. > 541(b) lists other exceptions to POE > 541(c): excludes from POE a debtors pre-petition interest in spendthrift trust, the transfer of which is restricted by either federal law or state law. 4) 522: Exemptions: this property is not included in POE 5) 554: Abandonment of POE: trustee may abandon property that is too burdensome on the estate. 6) What is the test for POE? > In Re Palmer: (p. 179) whether a year-end bonus is POE? - held: none of bonus was POE because based on both pre-petition and post-petition merit rating. > In Re Orkin: (p. 185) whether retirement plan of debtor from his selfowned business was POE? - held: POE. an employer cannot set up a spendthrift trust for himself, nor can he set up an Erisa transfer-restricted trust for himself as an employee. Why? because as his employer, he could terminate the trust. > In Re Burgess: (p.189) whether brothel license was POE ?

-held: not POE b/c more than a personal privilege, it was a revenueproducing license like a liquor license. III. Trustee A. Trustee in Bankruptcy (TIB) manages the estate B. duties: 704 - gather estate, protect and maintain it, sell it for the best price, distribute to creditors according to priorities. TIB also scrutinizes claims and investigates debtors affairs. C. Election of Trustees: 701-702 D. TIB especially charges with attacking security interests, preferences and priorities for the benefit of the unsecured creditors b/c basic premise is equal payments to creditors. IV. Automatic Stay A. In general: 362 - filing a bankruptcy petition triggers an automatic stay that prohibits any creditors attempts to continue to collect from debtor or debtors property. B. 362(a): details prohibitions of the stay (what creditors cant do) C. 362(b): provides certain exceptions that permit certain types of actions against the debtor to continue. D. 362 (c)(2): the stay terminates upon the earlier of: closure of the case, dismissal of the case, or the time when he decision of discharge has been made. E. 362(d)-(f): creditors can seek relief from the automatic stay under these provisions: > relief for cause, including lack of adequate protection of property interest for creditor > relief if debtor does not have any equity in the property AND such property is not necessary to an effective reorganization F. 362(g): burden of proof at the hearing to lift the stay G. 362(h): an individual injured by a willful violation of the automatic stay can recover actual damages including attorneys fees, as well as punitive damages in some cases. H. Andrews University (p. 196) > issue: whether creditor-schools withholding of a students transcripts b/c she had not paid her loans was in violation of automatic stay? > Court: while it is true that student loans are excepted from discharge under 523(a)(8), there is no exception for student loans to the automatic stay provision. > held: university violated the automatic stay, but not willful and so no sanctions imposed. I. Nissan Motors (p. 199) > issue: auto-dealer repossessed the debtors car after the debtor has filed bankruptcy and while the automatic stay was in place. The dealer sold the car. > The dealer wanted adequate protection of its property interest in the truck ( 362(d)) or relief from stay. > Court: dealer willfully violated the stay provision by repossessing and then selling the car. The automatic stay remains in place until a final decision has been made whether to grant special relief. Court sanctions dealer under 362(h).


I. Introduction A. Ch.7: straight liquidation bankruptcy 1) distribution process: 726 2) TIB must first determine which property is exempt, then takes any non-exempt POE to see if there is a creditor with a secured interest and pay that party the part of the proceeds it is entitled to. Then the remainder is available for distribution to general creditors. Three types of general creditors: > priority creditors ( 507) > general, unsecured creditors paid pro rata from remaining funds > subordinated creditors (usually because of some wrong-doing) 3) trustee must also consider any valid exemptions claimed by the debtor. II. Exemptions 522 A. Federal and State Exemptions 1) In general: exemptions are given to the debtor in order to help give debtor a fresh start. > All property not listed as exempt is considered non-exempt and will be sold by trustee. > The debtor keeps exempt property, except to the extent that the debtor has granted a security interest in some of that property. 2) **Debtor can choose to take either the federal bankruptcy exemptions ( 522(d)) or the (i) state exemptions, plus (ii) the federal nonbankruptcy law, like social security exemptions, plus (iii) a joint tenancy or tenancy by the entirety interest in property held by the debtor on the DOP that is exempt under state law. 3) Opt-Out: Your state can opt out of the federal scheme. 522(b) > Texas: allows debtors to choose between state or federal exemptions > Delaware: opts out can only take state exemptions, but adds a little (see p. 208) 4) Exemptions are claimed on Schedule C of Official Form 6. (p. 940) 5) 522(l): debtor is required to file a lists of exemptions (or spouse can do it as a dependent) 6) Objections to Exemptions: Bankruptcy Rule 4003(b)&(c): TIB or creditor must file an objection to the list of exemptions within 30 days after the conclusion of the meeting of the creditors was to take place. > could try and get a bankruptcy judge to extend > the objecting party has the burden of proving that exemptions are not properly claimed. 7) BR 2003: meeting of the creditors the conclusion of which starts the 30-day deadline for the filing of objections to exemptions. The trustee should schedule meeting 20 or 30 days after the order of relief filed. 8) Stacking: If spouses are involved, exemptions frequently can be more effectively claimed through filing a 302 joint petition and stacking the exemptions is permitted by 522(m). A property interest is a prerequisite to a spouses claim of an exemption in an attempt to stack. 9) Why choose state exemptions?: > if your state has an unlimited homestead exemption that is more generous than federal code. > see if state permits stacking (a state rule allowing only 1 homestead per

family prohibits stacking) 10) Why choose federal exemptions? > federal exemptions allows for an $850 wildcard exemptions that can be used to protect cash in a checking account. > option of stacking > flexibility of the categories: some property can be claimed under multiple categories. > up to $8,075 of the residential homestead exemption can be spilled over to increase the wildcard provision. B. Claiming the Exemption 1) Taylor case (p. 209) > issue: are proceeds from a lawsuit, claim for lost wages, and value unknown exempt? > facts: This was an employment discrimination case worth $110,000; a small fraction of which would be for exempt wages. The TIB did not file a timely objection he claimed that he is still entitled to object after the deadline b/c the exemptions were not made in good faith. > Court: held that deadline was final without exception under 522(l) so exemptions stand. C. Valuation of Exempt Property 1) in general: valuation is extremely important in bankruptcy exemptions, especially where there is a dollar limit on the exemption. 2) 522(a)(1): says that value is fair market value when that property became POE (liquidation value) 3) Walsh (p. 212): > held: that fair market value when property became POW would be its liquidation value b/c TIB would have to liquidate it to cash in any amount over the exempt dollar limit. > Note that under this approach, very few items would exceed the exemption limits. 4) Mitchell (p. 214) > Applies Texas law exemptions > Court: held that if state exemptions applied, then the 522 definition of fair market value was not controlling. Said that Texas defines aggregate fair market value to mean ordinary retail value controlled. D. Security Interests in Exempt Property - 522(f) Voiding Power 1) In general: allows a debtor to void the fixing of certain liens that impair an e exemption that a debtor has selected. 2) What kind of liens are voidable? > judicial liens (except judicial liens for alimony, maintenance, or child support) 522(f)(1)(A) > non-possessory, non-purchase money security interests that impair exemptions in the listed categories of tangible personal property are voidable. 522(f)(1)(B) - whenever the debtor has possession of the collateral, and

- whenever the secured obligation was NOT used to purchase the collateral 3) Impairment Formula for determining the extent to which a lien impairs an exemption: 522(f)(2)(A). 4) 522(f)(3): imposes a federal dollar limitation upon some categories of tangible personal property in which nonpossessory, and nonPMSIs that impair exemptions can be voided to the extent that state exemptions that impose no dollar limitations have been selected. > Formula: (i) find sum of the secured obligation of the lien sought to be voided, (ii) the sum of the secured obligation of all other liens attached to the exempt property, and (iii) the $ amount of he debtors claimed exemptions. > Voidability exists to the extent that the sum of these three figures exceeds the value of the exempt property. 5) Significance of 522(f) voidability: > a creditors lien can be wholly or partially voided, **but their debts remain unaffected. > The practical effect is to demote a creditor in whole or in part from a secured creditor to an unsecured creditors status. They are now entitled only to a pro-rata share with all the other creditors. E. Exemption Planning 1) Reed (p. 221) > Held: under Texas law, the deliberate use of Texas exemptions to shield assets from creditors shortly before filing bankruptcy can result in a disallowance of Texas personal property exemptions but not Texas homestead exemptions. 2) Coplan (p. 223) > facts: FL case where debtors moved from Wisconsin to FL and quickly bought a house 1 year & 5 days before filing bankruptcy. This left debtors with virtually no non-exempt property to distribute. > Court: upheld the creditors objection and allowed them only a $40,000 exemption they would have received under WI law, and the rest goes into non-exempt POE. III. Claims and Distribution A. Claims Process 1) Creditors must fill out a proof of claim form (Official Form 10) > must be filed within 90 days after the first meeting of creditors is set, unless it meets one of 5 exceptions (BR 3002(c)) > Proof of Claim must be accompanied by evidence of perfection 2) A claim is allowed unless a party in interest makes an objection under 502(a) > BR 3002(f)(a): properly filed proof of claim is prima facie evidence of the validity and amount of a claim. B. Disputed Claims 1) Lanza (p. 233) > facts: debtor objects to all three of creditors proof of claims. The debtor

has the burden to rebut a presumption of validity. She failed to give any evidence in 2 of the 3 claims. But, the creditor gave conflicting information as to the amount due on 3rd claim. > Court: allowed the 3rd claim, but for the lowest amount indicated by conflicting testimony. C. Unsecured Claims 1) The claim > 501: lays out procedure for filing claims > 502: explains the mechanics of calculating the claims - preamble of 502(b): calculates the basic allowable amount of prepetition for secured or unsecured claim. **Unless an exception applies, the basic allowable amount is the amount of claim on the DOP, including any prepetition interest, prepetition attorneys fees, and all other prepetition charges, plus all principal payments that had been scheduled in the post-petition period. 2) Interest > Pre-petition interest: yes > Post-petition interest: - if claim is unsecured, NO post-petition interest. 3) Accelerated Claims > once bankruptcy filed, all pre-bankruptcy claims are accelerated whether they have matured or not. D. Secured Claims 1) The claim > 502(b): governs the permissible nature and extent of prepetition claim > 506: sets forth special post-petition and collection rights of secured creditors. - 506(a): grants a secured creditor an allowed secured claim up to the value of the collateral. If the claim is less than the value of the collateral, the creditor is fully secured. If the claim is greater than the value of the collateral, the creditor is partially secured (the remainder being unsecured). 2) Interest > Pre-petition interest: yes > Post-petition interest: - If secured creditor is over-secured (the collateral is worth more than claim) then creditor can get post-petition interest at its contract rate until the value of the collateral exceeds the allowable amount of the claim is exhausted under 506(b). 3) Attorneys Fees > If unsecured or secured creditor is entitled to pre-petition attorneys fees, then they can collect. > Secured creditors who are oversecured are entitled to post-petition attorneys fees until the total claim exceeds the remaining value of the collateral. 506(b). > Authors believe that unsecured creditors should not be allowed to claim post-petition attorneys fees, but case law indicates a question in this area. (p. 239-240)

4) Exemptions: > a valid, unavoidable consensual security interest (not voidable under 522(f)) trumps exemption claims, so a debtor may only claim an exemption in the equity, the value remaining after the secured creditor has been paid in full. 5) Post-petition Claims > 503: Allowance of Administrative Expenses - Administrative claims have 1st priority over secured claims under 507(a)(1). 6) Priority among Unsecured Creditors > 725: Disposition of Certain Property: if there is an unvoidable lien, then TIB must pay off this secured creditor by selling the property and then distributing it 1st to the secured creditors before the unsecured creditors. > 726: Distribution of POE: - 1st: pay off in the order of priorities under 507 - 2nd: pay off unsecured creditors - 3rd: pay off unsecured creditors whose claims were not timely filed - 4th: pay off any allowed claim (secured or unsecured) for any fine, penalty, or forfeiture - 5th pay off interest at the legal rate from the date of DOP on any of the above claims - 6th: give to debtor * claims 1-5 shall be paid pro-rata > 507: Priorities - 1st: administrative expenses - 2nd: unsecured claims allowed under 502(f) - 3rd: allowed unsecured claims for wages, commissions - 4th: allowed unsecured claims for contributions to an employee benefit plan th - 5 unsecured claims of cattlemen & fishermen - 6th: allowed unsecured claims of individuals in connection with a rental, lease or purchase of property (i.e. deposit on an apartment) - 7th: allowed claims for debts to spouse, former spouse, or child support (with 2 exceptions) - 8th: allowed unsecured claims of tax by governmental unit: *only to extend to taxes that are due within 3 years of DOP. ; property tax claims *only 1 year priority period; employment tax on wages * 3 year priority period; - 9th: claims made to bank *Note: a tax penalty that is really a penalty (and not compensation) is subordinated to all general non-priority claims by 726(a) (4). IV. Discharge A. Exceptions to Discharge 1) In general: the discharge hearing is the second & last time the debtor comes to

the courthouse. The debtor is not entitled to a discharge as a matter of right, but discharge will be granted unless it is challenges by the trustee or creditors. > for a creditor, this is a last resort, but the threat of objecting to discharge may be used as leverage. > BR 4004: objection to discharge must be timely, no longer than 60 days after first date set for meeting of the creditors if not timely, then discharge is ordered. > BR 4007: exception to discharge must be timely 60 day deadline for 523(c)(1) exceptions, but no deadline other than statute of limitations on all other exceptions under 523. > BR 4005: the objecting party has the burden of proving an objection 2) 523: Exceptions to Discharge: exceptions to discharge of particular debts > 18 categories of non-dischargeable debt > Note - 523(2)(C) creates a rebuttable presumption of nondischargeability under 523(a)(2)(A) for the type of conduct involved in Dorsey case. 3) 727: Discharge: objections to discharge of all debts (global denial) > 10 grounds for total denial of discharge 4) Harron (p. 244) > issue: 727(a)(3) involves an unjustified failure to keep or preserve books and records from which debtors financial condition or business transactions can be ascertained. > facts: debtor was sole stockholder of 3 corporations, had commingled personal and corporate funds, and had scheduled a corporations debt as a personal debt. > Court: sustained a Ch. 7 objection to discharge b/c did not buy debtors story that the records were accidentally tossed out, and notes that insolvency is no excuse for failure to keep records. 5) Reed (p. 248) 5th Circuit Case > issue: was debtors conduct enough to justify a 727(a)(2) objection a transfer removal or destruction of property with intent to defraud creditors or hinder process? > facts: debtor converted non-exempt property into exempt real estate to take advantage of generous homestead exemption within 4 months of filing Ch. 7. > court: held that homestead exemption is not affected, but that since state law was used to claim exemptions, then state law determines whether a claimed exemption should be disallowed b/c of intent to defraud, but federal bankruptcy law applies to determine whether an objection to discharge should occur. Sustains the objection. 6) Whether a debtor had an actual intent to defraud is a quintessential issue of fact (p. 254-257). 7) Dorsey (p. 257) > facts: debtors sole income was $480/ month from a social security payments. She nonetheless racked up debts on three AmEx cards. > Court: held that two of the cards were used by debtor in actual fraud

under 523(a)(2)(A) by making charges that the debtor had no intention of repaying b/c she knew she had nothing to pay them with. > Note - 523(2)(C) creates a rebuttable presumption of nondischargeability under 523(a)(2)(A) for the type of conduct involved in Dorsey case. 8) DEttore (p.262) > issue: are student loans dischargeable? > court: 523(a)(8) says no discharge unless the court finds undue hardship. The court did not find severe enough undue hardship to make this dischargeable. 9) Hill (p. 265) > facts: divorced wife wanted 5 debts excepted from discharge as being 523(a)(15) related to property settlement in conjunction with divorce. > issue: debtor can justify cancellation of (a)(15) debts if (i) debtor has no ability to pay or (ii) the benefit of discharging the debts for the debtor will outweigh the detriment to former spouse. There is NO requirement of showing undue hardship. > court: did a balancing test and found in favor of the husband. 10) Milbank (p. 270) > issue: did debtor induce his wife and father to make loans to him to save a marriage that he had no intention of saving? Claim false pretenses under 523(a)(2)(A). > Court: said false pretenses. B. Tax Priorities and Discharge 1) 523(a)(1)(A) excepts from discharge prepetition unsecured tax claims entitled to a 507(a)(8) priority distribution. - postpetition interest on unpaid tax claim is also excepted from discharge - penalties on taxes excepted from discharge are also excepted from discharge even though they have no priority distribution. 2) Bottom-Line: taxes given priority under 507(a)(8)(A)-(G) are not only given priority, but any unpaid portion of these taxes is excepted from discharge. C. Bankruptcy Crimes 1) Concealment of assets, false oaths, false claims are made crimes under 18 USC 151-155. 2) Cluck (p. 279) > Texas attorney sentenced to 2 years in jail and ordered to pay $185,000 in restitution for concealing assets and lying about it in his Ch. 7 case. D. Effect of Discharge Order 1) 524: > discharge order voids judgments at any time obtained > to the extent that a debt is secured, an unvoided lien can be foreclosed, but a debtors unsecured personal liability for any deficiency is discharged. > **Debts are discharged, but Liens must be Voided unvoided liens pass through bankruptcy unaffected. 524(2)(a)(2). V. Debtors Post-Bankruptcy Position: Reaffirmation

A. In general 1) 524: Effect of Discharge - At the moment of the debtors Ch. 7 discharge, the 362 automatic stay lifts ( 362(c)(2)(C)), and the 524 discharge injunction slams into its place ( 524(a)(2)&(3)). > discharge injunction forbids any attempt to collect a dischargeable debt. > enforcement: sanctions, penalties, & contempt 2) 524(c) Reaffirmation: provides that a debt can once again become legally enforceable if the debtor signs a reaffirmation agreement that complies with this section. > window of opportunity: agreement must be made before discharge under 727. > agreement must contain a clear and conspicuous statement which advises the debtor that the agreement may be rescinded at any time prior to discharge, or within 60 days after the agreement is filed with the court. > agreement must inform debtor that reaffirmation is not necessary, and is completely voluntary on both the debtors and creditors part. > affirmation agreement must be filed with the court, and if represented by an attorney, an affidavit by the attorney stating that (i) fully informed and voluntary, (ii) agreement does not provide undue hardship on debtor, (iii) attorney has fully advised debtor of the legal effect > If debtor NOT represented by an attorney, then court must approve the agreement as being in the best interest of debtor and no undue hardship. 3) Three reasons to reaffirm: > (i) with respect to secured debt, reaffirmation prevents repossession of collateral, (ii) with respect to unsecured debt, the offer of future credit, and (iii) with respect to unsecured debt, the thr eat of an objection to discharge. B. Reaffirmation of Secured Debt 1) **Debts are discharged, liens are not (506(d)). Liens must be voided. > debtor has no personal liability on any debt, so unsecured debts are essentially vaporized. > secured debt remains attached to collateral and can be enforced against the collateral after bankruptcy, even though a debtor cannot be sued for any deficiency. 2) The discharge injunction only forbids claims for personal liability, but collection by seizure of secured collateral is not forbidden. 3) Debtor has 3 possible alternatives to avoid surrendering collateral to creditor: > (1) redemption - 722. > (2) reaffirmation agreement - 524(c) > (3) retention (ride-through) of the collateral by remaining current on payments throughout a bankruptcy case. 4) How Redemption Works: > requires the debtor to pay the creditor cash for the full amount of loan, or the full value of collateral, whichever is less. > debtor can force redemption on a creditor > redemption must involve collateral that has been exempted or has been

abandoned as POE by the TIB. > redemption price is the market value of the collateral and must be paid in cash. 5) How Reaffirmation Works: > requires a creditor to agree, cannot force a creditor to reaffirm > consequence of reaffirmation: debtor signs a legally binding agreement to waive the discharge on a given debt. > reaffirmation is a free market activity > Pendelbury (p.288) - facts: debtor files a motion to strike a provision in the reaffirmation agreement that makes him pay $250 in legal fees. - court: denied the motion and held that a reaffirmation agreement is negotiated between a debtor and a creditor and the court stays out of it, as long as it meets all the 524 (c) requirements. > creditors often require reaffirmation of the entire debt, regardless of the value of collateral, and even ask for unpaid prepetition interest. 6) How Retention Works > 521(2) within 30 days after filing Ch. 7 petition, an individual debtor must file a Statement of Intention (Official Form 8) with respect to POE that secures consumer debts. > Allows three choices: (i) surrender of collateral for consumer debts, (ii) redemption, (iii) reaffirmation. [Always can try & void lien under 522(f)] > One argument that retention/ ride-through is not available is b/c it is not listed as an option under 521(2) or OF 8. > Burr (p.294) - court: joins 3 other circuits, including the 5th Circuit, in rejecting the permissibility of the retention/ride-through option. > **Security agreement clauses that make filing a petition an automatic default can checkmate the retention doctrine in most federal circuits that recognize it. If this clause is valid, then retention doctrine only works until the automatic stay is lifted, unless the creditor has been persuaded by the keeping up of payments before the stay is lifted that it would come out okay if it did not repossess. C. Reaffirmation of Unsecured Debt 1) Why reaffirm unsecured debt: > to avoid the threat of an objection to discharge > a creditors offer of future credit 2) In re Latanowich (Sears Case) > facts: Sears failed to file the reaffirmation agreement with the court as required, and did not inform debtor that the agreement would not be binding if not filed with the court. > Court: b/c the debtor was not represented by counsel, the court would have to approve the agreement for it to be valid. Sears was sanctioned for millions. D. Debts to Sovereign States 1) When creditor is the state, the federal courts have limited powers of enforcement:

11th Amendment says that State cannot be sued in federal court without its consent. 2) Collins (p.306) > facts: state of VA had judgments against joint bankruptcy debtors for forfeited bailbonds. The debtors moved to have their case reopened to determine that the bonds were dischargeable. > Court: reopened the proceedings, claiming that the subject-matter jurisdiction was over the bankruptcy debtors and their estate. *The key here is that the state had not been named the defendant. 3) Neary (p. 309) > facts: debtors filed Ch. 7. Subsequently, the attorney general sent letters demanding payment of tax liability. Debtors tried to sue the IRS to obtain a declaratory judgment to declare that the state taxes were dischargeable. > Court: held that bankruptcy is not a privilege or an immunity within the meaning of 14th Amendment, and thus cannot abrogate states i mmunity under 11th A. The court dismisses the case, but notes that debtors could name the director of the IRS as the defendant. E. Nondiscrimination 1) 525: forbids governmental discrimination with respect to employment of an employee who filed bankruptcy, or the granting of licenses to a debtor. 2) Also forbids private employer from discriminating 3) forbids governmental loans from discriminating

I. Elements of an Acceptable Plan A. Overview of Ch. 13 Wage Earners Plan 1) focuses on using future earnings, rather than accumulated assets to pay creditors. Must promise three years worth of wages. 2) debtor keeps all assets, regardless of whether assets exceed the exemption limits. 3) TIB takes a % of debtors income for each pay period, applies it to administrative expenses, then distributes the remainder according to the plan. 4) When the debtor has completed the agreed payout, the debtors remaining obligations are discharged. 5) Debtor is under supervision of court for the 3 to 5 years. 6) *If debtor successfully completes a confirmed payment plan, the debtor is given a Full Performance Discharge of the unpaid balances of virtually all debts - 1328(a). 7) Trustee is obligated to ensure that payments are commenced within 30 days after the plan if filed, and that the payments are properly distributed to creditors. (1302(b)(5) & 1326) 8) Why File Ch. 13? > to keep property that is subject to an unvoidable security interest. > debtors who need a structured way to deal with their tax problems (Ch. 13

which prioritizes the paying off of tax debts is often better than Ch. 7 that does not have a structured approach and Ch. 7 tax debts are non-dischargeable) > Ch. 13 stops the relentless accrual of interest on tax debts. 9) Distinctions between Ch. 13 and Ch. 7: > Ch. 13 - involuntary petitions filed by creditor NOT possible - debtor retains possession of POE (1306(b)) - because discharge is withheld until completion of Ch. 13, the automatic stay continues throughout a Ch. 13 case (362(c) (2)(C)) - a Ch. 13 Full Performance Discharge is subject to fewer statutory exceptions than a Ch. 7 discharge (compare 523(a) with 1328(a)(1)-(3)) - trustees duties do not include collecting, preserving, and selling the property of the estate ( 1302(b)(1)). Trustee has duty to object to improper creditor claims. Main duties are in connection with confirmation of a plan and distribution of payments (1302(b)(2)(B)) > Ch. 7 - involuntary petitions filed by creditors are possible under Ch. 7 (303(a)) - debtor gives up possession of all POE - does not involve filing a plan - Ch. 7 cases terminate much more quickly than Ch. 13, thus no adequate protection issues in Ch. 7 cases. B. Procedures in Filing Ch. 13 1) Only a debtor can propose a Ch. 13 plan - 1321 2) A plan must be filed within 15 days after the DOP BR 3015(b) 3) A Ch. 13 TIB is appointed by US trustee prior to confirmation of a plan. 4) 1322: deals with both mandatory and permissive plan provisions 5) 1324: authorizes a confirmation hearing at which a judge considers all objections to the plan. 6) At confirmation hearing, the position taken by TIB carries great weight 7) 1325: contains the requirements that a filed plan must satisfy to be confirmed. C. Payments to Secured Creditors 1) Secured creditor enjoy substantially better protection than the unsecured creditor. > entitled to 361 Adequate Protection of the value of their security interest on the DOP (as an objection to automatic stay under 362(d)) AND the plan payment provisions comply with 1325(a)(5)(B) cramdown requirements for forcing confirmation over a secured creditors objection. 2) Secured creditors can also object to automatic stay and try to get it lifted under 362(d): * 362(d)(2) allows relief from automatic stay if (i) debtor does not have unencumbered equity in the property and (ii) property is not necessary for an effective reorganization. 3) Secured creditor may try and repossess and sell collateral > secured creditor is worried that collateral will decrease in value

4) Interest: secured creditors requires payment, including interest. 1325(a)(5) D. Turnover - 542 1) debtor in a Ch. 13, can use the trustees power to recover property 2) Radden (p. 323) > facts: debtor filed Ch. 13 petition immediately after creditor repossessed his car and given notice of a foreclosure sale. The debtors plan proposed to pay creditor claim in full with 5% interest with 36 monthly payments. > issue: debtor seeks turnover of possession of the car under 542. Creditor tries to lift automatic stay under 362(d)(2) . > * 362(d)(2) allows relief from automatic stay if (i) debtor does not have unencumbered equity in the property and (ii) property is not necessary for an effective reorganization. > court: said that while the debtor had no equity, he had proven that it was a necessity to his reorganization plan. Thus court denied relief from automatic stay. Also, said that there was adequate protection and met cramdown provision. Ordered turnover. 3) When does a debtor have equity in property? > when a secured creditor is undersecured, the secured creditors security obligation exceeds the value of the collateral, and the debtor a fortiorari has no unencumbered equity in the collateral. > becomes an issue when there is an over-secured creditor. E. Modifying the Secured Creditors Contract - 1322(b)(2) 1) If creditor loses his attempt at lifting the automatic stay, he will likely try and battle how much the creditor will be paid under the plan. 2) While a secured creditor has enhanced status, he is not guaranteed the same contract in bankruptcy that he negotiated earlier. 3) Power to Modify: 1322(b)(2) gives debtor the power to modify terms of the secured (and unsecured) debt. 4) Limits on Modification: 1325(a)(5) establishes the minimum terms to which holders of allowed claims are entitled. > At a minimum, plan must provide that creditor retains its lien, and must not receive less than the amount of its secured claim. 1325(a)(5)(B) > In substance, this requires that payments over time be accompanied by interest to compensate for delayed pay-off. 5) Cramdown 1325(a)(5)(B): > satisfying the cramdown permits confirmation over secured creditors objections. > key elements of cramdown: - valuing collateral (which fixes the amount of an allowed secured claim to the extent that the secured creditor is undersecured. - fixes the interest rate that must be paid to secured creditor > idea is to put secured creditor in as good a position as if the creditors claim had been paid on the effective date. 6) Rash (p. 328) > facts: debtors asserted that value of tractor was net amount that secured

party would have received at foreclosure (foreclosure sale value). The secured creditor said that value was the replacement value what it would have taken for debtor to replace it. > issue: what is the valuation standard of tractor for purposes of allowance of a secured claim? > Court: Fifth circuit said foreclosure value, but Supreme Court said proper valuation was replacement value. 7) Replacement Value: the price that a willing buyer in the debtors trade or situation would be willing to pay a seller to obtain property of like age and condition. Definition comes from 506(a)(2d sentence)- in light of proposed disposition or use of the collateral. > it is still up to judge to determine whether or not replacement value was retail value, wholesale vale, or some other value. 8) Hollins (p. 335) > facts: oversecured creditor objected to being paid out at 6 % interest when its contract rate was 11.5% interest. > The debtor has burden of showing compliance with Ch. 13 cramdown i.e. that this was an appropriate interest rate. > Court: confirmation denied b/c of insufficient evidence with respect to appropriate interest rate. Held that the appropriate interest rate is the market rate on a plans effective date (usually the confirmation date) that a secured creditor would have charged for a loan similar in character, amount and duration 9) How to Calculate Interest under Cramdown? > the appropriate interest rate is the market rate on a plans effective date (usually the confirmation date) that a secured creditor would have charged for a loan similar in character, amount and duration > see p. 338-39: computation of discount rate of interest F. Lienstripping 1) The process by which a debtor can reduce an undersecured claim to the value of the collateral (and voids the security obligations capacity to create a larger security interest in the future). 2) 1322(b)(2): other than clause excludes security claims in debtors principal residence from lienstripping or modification. Contractual payment schedule cannot be altered on a home residence mortgage. 3) Some courts have read 506(d) and 1325 to permit lienstripping of a second or subsequent home mortgage that is not covered by any value of the collateral. G. Curing or De-Acceleration of Home Mortgages 1) Taddeo (p. 341) > holds that a Ch. 13 plan can de-accelerate a previously accelerated balance of a home mortgage and provide for catching up payments that are in arrears without violating the ban on modification. 2) Cure defaults: 1322(b) & 1322(c) has two provisions authorizing a plan to cure defaults. > 1322(b)(3) > 1322(b)(5) 3) No-Modification to Long-Term debt - 1322(b)(5) > debt where contractual final payment is due after the last payment under

the plan is due. > permits cure of defaults within a reasonable time with respect to long-term debt but otherwise requires maintenance of contractual payments after case is over and implicitly precludes modification of the contractual payment schedule. > Only way to avoid this is to both modify long-term debt and to pay it off entirely under the plan if the long-term debt requires that it be handled under 1322(b)(5) then the contractual terms cannot be modified with the exception of de-acceleration of prepetition acceleration and cure any defaults within a reasonable time. H. Payments to Unsecured Creditors 1) All Priority Claimants under 507 are entitled to payment in full (no interest) ( 1322(a)(2)) 2) General unsecured do not have similar protection under the plan they are pooled together and paid pro rata. BUT they are entitled to interest if they are paid. 1325(a)(4) 3) Unsecured creditors can object to the amount paid under two 1325 provisions: > best interests test: each unsecured creditor, general or priority, receive at least as much as they would have received under a Ch. 7 bankruptcy. > debtor must devote all disposable income to plan payments **In addition, plan must be proposed in good faith ( 1325(a)(3)) 4) Disposable Income > 1325(b)(1)(B): the holder of an nonpriority unsecured claim that is not paid 100% by the plan, can object to confirmation, unless the debtor commits all his or her disposable income for 3 years from the date the first payment is due. > * reasonable payments to secured creditors and 507 priority claims are deducted when calculating disposable income that can go to unsecured creditors. Other deductions must be reasonably necessary for support of debtor and family. > disposable income: 1325(b)(2) income that is not reasonably necessary for either maintenance or support of debtor and dependents. > deductible maintenance, such as charitable contributions to qualified charitable institutions that do not exceed 15% of debtors gross income. > if debtor is engaged in business, deductions also include payment of expenses that are necessary for preservation or operation of the business. > Carter (p. 349) - facts: debtor filed Ch. 13, but non-debtor spouse did not file. She s cheduled her income, but did not include her husbands. - Court: held that if a married debtor files singly, courts calculate disposable income upon the basis of the family budget, including income and expenses of the non-debtor spouse. This reflects the idea that married couples share living expenses. > OF 6, schedules I & J require non-debtor spouses income to be revealed.

> Wyant (p. 352) - facts: court denied confirmation b/c debtors wife died, and while he took off payments for maintenance off his list, he increased his other expenses, leaving very little for unsecured creditors. - court: found that debtor had manufactured increases to offset the reduction. Also found that veterinary care to elderly horses and animals was not reasonably necessary. 5) Good Faith >**most courts consider 1325(a)(3) to require good faith in addition to disposable income test. > Greer (p.356) - issue #1: whether a 3 year plan had been presented for confirmation in good faith where all payments would go to secured and priority creditors, including TIBs fees, and the unsecured creditors would receive virtually nothing. - issue #2: whether a 3 year plan proposing zero payments to nonpriority unsecured creditors was sufficient cause to require a longer plan. - Court: held that while this could indicate bad faith, this alone was not enough, must be collaborative evidence. > Nominal or Zero payments to nonpriority unsecured creditors is evidence of bad faith that must be corroborated with other evidence of bad faith for denial on this ground. > When can 3 year plan be extended? What is good cause? - extending the duration of a plan in order to pay 100% of allowed nonpriority unsecured claims, which would improve the debtors credit rating. - extending duration of plan to pay 70% of allowed nonpriority unsecured claims, which could remove the bar in 727(a)(9) on obtaining discharge in a Ch. & case filed within 6 years after filing a Ch. 13 case would be sufficient cause. - extending for less than 70% payment is NOT sufficient cause. > When can Debtor file a Ch. 13 after filing a Ch. 7 in good faith? - Test: (1) the debtor had received a Ch. 7 discharge within 6 years of filing a Ch. 13 case, (2) 727(a)(8) would bar a Ch. 7 discharge in a Ch. case filed on the same date that the Ch. 13 case was filed, and (3) the proposed Ch. 13 plan amounted to a Ch. 7 liquidation. - In Strauss case (p. 363), the debtors proposed plan provided for payments on secured claims, attorneys fees, and priority tax claims but zero payments to nonpriority unsecured claims. The court held that this was the equivalent of what would have happened under a Ch.7 filing, and thus plan had been proposed in bad faith. *Note this case involved a planned Ch. 7 followed by a Ch. 13 = Chapter 20 case - note: (p. 368) 707(b) which provides for involuntary dismissal of

Ch. 7 claims that are substantial abuses can force a debtor to seek relief under Ch. 13. 6) Satisfaction of Confirmation Standards for Unsecured Creditors: Three Tests: > three-years disposable income test > good faith test > best interest of the creditors test - 1325(a)(4) - requires that the value distributed to nonpriority, unsecured debtors be at least equal to the amount that would have been paid in a hypothetical Ch. 7 case on the effective date of the plan. - debtor must introduce evidence of non-exempt POE under 541 and a total of the scheduled debts in a Ch. 7 case, with the Ch. 7 POE being valued at a liquidation value on the effective date of the plan. - 726 Distribution rules are then applied to determine what nonpriority, unsecured creditors would have received in a hypo. Ch. 7 case. Hypo administrative expenses are deducted in applying these distribution rules. - *If a debtor could have exempted all his POE in a Ch. 7 case, then it is clear that the nonpriority creditors would have received nothing under Ch. 7, so chances are that filing under Ch. 13 would not violate best interests. 7) POE under Ch. 13 - 1306(a)(1): includes all 541 POE, plus all property acquired by debtor between DOP and closure of the case. Also, it explicitly cancels the exclusion of earnings for postpetition personal services, b/c these are the wages used to fund the plan. I. Taxes & Priority Repayments in General 1) Unsecured Priority claims under 507(a) must be paid in full without interest to have plan confirmed under 1322(a)(2); including: > alimony, maintenance, support claims, & tax claims 2) As long as priority unsecured claims are paid in full, all unpaid nonpriority claims can be discharged by a 1328(a) Full Performance Discharge. 3)* 1325(a)(4) Best Interest of Creditors test also applies to unsecured priority claims. > note that under the test, in a hypothetical Ch. 7 case, allowed unsecured priority claims must be paid present value interest to the extent that the amount they would have received in a hypo Ch. 7 case is received over time under a Ch. 13 plan. 4) *IRS can upgrade and expand its unsecured tax priority by filing notice of its statutory tax lien prepetition. Then it is treated like a secured claim. > determining what taxes receive priority interest begins with 507. > a statutory tax lien attaches upon an assessment of taxpayers liability for unpaid taxes and is not limited to taxes in which an unsecured tax priority exists. ANY collectable taxes can be subject to this lien. > Unless notice of tax lien is filed prepetition to perfect a statutory lien, the statutory tax lien is voidable in bankruptcy under 545(b)(2). > Not voidable under 522(f) b/c statutory tax lien is neither a judicial lien not a voidable security interest. > If debtor files Ch. 13 before tax lien filed, then automatic stay prevents

IRS from taking further collection actions. > 507(a)(8): general rule is that priority tax repayment is limited to taxes for which a return was due within the 3 years preceding the bankruptcy filing. > Remember tax debts are not dischargeable in Ch. 7! > Baker (p. 374) - facts: debtors had previously filed Ch. 7 and were granted d ischarge. Later they filed a Ch. 13 a year and four months after Ch. 7. Debtors had hoped to settle tax debts after discharging their nonpriority unsecured claims. Ch. 13 was filed only b/c they could not resolve matters with the IRS after the Ch. 7 discharge. They have both secured priority and unsecured nonpriority tax debts. - issue: to what extent a Ch. 13 plan can change the IRSs allocation of payment to the taxes that are due? - majority position: payments to IRS through Ch. 13 plan are involuntary, and usually IRS allocates involuntary payments to the oldest taxes due (and prefer to allocate to unsecured debt before secured debt) - Supreme Court: bankruptcy judge has authority to direct the IRS on how to allocate involuntary taxes provided that it is essential to success of the plan. - caselaw limits bankruptcy judges power to change IRS policy only if 100% of tax debts are paid off. Thus would not help debtor in this case. > *Trustfund taxes (ex. withheld taxes) are entitled to priority no matter when they become due no time limit on the priority. > Tax fraud claims have no special priority > Zieg (p. 381) - held: 507(a)(8) does not confer priority upon prepetition taxes that are involved in a willful attempt to evade tax that did not arise in the priority period. Any taxes that do not fall within a priority period are both nonpriority and dischargeable under 1328. 5) Differential Payments Among General Unsecured Creditors > 1322(b)(1) allows plan to designate more than 1 class of unsecured claims but not to discriminate unfairly against any designated class. > intended to provide for full payment of co-debts (co-signed, unsecured debts) > 1301 also extends automatic stay to protect co-debtor that had not become a co-debtor through business and did not sign a negotiable instrument. > Schedule H, OF 6 list of co-debtors. > Can debtors treat all holders of allowed nonpriority unsecured claims as a priority? - Bentley (p. 385)

- plan tried to create special class of nonpriority unsecured nondischargeable student loans to be paid 100%. Other nonpriority unsecured claims would be paid 5%. - court considered this unfair discrimination. > May be permissible to give child support payments special treatment (but these are normally priority claims anyway) > some courts have allowed special treatment of student loan (p. 388-89). J. Modification and Dismissal of Ch. 13 Plan - 1307 1) Missing Monthly Payments > Faaland (p. 390) - creditor moves for dismissal of confirmed Ch. 13 case due to debtors having missed 2 monthly payments. The debtors had paid $38,000 or $71,000 commitment. - court held: when deciding whether to dismiss, bankruptcy judge must determine whether default was intentional or caused by circumstances beyond the debtors control. Court here found that the debtors were using their best efforts. 2) Test: intentional missing payments, or b/c of causes beyond their control. Have debtors been using best efforts? 3) In some places, it is common for judge to sign and order garnishment of debtors wages for amount plan requires this order is placed in file and used when needed. 4) Judges reluctant to dismiss cases, and do so for following reasons: > debtor did not file a timely plan > failure to begin timely payments (1st payments seen as most crucial) > material default on a confirmed plan. 1307(c). 5) Automatic stay remains in place between filing a Ch. 13 case and dismissal. 6) 109 imposes a 180 day bar upon refiling a case if a prior case was dismissed involuntarily for willful failure to abide by court orders -- this keeps debtors from refiling bogus plans just to get the benefit of automatic stay. 7) Modification of Plan > 1329 allows modification for 3 reasons: - to increase or decrease payments upon a particular class of claims - to extend or reduce the time for payments - alter the distribution to a creditor provided for by the plan to take into account a payment that the creditor has received from another source. > Meeks (p. 393) - facts: debtors had filed a Ch. 13 plan to pay secured creditor $174 for 36 months. They had a baby and proposed a modification due to changed circumstances to eliminate this $174 payment. They sought to reclassify this as an unsecured claim - issue: when can debtors successfully modify a confirmed plan? - court held: nothing in 1329 allows for alteration of the allowed amount to pay a secured claim, to eliminate the cramdown requirement that an allowed secured claim be paid in full, or to reclassify secured claims as unsecured claims. To do so

would be unfair to creditor who has no modification power and has not had their property either. > 1329(a) a secured creditor has no power to modify plan, BUT an unsecured claim has standing to move for modification increasing plan payments. 8) Debtors Attempt at Early Pay-Off > facts: debtor filed a plan providing for 30 month pay-out of $30,000 worth of debt. Two months after plan was confirmed, the debtors prepaid in full all the payments by the confirmed plan. > issue: whether then plan was made in good faith, and that they did not allocate appropriate for their disposable income. > Court: denied debtors full performance discharge. II. Threshold Eligibility for Chapter 13 A. Regular & Stable Income 1) 109(e) limits access to Ch. 13 to natural persons with limited debt and regular income. (Corporations & partnerships not eligible) 2) 101(30) defines regular income > broad includes funding from diverse and untraditional sources. 3) Murphy (p. 402) - facts: debtor shared household with Mr. H for 11 years. He was selfemployed and supported the debtor by giving her $800/ month. She has her car levied on, and she filed Ch. 13 trying to void the lien to the extent of her exemption and pay the remainder. She sought a turnover of car. Creditor objects saying she does not have regular income. - issue: What does regular and stable income mean? - court: says that Mr. Hs promise to make debtors Ch. 13 payments gave her an assurance of regular and stable income. B. Statutory Maximums & Non-Contingent, Liquidated Claims 1) 109(e) has statutory maximums imposed on debt > $290,524 in unsecured debt and $871, 549 in secured debt. > see footnote 1 of 109(e) > If individuals noncontingent and liquidated debt exceeds either of these maximums, must file under Ch. 7 or Ch. 11. 2) Claims must be uncontingent and liquidated debt > contingent debt: does not become an obligation until the occurrence of a future event. It is noncontingent if all the events giving rise to liability occurred prior to the DOP. > liquidated debt: if amount due is easily ascertainable on the DOP even if the existence of liability may be unclear. 3) Mazzeo (p. 407) > facts: debtor appealed from dismissal of his case because he had over the statutory maximum of debt that was noncontingent and liquidated. Debtor argued that a part of this debt was unliquidated and contingent b/c the actual tax assessment had not been issued against him. > court: held that just because the debtor disputed a claim and that there was

a pending determination did not make the debt contingent. All the events that would determine debtors status to the debt has occurred prior to DOP he was just hanging around, and waiting. III. Consumer Bankruptcy System A. The Policy Debates 1) Has been a 400% increase in the rate of consumer filings from 1981 to 2000. 2) It is not clear that creditors suffer greater losses inside the system than outside it 3) Two issues raised: > are consumers paying as much as they can? > does consumer bankruptcy result primarily from irresponsibility or misfortune? 4) Creditors are lobbying to preclude lienstripping on cars, and deny access to Ch. 7 if debtor had the means to file Ch. 13. B. Choice Between Ch. 7 and Ch. 13 1) Incentives to filing Ch. 13: > opportunity to keep property subject to a security interest > to reduce payments through a combination of lienstripping and modification of payments > an opportunity to save a home by stopping foreclosure, de-accelerating prior acceleration, reinstating contractual payment schedule, and curing arrearages within a reasonable time. > opportunity to keep nonexempt property that would be liquidated under Ch. 7. - but essentially the best interest of creditors test requires debtors to buy-back through periodic payments the nonexempt property that would have been distributed to unsecured creditors in Ch. 7. > fewer exceptions and objections to Full Performance Discharge ( 1328) - the only objection to discharge is debtors failure t make all the payments required under the confirmed plan. - the only exceptions to discharge: long-term debts, family support obligations, student loans, driving under the influence injuries, and criminal restitution orders and fines. > Tax liabilities are handled as priority tax claims to pay in full (no interest) but otherwise tax liabilities are dischargeable under Ch. 13. 2) Denying Access to Ch. 7 > 727(a)(8)&(9) objections to a Ch. 7 discharge: says that 6-year ban on a Ch. 7 discharge that was filed within 6 years of filing a Ch. 7, Ch. 11 or Ch. 13 case in which a discharge was obtained. No bar if discharge was not granted (1328(a)). > 727(a)(9): lifts the ban when a Ch. 7 case follows a Ch. 13 case in which payments to holders of nonpriority unsecured claims equaled at least 70%, provided that the plan had been proposed in good faith and was the Ch. 13 debtors best effort. 3) Substantial Abuse as bar to Ch. 7 > 707(b) judge can dismiss a Ch.7 petition when debtor owes primarily

consumer debts, if granting Ch. 7 relief would be a substantial abuse of Ch.7. > Court cannot consider qualified religious contributions and charitable donations in deciding when a substantial abuse exists. > There is a rebuttable presumption in favor of Ch. 7 relief requested by an individual debtor. > Walton case (p. 428) - facts: debtor had gone through bankruptcy 10 years earlier. He now filed Ch. 7. His monthly income exceeded his expenses by $200 that could be used to pay off his nonpriority unsecured claims under Ch. 13 plan. - issue: was this substantial abuse? - court: yes, said that debtors ability to pay substantial portions of debts through a Ch. 13 plan was an essential factor in creation of substantial abuse. > There is a split in the circuits as to whether Walton case is the right outcome. It is up to the judge to decide. 4) Other Bars to Ch. 13 Case > San Miguel (p.435) - facts: debtor filed Ch. 13 plan proposing to pay nonpriority unsecured creditors only $1.00, and they chose Ch. 13 so that debtors attorneys fees could be paid in monthly installments (b/c no Ch. 7 attorney would take the case). They in effect made attorneys fees priority claims, and had no intention of paying unsecured creditors. - issue: was this a good faith Ch. 13 filing? - court: denied confirmation of Ch. 13 b/c not in good faith. > Principal problem with case was that the debtors blatantly constructed to pay attorneys fees rather than nonpriority unsecured debt. 5) Chapter 20 > Saylors case (p.440) - facts: debtors filed Ch. 7 and got discharge from $65,000 home mortgage. Automatic stay was lifted on home mortgage creditor so they file a Ch. 13 plan to cure arrearage and continue monthly payments. - court: arrearage on home mortgage that has been discharged under prior Ch. 7 case can be cured in a subsequent Ch. 13 plan. Based upon debtors equitable right of redemption prior to foreclosure. Not bad faith for debtors to have filed a Ch. 13 petition before TIB filed a final report in Ch. 7. C. Debtor Decision-Making 1) Who Wants to Be Bankrupt? - Filing Ch. 7 seems to be more of a stigma than Ch. 13. - Now there are creditors that seek out debtors who had filed bankruptcy to give them credit at high rates. 2) Most policymakers and lobbyists feel that creditors fare better under Ch. 13 than in Ch. 7. But data suggests otherwise. - only about 30% of Ch. 13 plans are consummated.

3) Bankruptcy plays a key role in safety net for middle class families from complete financial collapse caused by serious injury or layoffs.