mag version janger fall 2006 v2

8/8/2019 Mag Version Janger Fall 2006 v2

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I. Non-Judicial Debt Collection .............................................................................................. 1A. Leverage ......................................................................................................................... 1

1. Types .......................................................................................................................... 12. How to increase it before default/avoid potential of not being paid .............................. 13. How to increase it as a creditor after default ................................................................ 1

4. Limits on creditor leverage .......................................................................................... 1B. Fair Credit Reporting Act ................................................................................................ 11. 1681(a) ........................................................................................................................ 14. Non-compliance by credit reporting agency can give rise to damages .......................... 2

C. Restriction on Non-judicial Collection: Fair Debt Collection Practices Act ...................... 21. § 803 = definitions ....................................................................................................... 22. § 807: No false or misleading reps. .............................................................................. 23. § 808: Unfair Practices ................................................................................................ 2

II. Judicial Debt Collection (State Law) ................................................................................... 2A. Steps ............................................................................................................................... 2B. Priority ............................................................................................................................ 3

1. Basic rule: First in time is first in right ......................................................................... 32. Considerations ............................................................................................................. 33. General priority regimes .............................................................................................. 34. New York priority law ................................................................................................. 3

C. Liens on Real Property .................................................................................................... 3D. Consensual Liens ............................................................................................................ 4

III. Garnishment .................................................................................................................... 5A. General............................................................................................................................ 5B. Priority ............................................................................................................................ 5C. Garnishments and Leases ................................................................................................ 6D. Income Garnishments and Limits Thereon....................................................................... 6

IV. Exemptions ..................................................................................................................... 6A. General and classifications .............................................................................................. 6

B. Valuation of exempt property ...................................................................................... 71. Fair Market Value ....................................................................................................... 72. Liquidation Value ........................................................................................................ 73. Proceeds/Tracking: In re Palidora (once wages have been paid they become monies inan account and are no longer exempt.) ................................................................................. 7

V. Fraudulent Conveyances ..................................................................................................... 7A. General/Badges of Fraud ................................................................................................. 7B. Modern FC law: UFTA ................................................................................................... 8

1. § 4 of Uniform Fraudulent Transfers Act: Intentional fraudulent conveyances ± badgesof fraud still prove these today ............................................................................................ 82. Constructive fraudulent conveyance ............................................................................ 83. § 5: Transfers Fraudulent as to Present Creditors ........................................................ 9

C. FC Law in Bankruptcy .................................................................................................... 9VI. State Collection Remedies ............................................................................................... 9

A. Assignment for the benefit of creditors (ABC)................................................................. 9B. Composition & Extension................................................................................................ 9C. Receiverships ................................................................................................................ 10



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VII. Bankruptcy .................................................................................................................... 10A. General outline of steps ................................................................................................. 10

VIII. The Estate ..................................................................................................................... 10A. Generally; what IS property of estate ............................................................................. 10B. NOT included in the estate ............................................................................................ 11

C. Non-assignability clauses .............................................................................................. 11IX. Automatic Stay .............................................................................................................. 12A. General.......................................................................................................................... 12

1. AS is injunction issued by BR court that stops any action by creditors to collect on pre- petition debt. Most AS not so controversial b/c most creditors understand its power. ........ 122. § 362(a): The Scope of the AS ................................................................................... 12

B. Automatic Stay and Adequate Protection under Ch. 11: § 362(d) ................................... 13C. Motions to lift the Stay: § 362(d) ................................................................................... 13

1. (1) Lack of adequate protection [³for cause, including«´] ..................................... 132. (2) W/r/t act against property if .................................................................................. 143. Secured claims [§ 506 (determination of secured status)] ........................................... 14

D. Treatment of interest in AP considerations .................................................................... 14X. Liquidation BR :Eligibility/The Means Test ...................................................................... 14B. After 2005: The Means Test......................................................................................... 15

1. General guidelines ..................................................................................................... 152. Formula ..................................................................................................................... 153. Process ...................................................................................................................... 164. In analysis, consider .................................................................................................. 17

XI. Homesteads, Trusts & Exemption Planning [³bankruptcy planning´] ............................ 17A. General.......................................................................................................................... 17

1. § 522(d): Federal exemptions .................................................................................... 172. § 522(b) ..................................................................................................................... 17

B. Homestead exemptions .................................................................................................. 18C. Planning ........................................................................................................................ 18

XII. Claims & Distributions .................................................................................................. 18A. General.......................................................................................................................... 18B. Priorities ........................................................................................................................ 19C. § 502: Allowed Unsecured Claims................................................................................. 19D. § 506: Secured Claims ................................................................................................... 19E. [Order of] Unsecured Priorities under § 507 [the bankruptcy chocolate fountain] ....... 20

XIII. Strong-Arm Power ........................................................................................................ 20A. General.......................................................................................................................... 20B. Strong Arm Powers under § 544(a)................................................................................ 20

XIV. Preferences ................................................................................................................ 21A. Generally/policies.......................................................................................................... 21B. § 547 b: avoidable preferences/the prima facie case ± 6 ³elements´ ± Except as providedin (c) [defenses], ................................................................................................................... 21C. Security interests as preferences/the problem of late perf ection .................................... 22D. Over versus under-secured creditors .............................................................................. 22E. Using preference as a defense to judgments ................................................................... 23F. Indirect preferences ....................................................................................................... 23



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XV. Preference Defenses ...................................................................................................... 23A. Earmarking.................................................................................................................... 23B. Contemporaneous exchange for new value .................................................................... 23C. Ordinary Course Payments (§ 547(c)(2)) ....................................................................... 24D. Subsequent Advance Rule(§ 547(c)(4)) ....................................................................... 24

E. Floating Lien (§ 547(c)(5)) ............................................................................................ 24F. PMSI (§ 547(c)(3)): ....................................................................................................... 25XVI. Executory K¶s............................................................................................................ 25

A. Generally....................................................................................................................... 25B. Executoriness ................................................................................................................ 26C. Deciding whether to assume or reject ............................................................................ 26D. Effects of assumption or rejection .................................................................................. 27

XVIII. Post Bankruptcy, Fresh-Start, Reaffirmation, Redemption ......................................... 30A. General.......................................................................................................................... 30

1. § 524 discharge is the post-BR version of the automatic stay, in that it stays anycreditor actions on pre-petition debts going forward .......................................................... 30

4. § 525 prohibits discriminatory treatment because of ̈ ¶s former BR status by ............ 31B. Reaffirmation: § 524(c)/(d) ............................................................................................ 311. Hoops to jump through .............................................................................................. 312. Different types of RA exist for secured and unsecured ............................................... 31

C. Redemption ................................................................................................................... 321. § 722 allows ¨ to extinguish liens on ......................................................................... 32

D. Retention? ..................................................................................................................... 32XIX. Chapter 13 Bankruptcy .............................................................................................. 32

A. Introduction ................................................................................................................... 321. Compare w/Chapter 7: ............................................................................................... 32

B. The plan of reorganization ............................................................................................. 33



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I. Non-Judicial Debt Collection

A. Leverage

1. Types

a. Reputational

b. Legal (security interests)

c. Commercial/transactional (need for future services)

2. How to increase it before default/avoid potential of not being paid

a. Take security interest

i. Limits ability of ¨ to incur additional debt

b. Monitor ¨ as part of K

c. Include negative covenant

d. Get confession of judgment note

3. How to increase it as a creditor after default

a. Dunning phone calls

b. Suit/judgment (expensive)

c. Get voluntary security interest on unencumbered asset (such assetsrare if you are one of many creditors not being paid)

d. Call credit bureau

4. Limits on creditor leverage

a. No assault

b. No battery

c. No libel

B. Fair Credit Reporting Act

1. 1681(a)

a. Disputed charges have to be reinvestigated by credit reportingagency and noted as disputed on credit report (latter part is1681(c))

b. If agency decides information is inaccurate it must deleteinformation

2. 1681(b): If no resolution of dispute, consumer can file brief statement of nature of dispute

3. 1681(d): Once information deleted, consumer can request that creditreporting agency



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a. Notify anyone who has denied credit to consumer in last sixmonths

b. Notify anyone who has denied employment to consumer in lasttwo years

4. Non-compliance by credit reporting agency can give rise to damages

a. Willful non-compliance (1681(n)) = Actual, punitive, costs andattorney fees

b. Negligent non-compliance (1681(o)) = Actual damages plus costsand attorney fees

C. Restriction on Non-judicial Collection: Fair Debt Collection Practices Act

1. § 803 = definitions

a. Debt collectors (6)

i. Are the ones covered by statute but they only include people

who are collecting OTHER ENTITIES¶ debts [does notinclude banks, payday lenders, others collecting for themselves]

ii. Debt collectors do not include people collecting on their own/their own entities¶ debts

iii. Includes creditors that are collecting their own debts but useanother name that would indicate a third party is trying tocollect

iv. Heintz v. Jenkins: Lawyers who regularly sue to collect debtsqualify under FDCPA as debt collectors § 805:

Communications have to be made at normal times and placeswhere ¨ won¶t be embarrassed

2. § 807: No false or misleading reps.

a. Includes threats to take actions that cannot be legally taken or thatentity does not intend to actually take

b. Whether a party actually intends to take an action might bedemonstrated by its past practices

3. § 808: Unfair Practices

a. No charging of fees incidental to obligation and not authorized byagreement creating the debt

b. Limits on postdated check acceptance, duty to notify of intent tocash

II. Judicial Debt Collection (State Law)

A. Steps

1. Become judgment creditor by getting J and writ



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2. Become lien creditor by having sheriff execute on writ

3. Sell assets to recover whatever you can from proceeds

B. Priority

1. Basic rule: First in time is first in right

a. But sheriff cannot levy on that which the ¨ does not outright own

b. NYCPLR §5201: ³A money judgment may be enforced againstany property which could be assigned or transferred«unless it isexempt.´ What matters under D&C law is the power the debtor has to transfer interest in property rights. NOT what the debtor has the right to transfer interests in.

2. Considerations

a. Are assets lienable? [see above definition in NY]

b. Were writs competing delivered to same sheriff?

c. Does a creditor seeking to levy have a property interest in the thingit seeks to levy on? In NY, e.g., just having a J does NOT give acreditor a property interest.

3. General priority regimes

a. Priority and perfection from date of levy

b. Perfection occurs with levy but priority relates back to date writwas delivered to sheriff

c. Perfection occurs when writ is delivered [NY]

4. New York priority law

a. Priority of writs delivered to same sheriff in NY

i. § 5202(a): Once a writ is delivered to sheriff for execution,creditor¶s rights in ¨¶s property are superior to rights of anyother transferees to the extent of the creditor¶s lien amount

ii. § 5234(b): If two writs are delivered to the sameenforcement officer, they are satisfied in order in which theyare delivered

b. Priority of writs delivered to different sheriffs in NY

i.

§ 5234(b): proceeds of property distributed first to officer who levies first then other sheriffs for other creditors canmake demands on levying sheriff and proceeds will bedivided in order of demands

C. Liens on Real Property

1. Recordation of judgments in land records gets you priority over other creditors.



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2. Recordation sits like a net waiting for property to fall into it as debtor acquires more, so that creditors get priority over subsequently acquired property as well.

3. BUT NOTE: IN NY, which follows a minority rule, when 2 liens existand then debtor comes into possession of property later, liens attach to

newly acquired property at the same time. This only applies to REALPROPERTY, however. IN the case of subsequently acquired personal property, recordation does not affect anything. (See I n re Estate of

Robbins, text page 52)

D. Consensual Liens

1. 2 statutory schemes

a. Personal property liens governed by Art. 9 of UCC

b. Real property liens governed by states law of mortgages (highlyvariable from one state to next)

2. Art. 9 security interest creation

a. Form binding contract attachment (UCC § 9-203)

i. must be a security agreement

ii. secured creditor must take possession of personal property

iii. Secured creditor gives value (extend loan)

iv. Debtor must have rights in the collateral (have something toconvey)

b. Perfect by filing financing statement or taking possession of

collateral in state recording officei. Danger of not perfecting is that creditor who perfects first or

sheriff who levies on property before perfection has superior rights to property

ii. TIB if ¨ files for bankruptcy also has superior rights

c. Note on different perfection regimes:

i. In M oniger under NE law,

i. Assertion by sheriff of dominion over property issufficient to levy, even if he doesn¶t actually take

the stuff ii. And lien creditor beats security interests perfected

after successful levy, unless writ became dormantfor some reason



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ii. In NY

i. § 5232(b): If property is capable of delivery, sheriff must actually take it. If not, (a) says copy of execution writ being served on garnishee is levy

ii. Perfected security interests will beat insufficientlevy on property (that was not, e.g., taken when itcould have been)

iii. Note danger of dormant writs ± execution has to becompleted or writ can become dormant. Instruction bycreditor not to sell property once levied on can also causedormancy

III. Garnishment

A. General

1. Process/structure

a. J creditor [³Garnishor´] obtains J against ¨

b. J creditor brings second suit and garnishes the garnishee, a third party who owes the ¨ $ or is holding personal property of the ¨

c. Garnishee is, e.g., ¨¶s employer ± garnishee is ³third party debtor´

d. J debtor wages, for example, get garnished

2. Setoff trumps garnishment because garnishor can only assert whatever rights the ¨ has against the garnishee. (I.e., if bank account gets garnished but account is overdrawn at moment writ is served bank is entitled to haveits overdraft amount paid by any deposits before satisfying a writ)

3. Operates like a net that stays open and waits for property to fall into it

B. Priority

1. Property subject to garnishment

a. ¨ in garnishee¶s possession at date writ was delivered

b. Debts owed by garnishee to ¨ on date writ delivered

c. Property or debt acquired or accrued up to date of garnishee¶sanswer

2. Depends on priority regime of state (perfection by service versus delivery

of writ, etc. ± majority rule is priority relates back to date of writ¶sdelivery to sheriff)

3. In NY

a. § 5201 tells what things can be garnished

b. § 5202 tells when a creditor becomes a lien creditor

c. § 5234 determines priorities



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4. Garnishment net usually stays open till garnishee answers. IN NY it staysopen until property is turned over to sheriff or after 90 days, whichever issooner.

C. Garnishments and Leases

1. Garnishment attaches subject to valid leasehold interest ± so personleasing property can keep it for duration of lease and judge can order turnover of property thereafter

2. But if a lease is executed after date of garnishment, garnishment attachesfree and clear of leasehold interest

3. Instead of garnishing property subject to valid leasehold, J creditor cangarnish lease payments being made to J ¨

D. Income Garnishments and Limits Thereon

1. Federal restrictions limit creditor to 25% of ¨¶s net income, and in noevent can ¨ be left with < 30X minimum wage

2. If J is to enforce support order, limit is 50-60% of wages, subject to somestate limits that give higher protection

3. Note that under CCPA § 304, employers cannot fire people on basis of agarnishment or indebtedness though multiple garnishments may allowfiring

IV. Exemptions

A. General and classifications

1. Definition: Something that cannot be levied on in satisfaction of the debt

2.

Policy: Even deadbeats should be left with something because otherwisethey become wards of the state

3. Two structures of state exemption statutes

a. Category approach: Types of categories are exempt

b. Dollar-value approach: Maximum dollar value for certain thingscan be held by ¨ and rest is given to creditors after sale

4. Pay close attention to possible creative interpretations of statutes ± i.e.,stock that is left to someone by father is family heirloom?

a. I n re Pizzi (Bus that seats sixty counts as ³motor vehicle´ under

exemption statute and cannot be seized) b. I n re J ohnst on (Annuity paying lottery winnings is not exempt

under exemption statute as an annuity b/c though called an annuityit is ³actually not an annuity at all´)



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B. Valuation of exempt property

1. Fair Market Value

a. Note: Equity is FMV ± D.

b. I n re Walsh (appraisal value must be liquidation value because that

is the fair ³market´ on the day of a forced bankruptcy sale)

c. I n re M itchell (6 karat diamond ring is not exempt property andwill be valuated at actual FMV, not liquidation value. Also, policy prevents letting a ¨ keep something so clearly not necessary tosurvive, which is purpose of exemptions)

2. Liquidation Value

3. Proceeds/Tracking: In re Palidora (once wages have been paid they become monies in an account and are no longer exempt.)

V. Fraudulent Conveyances

A. General/Badges of Fraud

1. FC: Conveyance made by debtor where a court can find a purpose tohinder, delay or defraud

2. Badges of fraud provide grounds for voiding transactions that may not beactually fraudulent are ones to which creditors can object anyway

3. Main badge: Transfer that ¨ makes while insolvent and for which ¨receives nothing or too little in return

4. T wyne¶s Case

a. General gift w/o exception for ¨¶s necessities giving someone

everything but being able to continue to operate makes it seem thatthere was no intent to actually give any of the stuff away

b. Debtor continued in possession

c. Secret nature of conveyance

i. Does not put other creditors on notice [in modern times, provided in legitimate transactions by the UCC filingsystem] as to ownership

ii. Possession is strong indication of ownership ± assumption of other creditors would be that if you fail to pay them they (via

levy/sheriff) can come claim your stuff d. Made pending the writ ± sheriff on his way to execute or you know

that the creditor is coming for you and all stuff conveyed awaylooks suspicious

e. Trust issue ± legal ownership separated from beneficial ownershipin a way that no one can tell



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5. Also meant to prevent preferential treatment of creditors, though transfer on account of antecedent debt presumed to be for fair value, and makes itnot an FC Vidable preferences affect how assets are distributed but nothow much is available over all.

6. Creditors can only challenge payment to another creditor if payment was

made w/actual fraudulent intent

B. Modern FC law: UFTA

1. § 4 of Uniform Fraudulent Transfers Act: Intentional fraudulentconveyances ± badges of fraud still prove these today

a. Transfers that violate 4(a)(1):

i. Fraudulent regardless of whether creditor¶s claim arose before or after transfer was made

ii. If ¨ made transfer with actual intent to hinder, delay or defraud any creditor of his

iii. Actual intent here proven by badges of fraud

b. 4(b): UFTA badges of fraud ± only apply to cases of actual intent

to def raud, not constructive FT under 4(a)(2)(i/ii)

i. Transfer to insider

ii. Retention of possession by ¨ after transfer

iii. Concealment of transfer or obligation

iv. ¨ was sued or threatened with suit before transfer made/debtincurred

v. Transfer is substantially all of ¨¶s assets

vi. Value of consideration much less than actual value of thing

vii. ¨ was insolvent when transfer was made or shortly thereafter

viii. Transfer made right before substantial debt is incurred [e.g.,transfer made before enormous purchase on next day]

ix. Transfer was of business assets to lienor who thentransferred assets to ¨ insider

2. Constructive fraudulent conveyance

a.

No proof of intent required b. §4(a)(2)(i): ¨ engages or is about to engage in transaction for

which remaining assets were unreasonably small in relation totransaction

c. §4(a)(2)(ii): Quasi-constructive fraud ± if creditor can proveunreasonably small capital or that ¨ reasonably should have



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believed that he or she was about to incur debts he or she could notrepay, this § is available.

d. Conveyance of security interest to secure a debt is NOT FC under Art. 9 because it is not secretive and puts creditors on notice

3. § 5: Transfers Fraudulent as to Present Creditors

a. Only applies to creditors whose debts arose before the conveyancewas made.

b. So if transfer made then debt is incurred but only constructive FCcan be proven, no suit for post-transfer creditors

c. If a transfer makes the ¨ insolvent, it may be FC under this §.

d. (a) = transfers for less than reasonably equivalent value whileinsolvent [also BR Code § 548(a)(2)]

C. FC Law in Bankruptcy

1. Can be invoked by TIB pursuant to § 544(b)

2. BR Code¶s own FC law = § 548

a. 2-year reach-back: Compare w/state laws, which have reach-backsas long as their S/L¶s permit

VI. State Collection Remedies

A. Assignment for the benefit of creditors (ABC)

1. ¨ assigns all non-exempt property to a local lawyer and sends creditorshounding him to work it out with that person

2.

Does not discharge ¨ from unpaid debts3. Any ¨ that can consider BR alternative will probably do so

4. But it does put property in due custody of the court so once assigned it¶sgenerally immune from legal process

B. Composition & Extension

1. Composition = agreement b/w ¨ and all/most of creditors to accept stated partial payment in full satisfaction of their debts

a. ABC is sometimes vehicle for this so that benefits of the vehiclego to satisfy composition obligations

b. Voluntary, esp. as to creditors unlike BR, cannot force somecreditors to go along w/this

c. No discharge if ¨ fails to keep to plan/agreement

d. Can be overturned if ¨ makes misrepresentations, secret preferences to creditors, etc.

2. Extension = general agreement to allow ¨ to pay bill over more time



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a. Often brought together w/composition so ¨ pays over more timeand pays less in full satisfaction

C. Receiverships

1. Used most often when ¨ cannot be forced into BR b/c of identity, incl. being a church, farmer, NGO.

VII. Bankruptcy

A. General outline of steps

1. Estate Created

2. Automatic Stay imposed immediately

3. Trustee appointed

4. ¨ files schedules, statement of income and expenses

5. Creditors¶ meeting (§ 341)

6. Trustee Gathers Assetsa. § 522: Exempt and non-exempt assets gathered

b. § 544(a): Encumbered and unencumbered assets

c. §§ 547, 544(b): Avoidance actions brought

7. Validity and priority of creditors¶ claims determined

8. Dischargeability/non-dischargeability of claims determined

9. Assets sold; proceeds distributed according to priority

10. § 524: Discharge

VIII. The Estate

A. Generally; what IS property of estate

1. Property of the estate defined in § 541(a): ³all legal or equitable interestsof the ¨ in property as of commencement of the case«´

2. ³«wherever located and by whomever held´: If someone else has

property but ¨ has a right that could be enforced against the holder to

get it back, it becomes part of the estate

3. Exempt property

a. DOES become part of the estate initially.

b. Exemptions respected by TIB: § 522(c) ± ³Property exemptedunder this ¨ not liable during or after case for any debt of debtor or estate that arose before commencement of case.´

4. Even property in which ¨ has no equity becomes pty of the estate initially,if ¨ has a right to possess the pty.



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5. Worthless property also becomes part of estate but will probably beabandoned by TIB under § 554(a)

6. Proceeds, product, offspring, rents, profits also included (§ 541(a)(6))

7. Contingent K rights like lottery tickets bought before BR but not yetdrawn will be part of estate ± if a right is worth something it should be property of the estate.

a. Ticket is property of the estate (a)(1)

b. Winnings are ³proceeds´ (a)(6) and

c. Winnings are ³interesting property that the estate acquires after commencement of the case´ (a)(7)

8. But this does not mean expectancies are ± they are not enforceable rights.

9. (a)(5)(a): Interests received by ³bequest, devise or inheritance´ that ¨ getsor becomes entitled to 180 days w/in petition filing

10. I n re Burgess: License to operate brothel, though non-transferable³privilege´ granted by state treated as ³property RIGHT´ in BR [policydecision? Often licenses most valuable thing ¨ owns.]

B. NOT included in the estate

1. Earnings for work done by individual ¨ after commencement of the case.(a)(6)

2. Spendthrif t trusts (c)(2) (paraphrase: restriction on the transf er of

benef icial interest of ¨ in a trust enforceable under non-BR law is enforceable in BR law) [¨ does not own the trust corpus ± trustee of thetrust has legal title] In re: Orkin ± can¶t keep trust because ERISA

requires non-assignability provision and the trust did not have one.

a. in Delaware you cannot touch it- as a trustee you can makeyourself a beneficiary

3. But then again, if wages can be separated from contractual bene f its theywill be ± think of farmer who plants wheat, files for BR ± if TIB paysfarmer to keep up and harvest wheat, farmer will get wages but not any benefits of the K

4. Expectancies (see above) and S har p v. Der y [possibly not part of estate.Court found employee bonus paid after filing, which was partiallycontingent on working post-petition and was not enforceable right at timeof petition is NOT part of estate.

C. Why does the Code take a broad view of ³property of the estate´?1. court supervision ² we don¶t trust debtors and want to bring everything

under supervision2. price of discharge ² everything comes in so that the B court can sort it

out and dole it out to creditors3. eff iciency ² handle all legal and equitable disputes in one action



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4. uniformity ² eliminate forum shopping that might be created if certaindisputes were to be handled outside the bankruptcy court

D. Non-assignability clauses

1. Enforceable if contained in a trust document like a spendthrift trust (c)(2)BUT

2. Not enforceable otherwise (c)(1)

3. I n re Orkin; Yates v. Hend on ± latter says working owner can still beretirement plan participant for (c)(2) purposes but if person can still/alsoterminate the trust (Orkin) then it will not protect his interest in BR because assets will accrue to ¨ on trust termination.

IX. Automatic Stay

A. General

1.

AS is injunction issued by BR court that stops any action by creditors tocollect on pre-petition debt. Most AS not so controversial b/c mostcreditors understand its power.

2. § 362(a): The Scope of the AS

a. 362(a)(1) ± can¶t sue the debtor

b. 362(a)(2) ± can¶t execute on property of the estate

c. 362(a)(3) ± can¶t grab property of the estate or property from theestate

d. 362(a)(4) ± can¶t create, perfect or enforce a lien against property

of the estate [includes enforcement of J¶s gotten before BR, suchas garnishment, e.g.]

e. 362(a)(5) ± can¶t create, perfect or enforce a lien against the debtor to secure a pre-petition debt

f. 362(a)(6) ± can¶t seek to collect a pre-petition debt from the debtor

g. 362(a)(7) ± can¶t setoff on the basis of a pre-petition claim

h. 362(a)(8) ± can¶t commence or continue a proceeding before the tax court

3. § 366: Utilities cannot cut off service either once stay is on

4. § 362(b): Exceptions to AS

a. (1): Criminal prosecutions NOT stopped as a rule.

b. Pursuit of post-petition claims not stayed, though if you win youcan¶t levy on any property.

5. Relates to discharge injunction in that if a debt is non-dischargeable it is

still subject to the AS [no attempts to collect on pre-petition debt].



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However, once a case is over, a non-dischargeable debt (§ 523(a)(8)willstill be in place and creditors can take action on it

a. Merchant v. Andrews University: Refusal to grant transcript toformer student in default on loan is AS violation, even thoughstudent loan debts are non-dischargeable.

6. Even applies to property of ¨ in the hands of third parties ± turnover

obligation

7. Penalties for violation

a. Willful violation of stay gives rise to punitive damages - § 362(h)( N issan v. Baker )

i. rationale: 362(a)(3) prevents all acts to obtain possession of property. This means that a C cannot engage in self-help. AC cannot play dumb and willfully violate this and if they dothen they are guilty of willful violation and might be liable

for punitive damagesii. t o prevent credit ors f r om violating the aut omatic sta y, the

court ma y assess punitive damages b. § 105 of BR code allows judges to dole out other remedies,

including criminal and civil contempt charges

B. Automatic Stay and Adequate Protection under Ch. 11: § 362(d)

1. S eitles case (criminal suit stopped b/c of solely pecuniary purpose andneed to have ¨ - also debtor in company¶s chapter 11, help reorg.). Seitlesnot the ¨ here ± company is what¶s in BR BUT

2. Judge uses § 105 powers to stay action to help rehabilitate ¨ company

3. 4-part test to decide whether suit against third parties should be stayed

a. Lawsuit against 3d party will do irreparable harm to ¨¶s successfulreorg

b. Likelihood of reorg. success [creditors should argue against

reorg success possibility if trying to get stay lif ted and

foreclose]

c. Harm caused by injunction < equity gained by granting

d. Public interest served

C. Motions to lift the Stay: § 362(d)

1. (1) Lack of adequate protection [³for cause, including«´]

a. § 361: AP can be provided by

i. TIB making payments if AS results in decrease in value of mover¶s interest in property

ii. TIB can give alternative lien (on something else) to make upfor decrease in value



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iii. Grant other relief under § 503(b)(1) as ³administrativeexpense´ to make up value

b. Valuation of property:

i. Is value of pty declining? As creditor you want to argue for higher valuation but only up to the point of the lien amount(your claim)

2. (2) W/r/t act against property if

a. ¨ has no equity in property AND

b. property is not necessary to effective reorganization of ¨

3. Secured claims [§ 506 (determination of secured status)]

a. AS does apply to secured creditors but

b. Secured creditor can have stay lifted if collateral is at risk

c. Secured creditor will want to have property valued at an amount nomore than the amount it is owed because otherwise there will bean equity cushion and the stay will not lift [because a lower valuation will provide an equity cushion, which a secured creditor does not want]

d. Value of ASC = replacement value of property w/o deduction for costs of sale or marketing (§ 362(a)(2))

i. Creditor will be under-secured if value of replacement property is less than the amount of debt it is owed

ii. Creditor will be over-secured if value of property is greater

thanD. Treatment of interest in AP considerations

1. Claims for unmatured interest in CH 7 liquidation only allowed if creditor is oversecured, and then only up to amount of collateral¶s value and if original agreement provided for interest.

2. No claims for unmatured interest otherwise (fully or unsecured creditors)

X. Liquidation BR :Eligibility/The Means Test

A. Chapter 7 filings that were deemed ³substantial abuse´ under 707 could bedismissed as early as 1984.

1. I n re S haw: Couple living way outside means, with expensive house, etc.denied Chapter 7 by court for substantial abuse

a. Most debts were unsecured credit debts that would not have been paid off

b. Other considerations to determine whether Ch. 7 should (or really,should NOT) be dismissed for subst. abuse



15

i. Reasons for filing ± illness, unemployment, etc.

ii. Schedules that show reasonable and accurate financial state

iii. Incurring of cash advances or other unsecured debt that ¨could clearly never pay

iv. Proposed family budget excessive/unreasonable

v. Petition filed in good faith

c. Factors that led to conclusion that petition was substantial abuse

i. V. expensive house allegedly bought to help house mother of wife (who had died years before by filing)

ii. Grown kids need no support but one lives at home and paysno bills

iii. College expenses for daughter not reasonable or necessary if at creditors¶ expense

d. But note: these are not typical Ch. 7 ¨s

B. After 2005: The Means Test

1. General guidelines

a. New § 707(b)(2)(A) creates a presumption of ³abuse´ based on acomplex formula of income minus expenses.

b. (b)(3) will get a petition dismissed even if not technically an abuseunder (b)(2) if petition filed in bad faith or totality of circumstances shows abuse

c.

Exception: § 707(b)(2)(B) (special circumstances can rebut presumption of abuse, such as serious medical problem, call toArmed Forces Duty, etc.)

d. Only applies to people w/consumer debts. People with ma jor

business debts need not apply MT at all

e. Basic question = does the ¨ have enough disposable income torepay his debts?

2. Formula

a. First threshold: Is ¨ CMI above or below median?

i.

If Income < median income for similar families in ¨¶s filingstate, no presumption of abuse

ii. Current Monthly Income [yearly one ÷12 ± charts used for this have yearly figures, so figure from those would be times12]

i. Defined in 101(10A) and includes a number of things



16

ii. Is calculated by finding average monthly income for 6 months before filing

iii. Is compared (for (i)¶s test) w/census figures on statemedian income

b. Second threshold if First failed: Expenses/presumption of abuse?

i. No matter what ¨s actually spend, they can only deduct National Standards used by the IRS for family size andincome level

ii. If court finds it reasonable and necessary, § 707(b)(2)(A)(ii)allows < 5% of national standards to be deducted for clothing and food.

iii. Courts also

i. Instructed to include certain other deductions inaddition to National Standards starting with §

707(b)(2)(A)(ii)(I)

ii. Allowed to include ACTUAL expenses for certainthings

iii. Must allow deductions for payments secured by personal property to lenders (707(b)(2)(A)(iii)[allowed to back out secured debt payments]

iv. Can allow mortgage payment deductions: Section707(b)(2)(A)(iii) says the debtor can deduct averagemonthly payments on account of secured debt,´calculated as ³the total of all amounts scheduled ascontractually due to secured creditors in each monthof the 60 months´ following the bankruptcy filing.

c. If af ter Second calculation, ¨ has net income (above-medianincome minus specified expenses is positive number ± the sur plus

income), then see

i. If surplus is < $100, ¨ is eligible for Ch. 7

ii. If surplus is $100 - $166.66, ¨ is eligible for Ch. 7 if surplusis < 25% unsecured debt ÷ 60

iii. If surplus is > $166.66 ¨ is not eligible ((11 U.S.C.

§707(b)(2)(A)(i)(2))

d. If after all calculations, under (b)(3) court can dismiss

i. If it finds ¨ filed in bad faith or

ii. Totality of circumstances of ¨¶s financial circumstancesdemonstrates abuse

3. Process



17

a. ¨ must first do means test on form given in § 521

b. US Trustee must also check and has certain other related duties (§707(b)(1))

c. Raising of question of abuse

i. Any party can raise abuse question for above-mediandebtors. (b)(1) Though such parties cannot ³abuse´ thisright or they may have to pay fees under (b)(5)

ii. Only court or US Trustee can raise abuse question for below-median ̈ s. (b)(2)(A)(i)

d. Attorneys for ¨ must certify as to their reasonable investigationabout circumstances giving rise to case and truth of filing(b)(4)(C) / (D)

4. In analysis, consider

a.

³Alternative´ households to make sure size is right when lookingto med. Standards of income

b. Social security benefits don¶t count to income but unemploymentwould

c. Whether person is receiving all income or is only due it [unpaidchild support? ± Only income received counts, probably]

XI. Homesteads, Trusts & Exemption Planning [³bankruptcy planning´]

A. General

1. § 522(d): Federal exemptions

a. (3) is homestead exemption and protects ~$20K in equity in thehouse, if any.

2. § 522(b)

a. States can opt out of these under § 522(b)(1) (NY has opted out, ashave most other states)

b. (b)(2): ¨ can elect to use state law exemptions

3. Consensual liens usually beat exemptions THOUGH

4. § 522(f)(1) says ¨ can avoid liens being fixed on property that are[generally]

a. Not PMSI¶s

b. Not possessory

c. And are in household things, professional/tools of the trade, professionally prescribed health aids



18

d. And that ³impair´1 ¨¶s potential state law exemptions

B. Homestead exemptions

1. § 533(b)(3)(A): Exemption for ³homestead´ is law of state where youlived for the 730 days (2 years) prior to filing

2. If no residence for 2 straight years, use exemption law for state

a. Where person lived for 180 days prior to the 2 years before filingor

b. For longest period OF that 180 days

Longest of above two options will be state of exemption law

C. Planning

1. Risky, but can sometimes be done by converting exempt into non-exemptassets

2. Risks: I n re Reed

a. discharge will be denied under 707(b) for really bad cases of obvious planning because it is federal law that governs discharge,even if state exemption would allow someone to keep a home.

b. Pretty clear intent by ¨ to deceive creditors will not do any favorsto case

3. Asset protection trusts

a. Self-settled trusts: Third party will become a trustee on somespecified event, often one being BR

b.

Offshore or overseas trusts: Judge can compel release of assets bycontempt charges, and even if you stay out of prison, the assetswill still be held by third party

4. Don¶t commit fraudulent conveyance in protecting assets ± keep self ³wellenough capitalized to pay any debt you realistically expect to materialize

5. Don¶t give all your assets to your spouse b/c of FC law

XII. Claims & Distributions

A. General

1. BR protects and respects property interests but tends to wipe out contract

interests [this is why oversecured creditors can claim unmatured interest tovalue of collateral ± that¶s when they ³run out of property´]

2. 101(5): ³Claim´ defined

3. § 501: Creditors must file proof of claim in Ch. 7 or 13 (but not 11, if properly scheduled)

1 Calculation for ³impairment´ in § 522(f)(2)(A).



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4. Claims presumed valid and accurate in amount unless party disputingamount can show otherwise (In re Lanza)

5. Steps in claim analysis

a. Is it a claim under § 101(5)?

b. If yes, is it all owed claim under another section, i.e., is itenforceable against ¨ as of petition date?

c. If yes, is it secured or unsecured? For/does it include post-petitioninterest?

B. Priorities

1. Secured claimants priority to extent of collateral value, then rest (if any) isgeneral unsecured claim

2. Unsecured creditors get pro rata shares of asset sale proceeds (cents on thedollar)

C. § 502: Allowed Unsecured Claims

1. Claim allowed unless a party in interest objects, so long as you file your claim

2. Allowed stuff in such claims

a. Amounts actually owed

b. Pre-petition interest

3. Exceptions to this in (b): Two important ones

a. Claim is not enforceable against ¨ [e.g., ¨ does not owe as much

as creditor claims] b. Claim is for unmatured interest ± this is NOT allowed for

unsecured claims.

4. BUT NOTE that unmatured interest is part of claim under 101(5), whichmeans it gets discharged. It just is not part of allowed unsecured claim.

D. § 506: Secured Claims

1. Undersecured claimants: No unmatured interest

2. Oversecured claimants: Unmatured interest up to collateral valueprovided that agreement granting security interest says such interest

is due. 3. (c) allows TIB to deduct from secured property ³value´ the administrative

expenses of getting collateral back to claimant if secured claimantbenef ited f rom these expenditures.



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E. [Order of] Unsecured Priorities under § 507 [the bankruptcy chocolatefountain]

1. Parties with priorities lower than another creditor¶s will oppose thatcreditor¶s categorization of his claim

2. Alimony gets first order of priority as domestic support obligation but property settlements from divorce have no particular priority and aregeneral unsecured claims

XIII. Strong-Arm Power

A. General

1. DIP in Ch. 11 case has power of TIB (because usu. none appointed in Ch.11 cases) so DIP has TIB avoidance powers

2. 3 main avoidance powers

a. Strong-arm: Power to avoid transfers of property that were

unperfected as of moment of BR filing b. Preference: Reaches back and can recoup preferential payments to

pre-BR creditors

c. Assumption, rejection of executory Ks

B. Strong Arm Powers under § 544(a)

1. To beat TIB a secured creditor must do whatever is required under

non-BR law before f iling, or TIB beats creditor and collateral

disappears

2. TIB

a. Beats any holders of unperf ected security interests as of petitiondate because he becomes a faux judgment lien creditor [or bonafide purchaser for RP]

b. UNLESS it is a PMSI, which beats everything if it is perf ected

within 20 days of purchase [the perfection date ³relates back´ to purchase date]

3. 20-day grace period starts to run when ¨ takes delivery on PMSIcollateral: UCC § 9-317(e): «if a person files a financing statement w/r/ta PMSI before or w/in 20 days after ¨ receives delivery of the collateral,SI takes priority over rights of [anyone] which arise b/w time SI is filed

and time it perfects.

4. Secured creditors under Art. 9

a. 3 essential steps to becoming creditor with attached securityinterest (UCC § 9-203)

i. Security agreement

ii. Creditor gives value



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iii. ¨ gives rights he has POWER to convey

b. Must then perf ect by filing financing statement, taking possession,recording, etc. Under UCC § 9-317, Perfected SI beatsunperfected

5. Filing for perfection after petition violates automatic stay unless there¶s aPMSI exception.

XIV. Preferences

A. Generally/policies

1. Point of preference law is to cut out the race of diligence among creditors,as it undercuts federal BR idea that similarly situated creditors should betreated similarly

2. Must distinguish between preferences and ordinary debt repayment,however.

3.

Creditors will always take a preference payment and have to give it back rather than not get anything at all even if distribution after BR would be$0, creditor will then return payment and each creditor will get cents onthose dollars returned

4. Example of how a pref erence work s: ¨ owes creditor $14K and pays$1400 60 days before BR, while insolvent. Unsecured creditors in theeventual BR receive 10 cents/dollar. Before payment, creditor would havereceived $1400, but it¶s still a preference b/c if creditor kept that money, itwould ALSO receive the pro-rata share of what it is still owed - $1260 ± meaning it would get $1400 + 1260 w/o preference rules.

B. § 547 b: avoidable preferences/the prima facie case ± 6 ³elements´ ± Except as provided in (c) [defenses],

1. any transfer of an interest of the ¨ in property [money or property or security interest, subject to exceptions]

2. to or for the benefit of a creditor

3. for or on account of an antecedent debt owed by the ¨ before suchtransfer was made

a. Transfers done as part of contemporaneous exchange for newvalue is not preference

4. which was made while the ¨ was insolvent

5. made

a. on or within 90 days before BR petition filed or

b. b/w 90 days and 1 year before date of filing if creditor at time of transfer was an insider

6. that enables such creditor to receive more than such creditor wouldreceive if



22

a. the case were a case under Chapter 7

b. the transfer had not been made and

c. such creditor received payment of such debt to the extent provided by the provisions of this title

C. Security interests as preferences/the problem of late perf ection

1. TIB can beat these via preference avoidance, even though not via strong-arm power because strong arm power doesn¶t reach back in time but thisdoes

2. If transfer happens by perfection w/in 30 days of attachment, 541(e)(1)and (2) protect voiding this as voidable preference by giving grace periodof ³relation back´

3. If perfection occurs within 90 days of bankruptcy, then it is a preference.

4. BUT if perfection occurs simultaneously with the giving of ³value´ then

the transfer is not ³on account of an antecedent debt.´a. Under 547(e)(2)(A) and (B), ³simultaneously´ means within 30

days.

5. Note that this means that the granting of a security interest in return for forbearance may also be a preference.

6. The moment that matters is the moment of a petition and not the momentof a transfer. So, for example, if a payment is made, then a fire destroyscollateral that had made a creditor over-secured but now makes themunsecured, if filing happens w/in 90 days of that payment, payment is a preference Question is what is the position of a creditor at the

moment of BR f iling in terms of security? D. Over versus under-secured creditors

1. Payment to a fully or over-secured creditor is not a preference b/c he or she will get paid in full anyway

2. Payment to an under-secured creditor is a preference b/c you are reducingthe amount of their unsecured claim

3. Floating liens: ³machines now owned or after-acquired´ is floating lienclause

a. Problem is that ¨ could favor secured creditor who was under-

secured by acquiring new inventory just before BR

b. Creditors with floating liens that go from being under-secured toover-secured ends up with voidable preferential treatment as well any change in position for the better of a creditor w/in 90

days of BR is suspicious

i. What is position on petition day or day the loan is made if w/in the 90 days before BR?



23

ii. What is the position on the day of BR?

E. Using preference as a defense to judgments

1. Perfection of an involuntary judgment lien constitutes a preference so

a. The 89th day after someone gets a J lien against you is BR day

because

b. On the 91st day, that lien becomes unavoidable via preferencemechanisms.

F. Indirect preferences

1. Exist when transfer happens on account of new debt, but for the benefit of an old creditor/old debt.

2. I n re Denochick : TIB recovers money from guarantors of loan to ¨.They never made any payments, but ¨¶s pre-BR loan payments in year prior [guarantors were family ± insiders, so exposure is longer] reduced

exposure on loan. TIB recovers payments from THEM though they never saw any of the money!

XV. Preference Defenses

A. Earmarking

1. I n re Calvert : ¨ ³borrows´ $ from parents to pay creditor but parents paythe creditor themselves, directly

a. No preference if proceeds of loan never ³hit´ the estate

b. Trades one unsecured creditor (the one getting payment) for another (parents)

2. Problem w/this doctrine

a. If ¨ borrows money and pays off creditor, distribution remains thesame because claims are reduced and increased by same amount

b. If ¨ keeps money, new claims are higher and assets are also

higher so distribution goes up.

c. This is why it matters if the money ³hits´ the estate or not

B. Contemporaneous exchange for new value

1. 2 elements

a. Intent: CEfNV must be intended to be such

i. Manifested by, e.g., giving a check

b. Substantial existence: CEfNV substantially exists

i. As soon as something shifts from a cash to a credittransaction, preference exists and defense disappears ± e.g.,if a first check bounces a CEfNV becomes a credittransaction.



25

c. If a>b there has been a preference to the extent of a minus b because as under-security of creditor drops his position isimproving

F. PMSI (§ 547(c)(3)):

1. Security interest must secure new value

a. Given at or after signing of security agreement that has descriptionof property as collateral

b. Given by or on behalf of secured party under agreement

c. Given to enable ¨ to acquire that property

d. In fact used by ¨ to acquire such property

2. Security interest must be perf ected within 30 days of ¨ receiving

possession of property [clock runs from delivery of goods, notattachment]

3. Did perfection happen 30 days or less after attachment?

a. Is there a strong-arm problem b/c perfection happened post- petition? [If so, you are screwed, subject to Art. 9 relation-back]

b. If yes, § 547(e)(2)(B) solves problem b/c ³for purposes of thissection transfer is made at the time such transfer is perfected if perfection happens after 30 days´

c. If no, a ³transfer on account of antecedent debt´ has occurred, andPMSI holders need further protection

d. PMSI exception gives extra safe harbor so that no [voidable]

³transfer´ happens if attachment and perfection are, by necessity,more than 30 days apart.

4. If creditor gives a loan w/in 90 days of BR and ¨ grants security intereston equipment it already has there is still a voidable preference

5. Be careful with this ± it must be a PMSI for this defense to apply

XVI. Executory K¶s

A. Generally

1. § 365: Except as provided in sections 765 and 766 and in certainsubsections of 365, TIB, subject to the court¶s approval, may

a. Assume [a/k/a perform]

b. Reject [a/k/a breach]

Any executory K or unexpired lease of the debtor

2. BR law is much more solicitous to K rights than property rights

3. Recall that all K¶s will come into the estate because § 541(c)(1) overridesnon-assignability clauses unless they are in spendthrift trusts



26

a. Under § 365(f) TIB can assume a K and assign it to someone else,even if it has a non-assignability clause, provided TIB gives

adequate assurance of the assignee¶s performance

i. (1) deals with provisions that prohibit, restrict or conditionassignability

ii. (3) deals with provisions that terminate or modify terms of lease b/c it has been assumed or assigned

iii. I n re Jameswa y C or p. (Provision in lease that requires ¨ toshare profits gained from assigning lease to someone elsewith the lessor invalidated by court as impermissibly limiting¨¶s ability to realize the intrinsic value of the lease to it)

i. Clauses limiting assignment by making it not makesense to do so will be invalidated as well.

b. Exception is § 365(c), which recognizes that TIB will not do as

above if K is for personal services where the identity of the partymatters

c. BR default clauses have similar provisions that apply to them - §365(e)(1)

4. § 365 must be understood in connection with § 524 because as the globaldischarge § it governs what happens to K¶s post-BR

B. Executoriness

1. ³K where there are sufficient obligations on both sides of a K that non- performance by either party would constitute a material breach´

2. If either side has substantially performed K is no longer executory anda. If ¨ has not performed, other side has a claim that will be paid in

BR dollars and otherwise discharged

b. If other side has not performed, TIB has a claim to that performance as an ³asset´ owed ¨

3. You can¶t ³reject´ a non-executory K

4. § 365 does NOT revive a K that terminated prior to BR KrystalCadillac (Franchise agreement that GM had given notice of termination on but where ¨ had filed an appeal about such notice, and which appeal hadnot yet been decided before ¨ filed for chapter 11 was NOT ³terminated´and could still be assumed or rejected. Determinations that would haveotherwise terminated the K but which were made after BR filing violatedautomatic stay and are not binding on BR court)

a. Key Q: Did ¨ have a viable legal interest in the K at the time theBR petition was filed?

C. Deciding whether to assume or reject



28

a. if lease provides its own cure period before final cancellation thiswill apply

b. possibly as long as 60 days available under BR code

XVII. Discharge

A. Generally

1. Discharge is the entire reason to file for Chapter 7

2. After TIB sells property of the estate and distributes proceeds to creditors,¨¶s unpaid debt left over is discharged, subject to certain exceptions

3. § 707(b) allows total dismissal of case when court deems ¨ is not honest

but unlucky, but rather abusing the system

a. If debts are mostly consumer debts

b. Court can also convert Ch. 7 case to Ch. 13.

B. Global Discharge Denial - § 727

1. (a)(1) If ¨ is not an individual, no discharge in Chapter 7 (because corp. just liquidates and there¶s nothing to discharge for)

2. (a)(2): ¨ intended to delay, hinder or defraud creditors w/in 1 year beforefiling or at all during BR case

a. I n re Reed

i. ¨ conversion of non-exempt to exempt assets is not by itself enough to deny discharge b/c it was proof of actual intent todefraud creditors BUT

ii.

extrinsic evidence can round things out enough to get globaldenial

3. (a)(3): ¨ has concealed, destroyed, etc. or failed to keep any recordedinformation unless justified under the circumstances

a. TIB needs documents to ensure that ¨¶s assets are accuratelyaccounted for and distributed to creditors

4. (a)(5): ¨ fails to explain satisfactorily loss of any assets or deficiency of assets to meet liabilities

a. I n re M c N amara (Explaining loss of 130K by gambling in winner-take-all poker game, where ¨ was driven there by someone no

longer living in U.S. and when ¨ couldn¶t provide any other details, esp. when coupled with ¨ testimony he ³reserved justenough´ to go to the Caribbean = unsatisfactory explanation)

5. (a)(8) & (9): ¨ has received discharge less than 6 or 8 (depending under what § ¨ received it) years ago in earlier BR case

C. Rifle Shot Discharge Denial - § 523



29

1. (a)(1): Certain tax debts excepted

2. (a)(2): Debts obtained by

a. (A) false pretenses, representations or actual fraud other thanfraudulent representation of ¨¶s financial condition

b. (B) use of writing

i. that is materially false

ii. regarding ¨¶s financial condition

iii. on which creditor reasonably relied2

iv. that ¨ made with intent to deceive

c. (C): Presumption of non-dischargeability

i. (I) Consumer debts owed to single creditor for more than

$500 in luxury goods or services incurred by individual ¨on or w/in 90 days of petition

i. Consider, depending on client (TIB, ¨ or creditor)what the purpose of something bought is ± if ticketsare bought for vacation, they may be luxury goods but if for job then maybe not.

ii. (II) Cash advances of more than $750 (aggregate) that areextensions of consumer credit, which are extended w/in 70

days of BR petition

iii. I n re Dorse y (widow w/ only Social Security as her realincome cannot discharge huge credit card bill she thought

her BF would pay after she takes two children on trip aroundEurope)

3. (a)(3): unlisted or unscheduled claims

4. (a)(4): claims for fraud while ¨ was acting in fiduciary capacity

5. (a)(5) and (15): domestic support obligations versus property obligationsfrom divorce decree

a. DSO defined in § 101(14)(A) as payment ³in the nature of alimony support or maintenance´

b. Other spousal debt ((a)(15)) debt is dischargeable in Chapter 13

but not 7 ± DSO is not dischargeable in either c. This matters because of priority as well ± alimony and support

obligations get priority

6. (a)(6) and (9) ± willful or malicious injury or drunk driving or flying judgments not dischargeable

2 May well apply to creditors¶ forbearance on collecting debt as well as their extension of credit ± Field v. Mans



30

7. (a)(7): Debts that are fine, penalty or forfeiture payable to gov¶t unit ± parking tickets, e.g.

8. (a)(8): Student loan debts guaranteed by governmental unit (Undue

hardship test)

a. UH test = would it be UH for ¨ to repay student loans? 3questions ± Brunner test

i. Can ¨ maintain minimal standard of living for himself anddependents if forced to repay the loans, as ability to maintainis judged according to current expenses and income?

ii. Do additional circumstances exist indicating state of affairsis likely to persist for significant portion of repayment period?

iii. Has ¨ made good faith efforts to repay?

b. Gerhart (While expenses definitely exceed income of musician

there is no indication that ¨ cannot correct the ³persistent state of affairs´ by getting, e.g., a non-musical job. ¨ not entitled under BR law to choose to work only jobs in field in which he is trained. No discharge granted)

c. M iller (Partial discharge granted to ¨ under court¶s equitable relief powers/§ 105. ¨ failed the UH test, so total discharge denied)

9. (a)(10) ± (18) ± other debts that are non-dischargeable

XVIII. Post Bankruptcy, Fresh-Start, Reaffirmation, Redemption

A. General

1. § 524 discharge is the post-BR version of the automatic stay, in that itstays any creditor actions on pre-petition debts going forward

a. (a)(2): a discharge injunction ³operates as an injunction against thecommencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the ¨, whether or not discharge of such ¨ iswaived.´

b. But note that discharge injunction does not preclude creditors fromrefusing to deal with a ¨ any further b/c of non-payment of a debtthat is discharged. [School can refuse to give transcript post-BR,

but just could not require repayment of debt]

c. ¨ may choose to pay someone who continues to hold a lien like acar dealer who cannot require repayment of the debt but canrepossess a car post-BR

2. (f): Nothing prevents voluntary repayment of a debt (but creditorscannot say ³pay and we will continue to deal with you,´ tho as a practical



31

matter this probably happens all the time and is not worth the lawyer andcourt fees to go against it)

3. (c) permits ¨s to enter into enforceable reaff irmation agreements[individual waivers of fresh starts]

4. § 525 prohibits discriminatory treatment because of ¨¶s former BR status by

a. Governmental units concerned with granting licenses

b. Employers

c. Student loan givers

d. Note that these categories are v. limited

B. Reaffirmation: § 524(c)/(d)

1. Hoops to jump through

a. Creditor cannot ask for it

b. Creditor has to explain to ¨ that he can rescind within 60 days of filing with court or before discharge, whichever is later

c. Reaffirmation agreements must be entered into before conclusion

of the BR case or they are unenforceable

d. BR courts must approve RA¶s unless ¨ has a lawyer who will signthe ³best interests aff idavit´

e. Clear and conspicuous statement that advises ¨ agreement is notrequired

2.

Different types of RA exist for secured and unsecured a. Rarely worth reaffirming an unsecured debt, though ¨¶s will

occasionally do so when not doing so would cause problems for aguarantor of a loan, e.g., or a desire to continue relationship withcreditor post-BR ( Paglia, doctor or other provider whose identitymatters to ¨)

b. w/r/t secured debts, collateral must f irst emerge f rom BR either b/c

i. it¶s exempt

ii. it is fully encumbered so TIB abandons it b/c SC would get it

anyway, and unsecured creditors would get nothing

i. Recall that while debts are discharged, liens are notso an encumbered asset that is abandoned is stillencumbered by that lien post-BR

c. Reaffirming very over-secured debts also not always in bestinterest as it will probably result in ¨ paying much more thancollateral is worth in such a case



32

i. Redeem or

ii. Sell collateral and if subject to an exemption (a car, e.g.) takethat amount and buy something w/value closer to price

3. I n re Pendlebur y: Reaffirmation process is one of K negotiation and if counsel signs off on affidavit, court less likely to get involved (here,$250.00 attorney fees creditor insisted on to let ¨s keep mobile homeupheld by the court)

4. Rogue reaffirmations

a. RA¶s not filed w/court and thus giving court no opportunity tocomply w/process

b. I n re Latanowich: Gross overreaching and total failure to follow proper procedures in connection w/RA¶s will result in courtrefusing to approve agreement. Predatory conduct will not be

tolerated

C. Redemption

1. § 722 allows ¨ to extinguish liens on

a. Personal property for household use [no business property andno real property can be redeemed]

b. That has been abandoned by TIB or is exempt

c. By paying the lesser of

i. What is still owed

ii. What property is worth

2. Also extinguishes assignments of wages and garnishments ± claims to ¨future earnings thus do not survive BR

3. Secured creditors must accept redemptions, in contrast with reaffirmations

4. Attorney need not sign affidavit for this

5. ¨ has 45 days to come up with cash

D. Retention?

1. ¨ just keeps goods and keeps paying

2. Not entirely clear this is legal by BR code but it happens. 2005

amendments tried to quash thisXIX. Chapter 13 Bankruptcy

A. Introduction

1. Compare w/Chapter 7:

a. Chapter 7 allows ¨ to keep post-petition wages and get dischargein return for giving up all non-exempt assets



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b. Chapter 13: ¨ gets to keep non-exempt assets but has to commitsubstantially all post-petition, disposable income3 to payment of creditors

c. Main advantages of this Chapter

i. ¨ gets to keep existing assets

ii. More debts are dischargeable than in 7

i. Debts that are not include

2. Usually used before ¨ house is about to be foreclosed on ± sometimesright after a Chapter 7 discharge, so ¨

a. Gets rid of all personal obligations and

b. Can deal with the lien that remains on his house after Chapter 7though a court faced with this might refuse to confirm plan ongrounds of bad faith

3. § 1328: Discharge granted if ¨ completes his payments under the Plan

4. Eligibility: § 109(e)

a. Unsecured debts < $307, 675

b. Non-contingent, liquidated, secured debts < $922, 975

c. Wage earner ± this may include any regular income source [ I n re

M ur ph y: ¨ who lives w/significant other and helps raise his kids,whose SO paid all her bills and signed agreement to pay her Chapter 13 plan has ³regular income´ and is eligible for Ch. 13]

d. Must file Ch. 11 if you fail above tests for debt limits

B. The plan of reorganization

1. ¨ files plan with court setting out how future income will be used to paycreditors

2. § 1322(d) Length of plan

a. No longer than 3 years if ¨ is blow median income and

b. No longer than 5 years if ¨ is above median

3. 1322: Contents of plan

a. Full satisfaction, in deferred cash payments, of all allowed

priority claims and administrative expenses under § 507 (unlessholder agrees to something else)

b. Distribution under the plan is > whatever unsecured creditorswould have gotten under Chapter 7

3 Surplus, if any, after means test is run



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c. Secured creditors get at least value of their collateral and balanceis an unsecured claim and payments under plan must providesecured creditor with adequate protection

4. Best-interests test: If there are NO non-exempt assets, any payment tounsecured creditors will satisfy because they would have gotten nothing

under Chapter 7 anyway

5. Plans must be proposed in good faith, be feasible for ¨ to comply with

6. Lifting the automatic stay

a. § 362(d): On request of a party in interest and after notice and ahearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling,modifying or conditioning such stay

i. (1) for cause, incl. lack of adequate protection of an interestin property of such party in interest

ii. (2) w/r/t a stay of an act against property under subsection(a) of this section, if

i. (A) ¨ has no equity in such property

ii. (B) such property is not necessary to an eff ective

reorganization

b. Even if a ¨ has no equity in property, it might be keep-able because he/she needs it for, e.g., his job

c. BUT if value of property is declining, there may be lack of adequate protection

i. § 361: If AP is a problem,

i. TIB can make cash payment or periodic cash payments to entity w/o AP to the extent that a stayresults in a decrease in value of entity¶s interest inthe property

ii. TIB can give entity additional or replacement lienon something else ¨ owns, if he/she has other assets

iii. Other relief

7. K modification permissible as a rule, subject to payments as outlined

above

8. Mortgages

a. Principal residence mortgages, CANNOT be modified like other secured claims ± original K obligations apply

i. Look for evidence that it is not principal residence if you

want to modify K



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b. But if ¨ cures w/in reasonable time and reinstates originalmortgage

c. I n re T addeo (landlord accelerates mortgage and ¨s file b/c of inability to pay it off)

i. Ch. 13¶s allowance for ¨s to cure defaults includes de-acceleration of mortgages and reinstate original paymentschedule

i. ³Default is an event in the debtor-creditor relationship which triggers certainconsequences«Curing a default commonly meanstaking care of the triggering event and returning to pre-default conditions. The consequences are thusnullified´

ii. Curing a default under a mortgage held NOT thesame as modifying it [prohibited action under §

1322(b)]

C. Secured claims in Chapter 13

1. 2 primary concerns

a. Adequate protection: Secured creditor must be protected againstthe declining value of collateral during automatic stay

i. I n re Radden: Secured creditor who retains lien on collateraland receives amount of ASC with interest is adequately protected if a plan is effectively consummated. Agreement by ¨ to arrange for adequate insurance in case of loss of

collateral shores up holding that creditor is adequately protected.

ii. If chances of rehabilitation are remote, this might beadequate protection problem as well

iii. Interest rate calculated according to Till decision ± usually 1-3% over prime. ³If the court determines that the likelihoodof default is so high as to necessitate an µeye-popping¶interest rate, the plan should probably not be confirmed.´

b. Adequate payment: Secured creditor must receive a distribution> present value of his ASC4 [TIB wants as much from ¨ for each

asset as he could get if TIB sold it]

2. Lien-stripping:

a. Value of collateral [not what you owe on a loan] paid off over time redemption w/monthly payments

4 Value of the property



i. § 506(a)(2): Valuation done according to replacement value w/o deduction for costs of sale and marketing [codifies SCdecision in Rash]

b. Not permitted for car loans younger than 2.5 years (910 days) or other collateral for loans taken out the year before BR

3. Interest rate payments under plan

a. No interest calculated b/w date of petition and date of confirmation of plan

4. § 1322(b): No modifying rights of holders of mortgages

5. If a plan provides all of a debtor¶s disposable income will go to generalunsecured claims over 5 years, the court can discharge the rest of themw/exceptions in 1328.

mag version janger fall 2006 v2

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