Bankruptcy Law: Debtor's Obligations and Creditor's Rights, Study Guides, Projects, Research of Commercial Law

Download Bankruptcy Law: Debtor's Obligations and Creditor's Rights and more Study Guides, Projects, Research Commercial Law in PDF only on Docsity! Bankruptcy Outline – Professor Davis us.docsity.com i. US v. Cluck, p. 250 1. Typical example of B Crime 2. Intentional hiding of assets and pre-B transactions amounted to bankruptcy crime 3. US Attorneys used to be very active in prosecuting, but they are not on the top of the list today b. PS. 12, p. 252 i. 12.1 1. This debtor is not unusual, he has not concealed anything, he is just not paying attention. 2. He will have a problem because § 727(a)(3) requires the debtor to keep or preserve records and papers from which debtor’s financial condition may be ascertained. 3. § 727(a) is really a smell test. The ct will likely give him his discharge. 4. The problem comes under § 521, which says that the debtor must provide certain paperwork: proof of income, pay stubs, tax returns. But is it even likely that he has filed taxes? ii. 12.2 1. He will have a problem under both 727 and 523 because: a. § 727(a)(2)(A) – Ct cannot grant debtor discharge if the debtor, with intent to hinder, delay, or defraud creditor or an officer of the estate transferred, removed, etc, property of the debtor within 1 year before the date of the filing of the petition. b. This probably qualifies as an “extension” under § 523(a)(2) either: i. (A) false pretenses, or ii. (B) use of a statement in writing that is materially false. 2. Attorney should advise to get a § 523, it’s in the attorneys interest. iii. 12.3 1. There are 2 kinds of divorce obligations, neither are dischargeable a. (1) child support & alimony (domestic support obligations). § 523(a)(5). i. Priority obligation. b. (2) property settlements. § 523(a)(15) i. Not a priority obligation. 2. Problem: a. $ 10k = property settlement b. $ 2,500 = property settlement c. $ 1k = support d. $ 200 = alimony 3. It doesn’t matter what the state divorce court calls each payment. That is done for tax purposes and is not binding the b-court. iv. 12.4 1. § 523(a)(6) applies because this debtor made a willful or malicious injury. So it will not be discharged. v. 12.5 1. § 523(a)(2)(C) = presumed non-dischargeable. a. $ 450 wallpaper - maybe b. $ 1,200 plane tix – will depend where they were going (vacation? A funeral?) c. $ 400 clothing - maybe Bankruptcy Outline – Professor Davis us.docsity.com 2. Here, we assumed that these were all luxury goods and owed to the same creditor. If you used more than 1 creditor, and each purchase was for less than $550, then it is not presumed fraudulent. The only problem might be the plane tickets. 3. If the CC company comes after a debtor and loses, 523(d) requires the court to give attorney’s fees. vi. 12.6 1. § 523(a)(7) is applicable. Fines for the benefit of a governmental unit are non-dischargeable. Depends on whether the school is public or private. vii. 12.7 1. It is hard to get them discharged, so people end up paying them off. II. The Debtor’s Post-Bankruptcy Position: Reaffirmation a. Introduction i. At the moment of discharge: 1. The § 362 automatic stay dissolves, § 362(c)(2)(C), and 2. The § 524 discharge stay begins. § 524(a). ii. These 2 injunctions are the bookends of Chapter 7. iii. The discharge stay operates as an injunction & forbids any attempt to collect a discharged debt. 1. But, it does not protect the repossession of property that is subject to a valid lien. 2. See problem 13.1, p. 277 – Muscle Mart cannot revoke the membership because he didn’t pay for 2 months because it is an act to collect in violation of the discharge stay under § 524(a). However, MM can discriminate against him because they don’t employ him. Realistically, he will probably just pay the money and be let back in as this is too small to litigate. 3. If the only doctor in town refuses to treat you unless you pay back payment? That is an act to collect under § 524(a). 4. Problem 13.5, p. 278: The state has recently adopted drivers-license suspension for failure to pay taxes. This is an act to collect and is prohibited under § 524(a). It’s also prohibited under § 524(a) – which protects debtors from discriminatory treatment by the government. b. 3 Ways to Keep Property that is Subject to a Valid Lien i. Under the discharge stay, personal debts are discharged, but liens are not. § 506(d) 1. A secured debt remains attached to its collateral and can be enforced against the collateral after bankruptcy, even though the debtor cannot be sued for any deficiency. 2. Collection by seizure of collateral is not forbidden. ii. 3 Options to avoid surrendering the collateral to the creditor: 1. 2 Statutory Options: a. (1) redeem the collateral under 722 b. (2) negotiate a reaffirmation agreement with the creditor under 524 2. 1 Option created by case law: a. (3) The Ride-Thru aka Retention b. Can continue making payments if you have not missed one. The 2005 amendments put an end to this but it may still be available if you have a cooperative creditor. Bankruptcy Outline – Professor Davis us.docsity.com 1. Most lawyers don’t like the idea of signing a reaff and won’t do it. 2. It starts with the engagement letter “I won’t represent you in a reaffirmation negotiation.” 3. Recent opinion hints that if you are not willing to do a reaff negotiation, you should not take bankruptcy cases. vii. Problem 13.4, p. 278: 1. We do not know how much her unsecured debt is. We don’t know how much equity she has in her house à she could maybe refinance. 2. Would this impose an undue hardship if all she has is the car? d. Debts to Sovereign States i. Under the 11th Amendment: you can’t sue another state (or your own state) in federal court. This is sovereign immunity à the government can do no wrong. ii. If state owes you money, you must get the legislature to make a bill instructing the treasury to pay you. iii. If you owe $$ to the state and its discharged, the state must recognize the discharge 1. Central Virginia Community College v. Katz (handout) 2. States, whether or not they choose to participate, are bound by a bankruptcy court's order discharging the debtor no less than are other creditors. 3. This is because initially, when the states ratified the constitution, they agreed to be governed by the bankruptcy clause, knowing that ancillary activities within the code also applies to states. 4. Thus, the discharge is effective against the state and the TIB can recover transfers to the state. e. Nondiscrimination i. § 525 – provides debtor protection against discriminatory treatment solely because of bankruptcy 1. (a) by a governmental unit a. Problem 13.5, p. 278: The state has recently adopted drivers- license suspension for failure to pay taxes. This is an act to collect and is prohibited under § 524(a). Its also prohibited under § 524(a) – which protects debtors from discriminatory treatment by the government. 2. (b) by an employer a. Problem 13.1, p. 277, MM can discriminate against the debtor because they do not employ him. b. Problem 13.8, p. 279: An employer cannot terminate an employee who files bankruptcy. However, there is a limitation: the firing cannot be solely b/c of bankruptcy. This is a pretty easy standard for employers to circumvent. Consumer Bankruptcy - Chapter 13 Bankruptcy I. Elements of an Acceptable Plan a. An Overview of Chapter 13 i. The 2 Main reasons why people file a Ch 13: 1. To save their house 2. To pay off their taxes Bankruptcy Outline – Professor Davis us.docsity.com ii. Ch 13 focuses on using future earnings, rather than accumulated assets, to pay creditors iii. Debtor keeps all assets, regardless of whether the assets exceed exemption levels, but the debtor agrees to turn over a portion of all future income for a minimum of 3 yrs. iv. The Key to filing from a debtor’s perspective = get the plan confirmed! v. The Plan = §§ 1322 & 1325 read together. vi. Trustee takes a % of debtor’s income for each pay period, deducts a percentage to cover administrative expenses, and then distributes the remainder to the creditors according to a court-approved plan. vii. When the debtor has completed the agreed payout, the remaining obligations are discharged. viii. Functions of Ch 13 TIB: 1. much different than the Ch 7 TIB à main function: receive payments from Ch 13 debtors 2. Objects to improper creditor claims 3. ensures that the debtor fives up the required amount of income 4. asserts any objections to the debtor’s discharge 5. assists debtor in performance of debtor’s duties 6. Recommends approval or denial of confirmation of a debtor’s plan. 1302(b)(2)(B). 7. Must ensure that payments are commenced within 30 days after the plan is filed and properly distributed to creditors. §1302(b)(5) & § 1326. 8. If a debtor starts missing payments – TIB seeks wage attachment orders ix. The Process of Chapter 13 1. Commenced by filing a chapter 13 petition. § 301 a. only the debtor may commence b. there is no involuntary ch 13 bankruptcy 2. This creates an estate which includes, among other things, “all legal or equitable interest of the debtor in property as of the commencement of the case,” § 541, and property and earnings acquired after commencement of the case but before the case is closed dismissed or converted, § 1306(a), with the debtor remaining in possession of the property of the estate, except as provided in the confirmed plan or the order confirming the plan, § 1306(b). 3. The confirmation of a plan vests all of the property of the estate in the debtor. §1327(b). 4. From the time of filing of the petition, the automatic stay provisions of § 362 restrict the actions of creditors against the property of the estate or of the debtor. A/S remains in effect until the case is closed or dismissed or a Ch 13 discharge is granted or denied. § 362(c). 5. Debtor must also file a plan for providing for the repayment of all or a portion of the claims against the debtor out of the debtor’s future income (or out of the estate). The plan must conform with statutory requirements. 6. The bankruptcy court must confirm the debtor’s plan x. The fundamental principle of the reorganization chapters = propose a plan that will pay everyone at least what they would have gotten in a Ch 7. 1. Thus to build your plan – you first have to figure out what everyone would get in a Ch 7 liquidation. xi. Ch 7 or Ch 13? 14.7, p. 312 Bankruptcy Outline – Professor Davis us.docsity.com 1. Debtors seek to save their home. They have only $4k in personal possessions (all of which would be exempt). They have $150/month in disposable income. Unsecured debts = $10,750. 2. They should do a Ch 7 instead of Ch 13. a. Because all of their unsecured debts would be discharged b. Their disposable income is so small c. The only problem is the foreclosure proceeding. Ch 7 won’t do much about that. But they can renegotiate / reaffirm the mortgage to save the house. b. Payments to Secured Creditors i. Computing the Amount the Secured Creditor Must be Paid 1. In Ch 13 à secured creditors must get at least what they would have gotten in a Ch 7 a. In Ch 7, the secured creditor’s claim is paid in full 2. Once a court determines that a claim is a secured claim, the court has to make 2 factual determinations: a. (1) The amount of the allowed secured claim under §506(a) – valuation is replacement value b. (2) the present value of the allowed secured claim under § 1325(a)(5)(B)(ii) 3. Determining the PV of the allowed secured claim: a. A truck is worth $43k today. Under the plan, you will get the PV over 5 years, so the payments must be more than $43k because of the use value of money. b. Use the formula approach: start with the prime rate (which is the rate a bank charges to their best customers who pose zero risk) & adjust it up to account for risk of default. Till v. SCS Credit Corp, p. 298 ii. A creditor may seek to get relief from the A/S to repossess the collateral § 362(d) 1. 2 possible grounds: a. § 362(d)(1) For Cause i. Includes lack of “adequate protection” for the secured party under §362(d). ii. 2 types of risks for a secured creditor: 1. loss of collateral (fire, theft, neglect) 2. decline in its value (depreciation) b. § 362(d)(2) The debtor has no equity in the property & the property is not necessary to an effective reorganization. i. There must be an equity cushion in the item or else the creditor can get a relief from stay. ii. Creditor should argue that even if there is equity, it is not enough to protect its interest in the collateral. iii. Most cts rule of thumb: an equity cushion of ≤ 20% is probably not adequate. 2. Problem 14.1, p. 310 a. Asset = computer subject to a $4,600 purchase money security interest. Worth ~ $5k b. IC wants to repossess the computer before a new cheaper model comes out. Is there anything we can do on IC’s behalf? Bankruptcy Outline – Professor Davis us.docsity.com 2. These types of security interests must be paid in full plus interest a. Any PMSI granted within the year before bankruptcy is exempt from lien stripping b. Any PMSI on a motor vehicle for personal, family, or household use given within the 2 ½ years (910 days) prior to bankruptcy is exempt from lien stripping f. 14.4, p. 311 à The Hanging Paragraph i. Suburban bought for $2k down & $40k on a 60 month, 8% note. Retail = $28k; Balance on note = $34k ii. Discussion of the Hanging Paragraph: 1. At some point the debt will become less than the value of the car 2. If you bought a car within the previous 2.5 yrs for personal, family, or household use, then § 506 shall not apply. Thus, you cannot strip off the unsecured portion of the debt in that situation. 3. So, he will have to promise to pay the full amount due on the note, ignoring interest. iii. The bank prefers you to surrender the collateral 1. Which would discharge the whole debt. 2. But circuit courts found that you only discharge the value of the car (the retail value) if it is turned in. So the debtor would still owe $6k. 3. Thus, now it is not so attractive to surrender a car. iv. Prime rate = 7.5% the going rate for a fully secured car loan = 8%. What interest rate will the court likely approve? 1. Probably 8% (or higher) since it is above prime and takes into account the risk of default v. He must make his car payments no later than 30 days after the date of filing of the plan or the order for relief which ever is earlier and must be paid to the trustee. § 1326(a). $34 $0 0 1 3 4 2 Debt Value of Car Bankruptcy Outline – Professor Davis us.docsity.com vi. No, he can’t merely check a table because the court can alter the monthly payments if they don’t provide adequate protection to the holder of the claim. § 1325(a)(5)(B)(iii). 5. 14.2, p. 311 a. Situation: Hunting Cabin. Purchased from LL for no money down & a $40k 5 yr note. Made 4 pmts. Principal balance owed = $39,980. LL claims $12,300 in past due interest, penalties and atty’s fees under the k. LL has begun foreclosure proceedings. K interest rate = 14% on principal. 21% on all past due penalties. Value of the land = $41,000 b. Observations: i. This cabin is not the debtor’s principal residence. § 1322(b)(2) ii. Under § 506(a)(1), a secured creditor has an allowed claim up to the value of its collateral. 1. Value of collateral = retail value = $41,000. iii. The pre-bankruptcy debt = $39,980 + $12,300 = $52,280 iv. Thus, LL is undersecured and will not get the post- bankruptcy interest. v. Thus, claim is bifurcated 1. The secured claim = $41,000 2. The unsecured claim = $11,280 c. What does GG have to do to propose a confirmable plan? i. He must pay the PV of the secured claim, over 5 years. ii. PV amount = $41k + interest iii. Calculating the Interest: 1. Use formula method from the Till Case: start with the prime rate & make adjustments according to risk. 2. Risk considerations: he has a job & is getting overtime, but he has no car etc. 3. Today’s prime rate + a couple points (2-3) d. Is this smart for GG? Yes, it will reduce his payment each month and also strip his lien of $11,280, which will get lumped in with the other unsecured claims. e. What if the bank wants the property instead? GG will have a problem because he has no equity in the cabin and its not likely essential to an effective reorganization. The bank probably doesn’t want the property though since its kind of a dump. f. What about reaffirmation? This would be good for the bank, but bad for GG. As his attorney you wouldn’t want to sign the reaff, b/c keeping the property at all is stupid. c. The Home Mortgage is exempted from the cramdown rule. § 1322(b)(2) i. You cannot lien-strip the home mortgage ii. The only relief in Ch 13 as to a home mortgage is to “cure and maintain” – to catch up on the past due arrearage while making current payments on the mortgage as they come due. § 1322(b)(5). iii. Litigation in Ch 13 cases is most likely to involve these 2 problems: 1. in the short term, saving the home from foreclosure sale, and Bankruptcy Outline – Professor Davis us.docsity.com 2. in the long term, proposing a plan to comply with the strict limitations imposed by the provisions of Ch 13 to protect the rights of mortgage lenders. iv. Saving a home from foreclosure sale, 14.6, p. 312 1. They should go immediately to a not for profit to get credit counseling so that they can file bankruptcy. Then they will be able to de-accelerate by curing and maintaining. 2. § 109(h)(1) à a person may be a debtor only if they receive credit counseling from an approved agency. 3. § 521(b) à The debtor must file a certificate received for the completion of that counseling with the court. v. In re Taddeo, p. 307 à An acceleration clause in the mortgage which made payment in full due now because of default by homeowners. Ct found that you can de-accelerate, cure, reinstate, but you cannot lein strip. (This is now found in the code)