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Creditors Rights
University of Dayton School of Law
Morris, Jeffrey B.

CREDITOR’S RIGHTS
FALL 2009

Working with the Bankruptcy Code

Chapters 1,3 & 5 of the Code apply in all bankruptcy cases. Remember, most EXAM questions are about some provision in Chapter 5 and require the use of §§ 101 & 105.

§ 105: The Court may issue any order . . . that is necessary or appropriate to carry out the provisions of this title.

Proponents of a requested order focus on “necessary or appropriate” and argue that the bankruptcy court can issue the order because it is “necessary or appropriate.”
Opponents of the requested order focus on the phrase “provisions of this title” and argue that the bankruptcy court can issue an order only if there is some basis for the order in some provision of title 11 other than § 105.

Chapter 7

Provides for independent liquidation (sale) of the debtor’s assets owned at the time of the bankruptcy filing and distribution of the net proceeds of the sale to creditors, pro rata, in accordance with statutory rules.
Business entities/individuals

Chapter 11

Permits but does not require the sale of assets.
Contemplates that the debtor will keep its assets and generate earnings with them that will fund a plan of creditor payment

The plan must be negotiated with and voted on by creditors and approved by the court

Business entities/individuals

Chapter 13

Contemplates that the debtor (individual only!) will keep his assets
Contemplates payments to creditors pursuant to a plan

Does not require that the plan be either negotiated with or voted on by creditors

Chapter 9

Municipalities

Chapter 12

Family farmers

Chapter 15

Limited to a case filed by a debtor who has a bankruptcy case pending in some other country

BUILDING BLOCKS

Policies

Equality of Distribution

§ 726 – mandates pro rata distribution to non-priority unsecured claims in Chapter 7 cases
§ 547 – “Preference” law (EXAM)

“Adequate Protection” of an Interest in Property

5th Amendment – federal law cannot deprive a person (creditor) of its interest(s) in property (lien/mortgage) without just compensation
Adequate protection is limited to the creditor’s property rights – not the creditor’s right to payment under contract or other law.

Fresh Start

This policy is often connected to the debtor’s discharge.

Concepts

Discharge

Does the debtor receive a discharge? (Tests)

Chapter 7

§ 727(a)(1) – Only humans can receive a discharge
§ 727(a)(2)-(12) – Bases for withholding a discharge from an individual debtor (“Objections to Discharge”)

Chapter 11

§ 1141(d) – a business entity receives a discharge on “confirmation of a plan”
The business debtor’s completion of payments under the plan is not a condition precedent to a Chapter 11 discharge
§ 1141(d)(5) Regarding individual debtors, generally all plan payments must be made prior to discharge (Read in conjunction with § 1129(a)(15))

Chapter 13

Individual debtors receive a dis

47 and 550 avoidance powers)
§ 541(a)(5) – Property that the debtor acquires or becomes entitled to within 180 days after the filing of the petition by:

Bequest, devise, or inheritance
Property settlement or a divorce decree
As a beneficiary of a life insurance policy

§ 541(a)(6) – Proceeds, product, offspring, rents or profits of or from property of the estate

Postpetition earnings of a corporation or any other “person other than an “individual” are property of the estate under § 541(a)(6).
In Chapter 7, postpetition earnings of an individual from the services that he performs after the bankruptcy are excluded from property of the estate.
In Chapters 11 & 13, regarding an individual debtor, look to §1115 & 1306 to determine what is included in property of the estate. Here, Postpetition earnings are property of the estate.

§ 541(b) & (c) – Property excluded from property of the estate

§ 541(c)(2) – interpreted to exclude traditional spendthrift trusts and ERISA accounts from property of the estate