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University of Mississippi School of Law
Czarnetzky, John M.

Bankruptcy – Fall 2012
I.            Overview – Bankruptcy law
a.        “financial death”
                                                   i.      As analogized to laws of wills and estates
b.        End-point of a financial transaction
c.        Models of bankruptcy law
                                                   i.      “Liquidation” bankruptcy (CH 7)
1.        Nearly universal idea
2.        CH 7 of US bankruptcy code
a.        CHs 1, 3, 5 apply to all bankruptcy cases
b.        All other chapters are different kinds of bankruptcy
c.        CH 7 is very old type of bankruptcy
3.        Ch 7 debtor
a.        Trustee appointed
b.        Trustee gathers all of the debtor’s assets
c.        Assets liquidated
d.        Trustee distributes proceeds to creditors
                                                                                                                           i.      Creditors get an organized/orderly liquidation
                                                                                                                          ii.      Debtors get their debts discharged
                                                  ii.      “Reorganization” bankruptcy
1.        CH 11
a.        Designed for businesses
2.        CH 12
a.        Family farmers and family fishermen
b.        Reorganization
3.        CH 13
a.        Wage-earner reorganization
b.        No corporations – just individuals who earn a regular income
4.        Reorganization bankruptcy
a.        Debtor keeps assets
b.        Debtor, at the end, receives a discharge of debt
                                                                                                                           i.      Debtor must present a plan of reorganization, passed by the court and the creditors
                                                                                                                          ii.      The reorganization plan must guarantee that that creditors receive at least what they would have received had the debtor gone through a CH 7 liquidation
1.        This is also the case in every other CH of the bankruptcy code
II.            Non-bankruptcy debtor-creditor law
a.        In the absence of bankruptcy law, the relationship between debtors and creditors is like the “law of the jungle”
                                                   i.      The quickest, most diligent creditor will win out over others
                                                  ii.      Once the money runs out, then the creditors did not get paid – too bad
b.        Federal bankruptcy law instills a sense of justice between the debtor’s creditors
                                                   i.      All unsecured creditors should share and share alike (pro-rata share of the debtor’s assets proportional to the amount they are owed)
                                                  ii.      Example, if the debtor has assets of $100, and owes a total of $1,000 (Owes $800 to A, $180 to B and $20 to C)
1.        This means that ($100/$1000=$.10 for every $1.00), so A gets $80, B gets $18 and C gets $2
                                                iii.      Absent the bankruptcy code, the smaller creditors will usually always lose out to the large creditors
c.        Unsecured creditors
                                                   i.      Creditor’s remedies
1.        After getting a judgment on someone, then the creditor can attach/seize the debtor’s property
a.        Enroll the judgment in a jd where the debtor has some property
                                                                                                                           i.      Full faith and credit clause allows a jg from another jd to be given FF&C in any other jd
b.        Enrolling a jg has the effect of imposing a judicial lien on the debtor’s property
                                                                                                                           i.      Personal property
1.        Majority rule: enrollment of jg coupled w/ sheriff seizing personal property
c.        A lien is a property right that the creditor has over the debtor’s property
                                                                                                                           i.      Foreclosure sale: forecloses the debtor’s right to “redeem” the property
1.        Redemption is when the debtor tenders all that is owed to the creditor
d.        An enrolled jg give sheriff the right (along with the writ of execution) to seize the property
e.        4A does not apply to creditor’s remedies, which means that the sheriff can break the debtor’s door down to seize property
f.         Seizure (by sheriff)
2.        Garnishment (wages, taxes, bank accounts, etc.)
a.        Garnishment is whereby the creditor can attach and get property of a debtor that is in the hands of a third person
b.        A garnishment suit is between the creditor and the third party
                                                                                                                           i.      The debtor is not a party in the garnishment action
1.        So long as the garnishment is proper, the debtor cannot intervene
3.        Debtor’s interrogatories
a.        Have enrolled jg on debtor, but not sure where the debtor might hold property
b.        A debtor’s interrogatory is like a deposition, done post-judgment, which asks the debtor what assets he has, and once the creditor finds out, then can seize the property
                                                  ii.      Fraudulent conveyances/transfer statutes
1.        Any transfer of property of debtor with the actual intent to hinder, delay, and defraud creditors is a fraudulent transfer
a.        This is a federal crime, especially if you then file for bankruptcy
2.        Transfer/sale of a debtor’s asset for less than what it is reasonably worth while the debtor is insolvent allows the creditors to get the asset back
a.        Majority of states have adopted this “less than reasonably equivalent value” doctrine
b.        The “reach back” period in bankruptcy law is usually 2 years, while some states are 3-5 years
III.            United States Trustee
a.        An employee of the Justice Department
b.        Administrative role
c.        Can appear on any matter on any bankruptcy case
d.        This is a disinterest third party
e.        In Ch 7 case,
                                                   i.      US Trustee keeps a list of the eligible trustees in the given jurisdiction
f.         US trustee has the power to suspend/waive certain requirements, like the credit counseling requirement
IV.            Eligibility
a.        Note: Origin of bankruptcy code is a debt collection statute to aid small creditors
b.        First question is whether the individual debtor is eligible to file CH 7
                                                   i.      Ask: what is the debtor’s “current monthly income”
                                                  ii.      Then get the debtor’s annual income (currently monthly income * 12)
                                                iii.      Figure out if the debtor’s income is > or < than the median family income in the debtor’s jd 1.        If debtor’s income is < median, then debtor can file CH 7 (means test does not apply) 2.        Means test kicks in when the debtor’s income > median income
a.        Take the debtor’s income and further calculate
                                                                                                                           i.      Deduct reasonably and necessary expenses (as defined by the IRS)
1.        Rent will not be deducted as an actual expense, but the amount to be deducted will be the IRS defined amount for the area
                                                                                                                          ii.      Deduct special expenses (childcare, care for elderly or sick, etc.)
                                                                                                                        iii.      Deduct payments to secured creditors (this includes mortgage payments)
b.        If the disposable income is above a certain amount, then the debtor cannot file CH 7 since their disposable income will be enough to pay creditors under CH 13
CH 2 Commencement of the Case and Eligibility for Relief
I.            Bankruptcy begins with the filing of a petition asking for relief
a.        Filed under CHs of the Bankruptcy Code
II.            Voluntary proceedings
a.        Vast majority of cases are voluntary under §301 of the Code
b.        Just file petition to begin
                                                   i.      Filed with the Bankruptcy Court
                                                  ii.      Petition will be date and time stamped
                                                iii.      Filing petition “constitutes an order for relief”
                                                 iv.      Filing triggers the automatic stay (§362)
1.        Stops all creditor activity
                                                  v.      Filing triggers creation of the bankruptcy estate (§541)
c.        The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 (signed by Bush) was aimed at making filing bankruptcy harder
                                                   i.      Most important change is that CH 7 is no longer available absent some strict conditions, and individual debtors will normally file a CH 13 repayment plan
                                                  ii.      Biggest change brought by BPACPA is §707
                                                iii.      Individual debtors also have to complete credit counseling from an “approved nonprofit budget and credit counseling agency” before they can file for bankruptcy under Ch 13; see §111(c), within 180 days of filing
d.        Problem 2-1
                                                   i.      Joe gets sick. Wife leaves him. He gets depressed and stops working and paying bills. Finds out home will be foreclosed today at 3 p.m. Calls you to see if you can help him by filing bankruptcy petition to stop the foreclosure sale. He has never been to a credit counseling agency. Can you help him? (see §109(h)(3))
1.        The filing of the bankruptcy will stop the foreclosure sale (automatic stay)
2.        Joe will need to contact whoever was going to hold the foreclosure sale so that the sale does not go through
3.        §109 states that Joe might be able to file the petition and ask the court to extend the time within which he can seek credit counseling, but Joe really needs to get the credit counseling before filing the petition, or at least try to get the counseling in order to satisfy §109(h)(3)(A)
                                                  ii.      What if Joe had gone to a credit counseling agency but then tried to pay off his creditors?
                                                iii.      What if it is not 182 days after his credit counseling session? Does Joe have to go back to the credit counselor before filing for bankruptcy?
1.        Might be ok, depending on jd
                                                 iv.      Note: Congress wanted to make sure that all who go into bankruptcy get financial training in order to avoid future bankruptcies.
1.        Regardless of whether the petition is filed in CH 7 or CH 13, the debtor will be denied a discharge until he successfully completes an “instructional course concerning personal financial management” during the bankruptcy period.
a.        This means an individual debtor has to get credit counseling before and during bankruptcy
2.        See §727(a)(11) and §1328(g)
e.        Rules:
                                                   i.      Computations start with determining debtor’s “current monthly income”
1.        Defined in §101(10A) to generally include the average of the debtor’s income for the 6 months prior to the filing of the petition
a.        The higher this amount, the worse for the debtor
                                                  ii.      Second computation: compares the debtor’s current monthly income (multiplied by 12 to reach an annual sum) with the Census Bureau’s figures for the state’s highest median income for a family household size comparable to that of debtor
1.        Example: Ohio median income for 2 person household in 2007 averaged $51,400
a.        If debtor’s income is equal to or lower than the state’s median income, the “safe harbor” provisions of §707(b)(7) apply and the debtor may freely file a CH 7 petition
                                                                                                                           i.      In this case, the “means test” is not relevant
b.        If the debtor’s income exceeds the state’s median income, then the debtor must go to the “means test”
                                                                                                                           i.      If debtor fails the “means test” then cannot file CH 7, but could still apply for CH 13 (where debtor would have to repay as much debt as possible over a 5 year period)
f.         The “Means test” (§707(b))
                                                   i.      Second hurdle for debtor (after the counseling) is meeting the “means test”
                                                  ii.      Means Test: If the debtor has enough net income that he could repay a significant amount of debt under a CH 13 plan, the deb

                                                                                                                       i.      The statute provides that the debtor “shall …file” the required disclosures “unless the court orders otherwise”
e.        TC holding: The order excusing the failure to file was beyond the scope of the bankruptcy court’s authority
f.         App Ct holding: We conclude that the bankruptcy court acted in consonance with the statutory scheme and within the realm of its discretion. Accordingly we reverse the district court’s order and remand for further proceedings
                                                                                                                                                                                                   i.      We conclude, therefore, that when the missing information has become irrelevant or extraneous and the court, in lieu of dismissal on that account, “order[s] otherwise,” §521(i) does not compel dismissal of the case
g.        1st Circuit Rule: the case must be dismissed under §521(i) if the statutory deadline is not met, unless the dismissal will further some unfair situation
h.        Note: Since bankruptcy is a collective proceeding, it is not just as simple as the debtor asking the Court to dismiss the bankruptcy petition
l.         Problem 2-6
                                                   i.      Bankruptcy attorney Barth represents primarily consumer debtors. The 2005 amendments to the Code created liability in the attorney if the debtor’s CH 7 petition is dismissed for abuse.
                                                  ii.      How much investigation must Barth do in order to keep from being liable?
1.        Attorney should conduct a reasonable investigation and inquiry into truth of facts asserted by client
2.        If there is added burden and work on the lawyer, then she should raise her rates
                                                iii.      Note: Any lawyer that helps a debtor file a bankruptcy petition will be considered a “debt relief agency”
m.      Problem 2-7
                                                   i.      Bankruptcy-R-Us is a for-profit corporation that advises debtors on how to restructure their debts and/or go through a bankruptcy without a lawyer. The company counsels debtors about credit problems, explains how bankruptcy works and how to file petitions, reaffirm debts, claim exemptions, and obtain a discharge. The company is careful never to advise the debtors to so any of these things, but explains to them how it would be done if they wanted to do it themselves. The company would help debtors fill out schedules and other paperwork.
                                                  ii.      Does this sound like the practice of law?
1.        It is in some jds, not in others
2.        Unsettled whether it is practice of law
                                                iii.      Is the company in violation of the Bankruptcy Code?
1.        See §110, §§526-528
2.        Also see terms in §101(12A), (3), (4), (4A)
n.        Other Matters
                                                   i.      Joint cases
1.        Bankruptcy code provides for the filing of joint petitions for married couples
2.        Under §302, an individual and his spouse (not partner or other relative) may file a joint petition – paying only one filing fee
a.        There are two bankruptcy estates, although consolidation of estates is possible in appropriate circumstances
b.        In re Kandu, 315 Bankr. W.D. Wash. 2004)
                                                                                                                           i.      Held that as a result of the DOMA (Defense of Marriage Act, 1 USC §7), a lesbian couple who had married in Canada was not eligible to file a joint petition under §302 of the Code
                                                  ii.      Foreign Bankruptcies
1.        A new CH 15 was added whereby a foreign representative of the debtor in a case pending in another country can petition the US bankruptcy court for a recognition order
2.        If the relief is granted – which it normally is – a case ancillary to the foreign case would be initiated
3.        Essentially gives a US venue to hear bankruptcy proceedings if the debtor has assets in the US but filed a bankruptcy in another country
                                                iii.      Filing fees
1.        The 2005 reform act reset filing fees:
a.        CH 7 is $245
                                                                                                                           i.      $100 goes to the CH 7 trustee
                                                                                                                          ii.      CH 7 trustee also gets a percentage of the amount of assets administered by the trustee
                                                                                                                        iii.      Any expenses incurred by the CH 7 trustee will become an administrative expense of the bankruptcy estate that has a high priority as against the unsecured creditors
b.        CH 13 is $235
c.        CH 11 is $1,000
2.        There is a waiver of filing fees in some appropriate circumstances
a.        This overturns the case United States v. Kras, 409 U.S. 434 (1973), which held that the inability to pay the filing fee barred the debtor from obtaining bankruptcy relief