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Bankruptcy
University of Mississippi School of Law
Czarnetzky, John M.

Bankruptcy

Czarnetzky

Spring 2018

Introduction

A . Two pillar of Bankruptcy Law:

(1) Bankruptcy Discharge – this is what the debtor gets from bankruptcy. slate is wiped clean of debts.

(2) Orderly distribution of debtor’s assets – The debtor must turn over all of r her assets to bankruptcy court supervision. These assets are sold and to creditors.

“Do the jackels share alike?”

B. Ways to collect debt:

Sheriff Execution

Sheriff has to be careful when collecting on the debt b/c if he takes something that really belongs to someone else other than the debtor in the debtors possession, he can be sued for conversion

Foreclosure

for secured creditors (unsecured creditors have no right to self-help repossession).

Garnishment

what you probably look for first. Garnishment is the procedure whereby you obtain a judgment and then go to a party that has property of that debtor and you garnish the property.

C. Statutory liens

There are certain types of creditors that state legislatures have said are favored under the law. If a debtor owes that creditor money, that creditor gets a lien on some of the debtor’s property without having to do anything else.

The Supreme Court has held that the 4th amendment does not apply to the seizing of property in order to satisfy a debt. In most states a sheriff can kick the door down.

D. 2 models of Bankruptcy law:

Liquidation bankruptcy- debtor files b case, a trustee assigned, he takes possession and distributes assets b/w creditors
Reorganization- debtor files case, he gets to keep his stuff; after 5 yrs he receives a discharge; over the time he must be pay to the creditors liquidation value of the assets; in his plan he must pay at a minimum what the creditors would receive at a liquidation today

Chapter 13- reorganization for individuals
Chapter 12- reorganization for farmers
Chapter 11- primarily designed for corporations to file–indiv. Can file but more expensive

E. Vocabulary:

Trustee-immediately upon the filing of the C. 7 case, the US trustee appoints a trustee from a panel (list of qualified lawyers) of trustees; done automatically

An individual outside of the debtor is appointed; paid a set fee and they get a legal skim off the debtors assets. But most of the cases have 0 assets but a few do.

Standing Trustees-C12 and 13- same person in the northern and southern part of MS- permanent b/c they have a lot less to do since they do not have to seize all assets

The debtor pays the trustee the funds

Debtor in Possession- In C 11 cases- the trustee is the debtor- the “DIP”-(debtor in possession)there is no standing trustee

The trustee owes fiduciary duty not to the debtor but to the debtors unsecured creditors

This is b/c the law is very clear on what secured creditors get
Also think the pillars of bankruptcy; orderly disbursement of assets
The trustee can sue the debtor if they do not turn over the property

US Trustee- has many important roles ; in c. 11; the appointment and maintenance of the c.7 trustees; can appear

Appointed by US Attorney General / different US Trustee regions
Administrative Responsibilities

Right to appear on any bankruptcy case on any matter.

Debtor- will come back to this later

More passive role in CH 7; more active role in CH 13

LIQUIDATION BANKRUPTCY – CH. 7

Liquidation Bankruptcy = Classic, “straight” bankruptcy where BT is appointed to gather the debtor’s property, sell it, and distribute the proceeds to creditors.

Eligibility to File – Who can file?

§109 – Just about every individual/ entity is eligible to file for bankruptcy.

Exception – Businesses whose insolvencies are governed by non-bankruptcy law (i.e. banks, railroads, insurance companies, etc.).

§707 – The bankruptcy court has discretion to dismiss bankruptcy cases for unreasonable delay or substantial abuse of the bankruptcy system based upon the totality of the circumstances. Or convert to repayment plan in Ch 13 or Ch 11 if Ch 7 constitutes abuse

There is a presumption that when a debtor files bankruptcy it is not a substantial abuse.

Substantial Abuse Test

Post-2005 Amendments

The general push of the 2005 amendments is to force debtors whom we suspect could repay some of their debts into filing a CH 13 case. How?
§707(b) was amended to give rise to a presumption of abuse of CH 7 when it can be proven that a debtor has enough disposable income to file a CH 13 plan. This proof depends upon a calculation laid out in 707(b) called the “MEANS OR THRESHOLD ELIGIBILITY TEST.”

Substantial Abuse Test

You have to know the debtors standard monthly income (based off of avg. of 6 months)
Multiply that by 12 to get current annual income
Once we get that, we compare the income to the statistical median income
If the debtors current income is below, the debtor can file C7 w/ no substantial abuse

See summary on pg. 42

If it is above, we go to the means test:

Monthly income
Minus governmental expenses
Minus secured payments
Minus care of dependent
The amount left over is the amount you should be paying to your creditors/ month

How much money should be left over to force them into C 13?

Formula: greater than 187. then the debtor cannot file. But if it is below 109 you can
Anything b/w: multiply by 60 determine whether it would pay 25% of the non priority of unsecured debt. If so, the debtor fails the means test and is barred b/c of presumption of abuse of the bankruptcy system

Filing a Petition and Debt Counseling

Order for Relief- once you file for a petition, the bankruptcy court has control over debtor’s assets. With your petition you have to file schedules- if you fail to do so, congress in Vapca, allows a dismissal of your case

– In re casta 2009-where the 1st cir ct held that the debtor shall file or be dismissed in 45 days unless the judge enters a nunc pro tunc order ( means now for then) -an order entered now to change things back then- basically saying th

We are unsure about why not against charities

General Points:

May a secured creditor count as one of the petitioning creditors? Yes, as long as they have a bona fide claim going to the dispute
What does it mean to say not paying your debts as they come due? There is no bright line rule. It is taken on a case by case and takes the amounts of the claims paid verse the amounts of claims unpaid.

ex: Lets say the debtor has 10 debts and is paying 9 of 10 on time, but the largest of debts he is not paying. Are they paying them as they come due?

-There is no bright line rule in this case

What if you are paying the one large creditors but not the rest of the creditors?

– There is no bright line rule

Is the creditors claim subject to a bona fide dispute? See Pg 56

Consider the nature of the dispute
the extent of the evidence and allegations presented in support of the creditor’s claim and in support of the debtor
Whether the creditors claims and debtors contrary claims are made in good faith and w/o fraud or deceit
And whether the balance of the interest of the creditor outweigh those of the debtor.

Debtor’s Eligibility for Relief

Chapter 9- a reorganization statute

• Only available to insolvent municipalities that intend to adjust their debts under a plan

• Must be authorized under the applicable state law to initiate the case

Chapter 12- Family Farmers and Fishermen

• Shouldn’t be allowed for large corporate farmers, only families (even it thery are wealthy w/ large biz interest)

• Sec 109 f provides that only a family with regular annual income may be a debtor

• Extremes excluded by the law

Individuals and Chapter 13 –see §109(e) for up-to-date values

• only living human beings can file

• In order to file you must be an individual and cant owe too much money

• Chapter 13 debtors must owe less than $307,675(336,900) of noncontingent, liquidated, unsecured debts and less than $922, 975 (1,010,650)on noncontingent, liquidations, secured debts

– Congress would rather those with a lot of debt file chapter 11 cases

Most Everyone Else and Chapters 7 and 11

• No requirement to show insolvency

• Chapter 7=(all persons can file c7)- (individuals who cannot pass the means test + railroads+ domestic insurance companies & banks+ foreign insurance companies & banks)

• Chapter 11=11 all C7 debtors + railroads -(stockbrokers &n commodity brokers)