Select Page

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

BANKRUPTCY OUTLINE
Czar
Spring 2007
 
 
 
I.                   THE NATURE, SOURCE, & POLICIES OF BANKRUPTCY LAW
 
A.      Models of Bankruptcy
1.   Liquidation (Straight Bankruptcy) –
            a.   Chapter 7
            b.   Bankruptcy debtor turns over all of his nonexempt assets to the
Bankruptcy Trustee (BT) who the sells them and gathers the proceeds from the sale and then distributes it to the debtor’s creditors.
c.       In exchange for the turnover of assets, debtor receives a discharge of his debts.
2.      Re-Organization –
a.       3-4 chapters of the Bankruptcy Code deal with this
                                                                          i.            Mainly Chapter 11 and 13.
b.      Debtor is permitted to keep his assets, and additionally, receives a discharge if he complies with certain requirements.
c.       Debtor must submit a plan of reorganization under which they will operate for the next 3-10 years.
                                                                          i.            Plan must provide a stream of payments to creditors such
that those creditors receive at least what they would have received had the debtor liquidated today. (Ch. 7)
 
B. Federal Nature of Bankruptcy Law
1.   Bankruptcy law is federal b/c Congress is given the power to establish uniform laws for the Bankruptcy through the Constitution.
2.   The Code uses the term “nonbankruptcy law” to describe the generally prevailing law of the jurisdiction in which a bankruptcy case is filed.
3.   Under the Supremacy Clause, bankruptcy law preempts state law to the extent that they are inconsistent.
a.   However, because in many respects state law is incompatible with bankruptcy law, it is preserved in bankruptcy and forms the basis of rights that are protected and upheld.
4.   Bankruptcy courts are Article 1 courts, and therefore bankruptcy judges are Article 1 judges as opposed to Article 3.
a.   do not have life tenure
b.   roughly the same status as U.S. magistrate judges
c.   they are arms of U.S. District Courts
d.   the order of reference is a standing order in all district courts which automatically refers all bankruptcy cases to bankruptcy courts – i.e. you file at the bankruptcy court clerk’s office.
 
C. The Goals and Policies of Bankruptcy
1.   Bankruptcy is remedial in nature.
a.   Often, bankruptcy relief is sought only after the debtor’s economic affairs have deteriorated to the point of collapse.
b.   Therefore, bankruptcy’s purpose is to manage financial distress and to do the best job possible of preserving what can be saved. Not necessarily to give creditors their full entitlement.
2.   Protection of Debtor and Creditor Interests
a.   Idea of bankruptcy serves 2 purposes: creditor protection and debtor relief.
b.   Helps creditors by providing an evenhanded and controlled environment for the settlement of the debtor’s affairs and distribution of his assets.
c.   It provides a haven for the straightened debtor, affording relief from the pressure of financial failure.
3.   Collective and Evenhanded Treatment of Creditors
a.   Bankruptcy is handled by an uninterested administrator.
b.   Though most creditors are not paid in full, they share equitably in the fund. (doesn’t necessarily mean they are all paid the same)
4.   Preservation of the Estate
            a.   BT is given substantial powers to investigate the debtor’s affairs, to
recover dispositions of ppty in fraud of creditors, to reveal hidden
assets, and to resolve the affairs of the debtor in a way that best
enhances the value of the estate.
5.   The Debtor’s “Fresh Start”
a.   goal of long-term rehabilitation.
b.   Provided that the debtor has complied with the Code’s requirements and has surrendered executable assets of sufficient future income for distribution to creditors, the debtor is entitled to a new beginning, unburdened by the unpaid balance of prebankruptcy debts.
6.   Minimal Interference with Nonbankruptcy Rights
a.   Generally, the treatment of such rights under the Code is intended to affect them only as much as necessary to further the aims of bankruptcy.
7.   Efficient Administration
8.   Preference for Reorganization and Debt Adjustment.
 
II.                ELEMENTS COMMON TO CONSUMER BANKRUPTCY
 
A.      Deciding to File
1.      Debtor must fill out a series of documents and file them with the bankruptcy court; bankruptcy proceedings are court proceedings.
2.      Most important document is the bankruptcy petition.
3.      Along with the petition must be appended a number of schedules, which are attachments to the petition.
4.      Must pay a fee in order to file for bankruptcy
5.      Anyone that assists in the filing of bankruptcy petition is subject to a duty of reasonableness.
a.   This means that they have the responsibility to look into things that they may believe are suspect.
 
B.       The Estate (§541)
1.      At the moment a bankruptcy petition is filed, and estate is created by operation of law.
a.   The bankruptcy estate is a new legal entity separate from the debtor.
2.      Bankruptcy is in a sense a financial demise, which creates an estate consisting of all the interest in ppty previously owned by the pre-bankrupt debtor.
3.      §541: defines the bankruptcy estate as all ppty interests (both equitable and legal) of the debtor as of the filing of bankruptcy.
a.   §541(a) states what is included in the estate, and §§541(b) and (d) make some specific exclusions from it.
b.   ppty of the estate includes more than just tangible ppty.
i.          541(a) captures intangible ppty rights or contingent ppty
interests such as the ability to file a lawsuit that has yet to
be file

applicable nonbankruptcy
law” by excluding ppty from the estate.
(a)     basically says that when you put money into a trust which protects you from getting a lot of money and spending it, if a debtor files bankruptcy and they had a spend thrift trust, the money does not become part of the estate.
                                    ii.         ERISA – federal government has set up a way for
individuals to set up retirement accounts similar to a
spendthrift trust.
(a)     “ERISA qualified” retirement plans are exempt from the bankruptcy estate.
(b)     see In re Orkin
(c)     NOTE: Under a 2005 US SC case, the Court held that most types of IRAs will be exempt from the ppty of the estate.
5.   Abandonment of Ppty by Trustee –
a.   any property of the estate that the trustee considers of no value or no benefit to the estate may be abandoned or given back to the debtor or whoever has the interest in the ppty by the trustee. (ex. pets)
b.   the trustee’s abandonment of burdensome ppty is intended to benefit the estate by disposing of ppty that will drain the estate’s resources.
c.   554(c) provides that at the close of the case, ppty that was inclueed in the debtor’s schedule but was not administered in the estate will be abandoned to the debtor.
6.   §541 makes it clear that the ppty becomes ppty of the estate and is likewise turned over to the trustee or its value must be accounted for no matter where it is located or who it is held by.
a.   Even a creditor with an interest in ppty is obliged to relinquish possession to the trustee. If the creditor wishes to recover the ppty so that the interest can be enforced, application must be made for relief from stay.
b.   ex. – you have a possessory right to a car, still owe the bank money, this interest transfers to the trustee.
 
C.      Participants in Bankruptcy
1.   Bankruptcy Court –
a.   presided over by a bankruptcy judge
b.   routinely deals as a court of first instance
c.   not an independent, autonomous arm of the federal judiciary but is statutorily described as a “unit” of the U.S. district court.
            i.          its powers arise as a result of reference from the district
court, and it exercises its judicial function subject to the
ultimate control of that court.
2.   The Trustee –