I. Bankruptcy Basics
A. Collective procedure for all creditors together as opposed to state proceedings which is every creditor for themselves (very expensive and time consuming)
B. Federal Jurisdiction means one single forum, one universal law throughout country designed to control assets and realize creditors behalf
C. Debtors required to file elaborate disclosures of assets to save time and expense of creditors
D.Benefit to debtors:
1. Discharge of debts
2. Fresh start
3. State interest of keeping people off welfare and keeps them productive
4. Safety net
E. Consumers and Businesses treated differently
1. Consumers = fresh start view
2. Businesses = financial view which is a more balanced approach
F. Liquidation v Reorganization
1. Liquidation = Chapter 7
a. Available to both consumers and businesses
b. Financial death
c. Surrender of all property
2. Reorganization = Chapter 13 (Individuals) & Chapter 11 (Businesses)
a. Allows assets to be retained in exchange for agreement to pay out future income
b. Allows for better terms on debt already owed
G.The Bankruptcy Case
1. Commencement of a case 541(a)
a. Creates an Estate of all property owned by debtor wherever located and by whomever held
b. Estate is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case
2. Property of Estate does not include 541(b):
a. 4 step analysis
i Is the item in question “property”?
ØProperty interest v. expectation or hope
Þ Real and personal?
Þ Tangible or intangible?
Þ In debtors possession or in others possession
ii What is the debtor’s interest?
ØIncludes contract rights and fractional ownership interests
iii Did debtor have an interest AS OF the commencement of the case?
iv Do any of the exceptions in 541(b) apply?
ØG/R: All property is brought in and sorted out by the Trustee and the party claiming an interest in it that the property should not belong
Þ Policy behind this is to ensure debtor does not construe rule to avoid bringing in property
ØExceptions include:
Þ :Future wages – 541(a)(6)
Þ Spendthrift trusts – 541(c)(2)
Þ ERISA accounts – Supreme Court case
Þ Liquor License – 2 factor test
§Transferability
à If it says nontransferable some courts respect as a stated policy
à With things like Broncos tickets the court may say transferable in fact b/c people do it all the time
§Public Policy
à Interest involved in the identity of the license holder
à May bring up public policy concerns like qualifications of holder
3. Invalidation of transfers
a. G/R: invalidates restrictions on transfer of debtor’s property
b. Caveat/Exception: 541(c)(2)
i A restriction on the transfer of a beneficial interest of debtor in a trust that is enforceable under non-bankruptcy laws is not enforceable in bankruptcy
4. Estate includes property debtor acquires or “becomes entitled to acquire within 180 days after petition by:
a. Bequest, devise or inheritance
b. Property settlement or divorce OR
c. As beneficiary of life insurance
5. TIB = Trustee in Bankruptcy
a. Has special duties to unsecured creditors
b. Gathers everything, sells it, scrutinizes everything, challenges everything
c. Fees are paid based on the amount of money dispersed to unsecured creditors
d. Typically local Bankruptcy attorneys
6. UST = United States Trustee
a. Monitors fraud
b. Auditor of TIB’s
c. Monitors Bankruptcy courts and appoints TIB’s
d. Don’t do Bankruptcy cases
e. Government officials
H.Automatic Stay
1. Prohibitions 362(a)
a. Need to identify who act is directed against and who is protected
i (1), (2), (6), (7), and (8) apply to debtors
ii (2), (3), and (4) apply to property of estate
iii (5) applies to property of debtor
b. What acts are barred?
i (1)( and (2) cover most litigation efforts
ØStays filing suit
ØBans enforcement of judgment
ii (6) bans any act to collect
Øincludes letters or telephone calls to debtors
iii (3) and (4) stays secured creditors actions
Ømeans SC can’t obtain or enforce a lien
2. Exceptions 362(b)
a. PMSI perfections per state grace periods
b. Landlords can still enforce if they have obtained an order BEFORE FILING of case
i 362(b)(22) & 362(b)(23)
ØNo stay will be granted if endangering property or using illegal drugs on premises
c. Criminal prosecutions not stayed
i 362(b)(1)
ØMake sure it’s not really a collection proceeding though
Þ EX: bad check prosecution is typically considered a collection tactic by the DA and the court can use contempt powers to punish prosecutor and stay the collection process
d. Alimony & Child Support
i 362(b)(c)
ØDoes not operate as a stay to collect for domestic support based on property not of the estate
Þ Includes
§Post petition wages 362(b)
§Pre petition wages IF failed to pay from them 362(c)
e. Utilities are stayed for past collection, but not future collection
i 366(b) allows utilities to be cut off for non payment after commencement of case
ØThis means debtor needs to make assurances of payment
Þ EX: cash deposit, letter of credit, etc within 20 days or utilities can cut debtor off
3. Length of Stay 362(c)(2)
a. In effect until EARLIER of:
i Case closed
ii Case dismissed
iii Discharge granted or denied
4. Violations of the Stay
a. Sanctions for willful violation 362(k)
i Actual damages
ii Costs
iii Attorneys fees
iv When appropriate punitive damages
v 105(a) gives contempt power to court to impose injunctions, fines and imprisonment
vi Acts against the stay can be UNDONE by the court through giving it back
5. Automatic Stay is self executing
a. Gives breathing room
b. Take the immediate pressure on the debtor off
6. Scope
a. Very broad
b. Stays most administrative AND judicial proceedings
c. Stays pre-filing judgment enforcements
d. BUT stays ONLY PROPERTY IN THE ESTATE
i All property NOT in the estate is free for creditors to continue to pursue
ØEX: Future earnings
e. STAYS ALL ACTS TO COLLECT: BROAD INTERPRETATION
I. Filing Requirements 521(a)
1. Failure to file ALL information required under (a) within 45 days after date of filing results in case being automatically dismissed NO EXCEPTIONS! – 521(a)(1)
2. Other concerns
a. Non-listed debts may be non-dischargeable 523(a)(3)
b. False statements can resulting denial of discharge or perjury prosecution 727(a)(4)
c. Attorney certification 707(b)(4)(c)
i Performed reasonable investigation
ii Petition well grounded in fact
iii Certify no knowledge after inquiry that information is incorrect
3. Specific requirements
a. Credit counseling certificate 521(b)(1)
i Can be done in an hour online
ii Exceptions 109(h) (not really though due to internet availability)
ØIf none are in the area, exigent circumstances, military zone
Þ Don’t file and get waiver later, MUST DO
iii Must be done within 6 months of filing 109(h)(1)
ØVery low standard
ØMake sure debtor gets correct certificate
Þ Jurisdiction specific as to certificate
b. Official Form One 521(a)(1)
i List of creditors
ii Schedule of assets and liabilities
iii Copies of payment advices (pay stubs for last 60 days)
iv Statement of amount of monthly net income
v Statement of financial affairs
vi Statement of expected increases or decreases of income
vii Last 3 years tax returns, etc
4. Timing of filing required filings
a. Must be filed within 45 days of filing initial form one otherwise dismissed 521(i)(1)
i This means if one pay stub is missing some courts will dismiss
ii Local WY Rules
5. Repercussions if failure to list a debt
a. May make debt dischargeable 523(a)(3)
6. Any false statement may result in complete denial of discharge and open door to perjury charges
b. 1st: Primary consumer debt? YES.
c. Chapter 7 Eligibility Screening Median Income Test: Current monthly income. Pennsylvania. 5 Person household.
i $5600 x 6mo. = $33600
ii x2 for annual for median calculation = 67200
iii Family of 5 in Penn Number is $77167
iv At this point they are ok but if wife is working they will go over if she worked just 1.5 to 2 months as annualized this will put them at roughly $84k. Thus over.
v If its just him stop and go chapter 7. If she worked proceed to means test.
d. Means Test: If above median income we now would have to apply the means test.
i The whole idea here is can they make meaningful payments?
ii Determine monthly expenses under §707(b)(2)(A)(ii-iv):
iii Go to UST website for list of means calculation and expenses that are used to calculate.
iv Thus their combined income per month is $9800 if wife works which is what we are assuming now!!
v Monthly Expenses: 707(b)(2)(A)(ii)-(iv) DEDUCTIONS:
Ø(ii): How to calculate monthly debtor expenses: General deductions.
Þ (I): See handout sheet.(Food / Housekeeping / Apparel / Personal Care / Miscellaneous)
Þ 5 Person family: Total for those categories above: $1762
§Right now in the problem their actual expenses are only $1555. But irrelevant.
§What if they spent more? Discretion by court to get a 5% bump but must justify it R&N.
§Specific Food and clothing category: They are spending $1555. The IRS specific category allows only $1333 so they should ask for the extra 5% bump: R&N justification: Growing children, special diet, his work. Would get them and extra $67. May be worth it.
Þ These are standard bright line deductions. Despite being punitive by IRS in nature.
Þ Charitable contributions: Necessary are allowed here but another line to challenge for additional line 40 for additional contributions you want to challenge. Likely a challenge by Trustee on these. Are they really necessary?
§School expenses: Actual expense up to $1500 (§707(b)(2)(A)(ii)(IV)) max per year, DOCUMENTED, under 18, and R&N and not elsewhere accounted for.
Þ (ii)(I): Health insurance: R&N insurance for debtor, spouse, and dependants.
Þ (ii)(II): Child care: What about a special needs child?
Ø(iii): Secured debt payments: Mortgages/car payments. (I) & (II) Full amounts + adequate protection
ØMortgages: Larger secured debt as owner vs. renter = easier to go chapter 7.
Þ FIRST OFF THIS IS A SCREWED UP SECTION.
Þ Look to sheet. Principal yes. Interest Yes. Insurance(PMI) + Taxes? Maybe? Are you contractually required to pay it? If so likely deductible.
Þ So accordingly it appears you get to deduct the $1600 and it appears from reading the statute you also get:
Þ Allowable local housing and utilities deduction per Montgomery County is $1446.
Þ This is stupid and makes no sense: So as not to double count you subtract the principal and interest debt from the local standard.
Þ So what we do is find out trustee position on what is included in the subtraction from the local standard. (Principal only, principal and interest, or P + I + PMI + Taxes).
Þ Subtract that from the local standard number. If anything left over use full amount of IRS number.
