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Bankruptcy & Creditors' Rights
Wayne State University Law School
Ruskin, David W.

Bankruptcy Outline

Ruskin, Spring 2011

1. Bankruptcy Basics

a. Bankruptcy’s purpose is

i. to give a debtor a fresh start

ii. gives creditor’s equality of distribution; not a race to a courthouse

1. Creditor’s rights are normally based on state law

2. First in time, first in right

b. Sources of Bankruptcy Law

i. Title 11 in Constitution authorizes bankruptcy

ii. Federal rules of bankruptcy law developed by Supreme Court

c. State Law Debt Collection

i. Default occurs

ii. Creditor sues in state court, becomes judgment creditor

iii. Judgment Creditor can place lien on assets, garnish, repossess property

1. Once property located

2. Obtain Writ of Execution: directs sheriff to seize and sell whatever assets of the debtor it specifies

3. Obtain Writ of Garnishment: collect intangible assets, obligations owed to debtor by a third party

a. Can only garnish up to 25% of gross earnings

iv. State law exemptions- can make it such that certain property cannot be levied or partly levied

d. Security Interests

i. Consensual lien placed on property of the debtor

1. Gives the creditor the right to seize upon default

2. No need to obtain a judgment

ii. PMSI- lien used to furnish credit to purchase the item

iii. Perfected Security Interest- lien recorded

e. Characters in Bankruptcy Code

i. Debtor- can be an individual, corporation, partnership, municipality

1. Ch 7- can’t be a railroad, insurance company or bank

2. Ch. 9- an insolvent municipality, authorized to be a debtor by state law

3. Ch 11- a railroad, or person eligible under Ch 7

4. Ch 12- family farmer or family fisherman

5. Ch 13- an individual with regular income, subject to debt limits

ii. Creditor- multiple types of creditors

1. Pre-petition, post-petition

2. Secured , unsecured creditors

3. Involuntary , voluntary creditors

4. Government creditors

iii. Bankruptcy Court- bankruptcy court is a federal court

1. Proceedings are conducted without a jury, unless parties authorize a jury trial

iv. Trustee

1. Chapter 7 and 13 cases are administered by trustee

a. §323(a)- trustee administers the bankruptcy estate

b. No trustee for Chapter 11; debtor-in-possession

2. Trustee represents the debtor’s unsecured creditors

v. Experts- accountants, real estate agents, lawyers

1. Fees may be paid before creditors

vi. US Trustee- agency within the justice department

1. Oversees and appoints bankruptcy trustees

f. Prior to filing for bankruptcy, debtor must undergo Credit Counseling

i. §109(h)- must have completed the course within 180 days of filing

ii. In Re Talib- §109(h)(1) requires debtor to receive credit counseling during the 180 days prior to filing under any chapter of Title 11

1. Waiver of Credit Counseling, §109(h)(3)

a. Exigent circumstances that merit waiver of prepetition credit counseling

b. Debtor requested credit counseling from approved agency and was unable to obtain services during the 5 day period beginning on the date of the debtor’s request

c. Be satisfactory to the court

g. Life of Bankruptcy Case:

i. Petition filed: Form 1 and Schedules

1. Petition becomes Order for Relief, §301

2. Bankruptcy Estate is created

3. Automatic Stay is issued upon filing, §362

ii. Notice is given to parties listed on forms, §342

iii. Meeting of creditors occurs, §341

2. Bankruptcy Estate, §541: trustee tries to increase the size of the estate

a. §541(a)(1)- contains all of the debtor’s legal and equitable interests

i. All legal or equitable interests the debtor has as of the commencement of the case

ii. Debtor’s non-exempt assets as transferred to the bankruptcy estate

1. Payments to creditors are made from the estate

iii. Trustee takes over the debtor’s interest in property once the petition is filed

b. Property included in bankruptcy Estate; §541(a)(5)

i. Things acquired thru a will, within 180 days of filing petition

ii. Money acquired as a beneficiary of a life insurance policy

iii. Jointly owned property that the debtor has management or control over

iv. Property settlement with debtor’s spouse

v. Money from something sold pre-petition but money received post-petition

1. Lottery ticket purchased 1 day before filing, wins the day after filing is estate property

vi. Any interest acquired by the estate post-petition

vii. Interests created by a contract that does not allow for the transfer of the interest

viii. License with a legal value, i.e. liquor license, are property of the bankruptcy estate

ix. Right to purchase season tickets:

1. Some courts hold that it is conditional so not a property right, other hold that it is a property right

x. Tax Refunds: refund from portion of year that fell pre-petition is included on a pro-rata basis

xi. Contingent Rights to Payment

1. In Re Ryerson- §541(a) bankruptcy estate includes all legal or equitable interests of the debtor in property held as of the commencement of the case.

a. Termination payments represent value for years of service completed prior to bankruptcy

2. Groves- court cannot force a debtor to quit their job to get termination payments; the right to termination payments is a contingent right that is not vested until termination, so not included in the bankruptcy estate.

a. In Re Clay- interest in an executor contract does not automatically vest in the bankruptcy estate at the time of filing

i. May become part of bankruptcy estate if trustee assumes the contract, §365©(1)(A), (B)

c. §541(b)- property excluded from the bankruptcy estate

i. Post-petition earnings from post-petition services

ii. Child support payments

iii. Money put into an Education IRA

1. State tuition programs

to sell goods to debtor

6. Criminal proceedings against debtor

7. Demand that co-signor pay pre-petition debt

8. Perfect lien within 30 days of purchase

9. Pursuit of a DSO: domestic relations matters

10. Garnishment of post-petition wages, for Chapter 7

a. Not permitted under Chapter 13

11. Assessment of tax on debtor’s real estate

12. Eviction pursuant to a judgment for possession pre-petition

a. But cannot touch estate property

13. §366 utility provider may ask for reasonable deposit

b. Exceptions to Automatic Stay, §362(b)

i. General Exceptions

1. Collection of post-petition spousal and child support against non-estate property, §362(b)(2)

2. File UCC continuation statement, §362(b)(3)

3. Lessor of nonresidential property to obtain possession of property if lease expired before petition, §362(b)(10)

a. Lessor obtained judgment for possession pre-petition, §362(b)(22)

4. Filing proof of claim

ii. §362(b)(20), (21)- prevent undermining certain commercial markets or corrupting certain financial products

iii. Debtor files petition after having previous bankruptcy case dismissed or stay lifted in previous case, §362(b)(20), (21)

1. Prevent a debtor who constantly files for bankruptcy

iv. Certain Governmental actions are exempted

1. Criminal proceedings are not stayed, §362(b)(1)

2. Exercise of police, regulatory, taxing, accrediting body, licensing board and stock exchanges are not stayed, §362(b)(4), 9, 12-16, 18, 25, 26, 28

a. Government can obtain money judgment but not enforce it

c. Duration of Stay

i. §362(c) duration of stay

1. Stay is lifted when property ceases to be property of the estate

ii. Action against debtor is permitted when the case is closed, dismissed, or discharged

1. Ch. 7, stay ends 90 days after filing

a. Discharge normally received by then

b. §727- discharges the debtor from debts

2. §523- non-dischargeable debts, creditor permitted to try and collect after stay is lifted

iii. §362 protects debtor during bankruptcy

iv. §524 protects debtor after bankruptcy

1. Discharge is a permanent injunction to prevent creditor from going after debtor for discharged debt

v. §362(e)- 30 days after request for relief the stay is terminated with respect to party in interest

d. Lifting of Stay, §362(d)