I.

Lorch_Bankruptcy_Outline_2012 fall
Background on State Law and Debt Collection
A.
Creditors Rights
1.
Rights determined at state level through UCC/contract/tort law
2.
Bankruptcy Code doesnt create creditors rights, just limits/eliminates/or provides mechanism
for enforcement
3.
Secured vs. Unsecured Creditors
a)
Secured creditors (mortgage on real property or security agreement for personal
property/collateral) typically entitled to seize property, sell it, and use sale proceeds to pay
debt owed, returning any surplus to debtor
b)
Unsecured creditorshave fewer rights and options for collection, usually have to
bring civil action, get entry of judgment, and pursue writ of execution or garnishment.
(1)
For Personal property, need to get a writ of execution to enforce collection
after a judgment is docketed.
(2)
For Real Property, the creditor usually must get a judgment on it in the county
where the land is located to get a lien on it, and then record and interest
4.
Secured and Unsecured Creditors treated differently in Bankruptcy because Congress can
abrogate contract rights, but cannot abrogate property rights (takings clause)
1. Stages: (2 needed)
a. Attachment the agreement is in place b/t the parties (security interest, and creditor
has extended $)
b. Perfection when all steps of attachment have occurred AND when filed a financing
statement
c. Priority date (of a consensual security interest) the DATE of filing of the financing
statement (NOT the date of levy). Priority date is ALWAYS the date of filing the
financing statement

STEP
Creation
Attachment

JUDICIAL LIEN
Writ delievered to Sheriff
Sheriff levies on property

Perfection

Sheriff levies on property, or

control of possession by officer
of the court
Date writ is delivered to sheriff

Priority Date

CONSENSUAL LIEN
Execution of security agreement
Debtor Obtains rights & creditor
gives value
Financing statement filed +
attachment
Earliest of date of perfection or
date of filing

d. HYPO A
i. Creditor 1 Sues Debtor
1. Obtains a Judgment on April 1
2. Delivers Writ to the Sheriff on April 10
3. Sheriff Seizes Copier on April 15
ii. Creditor 2 Makes Loan to Debtor
1. Debtor Executes Security Agreement Giving Security
2. - Interest in Copier on March 15
3. Creditor Transfers Funds on March 20
4. Debtor Takes Title to Copier on March 20
5. Creditor Files Financing Statement on April 16

iii. Creditor 1 has priority b/c priority date is before Creditor 2s. Priority Date for
1 is april 10 (when in Sherrifs inbox) and attachment is April 15 th. For #2,
priority date is April 16
e. TO TAKE AWAY: The expedient filing of financing statement is ALWAYS best
II. Bankruptcy Basics
A.
Primary Goals/Concerns of Bankruptcy:
1.
Providing a fair and orderly distribution to creditors
a)
Maximizing recovery of creditors as a whole
b)
Treat creditors equally
2.
Giving debtors a fresh start, and the ability to retain the going concern value of his/her business
if possible/applicable
a)
Persuade people to engage in economic activity and take risks, wont be punished too
severely if doesnt work out
B.
The Bankruptcy Solution
1.
Bankruptcy Code: Title 11provides substantive and procedural law governing bankruptcy
liquidation and reorganization cases
a)
Chapters 1, 3, and 5 cover general material that applies to all kinds of bankruptcy
cases, Chapters 7, 9, 11, 12, 13, and 15 relate to specific types of bankruptcy
proceedings/relief
2.
Bankruptcy Court: Congress has authorized federal district courts to refer all cases and
proceedings related to bankruptcy to bankruptcy judges [28 U.S.C. s. 157(a)], so bankruptcy courts
perform the trial court function except when the law specifically limits that role and reserves
certain powers to district courts
3.
Judges are appointed for 14year term, may be removed by judicial council for circuit court and
for incompetence, misconduct, neglect, or physical/mental handicap
4.
Usually no jury (which may not be constitutional)
a)
C.

Appeal of bankruptcy courts decision goes to either district court or Bankruptcy

Appellate Panel (BAP), parties must choose

The Trustee
1.
Chapter 7 cases are all administered by a trustee who represents and administers the
bankruptcy estate created out of the debtors prepetition assets once the petition is filed
a)
Trustees duty is primarily to protect debtors creditors by:
(1)
Gathering/managing/maintaining property
(2)
Selling property for as much as can reasonably be obtained
(3)
Distributing proceeds
(4)
Examining claimed exemptions
(5)
Objecting to debtors discharge if necessary/applicable
(6)
Scrutinizing claims filed
b)
Interim trustee appointed by U.S. Trustee after entry of order for relief from a panel
of private trustees; unsecured creditors can replace with a qualified elected trustee of own
choosing with a majority vote at the first meeting of the creditors
2.
Chapter 13 cases also administered by trustee, but with more limited duties
a)
Duties:
1 Review debtors payment plan to ensure complies with Code requirements
(1)
Acts a conduit through which payments are made to creditors

b)
Appointment: usually one standing trustee in each district and creditors have no choice
Chapter 11 reorganizations generally dont have trustees; debtor becomes debtor-inpossession and is given most powers of a trustee
Debtors Responsibilities
1.
Chapter 7: debtors role is limited, individual debtor has to file a statement indicating what
intends to do with collateral for any secured claim and must be prepared to respond to objections
regarding exemptions or discharge; business debtor even less of role, cant receive discharge and
generally no exemptions
2.
Chapter 13: debtor has to remain gainfully employed or financially productive since creditors
paid out of postpetition earnings usually
U.S. Trustee
1.
Responsible for supervising administration of bankruptcy estatessupervising all Chapter 7,
11, and 13 cases and actions of trustees serving those cases
2.
Appoints members of the panel of trustees for each judicial district
3.
U.S. Trustee is a presidential appointee for a region to represent the govt at every stage of the
process and has an absolute right to be heard at every stage
3.

D.

E.

F.

Creditors
1.
Secured Creditors:
a)
Ch. 7generally will foreclose on collateral, bankruptcy process might delay, but
doesnt otherwise interfere
b)
Ch. 13typically will continue to receive payments on secured obligation according to
original/modified payment schedule
c)
Ch. 11debtor will often agree to secured creditors terms because needs consent on
plan of reorganization
2.
Unsecured Creditors:
a)
Ch. 7represented by trustee, very little involvement
b)
Ch. 11oversight of debtor is left to committee comprised of creditors w/ largest
unsecured claims
G.
Other Affected Parties:
1.
Co-Owners: bankruptcy generally only deals with debtors rights in property, but often not
possible to have no affect on rights of co-owners
2.
Co-Debtors: bankruptcy generally has no affect on liability of co-debtors
3.
Prepetition Transferees: may have to return to estate
4.
Equity Interest Holders: is debtor undergoing Ch. 11, the owners of the debtor (interest holders)
have a role in remaining in control of debtor in possession and trying to negotiate a paln of
reorganization that will allow them to retail all or a portion of their equitable stake in the debtor
5.
Employed Professionals: trustee, debtors in possession, and certain creditors committees may
(w/ court authorization) employ attorneys, accountants, and other professionals at expense of estate
must generally be disinterested and free from adverse interest
H.
Bankruptcy timeline
a. Petition date
a. Estate is formed 541
b. Automatic stay begins 362 (collection action frozen)
b. Trustee is appointed
a. Meets w/ debtor, figures out whats in the estate. Meeting of creditors 341
b. Collects claims
c. Pays claimants using the property of the estate (after selling it)
d. Payment pro rata
c. Discharge of debts

I.

Consumer Credit Counseling

1.
s. 109(h) has recently made credit counseling a prerequisite to filing for bankruptcy protection
for most individuals
a)
Individual debtor must receive, prior to filing the petition for bankruptcy, certain
counseling during the 180-day period prior to filing in order to be eligible for relief [unless
meets requirements under s. 109(h)(3)]
2.
Reflects growing belief that consumers misuse/abuse of credit cards is what causes many or
most financial problems and that credit counseling can solve problem
3.
Congress envisioned that credit counseling would provide individuals with skills necessary to
lead financially responsible lives, but its evolved into an expensive, draconian gate-keeping
requirement that has prevented many deserving individuals from qualifying for bankruptcy relief
a)
In re Talib: debtor didnt pursue credit counseling in advance of scheduled foreclosure
and couldnt meet the s. 109(h)(3) exigent circumstances exemption, so denied bankruptcy
relief
b)
S. 109(h)(3): debtor exempt from credit counseling for exigent circumstance if:
(1)
Can describe exigent circumstance that merits waiver,
(2)
Debtor requested counseling but was unable to obtain services during 5 day
period beginning on date of debtors request, and
(3)
Is satisfactory to the court
J.
Starting the CasePetition and Schedules
1.
Bankruptcy case begins with filing of petition and schedules identifying debtors name,
address, approximate # of creditors, estimated amount due to them, the total value of debtors
assets, and chapter of Code under which petition filed, and with payment of filing fee
a)
Voluntary petition = order for relief filed by debtor
b)
Involuntary petition = brought by creditors, to grant courts must find that: debtor
qualifies for relief under specified chapter, debtor is not paying debts as they become due,
and petitioning creditors qualify in number and in amount and type of claim
III. The Bankruptcy Estate
A.
Generally:
1.
Estate is created at the time the bankruptcy petition is filed
2.
Estate determines what is available to creditors
3.
Property of the estate includes all legal and equitable interests of the debtor in property as of
the commencement of the case [s. 541(a)]
B.
Property in the Estate [s. 541(a), (c)(1)]
1.
All legal and equitable interests of the debtor in property at the time the case is commenced [s.
541(a)(1)], except for exceptions in 541(b) and spendthrift trusts in (c)(2)
a. Constructive trusts are exempt from the estate as well
i. Ie: Late child support payments received after filing are held in a trust for the child
ii. In Re Megafoods Stores, Inc - Texas statute places state sales tax in a trust for the state,
not as property of the debtor. Sales tax collected in this case is NOT property of the
estate but is held for Texas as a constructive trust
2.
All interests of the debtor and the debtors spouse in community property at time of
commencement thats under the control of the debtor [s. 541(a)(2)]
3.
Any interest in property that the trustee recovers under s. 329(b) [unreasonable debtor
attorneys fees], 363(n) [avoiding a sale where sales price set by agreement], 543 [turnover of
property by a custodian], 550 [liability of transferee of avoided transfer], 553 [setoffwhere
creditor still owes debtor something], 723 [rights of partnership trustee against general partners]
[s. 541(a)(3)]
a. 542 gives trustee the RIGHT to action in court to recover property of the estate

4.

C.

D.

Any interest in property preserved for the benefit of or ordered transferred to the estate under s.
510(c) [court ordered equitable subordination] or 551 [automatic preservation of an avoided
transfer for the benefit of the estate][s. 541(a)(4)]
a)
Avoided transferssee s. 522, 544, 545, 547, 548, 549, and 724(a)
5.
Any interest in property that would have been property of the estate if such interest had been
the debtors on the date of filing that debtor acquires or becomes entitled to acquire within 180
days after filing:
a)
By bequest, devise, inheritance;
b)
As a result of a property settlement agreement w/ spouse, or of an interlocutory or final
divorce decree;
c)
As a beneficiary of a life insurance policy [s. 541(a)(5)].
6.
Proceeds, product, offspring, rents, or profits of or from property of the estate, except for
individual debtors earnings/wages [s. 541(a)(6)]
7.
Any interest in property that the estate acquires after the commencement of the case [s. 541(a)
(7)]
8.
541(c)(1)] Property becomes property of the estate notwithstanding anti alienation/tranfers.
541c1
a)
Cant be a provision of nonbankruptcy law that restricts / conditions transfers of
debtors interest conditioned on the insolvency or financial condition of the debtor and that
effects or gives an option to effect a forfeiture, modification, or termination of the debtors
interest in property [s. 541(c)(1)]
b)
Restricts/conditions transfers = season tickets, taxi licenses, etc.; so trustee can take
even though says nontransferable [(c)(1)(A)]
c)
Ipso facto clause: Agreement stating that void if party files for bankruptcy is not
enforceable [(c)(1)(B)]
Property not in the Estate [s. 541(b), (c)(2), (d)]
1.
Any power that the debtor may exercise solely for the benefit of an entity other than the debtor
[s. 541(b)(1)]
2.
Any interest of the debtor as a lessee under a lease of nonresidential real property that has
terminated at the expiration of the stated term of such lease before the commencement of the case
and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real
property that has terminated at the expiration of the stated term of such lease during the case [s.
541(b)(2)]
3.
Spendthrift trusts and pension plan benefits [s. 541(c)(2)]
a)
The spendthrift trust if have certain language, debtor can keep this out of the estate.
Otherwise, under 541c1 it becomes part of estate. Language: No interest of the beneficiary
under the trust shall be subject to the claims of creditors or other persons nor to any
bankruptcy proceeding nor any liabilities or obligation
4.
Trust property the debtor administers as trusteelegal, not beneficiary interest [s. 541(d)]
Questionable Pre-petition Property Rights
1.
Tax refunds: most courts imply allocate a tax refund received after petition based on the
proportion of the taxable year that fell pre-petition (calendar day pro-rationing)
2.
Contingent rights: if debtor doesnt have contractual right to a bonus, most courts will exclude
the entire bonus from the estate on the grounds that the hope of receiving it was not a property right
on the date of the petition
a)
In re Ryerson Ryerson had a contract value interest in money to be paid when his
employment contract was terminated. Court found that under 541a1 there is a right to the
money and some should be excluded under 541a6 as money earned after compensation
b) In re Clay- like Ryerson, but b/c contract value couldnt be determined until termination of
employment, the earnings cant come into quantifiable existence until temination. Also, they
cant be divided into pre/post petition earnings until terminate. So NOT is property of the
estate
- no one cites to Clay, but everyone likes Ryerson

c). Must ask: is it a vested contract (one thats enforceable?) or contingent (not enforceable) or
illusory (not enforceable b/c 1 party is held and the other one cn do what it wants). IF
VESTED: more likely to be property of estate
PROBLEM FROM CLASS:
Were the trustee. What can be part of the bankruptcy estate?
1. Parakeet
a. Its property of the estate under 541(a). Note: those things that are of no value to the estate,
theyre abandoned (go back to owner).
b. Parakeet eggs property of the estate
2. Ford Taurus (still subject to a purchase money security interest)
a. Property of estate 541(a) (other property interests dont matter). Car in whole comes to estate,
and trustee decides later how to divide it.
3. Photos of friends
a. Estate property. Doesnt matter if insignificant. Could be subject to exemption still part of
estate, but the debtor may apply an exemption to the property and get it abandoned back to him
4. Tickets to U2 concert
a. Estate property.
5. Shares of monumental inc
a. estate
6. Dividend from monumental
a. Estate. Directly derived from estate property is prop of estate
7. Catchers mitt that he lent to his brother
a. This is a contract right. But as a contract right it is property. SO it becomes property of the
estate. Every contract right of the debtor becomes property of the estate.
b. Note: property right is a grant of the bundle of rights that comes with property. This is an
agreement that the brother will convey piece of property. Contract right usually dont survive
bankruptcy, but property rights do.
8. Debtor is the trustee of trust for his niece
a. 541d not property of estate
9. Salary receive hours after filing
a. Part of estate. If has 1 week prepetition labor and 1 week postpetition labor, divide it. 541(a)
(6) provides that any earnings after commencement of proceedings are NOT property of estate
(ONLY FOR INDIVIDUALS). Also includes proceeds of contracts
E.
Recovered Property
1. Be sensitive to transfers made by debtor before the petition date:
o Run it through 7 elements of 547B to see if preferential. If it is, then look at whether defenses
apply. Also look at the transfer to determine if has indicators of being a fraudulent transfer.
Look further back for fraudulent transfers up to 2 years before petition date under 5482
year statute of limitations-- or 4 years before petition date under 544b and UFTAshorter
statute of limitations. (90 days for preferential 1 year if preferential to insider).
1.
Trustee has broad power to require any entity that possesses property of the estate to turn the
property over to the trustee [s. 542(a)]
2.
Trustee can include recaptured property that the debtor previously transferred away or which a
creditor previously seized in the estate [s. 541]
3.
Two of most important types of transfers that bankruptcy trustee is empowered to avoid are
Preferences and Fraudulent Transfers
4.
Preferences: designed to undo certain prebankruptcy transactions that frustrate the bankruptcy
distribution scheme, allowing trustee to avoid a transfer and compel an already paid creditor to
return the money received and reinstating debt [s. 547]
a)
Elements of an avoidable preference [s. 547(b)] :
(1)
Transfer of an interest of the debtor in property [transfer defined broadly in
s. 101(54) as the payment of money to another person. Transfer need NOT involve
all rights to a particular piece of property]

a. Transfer occurs upon attachment of the lien IF perfection of the lien occurs
less than 30 days after attachment
b. Remember, for attachment to take place you need: value given, debtor must
have rights, and the security agreement must have been signed (any order, but
date of 3rd event sets attachment)
(2)
To or for the benefit of a creditor 547b1
(3)
On account of an antecedent debt [debt must have arisen prior to preferential
payment] 547b2
(described below)
(4)
Made while the debtor was insolvent 547b3
(a) insolvent defined s. 101(32)negative net worth (liabilities > assets)
(b) debtor assumed to have been insolvent for the 90 days preceding
bankruptcy filingss. 547(f)]
(5)
Made within 90 Days (or One Year to an Insider) 547b4
(6)
That enables the creditor to receive more than if the transfer had not been
made and the debtors assets are liquidated under chapter 7 547b5 [requires proof
that creditor benefited from transfer, harder to accomplish in Ch. 11, but as
general rule any payment by an insolvent debtor to a non-priority unsecured
creditor will have a preferential effect]
b)
Note: there is no intent requirement for preferences
c)
At beginning of June, Dickingson had $6000 in nonexempt assets, 10k in liabilities
($4000 owed to Cummings). D transfers $2k to Cummings .
Look for Assets, Liabilities, and claims
Assets:
$6000 -> $4000
Liabilities:
$10,000 -> $8,000
Claim (Cummings) $4000 -> $2000

Must figure out what Cummings would have gotten if the preferential transfer hadnt
occurred.
10,000/6,000 = 60%. Had they not gotten the pay out, they would have gotten $2400.
d)
The Nine Defenses to Preference Actions [s. 547(c)]
Three defenses are related to secured claims. 547(c)(3), (5) & (6). 547(C)(1) also used
almost exclusively by secured creditors
Affirmative defenses can all be defeated if theres evidence that the creditor was involved
in coercive dealingsthreatening foreclosures, etc.
1 De Minimis Transfers:
a
De Minimus Consumer Transfers: transfer is only avoidable if the
aggregate value of all property transferred is worth $600 or more [s. 547(c)
(8)]
(a) De Minimis Nonconsumer Transfers: only avoidable if exceeds $5,475
(inflation adjusted) [s. 547(c)(9)]
(2)
Spousal & Child Support Payments [s. 547(c)(7)]
a. 1014a defines DSO Alimony or maintenancefor child, spouse, etc.
(3)
New Value Defense: insulates from preference avoidance payments to the
extent that theyre followed by a grant of new value (ex. revolving line of credit) in
90 day period [s. 547(c)(4)]
(a) Most important of defenses
(b) Instead of demanding full money from creditor, give creditor benefit
for each time it provided new value and helped debtor continue to operate.
(c) This rule reduces liability for prior transfers, not latter
(d) cannot reduce liability below zero
(e) advise clients to get payments in advance or at least get
contemporaneous exchange
(4)
Contemporaneous Transaction [s. 547(c)(1)]

a. This is the most difficult defense to prove and understand.

b. You must show 2, then a or b: debt incurred by the debtor and creditor in their
normal business roles AND
a. transfer made in the same manner as the parties payment history
before the preference period
OR
b. Transfer made according to the standards of the industry
c. Policy: dont want creditors to have to run a credit check every month
d. Must show that there was no antecedent debt.
e. Timing:
a. Value: loan, delivery of collateral by SP
b. Attachment: vaue+rights+security agreement
i. Look at when 3rd happens (value given, debtor has rights, sign
security agreement)
c. Perfection: Attachment, Filed
i. Whenever the 2nd thing happens
d. Transfer:
i. Occurs at attachment if perfection is within 30 days.
ii. Occurs at perfection if perfection happens more than 30 days
after attachment
iii. THEN: determine time b/t transfer and when value is given.
B/c there is time b/t transfer and value, this is on account of
antecedent debt
e. In order to determine if there is antecedent debt
f. To determine if there is antecedent debt:
a. Value must occur before transfer. Judge time b/t perfection and
attachment. If over 30 days, then cannot use contemporaneous
exchange defense.
b. Example 1:
i. 1. Filing, 2. SA, 3. Value given, 4. Rights
ii. Attachment and perfection occur at step 4
c. Example 2:
i. 1. Security agreement signed
ii. 2. Then value given
iii. 3. Rights arise in collateral (attachment!)
iv. 4. Then file (perfection)
v. Is there antecedent debt? Yes. Value happened before
attachment.
d. Problem 6-8 (213)
i. April 1 date value given (made unsecured loan to debtor)
ii. April 1 security agreement signed.
iii. Debtors rights in the collateral? Prob years ago
iv. Attachment: April 1 (value, rights, SA) and perfection April 1
(attachment, filed or recorded)
(5)
Payments in the Ordinary Course of Business [s. 547(c)(2)]:
e. Debt incurred by the debtor and creditor in their normal business roles
AND
Transfer made in the same manner as the parties payment history
before the preference period
OR
Transfer made according to the standards of the industry

a. Try to see when the creditor stopped trusting the debtor: did they pay
before shipment or require a wire transfer
b. In Re Tolona Pizza Products Corp (7th Cir. 1993) (101) Ordinary
business refers to the range of terms that encompasses the practices
engaged by similar firms. Only dealings SO idiosyncratic as to fall outside
that broad range should be deemed extraordinary and outsice547(c)(2)
c. US v. Wolas (SC 1991) Long-term debt payments DO qualify for the
ordinary course of business exemption?
(6)
Improvement of position test 547c5 (218)
1. Defense to preference. NOTE: applies only to perfect security interest in
inventory or receivables
2. FIRST: determine value of all liens arising during the 90 day pre-petition
period.
a. Must go over every account, everything during 90 days. Must add all
of them up
b. Look at size of unsecured claim on 90th day and unsecured claim on
petition date. If there is any improvement (the size of claim has been
reduced), then that amount is what creditor is liable for
c. If no improvement, then there is no preference liability
d. If creditor is fully secured on the 90th day and on the petition date,
there is no preference liability (this is about 90% of situations)
e. Note: secured creditors position is deemed to be improved NOT if its
secured claim is increased but only if its unsecured claim is reduced.
If it improves PARTIALLY, some is protected by 547c5 and some is
preferential
5.

Fraudulent Transfers: when insolvent debtor transfers property without getting a reasonably
equivalent value in exchange (gifts, unequal exchanges, transfers meant to conceal assets or
remove them from the jurisdiction) and delays, hinders, or defrauds one or more creditors.
a)
Big different b/t preferences and fraudulent transfers is the in the preference case we
didnt find any element of disapproval or misconduct
b)
Uniform Fraudulent Transfers Act (UFTA)adopted in 37 states and DC. Remaining
states have their own, nonstandard acts
1 UFTA allows an aggrieved unsecured creditor to sue the recipient of a fraudulent
transfer to rescind the transfer
2 UFTA s. 4(a)(1): ACTUAL fraudulent transfer. deals with transactions done with
actual intent to hinder, delay, or defraud any creditor [true fraudulent transfers]
applies to present and future creditors
(a) This is difficult to prove
(b) Badges of Fraud provide indirect evidence of intent for true
fraudulent transferss. 4(b) : to insider, suspicious timing, secrecy,
transfers on paper w/out change of possession, transfers that place assets in
a foreign jurisdiction
(2)
UFTA s. 5: Constructively fraudulent transfer. Covers transfers for which
insolvent debtor received less than reasonably equivalent value (creditors claim
must arise before transfer in this instance)
a. Available to creditors whose claims arose before the transfer was made
b. No reference to intent, state of mind, or even recklessness
c. Policy: if you are insolvent, you have a duty to your creidtors not to
deplete you estate
(3)
8 (applicable to 4a2 and 5) ( I think this is also 550(a) (b)) Series of Transfers
a. Doesnt matter if 1st transferee acted in good faith, if didnt receive it at value it
can still be taken back (need good faith AND took it at value). If both

c)

requirements met, cant be taken back and cant get it from subsequent
transferees (CHECK THIS)
b. In a series for transfers, with the second transferee, if the transferee took it in
good faith and at value, cant recover and cant recover from subsequent
transferees
UFTA given effect in bankruptcy through s. 544(b) and s. 548
1 S. 544(b) authorizes trustee to use state law to avoid certain transfers within 4
years of when suit brought to rescind them
(a) To use UFTA through 544, trustee has to find an actual creditor and
sue in rel to that creditor
(2)
Trustee can bring a fraudulent transfer action 2 ways:
(a) S. 548 gives trustee express power to avoid certain fraudulent transfers
within 2 years before bankruptcy petition
(b) OR use UFTA (or states) but must go through tortuous to do that:
544b. May use this and sue in state court to recover the fraudulent
transfer. BUT the language that says voidable under applicable law by a
creditor holding an unsecured claim means that he must find a creditor w/
claim outside of bankruptcy law.

6.

Avoiding liens/ secured claims

a. 544 strong arm power
i. b. Two principal part to 544
1. 544a1 primary effect is to invalidate security interests that were unperfected
when the bankruptcy petition was filed
a. also grants the trustee the status of creditor w/ a judicial lien on all the
debtors property
2. 544a3 gives the trustee the status of a bonafide purchaser of all the debtors real
property
a. trustee is conclusively presumed to lack knowledge of the unrecorded
interest (for avoidance purposes)
b. 506a in an undersecured case, we do bifrucation. Theres a secured claim up to the value of the
collateral. Claim above that is an unsecured claim thats treated w/ all the rest
i. with an oversecured claim: dont bifrucate
ii. Equity above the collateral will go to the estate. Trustee is more likely to sell
c. 544a1 gives trustee on behalf of estate, the moment before the petition moment, the rights of the
lien creditor
d. PROBLEM 6-3 p 209 -- Explains 544a1
i. On 2/1, D gave security interest in certain ovens used as equipment to B1. B1 never filed a
financing statement, and thus its security interest is unperfected. On 7/1, D gave security
interest in same equipment to B 2 in return for a loan. B 2 perfected by filing a proper
financing statement the day of transfer. D files Chapter 7. What happens, and who has
priority?
1. First in time is first in right, but perfected always beats unperfected.
2. Because both trustee and bank 2 have perfected claims, bank 2 trumps trustee.
3. Bank 1 didnt perfect, so not in the running
4. Bc gets the claim, trustees claim fills up the rest of the equity, and B1s
unperfected lien, under 544a, is pushed down to an unsecured claim.
5. Note: same result if B1 was a judicial lien. An involuntary lien is treated the same
as a voluntary lien for all situations dealing w/ avoiding the lien
ii. Perfection:
1. Consensual lien Date of filing financing statement
2. Judicial lien automatic on levy; perfected by sheriff taking prop
3. Unperfected security interest always subordinated to perfected security interest

10

F.

4. 1 exception: 9-317 (see pg 208). 20 day grace period after lender of PMSI takes
possession of property to perfect.
a. If this happens past the 20 day period and after the petition date, its a
violation of the automatic stay
b. If this happens within 20 days, but after the petition date, its fine.
iii. SEE ABOVE PREFERENCES 547b2 for more on lien avoidance
Exemptions
1.
Important:
a)
Exemptions only apply to individual debtors, not entities.
b)
Only protect equity in property
c)
Exemptions DO protect against judicial liens
d)
Stackable a category of exemption may be used to carryover to another
category. Can have any color of chips on a piece of property, up to equity.
2.
522b1 an individual debtor may claim exemptions under subparagraph 2 or 3.
3.
Federal exemptions located in 522(d).
4.
522b allows states to opt out [s. 522(b)] and about 2/3 of states have; those that have not
opted out, residents may elect either state or federal exemptions (NOTE: Minton and Indiana opt
out). Minton statute 213.02
5.
Which states rules do you use? 522(b)(1)-(3)
522b3a start with the petition date and go back 730 days (2 years). Ask if the debtor
has lived in 1 state during whole 2 years. If yes, then use that states exemption statute.
If for any time out of the 730 days, debtor has been domiciled in another state, then
check previous 130 days. Whatever state was in for most of 130 days, THAT is the
state we use for choice of law
Whether or not you can use the federal exemptions has nothing to do w/ the exemption
state. Bases entirely on law of state in which you are currently domiciled
Note: There are some state laws that allow you only to apply exemptions if your house
is in that state (say, Wisconsin). If your property is not in Wisconsin and they only let
you use their exemptions on the house if its in Wisconsin, 522b3 hanging paragraph
says if you are denied by a states law b/c not domiciled there, you CAN apply the
Federal exemptions even if the state says you cant
522p a debtor may not exempt any amount of interest in a homestead that was
acquired during the 1215 day period preceding the date of the filing
a. problem at the end of the chapter that lays this out

11

6.

Whether using state or federal exemptions, retirement funds held in IRAs (up to $1,095,000)
and virtually all types of employer-sponsored retirement plans are exempt from bankruptcy estate
s. 522(b)(3)(C), (d)(12)
7.
522f avoidance may be filed by debtor when he claims exemptions. Sometimes can use it
later, but attorneys try not to amend the schedules
8.
How would the trustee deal with specific exemption situations?
a)

RULE 2003a: trustee or creditor must object to debtors claim of exemption within 30 days of
the creditors meeting. Note: RULE 4003c says that the burden is on the objecting party
b)
If property exceeds allowable exemption amount, in Chapter 7 cases the trustee will sell the
property and return the value of the exempted amount to the debtor
c)
If otherwise exempt property is subject to valid and unavoidable lien, only the debtors equity
in the property (if any) can be exempted
d)
If costs of sale and trustees commission would leave only a de minimis amount for creditors of
the non-exempt value of the property, the court will likely order the trustee to abandon the property
and debtor will get to keep
e)
How to value property for purposes of exemption: practically speaking, most will be valued
according to the debtors claims on bankruptcy form; legally speaking, its fair market value for
federal exemptions [s. 522(a)], and state exemption isnt clear

9.

Exemptions in Recovered Property. 2 ways to treat prepetition transfer of property that would
have been exempted:
a)

Voluntary transfer: trustee recovers property and debtor isnt permitted to claim an exemption in
it, property comes back into the estate for the benefit of all general creditorss. 522(g)(1)(A)
b)
Involuntary transfer: debtor may still claim an exemption in the property the trustee recovers [s.
522(g)], and if trustee refuses to go after property (because wholly exemptible and not worth time),
the debtor may exercise the trustees avoiding powers and seek to recover the property [s. 522(h)]

10.

Hanson v. First National Bank (145)

a. summary: did debtor attempt to defraud creditor when they sold cars, etc. to son for FMV
before filing bankruptcy and used money to buy life insurance and prepay their mortgage
(exemptions). NO debtor did not clearly have an intent to defraud creditors
11.
Norwart Bank Nebraska v. Tveten
a. Same as above, but Tvetens were rich. Owed creditor $19m and converted $700k of
nonexempt assets to exempt property. This was decided in favor of the debtor (head start not
fresh start)
IV. Claims
A.
Generally
1.
Debtors Schedule tells trustee who to send notice of bankruptcies tonotice tells creditors
that debtor has declared bankruptcy and that automatic stay has been put into place
2.
Upon receiving notice, creditor should file a proof of claims. 501; claim includes prepetition
collection expenses, interest, etc.
B.
Allowed Claims
1.
Once a proof of claim has been timely filed by creditor, it will be allowed unless a party in
interest objectss. 502
2.
When you dont have to file proof of claim:
a. Chapter 7 no asset case
b. Chapter 11 case when listed by debtor as being a creditor, unless you have a problem
with it, you have a proof of claim assumed
c. Note: when you represent a debtor, ALWAYS file a proof of claim. You never know if
theyll find some assets

12

3.

4.
5.
6.

7.

DEFINITION OF CLAIM [s. 101(5)]: right to payment (must eventually be in terms of

dollars), whether or not such right is reduced to judgment, liquidated (reduced to specific or
computable dollar amount), unliquidated (ex. liable in tort but no jury damage decision yet),
fixed, contingent (obligation whose existence is uncertain and will only be determined by a future
eventevent can happen post-petition), matured (immediate right to payment), unmatured (right
to payment on future date), disputed, undisputed, legal (right to payment for damages), equitable
(injunctions, specific performanceinstructions from court to do something, but still must be able
to be reduced to dollar value to be claimex. covenant not to compete, specific performance to
complete construction project)
REMEMBER: Allowed claim will be discharged when bankruptcy proceedings closed, so
creditor wont be able to collect thereafter
An ownership interest in the debtor (stock, investment in partnership, LLC, etc.) is not a claim,
but is instead an interest
How parties treat claims:
iv. Other unsecured creditors are the most likely to dispute claims because it increases their
share if another claim is disallowed,
v. Debtors prefer for all claims to be allowed so that theyre discharged from future payment,
vi. Trustee has guaranteed percentage of estate so doesnt care
In Re Ward
Issue: Does a noncompete clause survive bankruptcy? (enforceability of a noncompete clause)
Decision: NO
Reasoning: Equitable remedy is a claim if it gives rise to right to payment, but in this case they can
just get an injunction
Bankruptcy court says: saying that damages are hard to estimate is no When no
equitable remedies: domestic violence situation. There really is irreparable harm and
inadequate remedy at law. Nothing that payment can do that will compensate.

C.

Disallowed Claims
1.
Disallowed claims: s. 502(b)(2)-(9)
2.
Claims of creditors who fail to repay a preferential transfer are disalloweds. 502(d)
3.
502e disallows reimbursement for contribution.
4.
What happens under 502e HYPO:
SCENARIO 1:
GUAR
CR
ESTATE
Predistribution
0
0
-Filed claim
10k(cont)
10k(fixed)
__
Allowed claim
0
10k
-Distribution
0
4k
<4k>
Post distribution
(6k)
6k (against creditor)
<4k>
(6k)
10k
So Guarantor cant collect, but creditor is happy b/c collected from guarantor
SCENARIO 2:
Predistribution
Filed claim
Allowed claim
Distribution
Post distribution

GUAR
(10k)
10k(fixed)
10k
4k
0k
(6k)

CR
0k
0k
0
0
0
(10k)

ESTATE
-__
-()
(4k)

GUAR
(6k)

CR
6k

ESTATE
--

SCENARIO 3:
Predistribution

13

Filed claim
Allowed claim
Distribution
Post distribution
D.

E.

F.

6k(fixed)/4k(cont)
6k
2.4k
<2.4>k
(6k)

4k (fixed)
4k
1.6 (40%)
2.4 (from g)
10k

__
-()
(4k)

Tardy Claims
1.
Chapter 7:
a)
Late-filed, non-priority unsecured claims are effectively allowable, but subordinated to
timely filed claims (unless creditor has no knowledge of bankruptcy in time to file on
timely basis but still managed to file before distributions made)s. 726(a)(2), (3)
b)
Priority claims are allowed and retain their priority as long as the proof of claim is filed
before the trustee makes distribution to claims of that prioritys. 726(a)(1)
2.
Chapter 12 and 13: tardy claims are disalloweds. 502(b)(9)
3.
Chapter 11: tardy claims can be allowed by bankruptcy court if arise from excusable
neglectwhich requires equitable balancing of interests, focusing on danger of prejudice to
debtor, length of delay and its potential impact on judicial proceedings, reason for delay (whether
w/in reasonable control of claimant and whether acting in good faith) [Rule 9006(b)(1); Pioneer
Investment Services v. Brunswick Assoc. Limited Partnership]
Contingent Claims
1.
Contingent claims require that a certain event occur before liability accrues, so court must
determine the probability that a specified event will happens. 502(c)
2.
Tests courts use to deal with contingent claims;
a)
Accrued State Law Claim Test (right to payment): a claim doesnt arise in
bankruptcy until an action has accrued under relevant substantive nonbankruptcy law
b)
Conduct Test: if a debtors conduct forming the basis of liability occurred prepetition, a
claim arises when that conduct occurs, even though the injury resulting form this conduct
was not manifested at the commencement of the case
(1)
In re Hassanally (176)
(a) Issue: is an action filed after bankruptcy over a debtors bad conduct
performed bankruptcy a claim? (making it dischargeable with bankruptcy)
(b) Decision: Yes. If there is conduct giving basis to liability, claim arises
when the conduct occurs. This supports the idea of a Fresh Start
c)
Prepetition Relationship Test: an individual has a s. 101(5) claim against a debtor if:
(1)
Events occurring before confirmation create a relationship, such as contact,
exposure, impact, or privity between claimant and debtors product, and
(2)
Basis for liability is the debtors prepetition conduct in designing,
manufacturing, and selling the allegedly defective or dangerous product
3.
Due process issues arise when try to discharge a future claim without notice to the person who
will be injured
4.
502e1 exception to normal procedure. Court will not wait until a contingent claim becomes
fixed. Itll estimate it, allow the claim in that amt, and move forward.
a. This is like when the claim is having a claim against a tortfeasor. If theres going to be a long,
drawn out litigation, have to estimate.
Executory Contracts & Unexpired Leases [s. 365]
1.
Executory contract: when some substantial aspect of performance (other than merely payment
of money) remains due from both parties, constitutes both an asset and liability of estate
2.
Trustee must decide whether to assume or reject executory contracts and unexpired leases
(approved by bankruptcy court)s. 365(a), (d); Trustee has 3 options: Reject, Assume & perform,
or Assume & Assign;
a)
Reject - non-debtor party gets prepetition claim for breach. Do this when FMV is
down and the contract isnt beneficial,
(1)

If trustee rejects contract/lease, its treated as a prepetition breach and produces a

prepetition claims. 365(g)

14

b)

Assume and perform as if no bankruptcyto assume must become current in

payments/performance. Do this when FMV is up and the contract is beneficial,
c)
Assume and assign to someone else; do this when the lease is beneficial but debtor
cant assume it. (note: see below, 4a)
(1)

Trustee has authority to assign the rights and duties of an assumed contract or lease
s. 365(f)(1)and if does so, bankruptcy estate has no liability for future breach by assignee
s. 365(k)
(2)
If contract says not assignable, can ignorealmost always assignable unless it is a
personal contract that can only be performed by debtor (ex. paint picture)

3.

Long-term commercial lease is highly litigated issue because s. 502(b)(6) limits claim to larger
of either rent for 1 year or 15% of rest of lease not to exceed 3 years
4.
365d3 Trustee must perform all the obligations of the debtor arising from any unexpired
lease of residential real property or personal within 60 days after the order for relief. If this isnt
done, the contract or lease is deemed rejected
5.
365(p) if a lease of personal property isnt timely assumed (365(d)60days) by the trustee
or is rejected, the lease is not property of the estate and the lease is terminated. The debtor may
notify the leasor that they are assuming the lease (and taking on the responsibilities), but the leasor
cannot be forced to let the debtor assume the contract (just personal property. Not residential or real
prop)
6.
Theres a cap on the claim of the leasor resulting from the termination of a lease of real
property. (cant just sit back and not rent it)
7.
PROBLEM 5-8 (195)
Deanna has year-to-year lease on apartment and has a 4-year lease on car w/ 2 years left. Both leases
make filing for bankruptcy a default. She files on 6/15. At that time, she was current on apartment
payments and behind on car.
a. If trustee obligated to make payments to landlord or car leasor?
a. 365(d)(3) is for nonresidential real property, and here we have nonresidential and personal
property
b. SO no obligation of trustee to pay after the filing of the petition up until make decision to
reject or not reject
c. Personal property obligation under chapter 11, not chapter 7
d. What if we reject it after 60 days? 365d1 says that if nothing is done within 60 days,
leases of personal and residential real property are deemed rejected
i. What if accept after 60 days? Theres a claim on the prepetition areers and post
petition payment due. All gets paid off at rate give 365b1
b. Trustee is the holder of the leasehold, not the debtor. Trustee is charging rent to debtor. If trustee
knows hes going to reject, make sure debtor vacates before rejection. If not, then lessor could
claim that there was constructive assumption
c. If dont do something in 60 days, than lease is rejected
5.8 C.
d. Personal property can be assumed if the debtor accepts it, as long as the creditor approves. 365p.
e. This means that the debtor can assume the car, but not the apartment
f. Everything we owe to the leasors after the petition date, upon rejection becomes a prepetition
claim.
a. Never appears anywhere in the code, but courts decide that the nondebtor party is
compelled to continue to perform until time of rejection (leasor must let you use car,
apartment, etc.)

15

V. Secured Claims (p197)

A.
Secured Claims paid out of collateral subject to lien, not paid out of estate
B.
Amount of Secured Claim is limited to the value of the collaterals. 506(a)
1.
So, by definition, secured claims are satisfied in full
C.
Rule 3002 - No proof of claim needs to be filed for secured claim
D.
Having a lien on property does NOT make it a secured claim. Must have an equitable interest 506a

1.
2.

E.

F.

G.

What if there are multiple liens on the same piece of property?

The lien that has priority gets to take collateral up to lien amount. If
theres any left over, second claim gets to eat up the rest. Then whats
left of claim 2 becomes an unsecured claim

Lien Stripping
1.
Value shall be determined in light of the purpose of the valuation and the proposed disposition
or use of such propertys. 506(a)(1)
2.
A lien is void to the extent that the creditor is undersecureds. 506(d)
a)
SC greatly limited effect of 506(d) Now all it does is avoid liens that secure
disallowed claims (claims that the debtor doesnt legally owe)[Dewsnup v. Timm]
Liens on Collateral Acquired Post-petition
1.
A Floating lien is a security interest on all of debtors inventory and accounts, whether
owned at time security interest or subsequently acquired
2.
Prepetition security interest in property acquired post-petition is invalidated by s. 552(a)
3.
Secured claimants can retain their liens on post-petition proceeds of prepetition collateral,
allowing floating lien to largely retain its values. 552(b)(1)
a)
Secured party can protect interest by following proceeds from prepetition through use
of a lock-box which only lender has access to
Post-Petition Interest and Expenses
1.
Generally claims for post-petition expenses are disallowed and creditors are not entitled to
compensation for any delay in payment that results from bankruptcy processs. 502(b)(2), but
exception if debtor is solvent and able to pay all claims in fulls. 726(a)(5) provides that interest
at legal rate is payable from date of petition
2.
Oversecured creditors (if the value of the collateral exceeds the creditors claim) are allowed
to recover from the collateral interest on such claim, and any reasonable fees, costs, or charges
provided for under the agreement under which the claim aroses. 506(b) (this is a startling
exception to the general rule that a claim is frozen at the petition moment.. the value of the
creditors claim continues to rise and eat into the equity that would go into the estate)
i. good incentive for trustee with an oversecured creditor and equity in the property to sell it quick!

16

3.
H.

Under secured creditors there is no debtor equity, so trustee wouldnt bother selling the
property
Avoiding Liens
1.
Several different Code provisions allow trustee or debtor to avoid a creditors lien for a variety
of different policy reasonsresults in more collateral being freed up for estate or debtor can
exempt property. Then a secured creditor left with unsecured claim
2.
Motivations for avoiding secured claims:
a)
Debtor will want to object if property would otherwise be exempt
b)
Trustee will want to object because security interest in collateral takes it out of the
estate, thus cutting the size of the estate, of which trustee gets %
c)
Unsecured creditors will object because collateral would be added to estate if secured
claim not allowed
3.
Strong-Arm Powers [s. 544]
a)
Strong-arm clause [s. 544(a)] gives trustee power to avoid certain liens and other
transfers of an ownership interest in property
b)
Trustee is creditor w/ judicial lien on all of the debtors property at the time of
bankruptcy petition, so trustee has priority over another entitys interest in property of the
debtor or property transferred by the debtor, an
c)
544(a)(1) Tool for trustee to invalidate unperfected security interests.ALSO grants
trustee the status of creditor w/a judicial lien on all the debtors prop
(1)
Exception to power if secured party has PMSI in inventory, has 20 day grace
period to perfect after filings. 362(b), 546(b)(1)(A)
d)
544a3 Trustee has status as bona fide purchaser of all debtors real property, so trustee
may invalidate unrecorded mortgages on and unrecorded deeds of real property of the
debtor trustee is conclusively presumed to lack knowledge of the unrecorded interestfor
avoidance purposes)
1 Interaction with s. 541(d) might allow trustee to take priority over beneficiary of a
constructive trust and keep property in estate
4.
Purchase Money Security Interest where value that is extended by the lender is meant for the
purchase of the specific collateral and is in fact is used for the purchase of the collateral
a)
20 day grace period 9-317 (see pg208)
b)
If give bulldozer on PMSI, Get 20 days from time that secured party actually takes
possession of bulldozer to perfect. Then the date of perfection refers back to the date of the
transaction
c)
What if try to perfect past the 20 day period (and after petition date)?
(1)
If after petition date, its a violation of the automatic stay ONLY if past 20 day
period.
e. PROBLEM 6-3 p 209 -- Explains 544a1 (this is repeat info from above)
i. On 2/1, D gave security interest in certain ovens used as equipment to B1. B1 never filed a
financing statement, and thus its security interest is unperfected. On 7/1, D gave security
interest in same equipment to B 2 in return for a loan. B 2 perfected by filing a proper
financing statement the day of transfer. D files Chapter 7. What happens, and who has
priority?
1. First in time is first in right, but perfected always beats unperfected.
2. Because both trustee and bank 2 have perfected claims, bank 2 trumps trustee.
3. Bank 1 didnt perfect, so not in the running
4. Bc gets the claim, trustees claim fills up the rest of the equity, and B1s
unperfected lien, under 544a, is pushed down to an unsecured claim.
5. Note: same result if B1 was a judicial lien. An involuntary lien is treated the same
as a voluntary lien for all situations dealing w/ avoiding the lien
ii. Perfection:
1. Consensual lien Date of filing financing statement
2. Judicial lien automatic on levy; perfected by sheriff taking prop

17

5.

3. Unperfected security interest always subordinated to perfected security interest

4. 1 exception: 9-317 (see pg 208). 20 day grace period after lender of PMSI takes
possession of property to perfect.
a. If this happens past the 20 day period and after the petition date, its a
violation of the automatic stay
b. If this happens within 20 days, but after the petition date, its fine.
PROBLEM 6-5 (211)
a)
C gets judgment against D and has sheriff levy on Ds car a few days before D files
bankruptcy. Judicial lien is during the preference period and its on account of antecedent
debt, so avoidable under 547b2

VI. The Automatic Stay and Other Debtor Protections (B11)

A.
Sections of Code that kicks in immediately upon filing of petition to enjoin behavior by entities other
than debtor
1.
S. 525 prohibits certain discrimination merely because the debtor has filed bankruptcy petition
or received a discharge
2.
S. 524 prohibits acts to collect discharged debts
3.
S. 366 prohibits utilities from withholding services from a debtor merely because of petition or
failure to pay a prepetition bill (but utilities permitted to require reasonable deposit to cover future
service)
4.
S. 108 tolls certain statutes of limitations, as well as time periods in both the rules of court
procedure and certain private agreement
B.
The Automatic Stay [s. 362]
1.
Scope of Stay: 362a
a)
Does not stay the automatic expiration of property rights, only actions and efforts to
transfer property rights; also does nothing to toll the expiration rights of redemption or
prevent a lease from expiring
2.
362 lists activities prohibited by the automatic stay. (made void or voidable when done) (pay
attention to 1-6)
a)
Each has 3 parts:
c. Describes the action enjoined
d. Describes the entities/objects against which that action is enjoined
e. Then describes if its for prepetition, post petition, or both

Debtor
Prop of Db
Prop of Est
Prop FROM
Est
Pre-petition
Post-Petition
3.

362(a)(1)
Proceeding

(2)
Enforcing
judgment

XXXX

XXXX

(3)
Possession/
Control
(sec cred)

(4)
Lien

(5)
Lien

(6)
Any Act on
Claim

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX
XXXX

XXXX

XXX
XXX

XXXX

XXXX
XXXX

XXXX
XXXX

Exceptions to the Automatic Stay:

a)
362b exceptions to 362a (goes on and on). Focus on 362b1, 2, 3, 4, 9, 10, 11d.
b)
Look at specific action, see if its enjoinged by 362a, then see if its actually permitted
by 362b
c)
Directed at specific creditors:
(1)
Postpetition spousal and child supports. 362(b)(2),
(2)
Article 9 continuation treatments. 362(b)(3)

18

(3)

4.

Lessor of nonresidential property can obtain possession of property if lease

expired before bankruptcy petition or lessor obtained judgment for possession
prepetitions. 362(b)(10), (22)
d)
362(b)(6), (7), (11), (17), (27) Designed to prevent stay from undermining
commercial markets or corrupting financial products
e)
362(b)(20), (21) Deals with debtors who file bankruptcy after having a previous
bankruptcy case dismissed or the stay lifted in the previous
f)
362(b)(4) Deals w/ governmental actions (ex. criminal proceedingss. 362(b)(1));
govt. units can enforce their police and regulatory powers to obtain money judgments, but
cannot enforce money judgmentss.
Duration of and Relief from the Stay
a)
Duration of stay governed by s. 362(c) stay doesnt end at the same time.
1 Actions against property of the estate: stay expires when property ceases to be
property of the estate (sometimes extended to protect property FROM the estate,
which is possessed by estate),
(1)
Other actions: stay expires when bankruptcy case closed or dismissed or the
debtor is granted/denied a discharge, whichever occurs first
b)
362d Motion for Relief from Stay any party may bring a MFRS under this
provision. Most litigated. This is how they lift the stay to foreclose on property [generally
only relevant to secured creditors]:
1 Many secured creditors will try this if their claim has decreased b/c of
depreciation. 5th amendment prohibits bankruptcy to cause a loss in value of
property rights.
2 Grounds for motion from relief from stay: (p267 book)
a
First ground: lack of adequate protection of an interest in property
(i.e. secured creditor has little equity cushion and collateral is depreciating
or threatening to depreciate faster than debtor is paying off debt) [adequate
protections. 361], and
(a) Second ground. Debtor lacks equity in property AND its not needed
for a successful reorganization 362d2
(b) Third Ground For Cause (many causes. No insurance, didnt pay
taxes or a lot of time invested in an ongoing litigation). 362d1
(c) Note: oversecured creditor has no chance of getting a relief from stay.

19

c)

C.

Party seeking relief from stay files a motion [Rules 4001, 9014], and if court doesnt
rule otherwise, the stay will normally terminate 30 or 60 days after motion fileds. 362(e)
5.
Violations of the Stay
a)
362k teeth to 362 - Gives court power to grant actual damages for violation of stay
and order punitive damages where necessary. This isnt being used much anymore b/c
creditors are being more careful
b)
Violation of stay is punishable as civil contempt; compensatory damages are readily
available. No intent required, but unknowing violation not likely to be found in contempt
c)
Debtor has private cause of action when injured by willful violation of stay (if creditor
informed of stay and acts deliberately)s. 362(k)(1)
6.
Application of stay to rejected leases:
a)
Landlord whose debtor has defaulted on lease paymentseither prepetition or
postpetitionmust obtain relief from the stay to evict the debtor and obtain control of the
premises unless some exception to the stay applies;
b)
cant interfere with or exercise control over estates property on premises (s. 362(a)(3))
and cant attempt to collect a prepetition claim from property of the estate or property of
the debtor without violating the stay (s. 362(a)(2), (6))
7.
Actions against nondebtors: Chapters 7 and 11 have no provisions extending the stay to
individual co-obligors, but Chapter 13 does [s. 1301(a)]
8.
Prohibitions against discrimination against debtors: s. 525 prohibits public entities from
denying licenses to, denying employment to, or terminating the employment of a bankruptcy debtor
SOLELY because insolvent or has filed for bankruptcy protection. The word SOLELY is a
shelter they just need to come up with a second reason to fire the individual
Tolling Rules [s. 108]
1.
Concerns actions that the debtor might have been able to bring, but now belong to the trustee.
If the statute of limitations would expire 1 day after the petition date, the trustee has TWO YEARS
to bring that action CHECK THIS
2.
108b obligations that debtor/trustee may have to do after the petition date w/in some period
of time like: filing state tax report, response to show cause from fed or state env agency, etc. In this
case, they only get 60 days after statute of limitations to respond to this action.
a)
Problem 7-1 (251) Which actions violate the automatic stay?
i. Sending the debtor a bill for prepetition debt. - 362a6
ii. Sending the debtor a bill for postpetition debt violation only in chapter 13
iii. Bringing suit against debtor for postpetition debt ok
iv. Suit against debtor for prepetition debt 362a1; 362a6
v. Filing motion to dismiss for failure to state a claim in state court brough by debtor
prepetition - 362a3 (this is property of the estate
vi. Recording a prepetition judgement against debtor 362a2, 3, 4, 5 (recording can create
a lien)
vii. Receiving wire transfers from Ds employer pursuant to a prepetition order garnishing
debtors wages362a6 (doesnt matter if creditor didnt receive notice)
viii. Refusing to sell the debtor goods or services unless debtor pays prepetition debt
326a6
ix. Refusing to sell debtor goods or services unless debtor pays in advancethis is
probably okay. Just have to make sure that this is a regular practice of the creditor,
and not in response to the bankruptcy
x. Demanding payment of prepetition debt from guarantor of debtorok! Remember
though, that 109 says that a guarantor can be protected in bankruptcy if necessary
xi. Bringing an action against debtors liability insurer for prepetition claimdepends on
state. Limit recovery to extent of insurance
b)
Problem 7-2 (252)
One month after filing bankruptcy, D commits tort against P. May P sue D?
a. P may sue D after filing of the petition,
b. But if P obtains judgment, she cannot execute on the property of D (362a1, 362a4)
c. P MAY garnish Ds wages b/c 362a5 only protects against prepetition claims

20

c)
Problem 7-3
a. Bank account in the name of debtor. D claims it all as exempt. D wants to withdraw funds to
pay rent after filing, and bank wont allow it. Landlord threatens eviction. Does D have cause
of action against Bank?
a. Note: even if this is exempt, the property first goes into the estate. After exemption is
claimed, if its correct, trustee will eventually abandon it
b. Here, Debtor is violating the automatic stay! 362a1 (stay is applicable to all entities)
c. Bank also has a claim against the estate (b/c part of agreement is that the debtor will
move all of accounts into that bank)
i. In this case, bank has debt of $47k from estate and $4k in account. Bank can
take the $4k and bring claim of $43k
d. Bank is treated as a secured creditor to extent of the $4k
d)
PROBLEM 7-5
Client who is an obligor (not BK debtor). Someone has judgment against her and has begin to
garnish her wages. Amount is intolerable. She comes to us
5. What to do: file bankruptcy. That creates an automatic stay and then discharge
6. Then she comes back and asks if she can get back money she paid hospital before
filing. Can she?
a. If the trustee does not bring an action, debtor can bring an action if the transfer
is avoidable under 547 to the extent the debtor could have exempted such
property under g1. 522h
b. Opposing council will look first to 547b (thats satisfied), then look to 547c.
That contains defenses. Defense that works here is: 547c8
i. 547c8 says $600k is the deminimus amount for deminimus preference
actions
c. Solution: wait 2 weeks to file bankruptcy, until $600 is garnished, and its no
longer deminimus.
e)
PROBLEM 7-8
Duke and Duchess were divorced. Decree ordered Duke to pay Duchess $2k/mo for 3 years, but
Duke made no payments and filed Chapter 7 bankruptcy last week.
7. First question: is this a domestic support obligation (101 14a) . Opposite of domestic
support obligations is a property division obligation
8. Analyze two ways:
Dom Sup Obligation
Property division Ob
Levy on Car (362a 2,3,4)
No exception (property of the
No Exception
estate so 362b2B doesnt count)
(If trustee abandons it, can levy on
it even during case)
Garnish Post Petition Wages YES
No Exception
362a5, 362a6
9. What changes in Chapter 13? In chapter 13, postpetition wages for the period of the
plan remain property of the estate. SO, couldnt garnish postpetiton wages during
bankruptcy (see 362b2C)
f)

Problem 7-10 (264)

Which of the following actions may be taken postpetition w/out violating automatic stay??
1. County assesses a tax against debtors real estate 362b9d exempt from stay
2. State bar suspends a debtor from practicing law 362b4 exempt (bar association is
part of sup court and involved in licensing attorneys)
a. Common note of interest: falls under b4 if action relates primarily to states
enforcement of health, wealth, moral, safety. NOT pecuniary interest.
3. Motor vehicle dept suspending drivers license b4 or b1(if criminal act)
b. If suspending license for prepetition speeding ticket not stayed under b4 if
revoked for statutory period of time.

21

c.

If suspension is lifted upon payment, its an attempt to collect a debt and

violation of stay
d. If this is punishment, not violation b/c not protected by b4
4. EEOC Orders rehire of employees ok under b4
e. Instruction to pay another
f. Judgment to pay of govt agency is not protected by b11
5. EEOC orders debtor to pay illegally terminated employee wages for period of time
they were out of work.
g. NOT ok under b4 if the state takes the money (they take an interest in the
money)
h. It IS okay if its distributed to employee (non government) under b4
6. Order to stop pollution
i. Thats ok b4. Its an injunction, not an attempt to collect
j. Ordering the debtor to clean up the site is NOT okay.
k. Distinction to draw: when order requires us to make a payment to a non gover
entity, that IS permitted under the b4 exception. Where payment is actually or
constructively to the government, the b4 exception does not protect it
VII.
The Liquidation Process
A.
Dealing with Estate Assets Generally
1.
Debtor assigns valuation to each asset listed in schedules filed with or shortly after petition;
trustee and others may choose to accept valuation or conduct independent investigation/appraisal
2.
Trustee calculates estates interest in assets as: Total Asset Value Portion of Value Allocable
to Another Owner Amount of Unavoidable Liens on Asset Amount of Exemption to which
Debtor is Entitled in Asset
3.
Abandonment: trustee can abandon asset [s. 554(a), (b)]to abandon asset, trustee files motion
and sends copy to debtor, U.S. Trustee, and all creditorsRule 6007(a) if no one objects, court
will issue an order authorizing abandonment and estate divested of any ownership rights in asset
4.
Trustee may use, sell, and lease property of estate [s. 363], but must send notice at least 20
days in advance to U.S. Trustee and creditors committee to explain proposed transaction. Also
must get courts permission (363f2)
5.
Trustee may operate debtors business for a limited period of time [s. 721], as result can sell
assets in ordinary course of business w/o notice and hearing [s. 363(c)(1)] and can incur debt in
ordinary course of business [s. 363(a)]
6.
Debtor co-owner of property, trustee can
a)
Seek to partition the property [s. 363(f)(2)]
b)
Try to sell the estates interest [s. 363(f)(5)]
c)
Sell the entire property and give a proportionate share of the sale proceeds to the coowner [s. 353(h)]
B.
What Happens to Collateral
1.
Generally when trustee sells estate assets subject to lien of any secured claimant, the buyer at
the sale pays the secured claimant to redeem the property from lien. Trustee gets remainder for
estate
2.
Trustee authorized to sell property free and clear of liens provided that the trustee adequately
protects the interest of the secured claimant [s. 363(f)], which means holder of secured claim is
paid the amount of the claim from the proceeds of the sale
3.
Trustee can recover from the collateral the costs of preserving and disposing of it
4.
What happens to collateral? (If trustee abandons property and debtor needs collateral for
consumer needs (house, car, household goods then (reaffirmation, redemption or retention)
a)
Reaffirmationallows debtor to keep collateral while making periodic payments to
secured creditor [s. 524(c)]; in essence, the debt isnt discharged by bankruptcy
proceedings
(1)
Drawbacks: This is an AGREEMENT. Creditors often make debtors agree to
late fees, penalties, and the entire obligation;

22

(2)

Must be filed with court and be either (i) accompanied by a representation of

no undue hardship by the debtors attorney [s. 524(m)], or (ii) approved by court
after a hearing on the matter [s. 524(c)]
(a) Debtors lawyer will have to sign saying that believes agreement is in
the debtors best interest. Difficult, usually a conflict of interest. Lawyer
could withdraw and make the client go herself, but this is still difficult
(3)
Creditor may solicit reaffirmation agreement without violating stay
(4)
In Re Riggs (291) 521a2A says must either redeem, surrender, or reaffirm.
Debtor wants to retain, but cant. So he reaffirms (no attorney) and court denied
approval. People assumed that then it would fall back on surrender, but instead
court says that we can use retain.
b)
Redemptiondebtor must pay the lienor the amount of the allowed secured claim
(value of the collateral, not the full debt) to redeem the property [s. 722]; secured party has
no choice in the matter
1 Drawbacks: debtor must come up with necessary cash, redemption price is
determined by the propertys replacement value without reductions for costs of sale
or marketing [s. 506(a)(2)],
2 Available only in limited circumstances of individual debtors with tangible
personal property intended primarily for personal, family, or household purposes.
3 The property also must be exempt or abandoned and debtor must pay the lump
sum of the amount of the secured claim within 60 (or 45?) days after the meeting
of the creditors. USUALLY paid by an insider
c)
Repossessionsecured creditors prohibited from taking action to collect debts, such as
repossessing their collateral or conducting a foreclosure sale after a bankruptcy petition has
been filed [s. 362(a)(3)-(6)].
(1)
Courts usually find that postponing foreclosure sale is sufficient under 362(a)
(1), but depends---(2)
creditor can seek relief from stay under s. 362(d) - requirements
d)
Retentiondisputes over whether s. 521(2)(A) leaves room for option of retentions.
521(a)(6) in 2005 Amendments seems to have restricted debtors right to retain collateral
without redeeming it or reaffirming the debt by requiring the debtor to reaffirm the debt or
redeem the collateral within 45 days of the s. 341 meeting, but doesnt apply to realty
collateral or to non-purchase-money security interest in personalty
a. PROBLEM 8-2 (p310)
i. Question of what client can do when theyre a consumer. D is in chapter 7. Theres a
$2,500 motor vehicle exemption. Ds car is subject to a perfected security agreement from
L. Ds made all the requirement monthly payments.
Determine 1) what D could do to keep his car; 2) if redemption is available, what it would
cost D to redeem the car; 3) what Ds best option is; and 4) what Lenders best course of
action is.
1. We need to remember is that in the case of an individual PMSI we may not retain

(consumer)

Value

Claim

1- car worth
8k, claim is
$10k (for
car)
2 Car

8k P

10k

8k

10k

Reaffirm
(available for ANY
debtor)
$10k+
(negotiate)

Redeem
(for individuals)

Retain

$8k

NO b/c
PMSI

23

worth $8k,
debt is $10k.
Money used
for home
3 Car worth
$12k. claim
is $10k (for
car)
4 car worth
$12k; debt
$10k for
home
Business
1.
2.
3.
4.

12k P

10k

12k

10k

8k P
8k
8k P
8k

10k
10k
10k
10k

$10k+

$10k (amt of secured claim)

NO

X
X
X
X

NO

NO

VIII. Priorities and Distribution

A.
Trustees Duty to Liquidate Estate
1.
Trustee is required to collect and reduce to judgment the property of the estateand close
such estate as expeditiously as is compatible with the best interest of the parties in interests.
704(a)(1)
2.
Main provision authorizing trustee to liquidate estate is s. 363
3.
Trustee must distribute money to claimants as promptly as possibleRule 3009
4.
If the estate has an interest in collateral of secured claim, then trustee must sell the property
prior to completing distribution process [s. 725]
B.
Distributions of the Estate [s. 726(a)] (p314 of book has visual of 726
* After finishing the formation of the estate, liquidation of claims, go to 726

GENERAL LIST BELOW:

24

1.
2.

C.

D.

Support Obligations: 507a1

Administrative Expenses [507a2. Refers us to 503(b). Gives a nonexclusive list]
a)
Costs and expenses of preserving the estate (post-petition),
b)
Compensation to professionalstrustees, attorneys, accountants, etc. [s. 330(a)], (note:
327 allows trutee to employ these people)
c)
Reimbursement of certain creditor expenses and compensation for certain creditor
services
3.
Certain expenses arising from involuntary filings (507a3)
4.
Certain employee wage claims [up to $10,950 TOTAL including section below] (507a4 and
507a5)
5.
Certain employee benefit claims [up to $10,950/employee TOTAL including section above]
6.
Certain consumer deposits [up to $2,425] heavy burden on estate when debtor is a retailer and
when deposits have been put down. (507a7).
7.
Certain tax claims (507a8)
8.
Claims owed by depositary institutions to maintain capital levels
9.
Personal injury claims resulting from drunk driving
10.
**********1-9 are s. 507(a) priority claims**************
11.
Timely unsecured claims
12.
Untimely unsecured claims
13.
Prepetition claims for fines and penalties
14.
Interest on any of the claims listed above
15.
To the debtor (if corp. then to shareholders who filed proof of interest)
How Distributed
1.
Claims within each ranking are paid in full before moving down to next level [s. 726(b)]
2.
If insufficient assets to pay all claims within a single ranking, those claims share on a pro rata
basis [s. 726(b)
Priorities
1.
Support Claims 507a1
a)
Domestic support obligation = one in the nature of alimony, maintenance, or
supportwithout regard to whether such debt is expressly so designated [s. 101(14A)(B)]
b)
Court has to analyze each payment obligation to determine if its really support or a
division of property [s. 507(a)(1)]look to subjective intent and substance of obligation
unlikely to qualify as support if payments to continue after creditor spouse dies or
remarries
2.
Administrative Expenses
a)
Trustees Compensation:
(1)
Trustee receives $45 for each Ch. 7 case filed out of the filing fees. 330(b)
(2)
Trustee entitled to reasonable compensation for services, capped at percentage
of distribution to claimants [s. 326(a), 330(a)]
(3)
Trustee who is lawyer might hire self in litigation to recover a preference or
fraudulent transfersubject to court approval [s. 327(d)] and compensation for
such professional services not capped by % of distribution [s. 330(a)]
b)
Compensation for Employed Professionals
1 Debtors attorney seldom paid out of estate assetsmay be paid through
prepetition retainer, but court has authority and duty to review the reasonableness
of fees and to order any unreasonable amount either to not be collected or to be
disgorged [s. 329(b)]
(a) Lawyer has to be careful with retainer, cant transfer money from
retainer trust fund to lawyers account all at once because would be an
avoidable preferenceinstead lawyer should get retainer and draw on the
retainer at least daily for work done, so providing new value after
preferential transfer cancels out the preferential transfer
2 Attorney or accountant whose bill for prepetition services remains even partly
unpaid cant be employed postpetition by trustee or debtor-in-possession because

25

must be disinteresteds. 101(14)(A) [exceptions: s. 327(b), s. 1107(b), and s.

327(e)]; court has oversight of professional fees in two ways:
(b) Court may determine and approve the terms of the professionals
compensation in the appointed orders. 328(a), or
(c) Court can evaluate the reasonableness of the fee by examining the
services with the benefit in hindsights. 330(a)(3)
c)
Wage & Benefit Claims [s. 507(a)(4), (5)]wages postpetition fall under
administrative expenses in s. 507(a)(2)
d)
Taxes [s. 507(a)(8)]only addresses taxes for which taxing authority has not filed a
lien [tax liens are treated as secured claimsIRS tax lien places a lien on all personal and
real property however acquired and wherever located, overcoming any exemption, etc.]
1 If file bankruptcy petition before April 15 at any year, debtor accrues priority tax
liability for 4 years of any unpaid tax liability
2 If file bankruptcy petition after April 15 at any year, debtor accrues 3 years of tax
liability
3 Problem 9-9, B12, p5 deals with this. Pay taxes filed after petition date, and ones
3 years before. If we dont have enough money to cover all of the prepetition
taxes, prorate.
IX. Discharge and Dismissal
A.
Discharge
1.
General rule: courts shall grant the debtor a discharge of debts, which for the most part covers
all prepetition debts as well as some obligations treated as prepetition under s. 502; also covers
obligations for which creditor has not filed a proof of claim [s. 727(a)
2.
Effect of discharge: once a debt is discharged the creditor is permanently enjoined from trying
to collect it from the debtor [s. 524(a)(2)]. The debt itself still exists, so can go after guarantor,
credit system can still use debt to determine the credit worthiness of debtor, and technically debtor
can still voluntarily repay it [s. 524(f)]
3.
Only for individuals. Corps/partnerships dont need one or get one. [s. 727(a)(1)]
4.
Denial of Discharge
a)
Most destructive to the welfare of the debtor. If sustained by court, entire discharge is
denied. Go here for lists of reasons why youd deny discharge on exam. 727
b)
Discharge denied if debtor performs certain misconduct [making fraudulent transfer or
destroying property, failing to maintain adequate financial records, lying to bankruptcy
court, failing to explain loss of assets, disobeying order of bankruptcy court] [s. 727(a)(2)(6)]
(1)
Fraudulent intent in bankruptcy filings can be shown by either actual intent to
deceive or a reckless indifference for the truth 727a1.
(2)
727a3 deals with records. Its clear if the debtor destroyed records, but what
if debtor just failed to keep records with info the court might need?
(3)
727a4 making a false claim or other. Make sure that signing of petition or
schedule or statement of financial affairs from initial filing are all true, because
they are signed under oath.
c)
Discharge denied if debtor has previously received a Ch. 7 or 11 discharge in a case
commenced less than 8 years before petition date in current case [s. 727(a)(8)] (measure
petition date to petition date). a9 says 6 years for something

26

5.

Nondischargeable Claims: claims that survive bankruptcy process even if debtor granted a
discharge 523
a)
Even if claim is nondischargeable, the claimant is still entitled to share in distributions
from the bankruptcy estate
b)
Difference in tone b/t 523 and 727. The debt does share in the estate,
c)
523a with 727, when want to deny a discharge, creditors have a 60 day window
after date of 341 meeting in which complain has to be brought to deny discharge, and the
727 may only be adjudicated in bankruptcy court. A 523 action isnt precisely define,
and often the declaration never arises in bankruptcy. A defense here for the debtor is 12b6.
(1)
2 exceptions under 523: 2- ; 4 fraud by a fiduciary, and 6- willful and
malicious. For these 3 grounds, the creditor must bring an action in the bankruptcy
court w/in 60 days after meeting in order to have that claim declared
nondischargeable.
d)
Unscheduled debts: if debtor fails to list a creditor on schedule of debts and creditor
isnt notified of bankruptcy, creditors claim is generally excepted from discharge unless
its a no asset case [s. 523(a)(3)]
e)
Taxes: nondischargeability of tax debts includes taxes accruing in the 3 years prior to
the bankruptcy filing, taxes for which the debtor never filed a return or filed a fraudulent
return, and debts incurred to pay taxes. Taxes that fall into 507a8 are both 8 th priority AND
nondischargeable [s. 523(a)(1)(A)-(C), (a)(14), (14A)]
a. Courts have decided that INTEREST on a tax claim is part of the claim
Claims for Support: support obligations and property settlement obligations incident to
divorce are nondischargeable [s. 523(a)(5), (15)]
g)
Generally creditors with nondischargeable claims cant go after the debtors exempt
assets even after the bankruptcy process, but exception for nondischargeable tax debts and
nondischargeable support claims [s. 522(c)]
h)
Misconduct Claims:
1 Willful and Malicious Injury: debts for injury to persons or property resulting from
willful and malicious conduct of debtor are nondischargeable [s. 523(a)(6)]
(a) Willfulness requirement met if either debtor desires the injurious
consequences or believes that such consequences are substantially certain
to result from debtors actionssubjective test
(b) An act is malicious if it is wrongful and without just cause or excuse
(c) Court decides whether a specific creditor/claim is subject to the
discharge
(d) STANDARD: Its not the willful act that happens to cause injury, but a
subjective desire to perform an act likely to cause injury that is the
standard. Also a very low standard (wearing muddy shoes and causing
damage to apt is willful and nondischargeable).
(e) Most used: sale of collateral purchased on credit.
(2)
Fraudulently Incurred Obligations
(a) Debts incurred through fraud or under false pretenses [s. 523(a)(2)]
(b) Written misrepresentations about the financial condition of the
debtor or an insider of the debtor [s. 523(a)(2)(B)]
(c) Misrepresentations about something other than the financial condition
of the debtor/insider [s. 523(a)(2)(A)]
(i) Usually creditor asserts that debtor expressly or implicitly
misrepresented that debtor intended to repay debt]
(3)
Embezzlement, Larceny, and Fraud in Connection with a Fiduciary Duty [s.
523(a)(4)]
f)

27

i)

j)

6.

Education Loans [s. 523(a)(8)]: educational loan debts to a govt. unit or nonprofit
institution of higher learning is nondischargeable so long as it doesnt impose undue
hardship on the debtor or debtors dependents. They come down pretty hard on student
loans
Death or personal injury for operating while intoxicated. This is a filler for 523a6, b/c
most DUI offenses are negligence. This is JUST for death or personal injury, NOT
property damage. 523a9

Litigating Nondischargeability Issues:

a)
Either party may ask the bankruptcy court for a declaratory order on the issue of
dischargeability or petition the court to reopen the case if the issue arises after the case has
been closed [Rule 4007(a), (b)]
b)
If creditors position was not substantially justified, the debtor can get attorneys fees
so long as not unjust [s. 523(d)]

7.

PROBLEM 10-6 (366)

Debtor started out w/ a balance of $1500 on credit card. THEN borrowed $2500 to pay taxes
(total $4k). Then borrowed additional $1000, and paid $500, bringing amount owed to credit
card company to $4500.
As a trustee, how should we look at the claim by the credit card company
ii. $2,500 is going to be tax related (including interest). 523a14A second tier of
nondischargeability says that even if I borrow money, that debt, no matter how many times
turned over, continues to have characteristics of 523a1 tax debt and is nondischargeable
(not true for support obligations.
iii. Now, look at the initial $1500 that was in first. $500 that was paid come out of first in,
first out, so only $1000 is old debt. The $1000 old debt is DISCHARGEABLE WHY?
iv. Then, another $1000 is new credit card debt, charged 1 month before filing. 523a2A says
no discharge for fraud, etc. The person charges $1000k in debt a month before filing. Did
the person have certain knowledge that they wouldnt be able to pay it back?
v. Always suggest that your client does not take a cash advance. Within 70 days before
filing, its presumed nondischargeable under 523a2CiII. If the item was just charged to
the credit card, the creditor has the burden
b. Dismissal for Cause
i. Creditor may seek to have the entire bankruptcy case dismissed for cause if [s. 707(a)]:
1. Unreasonable delay by the debtor is prejudicial to creditors,
2. Nonpayment of filing fee,
3. Failure to timely file a statement about what the debtor plans to do with property
constituting collateral for a debt
ii. Court may dismiss a case if granting relief would be an abuse of the Chapteronly
applies to individual debtors whose debts are primarily consumer debts [s. 707(b)]U.S.
Trustee can also suggest dismissal
1. Means Test: creates a presumption of abuse if the debtors projected postpetition
monthly income, reduced by certain specified expenses, exceeds a specified level
provides mathematical formula for ascertaining whether the debtor will have
more than a minimum amount of disposable income over the next 5 year [s.
707(b)] (p 397)
[CMI-ME-(1/60 xSO) (1/60xSP)] x 60 >=
i. SO=Security Obligations
ii. SP=total Support Payments
iii. See means test data charts at tabbed appendix in book

28

iv. Steps:
1. Compare the familys current monthly income to the median family income for the
state. If its below, STOP right there. No one will question noncompliance with
the means test (707b).
a. Note: CMI is defined in 101(10)(A) and means the avg monthly income
from all sources received by debtor. This avg is derived during the 6
month period ending on the last day of the calendar month before you filed
(file on Jan 31, its the 6 months before, ending on Dec. 31).
2. Then, Means test. [CMI-ME-(1/60 xSO) (1/60xSP)] x 60 >=
a. Note: To calculate monthly expenses the national standards are tabbed in
the appendix. (This is controversial. How are national standards supposed
to gage how much money you need to live in any given place?)
i. Subtract 5% for food and clothing (always)
b. Once you have that number, if you make less than $6,575 theres no
presumption of abuse and can file chapter 7
c. If its Above $10,950, there is a presumption of abuse, and must file 13
d. If its in between: compare to 25% of unsecured claims. If the number is
LESS than 25% of claims, theres a presumption of abuse and cant file
e. (Normally, bankruptcy practitioners work this by going onto the website)
3. PROBLEM 10-15, p 399 (open book for problem).. walks through means test
a. Debtor is a 3 person family in Washington
b. CMI is $6k a month. This is OVER the meidan in Washington for a 3
person family: $59,732
c. Then use national standards for monthly expenses: $1368
d. Add $52 (5% ntl standard for food and clothing)
e. Then Add whats below, and subtract the total:
i. $420 2 cars (whether or not you plan on keeping them)
ii. Retirement contribtution (not 401k, thats voluntary)
iii. Cost of administration
f. Then ask, at $632/mo (thats CMI-expenses),
[CMI-ME-(1/60 xSO) (1/60xSP)] x 60 >=
g. If they add up to over $10,950, you must file chapter 13. If below $6575
(707), no presumption of abuse and may file
i. If Between:
1. Compare 60 month revenues to the total unsecured claims
divided by 4
2. If its greater than, may not file chapter 7.
3. 707b2 has the correct numbers
4. Last item: if a clients income is too great to file chapter 7, and they really want to,
what to do? Take on more debt!! (preferably not w/ credit card)
PUTTING TOGETHER ALL OF CHAPTER 7:
b. PROBLEM 10-12 (390)
This puts together everything about 7
Destitute, who has consulted w/ a local attorney about filing for bankruptcy, has the following assets and
liabilities:
LEFT WITH
Exempt assets
5k
5 estate
Non extent
5k
35 nonexempt debt
Secured lien on car $10k
CLAIM
Pay
Non Discharge
claim

29

ED loan
Spousal Support
Credit Cards

20
20
10

20
15
0

O
c. Destitute has an estate of:
$10,000 (encumbered car.)
$5k in exempt asset,
$5k in nonexempt assets
$20,000
d. Liabilities:
$20,000 Educational Loans
$20,000 Dom sup obs
$10,000 credit card (car is secured, so that doesnt count
$60,000 total
e. Both the educational loans and the DSO are nondischargeable loans, but they are NOT equal in
priority.
i. CHECK 507a educational loans do NOT have priority
f. This leaves debtor after the case with $5k in his estate and $35k claims (CASE I)
g. WHAT to do?
i. Any payment to a nondischargeable obligation is NOT a preference?
ii. Take the money/nonexempt assets and convert them into exempt assets
1. This leaves the former spouse with nothing, because there are no nonexempt assets
left
h. This creates CASE 2: Estate: 10k and Debt: 40k (this is fine if debtor is retiring and not earning
anything else. Bad for young debtor)
i. TRY:
i. Cant take money from the credit card to make it exempt: BAD. You may not get a
discharge at all, or the credit card company could make the debt nondischargeable
ii. SO: try to add $20k (from available credit on credit card) to debt and the exempt assets
become 30. This puts debtor in total $30k exempt estate and $40knondischargeable debt.
Good place.
iii. Could also use $20k credit to pay the spouses claim. Then, wait 91 or 71 days (so credit
card company doesnt get anything), then have: $10 or the estate and $20k total
nondischargeable claims. (THIS is best if client is young and will earn a lot more money)
j. This is an area of GREAT controversy! No clear line is drawn. Prebankruptcy planning is a
minefield. Know where youre going, bounce ideas off lots of people.
B. Moving on to the means test:
[CMI-ME-(1/60 xSO) (1/60xSP)] x 60 >=
a. SO=Security Obligations
b. SP=total Support Payments
c. What are we doing? Looks at the parameters of a hypothetical Chapter 13 case. Were going to
decide if well let them file Chapter 7 and begin anew, OR are we going to require you to file
Chapter 13 instead and live on a bare income every month until youve paid off creditor
i. This is NOT reality. This is a construct of chapter 13, and something that resembles reality.
Its not what we might do in a chapter 7
d. See Means Chart
e. #1, compare the familys current Monthly income to the median family income for the state. If its
below, STOP right there. No one will question noncompliance with the means test. (707b7). See
the appendix in the book (TAB) or check online.
f. #2 check monthly expenses
i. National standards (p559) (controversy: ntl standard for what it takes to live is based on
how much money you make!)

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ii. Subtract 5% for food in clothing (always do this)

g. Attorneys work this by going onto the website

PROPERTY
Land
Ford Truck
Boat

A. PROBLEM SET CHAPTER 7 HANDOUT

a. Im the trustee. Case filed the day before yesterday
b. First: see what the assets of the ESTATE are: (keep eye on CLAIMS)
Liquidation Value
Lien
Value to estate
$20,000
None
$20k
$15k
$12,000 bank
$1k (could abandon, but
$2k exempt
easily sold so sell)
(Draw this)
$10k
Judicial lien $11k
$10k
(Levied day after
Look at priority- went
petition filed)
to sheriff after petition!

Motorcycle
Other Pers. Property

$12k
$8,000

$16k to bank
$6k exempt

$0
$2k (but maybe not
worth selling if old
clothes, etc.. well
assume that its
worthwhile)

c. CLAIMS:
Freds claim: $11k (from boat) - UNSECURED
Bank has claim of: $4k (left over from motorcycle) UNSECURED
Landlord: $11k - UNSECURED
Step 3. Claw things back 541, 544 (fraud transfers
d. Preferences
i. UFTA from date of transfer, have 4 years to file the complaint
ii. 548 2 years before filing. (and then we have to file complain within 2 years
after filing)
iii. With respect to preferences only, we benefit from the presumption that the
debtor is insolvent (ONLY in 547)
iv. W/ fraudulent transfers, must show that debtor was insolvent
TRANSFERE
E
Nephew F

PROPERTY

VALUE

COMMENT

ANSWER

To Estate

Furniture

$10k

Gift; no
consideration.
Theres letter
that says that
he should keep
it until
financial
difficulties
done
Gift.

Look back 4
years prior to
date of filing
of complaint.
AND
Actual fraud
b/c

$10k

Within 2 years.
constructively
fraudulent
Fraudulent

$9000

July 15, 2006

Mom

Cash

$9k
Nov. 15, 2008

Landlord

Cash

$11,000

Payment of

$11,000

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Hop Cassidy
Tort claim

Loan

Nov. 1, 2008
June2007

delinquent rent
Preference
Postpetition.
Doesnt matter

B. TOTAL VALUE OF ESTATE: $69,600 (First phase done)

C. CLAIMS SCHEDULED (book p 314)
Creditor
Amt
Secured
Comments
Payday finance
$34k
No
Payment loan, due
12/29/08
Wilma Smith
$6k
Child support
IRS
$9k
Income taxes 2004

IRS

$6k

Income taxes 2006

Wilma Smith

$9k

Lawrence

$25k

Property
settlement to wife
Unpaid Legal fee
for bankruptcy
counseling and
filing

$6,600

1st
General unsecured
3 years before
petition date rule
(2006) so this is
Priority 8 (note: if
income tax is not
priority, it is
dischargeable. If it
is priority, it is
nondischargeable).
Unsecured
Unsecured

D. Estate = $69,600
- $6,000 Child support
$63,600 (then admin expenses)
- 9,000 IRS
- $6,000 IRS
$48,000
Divide remainder up, take out trustee money
- $11k (from boat) UNSECURED
- $4k (left over from motorcycle) UNSECURED
- $11k landlord UNSECURED
- $34,000 Payday
- 2500 legal fee
- 9000 property settlement to wife
I. Trustee money
- 25%x $5000 = 1250
- 10% x $45,000 = $500
-5% x $331,600 = $1580 (b/c added $12k from motorcycle)
+ 1000 (for being own attorney
$8320
- Add amount kept from motorcyle 12k b/c its monies dispersed in the case by the trustee to parties in
interest excluding the debtor 326a (selling it b/c selling is beneficial for the estate) Benefit by the amount
he disperses to the secured party (NOT FTO THE DEBTOR)
- $49,270 (amt in estate) / 80,500 = .61205
- Multiply .61205 times unsecured claims.

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QUESTION 2
To improve the debtors position, what should the debtors attorney do?
Positive: Debtor paid nondischargeable debts, has $2k in cash, 6k in clothes
What could he have done?
o Convert nonexempt land and motorcycle into exempt assets
o Buy a residence worth $15k
o Put a home on the land that would make it a homestead (tents dont work, trailers do)

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II.

III.

Chapter 7 Liquidations (for purpose of comparing to Chapter 13 and 11)

a. Overview
i. Purpose: fair distribution of nonexempt property of debtor, give debtor fresh start by
discharging obligation to pay unpaid portion of most debts
ii. Available to both individuals and businesses
iii. Takes 3-6 months
iv. Begins when debtor files petition for bankruptcy relief and pays appropriate fee or when
creditor files an involuntary petition
1. Debtor must be eligibleincome cant exceed certain amount
v. Automatic stay goes into place when petition filed; injunction against virtually all creditor
collection activity
vi. Creditors must file proof of claim to demonstrate validity, nature, and amount of claim;
if timely filed and correct then allowed
vii. First meeting of creditors occurs shortly after filing, attended by debtor, debtors lawyer,
and trustee; trustee will ask questions to locate missing property or uncover fraudulent
transfers
viii. Estate: all of debtors legal and equitable interests in existence when the case begins, any
property that the debtor transferred prior to commencement that trustee is able to recover
for the benefit of creditors, certain limited property that debtor acquires after
commencement, earnings and sale proceeds acquired with property of estate
1. Estate doesnt include exempt property and debtors future wages
ix. Payments of claims: first to priority claims [child support, taxes, employees claims for
wages, trustees fees], then rest of assets distributed pro rata to unsecured creditors
whatever remains is most likely discharged
1. Secured claims generally ignored because retain interest in collateral and can
extract value from that
Chapter 13 (b25) (411)
a. Overview
i. Individual debtor must have regular income and debt must not exceed certain specified
amounts. (focused on the debtors income in chap 13; while in chapt 7 focus on property)
ii. Estate includes debtors post-petition wages/salary and debtor is generally permitted to
retain his/her assets
iii. Payment plans lasts for 3-5 years, with trustee taking specified amount of wages and
distributing to creditors according to priority of claimsat end of payment plan, debtor
receives discharge of most unpaid debts
iv. Payments may take longer for creditors to receive, but each creditor must receive (in
present value terms) at least what he/she would receive if debtor went into Chapter 7
v. Advantage over Chapter 7: debtor is able to keep most of assets regardless of whether their
value exceeds the exemption amount
b. Eligibility Compared: Chapter 7 vs. Chapter 13
i. Eligibility Requirements/disadvantages of Chapter 13
1. Must be individual debtor with regular source of income and fairly modest debt
levels to be eligibles. 109(3); 101(30)
2. Plan must pay creditors what would have gotten under Chapter 7 (s. 1325(a)(4))
and must do so with 3 or 5 years (s. 1322(d))
3. Plan must provide for full payment of all priority claimss. 1322(a)(2)
4. Administrative expenses must be paid first and can substantially increase the cost
of completing a Chapter 13 plans. 1322(a)(2)
ii. Eligibility disadvantages of Chapter 7
1. Debtors with high income may fail the means tests. 707(b)
2. Debtors who receive discharge in last several years are ineligible for a Chapter 7
discharge [s. 727(a)(9)], but may be able to get a new discharge in Chapter 13 [s.
1328(f)]
3. Debtor receives slightly broader discharge under Chapter 13 [s. 1328(a)]

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4. Chapter 13 debtors can cure defaults on secured obligations, de-accelerate debts,

and strip down some secured claims (except home mortgages and purchase-money
loans) [s. 1322(b)(2), (5) and (c)]
c. Eligibility for Chapter 13
i. Human being, regular income [s. 109(e); s. 101(30)]
ii. Unsecured debts of less than $336,900 and secured debts of less than $1,010,650; debts
must not be noncontingent and liquidated, but may be disputed [s. 109(e)]
1. Monetary limitations meant to drive debtors with large debts into Chapter 11
where more court supervision
iii. 1328(f) Must not have received discharge under Chapter 7, 11, or 12 during past 4 years
from petition moment to petition moment or Chapter 13 during past 2 years (petition to
petition) to receive a discharge of all debts (can still file)
iv. Have to go through credit counseling during 180-day period prior to filing to be eligible
s. 109(h)
d. Mechanics
i. After determining eligibility, then determine commitment period. Commitment period of 3
or 5 years? 1325b4 determines this (1322d1 also discusses it)
1. If the current monthly income of debtor and debtors spouse combined, when
multiplied by 12, is not less than:
a. In the case of a debtor in a household of 1 person, the median family
income of the applicable State for 1 earner
b. Similar w/ 2-4 people in family
c. If over 4 individuals, highest median family income for the state for a
family of 4 PLUS $575 per month per individual in excess of 4

ii. Debtor must begin making payments to trustee w/in 30 days after plan is filed
(even if not yet confirmed) 1326a1
iii.

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1. If CMI is less the amounts specified, the plan may not provide for payments over a
period longer than 3 years (36 months). If CMI is greater than MFI - 5 years.
iv. Debtor must file schedules giving information about employment, income, expenses, debts,
property, and estimates of future monthly income/expensesRule 1007(c) and must file a
plan within 15 days of filing petitionRule 3015(b)
v. Debtor must begin making payments to trustee within 30 days after plan filed, even if plan
not yet confirmeds. 1326(a)(1)
1. If plan never confirmed, trustee gives money back to debtors. 1326(a)(2)
e. The Estate
i. Property of the estate for Chapter 13s. 1306everything form Chapter 7 and property
and earnings acquired after filing and before the case is closed
ii. Once the plan is confirmed, the property of the estate is vested back in the debtors. 362?
f. The Stay: creditors enjoined from making any efforts to collect prepetition claimss. 362(a)(6)
from petition moment until case is closed (when last payment is made and trustee filed statement
with court saying final payment made and court grants discharge)
i. Co-debtor Stay: s. 1301(a) prevents creditors form attempting to collect a consumer debt
from an individual co-debtor during the pendency of a bankruptcy case (more protection
than Chapter 7)
g. Trustee (Standing Trustee)
i. Dispersing agent, taking payment from debtor and giving to creditorss. 1302(b)(5),
1326(c)
ii. Recommends approval or disapproval of claims. 1302
iii. Can object to improper creditor claims
iv. Can object to debtors discharges. 1302(b)(1)
v. Incentive: wont get paid if debtor cant make payments or if debtor backs out (in which
case money goes back to debtor)
vi. Can receive as much as 10% of all disbursements made to creditors under the plan (doesnt
affect secured claims, but reduces percentage of recovery of unsecured claimants)
h. The Plan mainly 1322 and 1325
i. General Requirements 1322a, b
1. Priority claims pay in full over life of the plan, but without interests. 1322(a)
(2)
2. Plan may classify claims into different groups provided it doesnt discriminate
unfairly among classes of claims and provided that it treats all claims within a
class alikes. 1322(a)(3), (b)(1)
3. Rules of confirmation:
a. Secured and priority claimants must be paid in full unless agree to other
treatments. 1325(a)
b. Plan must be proposed in good faiths. 1325(a)
c. Best interest of creditors test: An unsecured creditor in chapter 13 must get
at least as much out of the plan as it would in chapter 7 1325a4
d. Nonpriority unsecured creditors must either be paid in full or debtor must
allocate all disposable income for the applicable commitment period to
the payment of creditorss. 1325
i. Depends on debtors income, but usually 3-5 yearss. 1325(b)(4)

36

e. Disposable Income: s. 1325(b)(1)(B) requires plan to either pay creditors

in full or allocate all of the debtors projected disposable income to the
plan for the applicable commitment period
i. Disposable income = income which is not reasonably necessary
to be expended for the maintenance or support of the debtor or a
dependent of the debtors. 1325(b)(2)(A)
f. If debtors income exceeds median household income of the same size,
reasonable expenses are computed using the formula in the means tests.
1325(b)(3)if income doesnt exceed state median, court determines
whether each of listed expenses is necessary
4. Courts have power to modify plan if financial conditions changes. 1329
ii. Treatment of Secured Claims: can cure and/or modify secured obligation [can pay
arrearages and change term, number of payments, and interest ratebut total stream of
payment has to be equivalent to the value of the secured claim on the day of confirmation
(present value)]
1. Exception: cannot modify secured claim where sole collateral is principal
residence (can only cure)s. 1322(b)(2)
2. Limitations:
1 Debtor must adequately protect the creditors interest in the collaterals. 361
a. Any periodic payments must be made on a monthly basis and must not
vary in amounts. 1325(a)(5)(B)(iii)
b. Must pay secured claimants the amount of their secured claim in present
value termss. 1325(a)(5)(B)(ii)
i. Value of secured claim = value of collateral [s. 506(a)], based on
replacement value
ii. Present value = as of the date of confirmation; till rate is 7%
iii. This rule essentially allows a Chapter 13 creditor to strip down a
lien (not allowed in Chapter 7)
c. Anything bought within the year of the petition date or a motor vehicle
acquired within 910 days preceding the petition date must be paid in full
according to hanging paragraph of s. 1325(a), but 7th cir. says have to
just pay off secured portion and the rest becomes an unsecured claim
iii. Treatment of Unsecured Claims: debtor may alter contractual payment schedule, pay only
small portion of claim, and treat differently from other unsecured claim, but 3 important
limitations:
1. Each priority claim must be paid in fulls. 1322(a)(2), (4); 507=priority
2. Unsecured creditors must receive at least the liquidation value of their claimss.
1325(a)(4) (what theyd get in chapter 7best interest of creditors test)
3. Disparate treatment of different unsecured claims limited in 3 ways:
a. All claims within a single class must be substantially similars. 1322(a)
b. All claims within a single class must be treated alikes. 1322(a)(3)
c. Plan must not unfairly discriminate among different classes of claimss.
1322(b)(1)
4. Must pay the higher of:
a. Best Interests of Creditors Test = must do as well as would have done
under Chapter 7 in present value terms (meaning liquidation+interest)

b. Disposable income (to find monthly expenses)

i. CMI-ME-MS-MP=Disposable income
ii. If CMI < MFI judge will decide (prob 3 year period)
iii. If CMI>MFI 707b means test
c. Debtors current monthly income > median family income = 5 year plan
d. Total all of these payments to determine the MPP
5. Can the debtor make the payment plan?
a. Compare CMI with the MPP. CMI-MPP = is this a positive number?

37

b.
c.
d.
e.

i. If note, monthly expenses exceed income. If it is, check to make

sure that its enough for debtor to live on
1325a6 feasibility. (CMI monthlyPayPlan=something thats enough
for the client to live on?)
1325b2 disposable income analysis. Defined here
CMI = avg income of previous 6 months ending on month before petition
date
Disposable income =
i. FIRST: compare CMI with Mean Family Income of state
If GREATER than meanthen look at 707byour disposable income is
determined based on the 16 page form using census data or process
described in 707b (dont take into account charitable contributions)
If LESS than Mean what the judge thinks

SECOND:
CMI
- necessary monthly expenses (707b)
- monthly secured payment
- monthly priority payments
disposable income
* If the disposable income is greater than the monthly payment plan,
SMP = 500
PMP = 100
UMP = 150
MPP = 750

CMI = 2000
ME = 1100
SMP = 500
PMP = 100
DI = 300
Minimum Plan Amount = 500+100+ Larger of (UMPs 150 or DIs 300) (1325(b))
= 500+100+300
= 900
iv. Effect of Confirmation
1. Confirmation vests all property of the estate in the debtors. 1327(b)
2. Confirmation binds the debtor and all of the creditors to the plans. 1327(a)
a. But plan thats confirmed despite failure to provide for payment of priority
claims is null and void and can be attacked after confirmations. 1322(a)
(2)

38