Creditor's Rights - Spring 2001
Nonjudicial Collection Methods Provision for frivolous actions.
Every individual is both a debtor and creditor
Depends on the specific situation
Security interest provides leverage on the part of the At common law, tort action for unreasonable publicity
creditor for the debtor to pay that particular debt.
Accelerate entire loan
Foreclosure Lender Liability
Non-payment may result in adverse credit report or Regulations for other creditors also apply, with some
cutting off credit additional regulations
Prioritization is based on legal and non-legal factors; so Implied duty of good faith
legal position may be the same but priority is different. KMC v. Irving Trust
Alternatives to collect debt: Bank had security for line of credit and cut off
1. Lawsuit - yes, this is available within the agreement
Advantage: Client may want/expect - gives incentive KMC said caused business to fail
Disadvantage: Court imposed implied duty of good faith
Expensive/delay Test: Would reasonable bank have accelerated the loan
No guarantee of payment under these circumstances?
Could trigger bankruptcy There are restrictions on how a bank can call loans
Unlikely to be made whole Sometimes technical default is not enough
May lose entire if debtor successfully argues
invalid debt or violated consumer protection laws
2. Negotiate (to improve relative position)
State Law Judgment
Get something better than nothing
May negotiate lower payment/longer Most States
period/guarantee/higher interest rate in return
for no lawsuit
Judgment Document stating there is an
Leverage is created now by threat of lawsuit
Disadvantages: No interest in specific property - no
If security interest was not contemporaneous priority; general unsecured creditor
with the loan, and debtor files for bankruptcy Waiting period to allow decision to appeal
within 90 days, may be unenforceable. File writ To clerk of court to verify there is a
May not be much property left to take security judgment
interest in - perhaps stocks, bonds, retirement
funds, business assets, personal assets, second Writ issued by clerk of Indicate what property should be
on house or car Court seized; will probably take more to
3. Restructuring/workout cover fees
Greater likelihood of being paid Sheriff levies on the May either seize or post notice of
Will not have to write off bad loan Property seizure
Avoid litigation costs Upon levy the J.C. becomes a lien
Disadvantages creditor with respect to specific
Lost time; postpone the inevitable property
May be strung along; may end up filing
anyway, and time is lost Sheriff returns the Will say how he levied;
4. Threaten legal action - risk: may be prohibited if don't Report Usually will say how much received
follow through at auction; Date is important for
5. Look for persuaders priority
Tort Sale Proceeds, less cost, will be
Criminal charges distributed to J.C. until paid in full.
Civil action (FDCA, FCRA) If excess, return to J.D.
FCRA was revised because of creditor abuses
Distribution of If deficiency, start over
Made more specific
More detailed procedures
Page 1 of 25
Creditor's Rights - Spring 2001
Since atty has mechanisms (depos. Interrogatories) to find
out what the debtor has, should let the sheriff know. Wyoming Statutes
Ask for cash first
Prior to 1999
Some States Automatic lien on real property in county where
judgment was granted
Judgment Record judgment, docket Meant - must search real estate records and clerk's
Some states, when judgment is office and UCC records.
docketed, get lien on real property; In 1999
sometimes personal property. Amended to require file with clerk (1-17-303).
Docket date gives priority date No longer self-executing
Recordation Certified judgment
Take to real estate office to record
Advantages Must find out all the property the person has.
Lien provides leverage to get paid Compare bankruptcy
Can increase expenses for JC - waste of time
Problem 4.1 Advantages of state law procedure
To show position of creditors with various judgment dates,
1. No lien, therefore, general unsecured creditor
Good to know how to get liens in place for priority in
2. Sheriff levied, so creditor has lien - paid from proceeds
a. Encourage sheriff to look for other goods
3. Remainder to JD unless one of the other creditors takes If debtor is client, explain this to suggest bankruptcy as
If waiting period violated, improper seizure Aging Judgments
Dormant - must be revived before can execute
Priority with Competing Cannot revive after 21 years
execution Liens - State Law
1-16-502 steps to revive
1. Some states - Relation back to delivery date of writ to To avoid dormancy, periodically try to execute
sheriff (WY) Lose priority after one year § 1-17-336
a. Fairness - did all you could do - up to sheriff Statute of limitations to enforce judgment - 21 years
2. Some states - First to levy wins Execution writ - 60 days to execute
3. Some states - Based on issuance date of writ provided the
writ hasn't lapsed Problem 4.2
4. If the statute says a judgment constitutes a lien, it does - Sheriff levied but forbore seizure
otherwise it does not To show relative position of creditors;
5. Levy - some states say must physically seize; some just tag Distribution of proceeds
a. Usually - first to levy wins Leverage
b. Must wait until waiting period expires before levy Security interest in property
c. May get stay of execution (put up bond) Get agreement they will not borrow or grant other
6. Wyoming security interest
a. Lien attaches when certified judgment filed (uncertain 1. If no physical seizure required, lien can relate back to the
interpretation) filed with clerk. issuance of the writ; can affect if writ expires
b. In Albany Co. cross-reference to all real estate records 2. Can argue that leaving property with JD was waiver of lien
i. If property in another county, take transcript 3. Lose priority by stopping
of district court in judgment county to clerk of 4. Is there really a levy if the JD has the property?
court and county clerk where property is and
ensure recorded in real estate records
What is the effect of halting the collection process?
ii. Personal property - writ to sheriff
Can have risks for JC
iii. If property in another state, comply with law
Documents could expire (refile or lose)
of that state
c. Personal property - dates from levy (seizure); deliver Left with JD for a long time, hard to assert that
writ - sheriff seizes sheriff had dominion (levy could be challenged)
d. 1-17-309 - first delivered to sheriff gets priority of Halt of execution constitutes a waiver
proceeds. (Two delivered on same day - distributed in
proportion to debt).
Page 2 of 25
Creditor's Rights - Spring 2001
Think carefully before agree to forbear, because secured Low price alone not enough - may signal fraud,
creditor with perfected security interest in specific property mistake, overreaching or failure to follow statutory
may come in. procedures;
If agree to workout -- condition it on agreement to protect Unfairness
yourself (get leverage) If only asset was worth 64,400 and just have
Security interest $2000 judgment, court may step in under fairness,
Agreement from JD won't borrow more or without and say can't force to sell such large asset to satisfy
your consent Sheriff's duty
Don't grant security interest in any other property - if General rule - In most states, sheriff is agent of both JD
refuses, ask to find out what other property may be out and JC and must protect both; must exercise care and
If breach this, allows to accelerate and move in self- Must levy only o property sufficient to satisfy the debt.
help under Art. 9. Dividing the property
Some states allow (by statute) the JD to choose
Sheriff then responsible to ensure sufficient property
Why Reduce Technicalities?
In real case, JD could get back the property if:
Help creditors get their money Paid $20,000 for it to purchaser
Sales more quickly $2000 to Creditor 1
Fewer challenges $17,000 to Creditor 2
Less cost The purchaser is the only one who loses
Prices would rise Discourages buying at sheriff's sale
If want to discourage judicial sales, use other means (make So, although this seems fair, may have economic effects
More confident sale won't be overturned
But there is no evidence that reducing technicalities would Garnishment
result in more sales.
Why Have Technicalities? Procedure to reach property of JD held by a third party
Protect JD - minimize debtor's loss Bank account
Protect JC - may get better price Proceeds of contract
May help prevent fraud 1. To use garnishment procedure must be a JC
Encourages negotiation and refinancing a. Must have judgment in hand
Encourages money recovery rather than sale b. E.g. just because have Art. 9 rights doesn't mean can
Discourages sale and seizure garnish
But - no evidence 2. Essentially bringing another lawsuit
If procedure was easier, not so many set aside 3. Must follow state's procedures
Higher prices 4. Time of service of writ to answer (as hearing, of contested)
Not so many technicalities, just deal with in
requirements for the sale. Hypo
Jason $500 loan Ryan
Judicial Sales Garnishee
Owes $550 over owes
In most states, sale can be either public or private 4 months $1000 next Car
In WY, if show cause can order private sale (usually get month
Sale procedures are very technical Garnishment Kelly
Notice Action Garnisher
Waiting period Ryan unhappy with the car and refuses to pay Kelly.
Redemption provisions Offers to return car - refuses
Appraisal provisions (WY) What can Kelly do?
1. Lawsuit - judgment against Ryan Two
Problem 4.3 2. Garnishment action against Jason Lawsuits
Shows sale procedure
How to set aside sale
Page 3 of 25
Creditor's Rights - Spring 2001
Raise defenses (usurious)
How does Kelly know that Jason owes Ryan money? Claim right to setoff
Discovery procedures - interrogatories, depo. Hearing after answer
If Jason is in Colorado - use Colorado law
Uniform Enforcement of Judgment Act
Garnishee is Jason One-time v. Continuing
Garnisher is Kelly Garnishment
JD - Ryan
JC - Kelly Restrictions
General rule - any debt in possession that is garnished - must Don't want to take all of salary
hold (keep in safekeeping) until finds out what to do. Incentive to keep working; social costs
If wrongfully paid out, garnishee can become liable. States vary on how much can be taken
Jason's defenses against Ryan (like interest rate too high) Federal restrictions
Goes in answer Wyoming - 25% disposable income (after taxes, certain
1. No obligation is owed to JD, or exempt property)
2. Offset, or Threshold - If JD makes less than this amount, cannot
3. Counterclaim against Ryan garnish for anything other than child support.
If ignores garnishment and pays Ryan, Kelly gets default
judgment against Jason for full amount (Webb v. Erickson) Problem 5.2
Will look at evidence about what he owed Ryan, and how Shows timing of transactions, and which are subject to
much he can pay on the garnishment. garnishment
Lease (disputed date of execution)
Problem 5.1- apply Wyoming statutes Equipment that was leased
Wyoming garnishment statutes
1-15-425 - Wyoming net - when writ is served until writ is These measures are extraordinary
discharged. Matter of state law
1-15-417 - In Wyoming, may get attachment, replevin,
Bank can offset overdraft garnishment
How do garnishers divide? States differ, but here Attachment - lien on certain property
use delivery to sheriff Replevain - request delivery of the property - wrongful
1-15-504 - Wrongfully paid the check. JD entered a judgment retention
Effect of answering 5 days early - varies by state. Pre-judgment garnishment - attaches to property in
hands of 3rd party
Answer 1. File complaint - claim recovery of money judgment
2. Written motion to get court order
Answer form sent along with writ of garnishment a. Notice, opportunity for hearing
State statutory procedures 3. Or - Affidavit claim irreparable harm before notice can be
Garnish wages, amount, or stream of payments under given
contract a. Dispose of property
Cannot garnish unless you are a JC b. Concealed
Separate lawsuit against garnishee, c. Value impaired
Therefore, discovery procedures are available to find 4. Hearing at earliest possible date
out what property has (if don't complete answer Very technical procedure
correctly) Must post bond for costs and damages
1. Procedures are very technical Problem 6.1
2. Generally allow net around assets in hands of 3rd party at To show procedure for pre-judgment remedies, and some of
time of writ the problems with it.
3. Net lasts until (differs) answered, discharged, object. Must show need for extraordinary measure
Fundamental rights, due process
JD can claim property exempt Order must be issued by a judge
Garnishee Must set forth facts
Can say no obligation owed
Page 4 of 25
Creditor's Rights - Spring 2001
Affidavit must be more than conclusory (cannot just say he c. Even if not in statute, courts generally protect the
will conceal assets) homestead.
Must have personal knowledge of facts d. Often use common law tenancy by the entirety - would
Must have immediate hearing need other owner to sign.
Writ will not continue unless requesting party puts on
proof. Problem 8.1
Examples of going through possessions to determine what is
Wrongful use of State Process exempt
Tax judgment not exempted by any state law.
1. Secured creditor cannot breach the peace Can usually negotiate
a. Unlawful seizure if breach Private Texas statute - arguments to be made to make some things
b. Civil and criminal penalties Repossession exempt; car on blocks, wedding ring; law books
c. Damages Recovery under pending claim - states differ
d. May constitute a tort Bank account that contains wages and social security
2. Sheriff acting on repo is action of the State payment
a. Misuse of process Argue that it keeps its exempt nature.
b. § 1983 civil rights actions At what point is it no longer current wages?
3. Misuse of collection statutes Holmes, Williams cases
a. Malicious prosecution Hard to prove. Debtor values the items, creditor can object
b. Abuse of process Needs malice. Burden of proof depends on state law
Exemptions Problem 8.2
To show distribution of proceeds from sale of home (including
Every state has statutes 1. Expenses of sale - sheriff cost, fix-up, advertising
Policy - don't want people to become destitute 2. Mortgage amount (consensual liens)
Want people to have enough to make a fresh start. 3. Exemption amount - JD
Not exempt from voluntary liens 4. First JC who executed involuntary
PMSI Not protected 5. Other JC whose judgments have attached, liens
Mortgage by exemption Or steps taken toward execution
Installment contract statutes 6. JD
Applies to voluntary liens
Judgment The forced sale
Levy Bidding in
Garnishment Secured party may bid amount up to amount of debt
Can only garnish non-exempt property and don't have to come up with the cash
Execution - can only execute on non-exempt property Reduction of deficiency owed by debtor
In addition to state statute, there are a number of other Discourages unrelated parties
exemption statutes Most statutes say court must consider FMV
Federal exemptions Bid-in price probably not a good indicator of FMV, because
Social Security the secured party doesn't have to come up with cash,
AFDC whereas unrelated party does, so unrelated parties are
Veterans' benefits discouraged.
Black lung However, even if at private sale
Other state exemptions Will probably get less than full value
If owner knows he will lose it - won't take care of it.
1. Classification - most fighting time here
a. must make statutory construction arguments Why would JC want to force a sale even if he gets nothing?
b. Legislative purpose, plain meaning, specificity or lack Force into bankruptcy
c. Many items move from state exemptions to other Revenge
2. Changing form - does it stay exempt? Anger
3. Partially exempt 1. Could get leverage - try to get 2nd mortgage and improve
a. Sell property position (currently 4th on the list
b. Exemption attaches to part of proceeds 2. Might ask for reaffirmation of the debt.
4. Homestead exemption 3. Could try to buy the property himself.
a. Especially multiple property owners
b. Can one person waive the exemption?
Page 5 of 25
Creditor's Rights - Spring 2001
Paternalism of the judiciary
Downside - Judicial efficiency
Important issue in whether debtor gets to keep the property Based on limited experience; forget to list some things
Proceed value Gives direction to people who have made bad decisions
Sometimes exemptions are absolute - like family bible Fraudulent Conveyances
If there is a $ value on the exemption,
Estimated value Themes
-security interest Fear of fraudulent debtors
If more, must be sold Fear that creditors will be misled
But if property is less than exemption amount, sale will not Assist bona fide purchasers
be ordered 1915 UFCA - Wyoming adopted and still has
If represent debtor, many times wants to keep, not sell. Intent: Not free to give away own property/make
Sentimental bad deal if serves to chat creditors
Expensive to replace Restriction on basic freedom
Little proceeds from sale 1984 UFTA - Adopted by many states - same basic principles,
Usually won't recover debt. with a few technical changes
Therefore, exempt property has high leverage/hostage
Equity in property - don't know until actually sold
Value from sale Section 5
-consensual lien 1. Transfer (§ 1(12)
Debtor's equity 2. Claim arose before transfer made
3. Did not receive Reasonably Equivalent Value and
Wyoming 1-17-316 4. Debtor insolvent or became insolvent (§ 2)
Officer who levies must designate an appraiser a. 2(a) - Balance sheet testimony
Appraisal to sheriff b. 2(b) - not paying as become due
If appears 2/3 value is sufficient to satisfy execution with Reasonably Equivalent Value
costs, don't go after more property Is there a market?
Mean - will not sell if it will bring less than 2/3 of debt Discount for fast sale
Must be prepared with arguments and paper trail
How to structure order for the sale? If all elements of § 5 are met except REV, go to § 7
If JD - private Transaction is set aside even if good faith
If JC, Buyer is the one who is hurt
Give to long, may reduce value of property Defenses of buyer under § 5
May order cost of upkeep as cost of sale Not talking about § 8 because § 8(a) applies to § 4(a)(1) intent
Determine what is the worst that can happen, and plan for
that If have § 5 claim, good faith is not a defense.
Only defense is that one of the other § elements is not met.
Looks at sale of house and what must be done with the money §4
that goes to JD as exemption amount (a) Claim arose before or after
Intent of legislation - fresh start Transfer
How long should exemption be protected? What if can't Creditor before or after
find a house Actual intent to hinder, delay, or defraud
If use the money to buy a Porsche? 4(a)(1) factors in determining actual intent (4(b))
How paternalistic do we allow the judiciary to be? 4(a)(2) or without receiving REV and
Some states protect for specified period of time unless put Remaining assets unreasonably small or
in same asset Incur debts beyond ability to pay
Some states disregard proceeds. Only use 4(b) when talking about 4(a)(1)
4(a)(2) don't use facors
Problem 8.4 Present creditors - better to make § argument because need
Policy basis for exemptions not prove intent
1. Overall dollar limit - JD can keep whatever he wants
2. List the categories - JD can retain any amount **In Wyoming, UFCA has good faith defense because of §§3
3. List the categories and limit the value of each group and 4 together
Page 6 of 25
Creditor's Rights - Spring 2001
Creditor may come back and say assisted in fraud
More defenses under old act - more good faith stuff
New - good faith not a defense Problem 10.3b
Is this fair? Client asks for help in making a transfer - don't know for sure
Creditor is unsecured whether it is fraudulent
Restriction on all property transferred Document that you asked all the right questions
Implies promise to pay means won't squander assets Malpractice - did you block something he was allowed to
until pay. do?
Statute says -- certain facts suggest cheating;
When those facts are present presume fraud
Different, depending on future or present creditors.
Problem 9.2 How Bankruptcy Works
Application of § 5 and § 4 to determine whether claims will be
successful under either of these (apply elements)
1. Filing creates estate
Problem 9.3 2. Automatic stay provides protection from further creditor
Apply factors - no asset, so no transfer of asset. action
3. Divide property in estate
Problem 9.4 a. Exempt - to debtor
b. Non-exempt - sold and proceeds divided
What can creditor recover from bona fide purchaser, if
4. Creditors take allowable secured claims
shown the conveyance was fraudulent?
5. Priority of unsecured claims
Concept of innocent buyer v. innocent creditor;
Amount given - probably buyer can get that back after
From Creditor's Perspective
Amount spent on improvements? Depends on State Law
interpretation; lien for improvements the BFP made
Has to compete against other creditors
Enhanced value of property because of improvements?
Pressure to move quickly
Harder to BFP to claim
Often get less because forced sale
Other Ways to Hide Assets - Can you Plan for
Must follow procedures - where is property?
Problem 10.1 Collective procedures - interest of all creditors
What to do with cash, if bankruptcy looms All creditors work with debtor thinking will get
Full spectrum among the states on what will be allowed more than with forced sale
Will have problems with conversion, even if the law allows. Federal jurisdiction - improves ability to control
Even if conversion is allowed under the relevant state Debtors have to file elaborate schedules. Creditors
law, may deny discharge under bankruptcy. benefit from enforced candor
Coplan From Debtor's Perspection
Planned carefully and moved to Florida to take advantage Bankruptcy
of homestead exemption. Discharge - frees from obligations
Court held it was a concerted effort to evade creditors, and Policy reasons:
denied Florida exemptions a. Humanitarian
Court has power to deny relief under the state law, if debtor b. State interests - safety net to avoid becoming
has not acted in good faith public charges
Fact specific c. Safety valve - mitigate harsh consequences of
Reason for move
d. Avoidance of debt has adverse effect on the
Lawyer's advice on conversion
Distinction between treat of businesses and individuals
Individual - focus on fresh start
Legal right to convert; malpractice not to advise
Business - more from a financial standpoint
No one will challenge converting cash to necessities
Two approaches in Code
Bankruptcy laws may prohibit discharge later
1. Liquidation - sell-out
Own feelings of ethics a. Available to individual and to business
Page 7 of 25
Creditor's Rights - Spring 2001
b. Take everything; I'll try again. What if employer promised to set up retirement
c. Usually Chapter 7 account
2. Reorganization No money in it now
a. Allows debtor to keep assets in exchange for promise Promise is contract right
to pay with method to repay. Doesn't fall under ERISA.
b. Chapter 11 - Individual and business; If granted an interest in retirement account - this is
i. Lots of assets a consensual lien.- becomes part of estate
ii. Rich people more like a business Policy for retirement plans - encourage to save for
c. Chapter 13 the future and not be State wards in old age.
i. Real people with relatiely modest debts
Abuses like OJ Simpson - assets protected
Elements Common to Consumer from bankruptcy because in retirement plan.
The estate Property right
The minute a petition is filed, there is an estate.
Everything previously owned by the person
§ 541 (Lottery ticket)
Includes (Promise to marry is not contract right)
Tangible personal Problem 12.3
Intangible personal Contract is part of estate
1. Is the item in question "property?" Value depends on crop when it is harvested
2. What is the debtor's interest in the property? Farmer does not have to harvest, unless it is a personal
3. Did the debtor have an interest as of the services contract; if he does harvest, he is entitled to
commencement of the case? compensation for the value of his services
4. Then, do any of the exemptions apply? § 522
541(a)(1) is very broad - want to bring all property into Problem 12.4
estate Trust, with non-assignable rights to future income and
Exception corpus; gets these when mom (who is sick) dies
(b)(1) - Power as trustee that can be exercised only for Estate gets income already received
someone else's benefit Whether estate gets corpus under 541(a)(5) depends on
(c)(2) - restrictions on transferability of trust are definition of devise, bequest - so wait to file until she
enforceable (spendthrift; ERISA-qualified) dies
Policy for including almost everything in estate. 541(c)(2)
1. Need to monitor the debtor's property. If the court
General rule - Invalidates restrictions on transfer of
knows about everything, can consider exceptions debtor's property
2. Debtor gives up all non-exempt property
Caveat/exception - A restriction on the transfer of a
3. Concern that debtor can construe a statute to not
beneficial interest of the debtor in a trust that is
include valuable property.
enforceable under non-bankruptcy law is enforceable
in a case under this title.
To go through list of items and determine whether each is part
of the estate. Note: Includes property debtor acquires or "becomes entitled
to acquire" within 180 days after petition by
If have legal title and someone else has equitable
title (like you are the trustee and someone else the Bequest, devise, or inheritance
beneficiary), the legal title comes into the estate, Property settlement or divorce
but the beneficial interest does not As beneficiary for life insurance
If there are profits from the estate (dividends from Net comes out at date of filing and extends for 180
stock that goes into estate), § 541(6) overrides (5) days
requirement of interest on date of filing, so goes to Interpretation question as to whether the corpus is an
ERISA qualified retirement account - NO Policy: windfall; not expecting, not able to manipulate
Spendthrift trust - NO (§ 541 (c)(2)) Therefore, does not impair fresh start
Trust provided for benefit of another -
restrictions to protect from "wasting" assets What is interest in property?
No property of the debtor
Must look to state law
Page 8 of 25
Creditor's Rights - Spring 2001
May be included No time for calm cost/benefit of filing
Certain Usually overwhelmed
Determinable Shows different conditions, and effect of filing
When matures, becomes part of estate (garnishment, check outstanding,
May be enforceable Criminal prosecution for bad check - some wiggle room
Expectancy Some courts have held that conditional dropped
Marry rich charges (conditioned on paying back) is a collection
Work for larger law firm device, and can enjoin DA from prosecuting
Not part of estate Some courts order the debtor not to testify so drop.
Doesn't stay criminal prosecution unless it's really a
Problem 12.5 Alimony, child support can go forward
To show arguments for whether awards, bonuses are part of the 362(b)(11) doesn't prevent presentment of negotiable
Is the award for past services (estate) or contingent on an Present to estate, reject, this preserves claim against
event that happens after filing (not estate) other parties.
Something like research award, what will the estate do with Does not allow to enforce against debtor (preserved
it? May have to abandon because restrictions prevent against secondary obligors on check)
anyone from bidding on it. 362(a)(7) setoff
Generally recognizes state law rights to setoff
Problem 12.6 May not set off post petition against pre-petition unless
Licenses get relief from stay
1. Whether become part of estate depends on whether can be Supreme Court has held that administrative freeze on
transferred bank account does not violate the automatic stay
2. Interest involved in identity of license holder. (driver's because just preserves the status quo.
license, liquor license)
Factors to consider Problem 13.2
Some courts respect stated policy on transferability To show range of actions that cannot be done by creditors
Some courts look at what really happens without violating the automatic stay
If don't transfer, creditors will be hurt
Some say, don't want to create a market in government Exemptions
Property itself is not exempt; exemption is debtor's equity that is
Automatic Stay allowable under exemption.
522(d) - Federal exemptions
Biggest benefit to petitioner 1. Only available to real person
Self-executing 2. Be in state that has not opted out under 522(b)(2)
Gives debtor some breathing room; relieves pressure from WY (1-20-109) opted out, so must use WY exemptions
collection activities rather than 522(d)
Very broad concept Can use other federal exemptions like Social Security,
Automatically stays judicial, administrative actions disability…
Prevents enforcement of pre-petition judgments 39 states have opted out
Agreeing to settle for less - may be reaffirmation - check Some of the remaining 11 allow debtor to choose state
with the court; very limited or federal (cannot mix and match; all one or the other)
Taking payments after petition - no because upsets the Inflation adjustments to specific amounts
status quo Important to know federal exemptions, because big flap
about variations in state exemptions
362 (h) Violation of Stay New law may have federal limits or not allow states to opt
Willful - Recover damages including costs and attorney's out
fees 522(d)(5) - wild card
Civil contempt; criminal charges; jail; injunction of activity Married, double the amount
that is violation of the stay
Ordinarily the action taken has no legal effect (will undo 522(f)
the transaction) Overrides lots of case law;
Certain judicial liens and non-PMSI non-possessory liens in
Problem 13.1 certain types of property are not favored.
Illustrates why people file for bankruptcy
Page 9 of 25
Creditor's Rights - Spring 2001
Problem 14.2 Unsecured under § 502
List of assets; discussion of what can be kept under Federal Amount of debt
exemptions + pre-petition interest (if agreement so provides)
+ pre-petition atty fees (by contract or state law)
Some debtors doe better than others + post-petition atty fees [maybe][probably]
Homeowners do better (Merchant case says yes if
Car owners do better agreement or state law so
Alimony recipients get a break ((d)(10)) provides)
Some types of benefits can be kept. Caveat: commentators argue no, but no post-petition
If both are debtors, and file can stack exemptions Secured § 506
Joint petition Choose: 2 fed. or Only as good as the collateral that secures it.
Two state (if state Oversecured
Effect: Collateral value greater than what is owed.
Exemptions apply to each debtor Amount of debt
+pre-petition interest (at contract rate, if agreement so provides)
522(a)(1) defines "dependent" to include spouse;
+pre-petition attys fees (by contract or state law)
Can exempt some of each other's assets
+post-petition attys fees (by contract or state law)
If file separate petitions could take one state, one federal
+post-petition interest (allowable even if no agreement)
set of exemptions
(contract rate, if none, legal rate of interest)
Some courts, when they see this, join the petitions to not
Add these until value of collateral is exhausted
522 (f) Involuntary Lien Undersecured
To the extent a judicial lien "impairs an exemption" (makes
Secured to value of collateral; remainder treated as
it less valuable to the debtor)
May avoid the judicial lien - even if put on before filing.
Applies to nonpossessory, non-PMSI (voluntary lien); Unsecured
Household items Get put in a pile
Tools of the trade Take proceeds and distribute pro rata.
Impairment defined in 522(f)(2)
Can only avoid the lien to the extent of the exemption Procedures for Creditors
Remainder will still be available to creditors Creditors will usually get notice of bankruptcy and proof of
Valuation Ch 7 and Ch 13
Must file proof of claim within 90 days after first
Under Mitchell, meeting of creditors (§ 341 meeting)
FMV is not limited to liquidation value Must file claim, even if your debt is on the schedule
Should not look at foreclosure sales value Ch 13 - not required to file claim if amount on
Realized; reasonable; diligent; interested buyer schedule is correct, but hardly ever correct.
Under ordinary selling conditions Ch 11
Under Walsh If debt is scheduled, not required to file proof of claim
FMV is liquidation value Proof of claim
Look at surrounding circumstances; foreclosure sales How much is owed
price What is debt based on
Copy of the agreement (writing)
This is the Mitchell/Walsh analysis of whether to force a sale § 502(a) Allowance of claims
Calculates Cindy's "effective exemption" if Walsh valuation Claim allowed unless party in interest objects
is used and judge doesn't force sale. Court can decide
If Mitchell valuation theory is used, judge will force sale Often based on one party not coming up with proof
Argue for appropriate valuation method depending on Disputes
which side representing Bookkeeping error
Debtor thinks it has been paid
Secured and Unsecured Pre-petition repo not commercially reasonable
Page 10 of 25
Creditor's Rights - Spring 2001
Problem 15.1 Include downpayments
Example of debt secured by stock; variance in selling price of Rentals
stock causes the debt to be oversecured in one case and Rental equipment
undersecured in another; distribution of proceeds in each case. Policy - protect innocent consumer
Problem 15.2 No opportunity to spread the risk over a number of
Another example of oversecured and undersecured; transactions
Definition of allowable secured claim
Income Tax - Three years
Problem 15.3 507(a)(8)(A) Probably get the whole amount
Allowable secured claim - value of collateral Include a tax year if it passes two tests:
Allowable unsecured - remainder of principal and interest 1. Tax year ended before date of filing, and
and possibly atty fees. 2. Return for the tax year must have been due before the
Unsecured post-petition interest - not collectible date exactly 3 years prior to date of filing.
Authors say don't collect post-petition anything. Generally can reach 3 years
Case law Based on date due not taxable year
Merchants says get post-petition costs Note: if filing date if before April 15, current year drops
If meant to exclude would have specifically excluded out.
Tax liabilities are not discharged, so priority is important to
fresh start policy.
Priorities - § 507
507(a)(1) - costs of preserving the estate (503(b)(1)), and
§ 507 applies to all cases (ch 7, 13) except some Ch 11. compensation (503(b)(2))
Each priority class gets paid in full before unsecured Why an administrative priority?
creditors in the next lower class Protects unsecured creditors
If not enough to pay a class, they share pro rata then
nothing goes to next level. Still on Problem 16.1 - lots of items to prioritize
Sometimes there are arguments that can be made relative to Attorney's fees -
classifications. For will - no priority - general unsecured credit
Trustee makes classifications Bankruptcy filing - 507(a)(1)
If client is lower on the list - challenge classification of Varies by district
those who are higher. 503(b)(4) only if reasonable
Some will not pay pre-filing costs
If not, insist on cash up front
Levels of priority for unsecured creditors
Negotiable note to ex-wife
Wages to $4300 (includes bounced checks)
Alimony or child support - 507(a)(7)
Policy - want to give higher priority to those who
Property settlement - no priority (general unsecured
cannot bear the loss
90-day limit - time to be on notice
SSI and withholding Discharge
Employee part - 507(a)(3) just like wages
Employer part - 507(a)(8)(D) employment taxes This is very important in consumer case
Failure to pay - creates personal liability of Must turn over assets for sale, but don't really get
principals; this priority gets them off the hook discharge from all debts
Property taxes (507(a)(8)(B) - one year - to qualify for Lots of the litigation in Ch. 7 happens here
But discharge litigation is rare.
1. Must be a "property tax"
Challenges may not show up because those threats of
2. Must be assessed prior to commencement of the
challenge may be used as negotiations to get reaffirmation
3. Must have been last payable without penalty after
one year prior to commencement of the case.
Challenges to discharge
Note on taxes:
Certain debtors from certain debts
Many tax claims will actually be secured claims because they
get a tax lien; 507(a)(8)D) only applies to unsecured Nondischargeable debt depends on the type of bankruptcy
1. Assessment Creation of Can leave bankruptcy still saddled with large debt
2. Notice and demand of amount due tax lien Can be challenged by trustee (acting on behalf of all
3. Failure to pay within 10 days creditors) or single creditor
523 - particular debts
Deposits 727 - global denial
Page 11 of 25
Creditor's Rights - Spring 2001
727(a)(3) - failed to preserve records (Harron) Can fairly easily make a credible threat of global
523(a)(2)(A) - fraud (Dorsey) discharge and get reaffirmation
727(a)(2) - intent to hinder, delay, defraud
727(a)(5) - failed to explain loss of assets (Reed) Problem 17.3
523(a)(8) - student loans undue hardship (D'ettore) Can bank avoid discharge of the loan, based on the application,
523(a)(3) - debts neither listed nor scheduled when there were some misstatements on the application
727(a)(4) - made false oath, gave advantage, withheld info § 523 (a)(2)(B)no discharge from debts by statement:
523(a)(2) - written statement 1. In writing
a. materially false 2. Materially false
b. respecting financial condition 3. Respecting financial condition
c. reasonably relied, and 4. On which creditor reasonably relied
d. intent to deceive 5. Intent to deceive
523(a)(6) - willful and malicious injury § 523 (a)(5) - exempt support payments from discharge
Non-support obligations may be dischargeable
In re Harron 1. 523 (a)(15)(A) - inability to pay
Denied discharge because no records at all. 2. 523(a)(15)(B) - balancing
Creditor objected under § 727 (a)(3) failure to preserve 523(c)(1) - failure to get determination of dischargeability
Objector has burden of proof
523(a)(5) General rule exempts support payments from
Usually bad records, alone, not enough
Make sure debtor answers questions accurately
Support = alimony, maintenance or support
Label is not determinative - must be "in nature of support"
Bankruptcy court must determine what is support and what
is property settlement.
In re Reed - global denial of discharge Divorce is a major cause of bankruptcy, so be careful how
the settlement is structured
Federal bankruptcy court
Under § 727 (a)(2) intent to hinder delay, defraud
Support payments are day-to-day expenses - don’t'
Under § 727 (a)(5) failed to explain loss of assets
want to force onto public assistance
D'ettore Spouse and children are not able to spread the risk.
Student loans § 507 - support payments are 7th priority (favored)
Non-dischargeable (523(a)(8)), except Nonsupport may be dischargeable under:
1. 523(a)(15)(A) debtor lacks ability to pay
2. 523(a)(15)(B) balancing testimony
Factors on p. 296
If benefit of discharge to debtor outweighs
Judges may vary.
detriment to recipient, may discharge (Hill)
Court is inquiring into how much all the parties
§ 523(a)(3) - if not listed, will not be discharged.
need to live on
Should advise her to list - may decide later don't want to
pay and will blame atty
Not just egregious cases; average people
If creditor had notice or actual knowledge and she didn't
list, it would be discharged Must determine what is alimony and what is
If didn't list, would be false oath
What happened in divorce is not necessarily
§727 (a)(4) - withheld information and gave advantage
If creditor, claim that failed to list and met one of these,
3. 523 (c)(1) - If spouse fails to request determination
can challenge under this
In this case, must file complaint (4007)
Response to § 727 discharge:
When non-debtor spouse gets notice of
Unduly harsh penalty
bankruptcy, should file right away
No prejudice to other creditors since she intended to
If don't file, judge will probably look carefully to
ensure notice, atty competence.
Reason for § 727
Hammer - lose all discharge 1. Is it support, and therefore, automatically exempt from
Puts bite in disclosure provisions discharge?
Discourages side deals to skirt safeguard and 2. Should it be discharged anyway under one of the other
Page 12 of 25
Creditor's Rights - Spring 2001
Problem 17.5 Can re-negotiate the terms
Look at sections of divorce settlement to determine what can be Voluntary
construed as support, and what is property settlement Safeguard for debtor is 3rd party review for
Look at willful and malicious injury - no discharge; negligence - Problem 19.1
may be discharged; drunk - not discharged Interrelationship between redemption provision and exemption
Effect of Discharge
Bank loan - still owe $1000 Trustee has right to sell
§ 525(a) - cannot discriminate based on use of the bankruptcy FMV - $5000 property in excess of
code. Exemption - $2000 exemption
List in (a) is not exhaustive If trustee values the car at $5000 with $2000 exemption, estate
Codifies Perez where driver's license renewal was denied will get $3000; then must pay off bank $1000 from that
because of bankruptcy. If debtor wants to keep the car must pay $3000; pay trustee
Discrimination frustrates fresh start. amount equal to excess equity and secured party the value
of allowed secured claim.
525 only applies to government units, employment and student Problem 19.2
loans. Points out that affidavit is only needed for reaffirmation, not
Problem 18.2 Policy to let him keep what he can pay for
Cannot fire solely because of bankruptcy; very difficult to prove Really not encumbering a fresh start
reason, much less solely because 525 (b)
Freedom of choice
Perhaps Ch. 13 would be better, if really wants to
keep- could make periodic payments rather than
Debtor's Post-Bankruptcy Position
524(c)(1) not enforceable if made after discharge. Why?
Debts are discharged, but liens are not discharged
Reform measure - wanted someone to look over shoulder
Unsecured debts vanish
Impairs fresh start
Liens remain attached to the related collateral
Don't get anything in return
May be coercion
To keep collateral with a lien, debtor must either:
1. Put up cash to redeem May reaffirm for the wrong reasons
2. Get the creditor to agree to let him keep it by May not be in debtor's best interests
reaffirming the debt
To redeem - 722 Developing a procedure for a creditor to get reaffirmations from
Must be consumer good (personal, family, household) customers
Exemption abandoned Approach at § 341 meeting - may arrange before or after
341 meeting for reaffirmation
Debtor has to pay an amount equal to the allowed secured
claim (according to § 506) which is generally the value of
the collateral, or amount owed on loan, whichever is less. Can do Cannot do
After the value of the collateral has been paid - remainder See only for cash Withhold (or threaten) medical
of debt is discharged (in the real world, this rarely happens - services
need relative or friend to help) Creditor-initiated contact can Pay debt first, then treat
happen at 341 meeting
Reaffirmation - 524(c) Condition future credit on
Agreement must be executed before discharge reaffirmation; this re-
negotiation is actually act to
Right to rescind within 60 days
Must have affidavit from attorney
Debtor is fully informed and voluntary
There is some kind of line between what can and cannot be
Agreement is not undue hardship
done, although also some gray area
Debtor is fully informed of effect of agreement and
Letter to debtor's atty - Standard and have been viewed as
consequences of default
This is a new agreement between creditor and debtor
Page 13 of 25
Creditor's Rights - Spring 2001
Problem 19.5 Amount distributed must not be less than the amount of
Tensions faced when trying to handle affidavits the claim
Some atty say re-affirm everything or nothing Prepare the plan
Problems with no-affirm decisions Terms of repayment
Cannot save collateral Debtor remains under supervision of court until complete
May jeopardize client's position (deprive of a benefit) the schedule
Hard line may be a problem with relationship in the Debtor gets to keep control of the property
community Trustee - object to improper creditor claims
Problems with all-affirmation decision
Jeopardize fresh start Problem 20.1
Unhappy clients Adequate protection - § 361
Can ruin credibility with court File motion for relief from stay under § 361, § 362(d)
Grounds for relief:
Problem 19.6 1. Cause - including lack of adequate protection
What is the analysis to determine whether affidavit should be Policy: keep creditor in same position
signed? Risks - If these risks
§ 524 (c)(3) - Decline in value are present, may get
Fully informed Loss - fire, destruction relief from stay
Voluntary 2. Debtor does not have equity in the property
Undue hardship Remember valuation arguments
Ability to pay 3. Property is not necessary for an effective
Projected income reorganization
Cost of living - how strict The facts are key
Propensity to consume § 361 may award -
Cost of alternatives lump sum
Factors in addition to financial periodic payments
What is the benefit of the item? additional or replacement lien
Best interest test - are we making value judgments? grant other relief, so creditor gets indubitable
When can refuse to sign? equivalent of its interest
Atty must determine what best interest is
Consider only debtor's assessment of ability to re-pay Problem 20.2
(they will lie)? Creditor is entitled to be paid to account for the time value of
money (value of collateral or debt at its present value)
524(c)(3) mandates an independent assessment - does
that require atty to make decision hostile to client's What interest rate will be used in the PV calculation?
wishes? Collier's - T bill rate, adjusted for risk of subsequent
Brown shows a way around - refuse to sign and let court default
decide Courts often use combination - assume contract rate
Explain consequences of reaffirmation to client and will reflects market and adjust for risk.
usually change his mind. Courts may look at similar contracts
Arguments re: valuation is more useful than arguments re:
Chapter 13 interest rate
Reorganization In this problem, to have a confirmable plan, must have PV
of 21,000 and pro-rata share of unsecured.
At this time, no involuntary Chapter 13 - choice of the
debtor Problem 20.3
Arguments in valuation
§ 1325 Confirmation of Plan
1325(a)(4) - How much of each allowed unsecured claim
must be paid Debtor may keep property over creditor's objection if creditor
Must look at what would happen under Chapter 7. retains lien securing the claim and debtor makes payments that
total the PV of the allowed secured claim (i.e. PV of value of the
Creditors must get as least as much as would get
under Chapter 7.
Rash - price a willing buyer in debtor's trade, business, or
1325(a)(5)(ii) - How much of allowed secured claim must
situation would pay to obtain like property from willing
Don’t want Chapter 13 to deteriorate secured creditors
Definitely applies to Ch. 13 - some courts have held
applies to § 722 (Ch. 7)
Page 14 of 25
Creditor's Rights - Spring 2001
Was supposed to resolve the most basic valuation -If no dispute about liability but dispute about
question, but was no help - left to trier to fact amount - It will be liquidated to the extent of the
In light of the purpose of the disposition § 506 - admitted amount
valuation Modifications in response to perceived problems
Therefore, Rash holding is that proper valuation is Concern about unfair treatment of unsecured creditors
replacement value - what the debtor would have to pay by abusing Ch. 13
for comparable property (like age and condition) Payment plans well below ability to pay
Not foreclosure - leave to court as trier of fact, on the So - read into Code a good faith requirement
basis of evidence presented Require meaningful payments
5th Circuit had focused on creditor's interest - therefore Debtors must use best effort
the foreclosure value. Court rejected this Abuse of process - debtor must not have entered into
Stevens dissent says the "purpose" is to put the creditor debt without intent to pay)
in same shoes as if he were able to exercise his lien and 1325(b) - Attempt to resolve
foreclose. Plan may not be approved over objection of creditor or
Problem 20.4 Provides payment in full of objecting unsecured
Contents of the plan; necessary provision in plan for mortgage creditor, or
1322(b)(2) - can modify rights of holder of secured claim Commits all debtor's disposable income over a period
except real property that is principal residence of years
1322( b)(5) - Can provide for curing of default within
reasonable time for mortgage Disposable Income Test
If arrerage is paid over time, must account for time value of Not reasonably necessary to be expended for maintenance or
money support of debtor or a dependent.
Also necessary to cure - if oversecured, may have to pay Most courts have not abandoned good faith test, and have
(under § 506) additional penalties and interest. also applied disposable income test
Caveat - do not have to pay interest on interest No clear standard
Problem 20.5 Reasonably necessary?
File bankruptcy now to stop foreclosure proceedings; Future expenses? (Dentist)
1322(c)(1) codifies Taddeo - deaccelearated ; original schedule
Standard of living?
If last mortgage payment is due before last payment under
§ 1329 - modification is allowed after
the plan, can modify payments (to reach the end of the
confirmation, so argue that cushion is not
§ 109 (g) limits how often can file and dismiss (six months)
Qualifications for Chapter 13 filing Look at current expenses and formulation of plan - what is
reasonable? What is the test?
2. Regular income
Do not have to be employee (available to self- Formulate a plan;
employed) § 1325(a)(4) - unsecured cannot get less than would receive
Do not have to be wage earner under Ch. 7 - here, OK because Ch. 7 would be nothing
Sufficiently stable and regular to make payments under Nominal plan OK (Greer) as long as good faith
the Chapter 13 plan (courts interpret this liberally)
§ 1325(b)(1) - reasonably necessary test (this case was
Regularity is important (like alimony) luxury goods - IL says must give up)
3. Debts owed on the date of filing (bright line date)
§1325(a)(3) - still must pass good faith test
4. Noncontingent, liquidated
Unsecured debts less than $290,525 Problem 21.3
Secured debts less than $871,550 Time value of money - unsecured creditors would get that under
Noncontingent - Ch. 7, so proposal of face value spread over 3 years is not
Owes a legal duty as of the filing date equivalent.
-Determinable with some degree of precision Problem 21.4
-No dispute as to amount §1322(a)(2) - plan must provide for full payment of all claims
Not liquidated if there is a dispute about liability entitled to priority under § 507 unless holder of claim agrees
or amount otherwise.
Page 15 of 25
Creditor's Rights - Spring 2001
Note: Once priority claims are figured in - they are usually No leverage - probably only bad faith
the only ones who get paid. Under Ch. 13 must delay write-offs of loss until plan is
completed, whereas discharge is immediate with Ch. 7.
Difficult to justify discriminating unless there is a real
Exceptions to Discharge in difference.
Chapter 13 - § 1328
After successful completion of plan - discharge except Discharge of debts following divorce
(a)(1) - long term debts (1322(b)(5)) - stay current during Child support, alimony non-discharge under 1328.
plan; continue after plan Can re-litigate the divorce agreement, but takes times and
(a)(2) - alimony, maintenance, or support (523(a)(5)) expense to re-litigate in bankruptcy court.
education (523(a)(8)) Joint debt - may be treated differently
DWI death or PI (523(a)(9)) If he discharges, the creditor will come after Jessie (§
(a)(3) - restitution or fine in sentence for criminal 1301) - reclassify and discharge
conviction Medical bills
On grounds such as Kourtakis Past bills - argue this is support
Bad faith Usually only in Future - depends on whether they are listed as debts on
Abuse of process intentional tort schedule (contingent debts)
No honesty of intention cases If listed, claim as child support; if not listed, not
Classification of Unsecured Debts A spouse in divorce is a potential creditor in bankruptcy.
§ 1322 (b)(1) Would settlement be dischargeable in Ch. 7?
Debtor can classify unsecured claims if claims are 523 (a)(15) balancing test. Certain property settlements not
substantially similar (references § 1122) dischargeable in Ch. 7 because doesn't meet the test -
May not discriminate unfairly therefore, not dischargeable in Ch. 13.
Can treat individual consumer debt differently if a
Courts have not been friendly to classification Dismissal or Conversion
Groves test (p. 383) - Absent a showing that discriminatory
treatment is necessary for the debtor to complete the plan, § 1307 - Debtor may convert to Ch. 7 or dismiss at any time
separate classification not permitted. § 1307 - Court may convert to Ch. 7 or dismiss at request of
party in interest or U.S. trustee, after notice and a hearing, for
Problem 22.1 the reasons listed in this section
Classification of unsecured debt Must be for cause - § 1307(c)
In this case, debtor classified because he wanted to treat Default doesn't automatically lead to dismissal
them differently § 1329 - Modification of plan after confirmation
Arguments of creditors if debtor tries to classify their debts § 1328 (b) - Elements of harship discharge (Bond case)
Would do better under Ch. 7 Circumstances beyond debtor's control
Not best effort Creditors have been paid at least what they would
Not good faith have been under Ch. 7.
Abuse of process Modification would not be practicable.
Tort judgment Doesn't discharge 1322 or 523 non-dischargeable
Generally dischargeable under 1328, unless drunk or stuff.
Edgar's argument that should not be dischargeable
Abuse of Ch. 13 process Problem 23.1
His leverage - threats to challenge plan Ch. 13 plan - Creditors will get 100%
Strength of this argument - weak (p. 379 more Representing creditors:
egregious - was dischargeable Meet all eligibility elements for Ch. 13? 109(e)
And others will probably object because they will Creditors atty can move to dismiss for cause, (§
get less. 1307(c)), including
Collins (credit union) No longer eligible under Ch. 13
Threaten to cut off credit Not in best interests of creditors
Will say violates stay Failure to make timely payments
May still feel some pressure to pay - so unofficial Representing Leona:
leverage Advise of eligibility requirements
Margo (consumer debt) Creditors will find out when she misses payments
Page 16 of 25
Creditor's Rights - Spring 2001
§ 1326 (a)(1) - commence payments within 30 days 1. Individual
after plan filed unless authorized otherwise 2. Regular income (§ 101)
Options Don't have to be employee Courts
1. If haven't heard about it - come up with cash to make Don't have to be wage earner interpret
1st payment. Sufficiently stable and regular to liberally
2. Ask court to authorize. Get company to say will be make payments
called back. Irregularity (like alimony) is
3. Convert to Ch. 7 - wouldn't want to do this important
4. Move to dismiss - cannot file again for 180 days Income too low
5. Hardship - implies some payments have been made 3. That owe on the date of filing (bright line date)
6. Could request modification under § 1329, but will be 4. Noncontingent (owes legal duty as of filing date; not
difficult to get dependent on occurrence of future event), liquidated (no
dispute as to amount; not liquidated if there is a dispute
Problem 23.2 about liability or amount; if no dispute about liability, but
TIB duties and incentives dispute about amount - it will be liquidated to the extent of
Court can monitor, but not much motivation to do so the admitted amount.
Generally, TIB only will move for dismissal on his own if
creditor hounds him. Problem 24.1
Why Ch. 13 rather than Ch. 7?
Problem 23.3 Trying to get rid of a tort judgment
Doris's life turns around and gets big salary Under § 523 (a)(6) not dischargeable in Ch. 7, but may be
Then, holder of unsecured claim will move for modification discharged in Ch. 13 (§ 1328).
Doris is essentially working for creditors Eligible?
Sometimes courts will sympathize and allow her to Argue about regular income
realize a benefit from her hard work. Then again, ll his debts may be discharged, so no
If modify under § 1329, will be litigation costs. payments may be necessary.
Creditors cannot call debtor - violation of stay which is in $250,000 tort judgment;
effect during the plan. Noncontingent If don't plan an
Call atty - negotiate, not threaten, may make arrangements Liquidated appeal
outside the plan. Unsecured
If plans to appeal - not liquidated - don't file.
Problem 23.4 Can argue bad faith, because just doing it to avoid Ch. 7
Is it worth it to pursue modification to the plan if debtor receives
If it were more than the allowed amount, ti's not a debt on
regular pay increases?
the date of filing.
Remember, all creditors in a class (like unsecured) will
receive pro rata share - probably not worth it (modification
motions are not as quick as dismissal motions)
Making the choice - Ch. 7 or Ch. 13;
Debtor guaranteed a mortgage loan that missed some
Are there grounds for creditor to attack the Ch. 13 filing?
Analyze loan agreement, security agreement, and
No nonexempt property guarantee
Had Ch. 7 last year, so cannot do
Language determines whether this debt is contingent
Will probably use good faith standard
Is the guarantee secured or unsecured ? Arguments
Not good faith because should do Ch. 7.
If secured, how much is secured?
He is trying to do a Ch. 7 and avoid § 727
Can offer collateral to make debts secured to be eligible
If Joe loses procedurally, could convert to Ch. 7 and invoke under Ch. 13.
the stay in the short term - then he won't get discharge
But, lenders may not agree to it, because rather have in
because of § 727.
This is not unethical because could have been granted a Ch.
13. Problem 24.3
Restrictions on Ch. 7 discharge
§ 727 (a)(8)
If discharge in Ch. 7 or 11 commenced in past 6 years -
§ 727 (a)(9)
Page 17 of 25
Creditor's Rights - Spring 2001
If discharge under Ch. 13 or 12 commenced in past 6 1. Individual
years, denied discharge unless 2. Primarily consumer debt (§ 101)
(a) Paid 100% of allowed unsecured, or 3. If substantial abuse
(b) Paid 70% of allowed unsecured and 4. Presumption in favor of granting relief
i. in good faith
ii. and best effort Substantial Abuse Test
Ability to pay (Walton)
Problem 24.4 Consumer debt includes all non-business debts one is
Exercises in determining whether a person can file for Ch. 7, likely to incur in life - and it does include PI
Ch. 13. Used ability to pay - pay debts as they become due - So
if allowed Ch. 7, it would be abuse
Consumer Bankruptcy System Last resort (Texas)
707 (b) very strict - Ch. 7 only used as last resort
Done everything else
More recent revisions have tried to make Ch. 13 more attractive. Not trying to pay
Increased limits for eligibility No effort to live within budget
§ 348(f) encourage to attempt Ch. 13 - if later have to Totality of circumstances (4th Circuit)
convert, get to keep property acquired since filing.
Does he need Ch. 7, relief or is he just trying to beat
Limit the access to discharge under Ch. 7. creditors?
§ 707 substantial abuse limits access to Ch. 7. Ability to repay out of future income
Evidence of bad faith
Failure to disclose
Has potential tort judgment that would put over limit - what to
Misrepresentation of income or debt
Eve of bankruptcy spending or debt
File Ch. 13 just before pre-trial action (his debts qualify)
Calamity beyond control (illness, unemployment)
Tort action is contingent and unliquidated
Creditors will move to life automatic stay.
How should the lawyer bring up that there might be abuse?
After litigation - even if judgment comes in higher than
At the § 341 hearing, show
Facts that show these things
If stay lifted, then litigated, will amend his plan to include
judgment Bring to court or trustee
Then argue bad faith Cannot bring own motion of with personal trustee.
His argument - amend to five years
In re White - Debtor 19 year-old store clerk
Court will say this is a ruse.
Car wreck; judgment for PI
Criminal fines/restitution will not be dischargeable
Court held not a consumer debt, so 707(b) shouldn't apply
Court will usually hearsay this
If didn't allow Ch. 7, life would be ruined.
Even if too much - was decided after
Usually PI judgment would be included and called
List it as a contingent debt.
To show clawhammer guy gets out from under debt in 3-5
Changing jobs, analysis to determine whether Ch. 7 would
years, and student loan is forever.
Old job - Ch. 7 would constitute abuse
Atty fees are #1 priority in Ch. 7 (§ 507 (a)(1)) New job - Ch. 7 would be OK
Still require fees up front because just first in line for
nothing. § 303 Involuntary Ch. 7 or Ch. 11
§ 1328 has no limitation based on previous bankruptcy.
Must be 3 creditors sign the motion
All 3 must have non-contingent claims, not subject to bona
Substantial Abuse § 707 Dismissal fide dispute
As a group, claims must aggregate $11,625 unsecured
Court can dismiss on its own motion or motion of U.S. contingent (more than the value of liens on the property)
Trustee, but not on motion of a party in interest (can raise If there are fewer than 12 creditors, go to exception
facts and court comes to its own decision), if substantial
abuse of the provisions of the Code. Any time before case is dismissed, other creditors may
Presumption for granting relief: come in.
Cure defective petition
Page 18 of 25
Creditor's Rights - Spring 2001
Avoid technically deficient petition. In this problem, has regular income, so could probably file
To withstand motion to dismiss, must allege statutory a Ch. 13 plan.
1. § 303(h) - Generally not paying undisputed debts as they Chapter 11
Important - in present tense; insolvency is not enough People who do business with the debtor often don't notice a
Debts cannot be disputed difference.
Non-payment has to be in the normal course of DIP has power of trustee.
business - not isolated incident File to give breathing room.
Debtor's ability to pay is not a defense. But, the DIP is acting with fiduciary duty to creditors.
§ 1104(a) may appoint outside trustee - with grounds
2. Preceding 120 days - made general assignment or appointed Usually, this is the death knell for business
a receiver under state law. May go around this with federal
bankruptcy. Automatic Stay - Adequate Protection
Secured creditors shouldn't be harmed by bankruptcy.
Policy If not adequate protection, can petition for relief from stay.
Debtors wait too long to file (gives creditor ability to jump Most frequently litigated part of bankruptcy law.
in) § 361 gives non-exclusive list of some things that can show
Fear dissipation of assets or preferential treatment to other adequate protection
creditors 1. Periodic payments
Some creditors want to stop the state law race. 2. Additional or replacement lien
Problem 27.1 Most common way - collateral has value greater than claim.
"Generally not paying" - has been left to courts. The excess amount can constitute adequate protection.
Focus on conduct - no balancing; no financial condition test This is equity cushion (complicated by valuation
Totality of circumstances issues)
Make this argument if value of collateral is
Involuntary petition not usually filed against consumer declining in value
Not practical Cushion should cover decline in value, risk of loss,
Consumers get better remedies under state law, so and penalties, atty's fees
creditors better off with state law. Policy
To what extent should we protect unsecured creditors/
Generally not paying undisputed debts as they come due secured creditors?
1. No paying % of debts If equity cushion not enough, not automatically lifting stay.
2. Not paying % of amount due May get higher payment agreement
3. Not paying largest debts Debtor floats adequate protection
4. All debts late
E.g. higher interest - longer
5. Not making any effort to pay undisputed debts
Sell some asset - increase cushion
6. Not paying some debts that are critical (rent, taxes, wages,
Creditor just gets to protect his secured position - not
Some state law discovery is allowed
improve it - e.g. if have 75% secured position, that is the
amount he gets to protect
If file on best information, and turns out wrong -- costs, § 362 (d)(1) and (2) Grounds for lifting stay
attorney's fees, damages if bad faith. (303(i)) 1. For cause including lack of adequate protection, or
2. Debtor does not have equity in property AND
Problem 27. 2 3. Not necessary for effective reorganization
Debtor fears bankruptcy. Why? What else can he do?
Restrictions on transfer of transfer of partnership interests. Court must decide within 30 days (362(e)); if no decision,
Why is "generally not paying" judged on financial stay is lifted.
statements, but rather on conduct? Judge must balance:
Bad faith not relevant unless case is dismissed 1. Protect creditor v. debtor interests
Unsecured creditors will be harmed if take assets
**If involuntary 7 is filed, can convert to 11 or 13 and file a 2. Equity cushions have divided courts.
plan.** Creditor argument
1. Insufficient cushion ($3,000 not enough)
2. Depreciation - wear and tear
Page 19 of 25
Creditor's Rights - Spring 2001
3. Risk of loss 4. The bank is losing money under this plan - bailing the
A. the 30-day limit protects creditors, whose position company out.
deteriorates over time.
B. But few creditors actually seek special writ (makes judge Policy arguments
mad) Debtor - creditor is getting all that he was promised - the value
Policy argument for debtor of his secured claim.
1. Benefits to community to keep business going (jobs, taxes) Creditor -
2. Lender partially responsible - knew about bankruptcy law; losing the time value of money.
could have negotiated better loan In anything goes wrong with the collateral, the creditor
Policy against debtor bears the risk.
1. Debtor entered freely into agreement General
2. Economic ramifications which will be passed on to other Debtor gets to get on his feet
customers. Spreading the loss - redistributed
Commentators disagree - unsecured creditors should bear
Problem 28.3 the loss
§ 362(d)(2) - debtor does not have equity in property (lean
exceeds collateral) Problem 29.2
Not likely to be effectively reorganized as slide rule To show valuation issues
business. If bank wants stay lifted, argue:
Court must quickly investigate plan. Value declining
Creditor may ask for relief before plan is in place. No adequately protected
If stay maintained, will argue for high value, because:
Cartwright ***Value determined by court on adequate protection hearing is
Creditors can argue that debtor is unlikely to propose an not binding on other issues (506(a))
effective plan But - credibility problem
If I'm a creditor, argue not adequately protected because
plan is implausible Problem 29.3
Concern - not moving toward reorganization plan - stalling
Adequate Protection Payments (apartment building)
If creditor, make these arguments for valuation:
1. Figure the payments needed - if higher than cash flow - stay 1. Stream of income (occupancy, here)
is lifted, reorganization is over 2. Market estimate
2. What kind of payments are creditors supposed to get - how 3. Offer year before
to meet them. 4. Historic price
Must balance the fact that they may not have adequate
protection so entitled to payments, with
Debtor cannot make payments
Interest Prepetition Pendancy Plan If creditor loses on 361 issue, do they have 362(d)(2)?
Oversecured to To extent Get contract rate May demand on
fully secured permitted by on pendancy entire claim - but Debtor has no equity and
state law interest (506) court can adjust No necessary to effective reorganization
to current rate Locked into an investment controlled by someone with no
intead of contract
rate (1129) equity, paying less than current interest, and completely
Unsecured To extent No pendancy No entitled to speculative.
permitted by interest (502) interest under If stay is not lifted, § 1121, creditor can propose its own
state law plan plan.
Partially secured To extent No pendancy Interest only on
to undersecured permitted by interest (Timbers allowed secured Should file a liquidation plan
state law case) claim to value of Force debtor to bring plan
collateral No atty Only debtor may file in first 120 days
fees or costs
(1129) If less than $4,000,000 falls into 362(d)(3) then he has 90
days to get plan approval or start making monthly payments
Problem 29.1 at market rate of interest
To see application of Timber's case. 90 days starts when creditor petitions to lift stay
Company's plan - Meet current expenses, and make monthly
payment to bank to cover depreciation. Summary
Bank wants more § 362 (d)(1) for cause, including lack of adequate protection
1. Secured creditor § 362 (d)(2) no equity and not necessary for effective
2. Undersecured reorganization.
3. Not entitled to pendancy interest - Timber's case § 362 (d)(3) single asset real estate
Page 20 of 25
Creditor's Rights - Spring 2001
Cash Collateral Setoff
Section 363 Creditor has a claim and is also indebted to debtor
May enter into transactions in the ordinary course of Common law says offset is OK; must have:
business 1. Mutual claims
(a) definition of "cash collateral" includes proceeds, 2. Both are valid and enforceable
products, offspring, rent . . . in which entity other than 3. Arose before filing of petition
estate has an interest. 4. Not part of same transaction.
(c)(2) - trustee may not use . . . sell cash collateral unless This is basically preferential treatment for some creditors.
A. Each entity with interest consents. Exceptions: (553) validates setoff in bankruptcy
B. Court authorizes after notice and hearing. Not automatic
Court must determine that have setoff rights
Appointment of Trustee
1104(a) mandates appointment of trustee for cause Example - bank's right to setoff
Cause = fraud, dishonesty, gross management,
incompetence You You You You
Creditors' Committee Deposit $100 Borrow
§ 1102 and 1103 - Creditors' committee formed Checking $100
Appointment by U.S. trustee
Usually 7 largest creditors willing to serve Owes borrower Sends
Usually only in larger cases $100 $100 Cash
Often other committees as well, e.g. equity committee
§ 1103 - power and duties Bank Bank Bank Bank
Assist in running General deposit in a bank creates debtor/creditor
Important right - access to information about the debtor relationship
Right to be hearsay on virtually anything that comes If then file for bankruptcy then bank has setoff right
before the court. (can't use to profit own business) Mutual Claims
Information that affects business decisions. Valid
Arose before filing
Cash Not same transaction
This restricts company's ability to use cash.
§ 363(c) - DIP can use cash in ordinary course of business 506(a) allowed claim of creditor has language "or subject to
Also constraints in use of cash that is subject to a lien. setoff" under § 553 is a secured claim
Equates to a lien to the extent of the setoff
Limitations on Use of Cash 363 = lien = cash collateral
1. Cash collateral
2. Setoff right Supreme Court hs held that an "administrative freeze" does
not violate the stay (only true for banks).
§ 363(a) - Definition of cash collateral
For example, bank security interest in inventory and A/R. § 553 Feared abuses - specific circumstances where setoff is
As inventory is sold, debtor gets cash prohibited
Creditor's interest continues in the cash. (a)(2) - transferred to creditor by 3rd party 90 days prior to
Bank's interest is protected in bankruptcy because filing.
cash is treated as cash collateral. Claim was transferred by an entity other than the
Debtor must have consent of creditors to use. debtor to such creditor
After commencement of case, or
Problem 30.1 1. After 90 days before the date of filing and
To show what ordinary course of business is.
2. While debtor was insolvent.
May set up arrangements with creditor to make partial
(a)(3) - debt incurred to obtain setoff
payments as cash is collected, but probably won't work
within 90 days before petition
Go to court to determine how to pay
while debtor was insolvent, and
for the purpose of obtaining a right of setoff against the
(c) - presume insolvent 90 days prior to filing.
Page 21 of 25
Creditor's Rights - Spring 2001
Says priority put in place by court won't be upset on appeal
Problem 30.2 This alters the priority of payment
This is thought to be a compensating balance that some Generally: need notice and hearing (but real world - go in
banks require. This is asked for 2 months before filing. at time f filing to ask the court to authorize post-petition
$4000 in account; $1500 was required; $2500 just in borrowing, court then finds exigent circumstances and they
account will authorize limited borrowing for a period of time.
So trustee can look to § 553 (a)(3)
Here creditor = bank; debtor = Teddy; Debt owed = $1500 Problem 31.1
§ 553 (c) - presumption that if within 90 days was insolvent First look at 364 (a) and (b)
- so looks like meets all elements of 553 (a)(3) - it was 60 To get to 364 (c) must first show paper trail to show cannot
days. get unsecured credit.
Presumed insolvent and they did it to get a right to setoff If cannot get unsecured, move on to other types.
So -- probably won't get right to setoff with respect to Offer Super Super priority, lien on unencumbered or
$1500. junior lien on already encumbered. Loan will make it
The other %2500 doesn't meet, so could get right to setoff more valuable.
for it, but must go to court to get it (probably could get the So best deal possible
But estate cannot use it either because it is cash collateral.
Problem 30.3 552(a) prepetition security interests do not attach to
Bank is trying to claim a right to setoff because they now property acquired after bankruptcy.
own the $5000 claim - so then they would only owe 364 allows DIP to obtain credit or incur obligations after
Funtime $12,000. petition is filed.
553(b) - Debtor = Funtime; Creditor = Bank 364(a) and (b) authorizes unsecured credit as administrative
Entity other than Debtor, within 90 days (not after expense with priority over other unsecured.
commencement but this an or) so no right to setoff for the 364 (c) if unable to obtain unsecured credit, court may
Also, this means there is no lien so the account is not cash 1. Priority over administrative expense
collateral; 2. Lien on unencumbered property, or
Therefore, the estate can draw on it in the ordinary course 3. Junion lien on the encumbered property
without the court's permission.
Converted from Ch. 11 to Ch. 7
$35,000 unencumbered assets
After sell remaining inventory and A/R:
The estate is a new entity, so old security agreements don't Debts:
bind it with respect to new stuff Bank $25,000 - sought adequate protection
552(a) - prepetition security interests do NOT attach to Finance Co. - $10,000 post-petition loan
property acquired after bankruptcy Debtor's lawyer - $15,000
May become cash collateral if sold Ch. 7 trustee & atty - $5,000
If creditor can show that new inventory was purchased Total - $55,000
with proceeds from old (secured) inventory - may 1. Ch. 7 trustee and atty - $5000 Paid 1st (726(b))
claim. 2. Bank - $25,000 (507(b)) lack of adequate protection
This means secured creditors don't want to give any money 3. Hanratty unsecured treated as administrative expense as
based on old loans and debtor needs cash, so we have § 364 post-petition financing
§ 364 (a)
Chapter 7 Trustee
Allows DIP to obtain credit or incur obligations after the
petition is filed.
364(a) and (b) - allow unsecured credit as an Super priority under § 726 (b) - people who do conversion
administrative expense work get paid first (otherwise no one will do Ch. 7s)
364(c) -if unable to obtain unsecured credit, court may Trumps everything else.
authorize. Even if get great preference treatment under 364, still get
1. Priority over administrative expense trumped by conversion folks.
2. Lien on unencumbered property
3. Junior lien on encumbered property
§ 364 (e)
Page 22 of 25
Creditor's Rights - Spring 2001
If Yankee drops out, and Murphy is only one left, and only
Bank way to save the company, may allow.
Sought adequate protection, got inadequate protection Avoiding Powers of the
(inventory and A/R) Trustee
Court guessed wrong - assets not worth enough
507(b) Bank has super-priority in remaining assets over Strongarm Clause - § 544
other adminsitrative expenses, because of inadequate Preference Provision - § 547
protection Power to undo pre-bankruptcy transactions.
Extends to new liens to give adequate protection to pre- Policy:
petition liens. Bankruptcy to assure fair distribution.
Treated as administrative expense. Keep level playing field prior to bankruptcy.
The power to undo also provides leverage.
Strongarm Clause - § 544(a)
§ 503 and § 507 legal fees treated as administrative Gives trustee the rights of a hypothetical creditor with a judicial
expenses lien on the property as of the date petition is filed.
5033 (b)(4) - lawyer ****If the lien creditor would win, trustee can avoid****
507 (a)(1) (ref 503(b)) lawyers - First priority in Must draw on state law to see what rights a lien creditor
administrative expense would have.
Mostly go to priority - UCC
$10,000 unsecured - sold equipment, not enough collateral 544(a)(1)
He can argue he's entitled to first priroity as post-petition
Treat as administrative expense
These two share pro rata
Secured (by airplane) Judicial Lien
So - 507 (1) (2) . . . used to be the order of classes to be paid. Unperfected WINS!!
Now have inserted someone else above.
1. Conversion attorney So trustee can avoid
2. Inadequate protection Mitchell has unsecured status
Does not matter if Mitchell filed now - status as of
Problem 31.3 commencement of case
Ch. 11 Nothing in law to allow to perfect.
Murphy $300,000 mortgage; $200,000 appraisal
$150,000 unencumbered assets Problem 32.2
DIP wants to borrow $75,000 from Bank with lien on Aero wins
unbencumbered assets Trustee cannot set aside as long as file within grace
This gives Bank good position - period to create security interest.
Oversecured Part of loan secured by other plane parts - no PMSI on
Court monitors that part, and no perfected security interest.
Cannot be challenged on appeal Can avoid this part
No subject to claims of lender, unperfected security Unsecured with respect to that amount.
Murphy doesn't have good position; how to improve: 544 (a)(1)
Get cross-collateralization, so $150,000 will also cover Gives trustee the rights of a hypothetical creditor with a
prior loan. judicial lien on property as of the date petition is filed
Therefore, if lien creditor will win (under state law), trustee
Sabre said no cross-collateralization, but some courts will can avoid
allow. Federal law that references state law
In this case, even a court that allows will not find lower
interest rate good enough to improve Murphy's position CREDITOR V. HYPOTHETICAL JUDICIAL LIEN
Court will probably choose Yankee CREDITOR
Page 23 of 25
Creditor's Rights - Spring 2001
544 (a)(3) - land transfers This is Meritt case - p. 552
Gives trustee status of hypothetical bona fide purchaser of If perfected (secured and perfected, so allowable secured
debtor's real estate at time of filing of the petition claim)
Recording laws for land transfers Even within the 90 days, if perfect within 10 days of loan,
still secured and not voidable. (gives new value to the
CREDITOR V. HYPOTHETICAL BONA FIDE PURCHASER business); assume not fraudulent
OF REAL ESTATE
547(c) - exceptions - if bring within one of these exceptions,
547(b) - definition and elements of preference cannot avoid
Most important, most frequently used 547(g) - Defendant has burden of proof
Policy is to foster equality of distribution, fairness 1. contemporaneous exchange
Ability to un-do transactions that took place within 90 days a. Exempts simultaneous cash transactions
before bankruptcy; go back one year for insider b. Should be clear because no antecedent debt, but wanted
Key elements of a preference: must have all to make absolutely clear
1. a Transfer (101(54) parting with interest in property; very c. Policy: don't want to discourage from doing cash
broad) business with bankrupt
2. of the debtor's property d. Might be pulled out of problems if suppliers continue
3. to of for the benefit of a creditor; must have creditor status to work with them
4. for or on account of an antecedent debt e. Don't want to impose of marketplace transactional cost
5. made while the debtor was insolvent (547(f) presumed of determining position of every party do business with
insolvent during 90 days immediately preceding filing - if could void cash purchases
rebuttable; to rebut 101(32), balance sheet test f. Done everything possible to ensure not creditors, so
6. transaction is within 90 days before bankruptcy (one year don't penalize them
for insiders (101(31)) and 2. Ordinary course payments
7. effect to give the creditor more than he would have a. Policy: keep the party in business
otherwise have received in a Chapter 7. b. Transactions in the ordinary course
1. Must be incurred in ordinary course
Generally transfers are cash, but don't have to be. Transfer 2. Must be made in ordinary course
is very broad - equipment, assets 3. Made according to ordinary business terms
Transfer includes parting with an interest - create or perfect c. Immunized if regular payment of debt in ordinary
a security interest for the benefit of creditor course
Actual attachment of security interest to after-acquired d. Only covers payments - don't want to disrupt routine
property can give rise to a voidable preference transactions
e. This is a large loophole - ordinary course and ordinary
If creditor is under-secured and payment is made, usually
business are not defined
f. Tend to focus on prior conduct of the parties
But - if over-secured, probably won't be avoided, because
g. Is it subjective or objective - ordinary for that business
not more than would have gotten in Ch. 7.
or normal in the trade or industry
h. Protect trade creditors who normally receive periodic
547 (e) - timing; dating the transfer
3. Purchase money (enabling loans)
a. to protect PMSI
b. Not voidable preference
if perfect w/i 10 days if perfect
c. Must be PMSI lender
10 days of "tsf after 10
d. Properly perfected within 20 day period
days,made" it relates days tsf
e. Comply with other statutory requirements
back & deemed to deemed to
f. Usually the goods serve as collateral for the loan no
occur simultaneously occur at the
harm, no foul (contemporaneous new value)
so no antecedent debt time of perfection
g. Encourages new sales to debtor
4. Subsequent credit extension (transfer for subsequent new
a. Applies if creditor gives new value to the debtor on
unsecured basis after receiving preference
b. That is, creditor may offset
Date perfected = transfer made date
c. Open or running account upon which payments are
Perfect quickly so treated as simultaneous and will be made at intervals -
antecedent debt. d. Sheltering payments coming in before extension of
If not within that - not antecedent debt - "delayed filing credit
problem" 5. Floating liens (receivable and inventory financing)
If wait more than 10 days - voidable preference
Page 24 of 25
Creditor's Rights - Spring 2001
a. AR and inventory
b. SI interest in inventory not subject to avoidance unless
it really improves their position
6. Statutory lien
7. Payments on alimony maintenance or support debt
a. Pretty new
8. Small preference in consumer cases
a. Consumer transactions where value is less than $600
Page 25 of 25