Bankruptcy Outline

1. Basics of Article 9 (attachment, perfection, basic priorities, PMSI)

With a secured interest (s/i), before default, a creditor has a contractual interest to get paid and a property interest against
the debtor, so that they do not have to go through the levy and sale process
need to have the debtor grant property interest at the outset
Advantages:
o Can repossess without the state and have your own private sale
o Have a property interest at the outset
o Have an interest in personal property or fixtures which secures payment or performance of an obligation
(UCC 1-201(37))
o Having collateral means the property is subject to a s/i
Unsecured creditors have contractual rights, but once they get a judgment, they will have to go through a process where
they turn the contractual right into a property interest
Attachment of the s/i creates the property interest
UCC 9-203(b) a s/i is enforceable against D and third parties with respect to the collateral only if:
o (1) Value has been given value is generally given by C to D (this creates the obligation)
o (2) D has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
Assures that D cannot just steal property and use it as collateral or use property in an
unauthorized way
o (3) Agreement Plus
D has authenticated (signed) a security agreement that provides a description of the collateral, OR
The collateral is in possession of the secured party under UCC 9-313 pursuant to Ds security
agreement
Note: A secured party cannot get attachment of a s/i in property that D has not yet acquired. Ex.: Suppose the
security agreement covers after acquired equipment, attachment of the s/i in the after acquired equipment does not
occur until D gets rights in the after acquired equipment
By itself, attachment is not enough against other lien creditors and secured parties. Also need to have the
perfection step
Perfection (creates priority)
Have to have this in addition to attachment
To have a s/i that is enforceable against D and all other parties, the secured party has to take a step to give people
notice of their interest in the property
o Otherwise, this interest would be invisible
To have perfection of a s/i, need to have attachment and then meet the applicable requirements for perfection
o File a financing statement with the secretary of state (most common way)
Indicates names of D, secured party, and collateral in question
Anyone who wonders if a particular property is encumbered can go to the filing system and look
at the name of D to find out
o Take possession of the collateral pursuant to the agreement (alternative)
Basic Priorities
Secured Party v. Lien Creditor (Executioner or Trustee)
1

Clause (h) UCC 9-317(a): An unperfected security interest is subordinate to the rights of .. a person
who becomes a lien creditor before the earlier of the time the security interest is perfected or a
financing statement covering the collateral is filed (governs contest between secured party and lien
creditor)
o Unperfected secured party is a creditor who has yet to get their lien subordinate to someone who has
gotten perfection
Mission is to achieve perfection of their security interest before JC becomes a LC (getting sheriff
to levy upon the property)
Did SP perfect security interest, or at the very least file a financing statement, before JC became a
LC (before levy occurred)
Filing a financing statement stakes a claim covering the collateral
o A SP can file a financing statement before giving out a loan (could be a race
against time), but has to subsequently go through with the attachment
First in time wins!
o 1 files a f/s covering collateral (perfection step)
o 2 LC collateral
o 3 SP attachment (completed perfection)
o SP would win here.
Secured Party v. Secured Party
o Clause (m) UCC 9-322(a): Priority among conflicting security interest in the same collateral is
determined according to the following rules:
Conflicting perfected security interests rank according to priority in time of filing or perfection.
Priority dates from the earlier of the time a filing covering the collateral is first made or the
security interest is first perfected
SP1 files financing statement
SP2 attachment p/s
SP1 completes attachment (financing statement will lapse in a period of 5 years unless
an amendment or continuance is filed)
Secured Party 1 beats out SP2, because they perfected first
o

PMSI liens used to furnish the credit necessary for the purchase of the collateral
Allows for D with limited funds to be able to purchase something on credit and grant a s/i in the very thing D is
purchasing
Under UCC 9-317(e), in regard to PMSI, if a person files a financing statement with respect to a PMSI before or
within 20 days after D receives delivery of the collateral, the s/i takes priority over the rights of a buyer, lessee, or
lien creditor which arise between the time the s/i attaches and the time of filing.
o Situation where secured party has not filed before judgment creditor becomes lien creditor, but gives
secured party additional time NEED A PMSI FOR THIS TO HAPPEN
o Describes a situation where a person has not filed financing statement before lien creditor comes into
being and still win out
To take advantage, secured party needs to have a PMSI and the creditor also has to file the
financing statement within 20 days from the time the debtor receives possession of the collateral
Tricky party: debtor purchases the property, but it takes some time before the debtor receives
possession of the collateral
Remember that the clock does not begin to run for the secured party until the debtor
receives possession of the collateral

Post-judgment remedies (execution (personal property), garnishment, judgment liens by recordation (real
property), basic priorities)
When a C pursues collection in a court, the first step is to establish that a debt is owed (may involve a trial w/factual
determination). Once this determination is made, the judgment debt-collection process begins. The following is an outline
of the general procedure involved in collection efforts of the Judgment-Creditor (J-C)

Execution (Involuntary liens): The judgment gives no rights to the J-C per se, but instead makes the claim
undisputable (liquidated). The J-C remains an unsecured creditor until an execution is obtained on the judgment.
Execution applies to the property of the debtor
o Definition the enforcement of a judgment by the seizure and sale of nonexempt property of the debtor
o Collection Process:
WRITS (writ of attachment, writ fi.fa.) The process begins with a writ which is simply a
court order that orders the sheriff to go and seek non-exempt property of the Judgment-Debtor for
attachment (ordinarily, the J-C lawyer will tell the sheriff where to look)
LEVY (seizure, physical or otherwise, on property of Judgment-Debtor) the sheriff will either
take physical or symbolic possession of any personal property of the J-D that is nonexempt. Real
property is seized by posting since it cannot be taken into possession physically.
Once the sheriff levies upon the J-D property, the s/i of the J-C in that property is
perfected and no other creditor later in time may defeat J-Cs rights to the proceeds
from the sale of such perfected property. (J-C becomes lien creditor)
JUDICIAL SALE (of assets seized via writ) After the levy, the sheriff will advertise the
property for public sale and sell to the highest bidder. The proceeds will be used to satisfy the
debt, and the remainder will be returned to the debtor. If the proceeds are insufficient, the sheriff
will seize more property via a new writ and sell that.

Garnishment: one of the most important assets a J-C can reach is an asset held for the J-D by another person (e.g.,
wages owed, bank accounts, payments owed to J-D on installment plan, any debt of money or property owed to JD by a 3rd party). The key element is that the 3rd party owed the J-D money, goods, or an obligation. Here, the J-C
attempts to reach the debt owed by the 3rd party to J-D through a lawsuit known as a garnishment. Garnishment is
a separate lawsuit that requires three parties: D, Garnishee, and Garnishor. It also requires at least two debts: one
from the J-D to the J-C/Garnishor, and one from the Garnishee to the J-D.
o Definition a creditors (garnishors) levy on property of the debtor in the possession of a third party
(garnishee), or on a debt or obligation due by the garnishee to the debtor.
o Liabilities of the Garnishee
If the garnishee fails to comply with any aspect of the writ (willfully), it may be liable to the J-C
for the amount of the property, or even the entire amount of the judgment
o Defenses of the Garnishee to the garnishment
Set-off When, for example, the garnishee owes the J-D money, but the J-D owes the garnishee
money back, the garnishee may set-off the amount it is owed by J-D against what it owes to the JD in the garnishment. Timing is crucial, where in some jurisdictions, the bank must set-off before
the writ of garnishment hits.
Unenforceable Debt garnishee may assert the defense to the garnishment that the debt the
garnishor is attempting to collect is unenforceable, such as a gambling debt, or loan sharking
Debt Already Paid garnishee may assert the defense to the garnishment that its debt the J-C has
already been paid to the J-D
o Restrictions on Wage Garnishment
3

If the garnishor were allowed to seize the entire wage of the garnishee, the garnishees ability to
survive would be seriously jeopardized. It would also give the J-C excessive leverage in the
bargaining with the J-D (e.g., a J-D facing garnishment of his entire wage might give up exempt
property to the J-C to stave off having his entire wage taken.)
Maximum Allowed Garnishment the maximum amount of aggregate disposable earnings that
may be garnished is the lesser of:
25% of disposable income for the week; OR
Up to an amount that would leave the J-D with disposable income equal to 30 times the
minimum Federal Wage
Restrictions do not apply to the following garnishments:
Child support or alimony
Chapter 11 or Chapter 13 payments to the Trustee under a Plan of Reorganization
Any Federal tax due
No employee may discharge any employee by reason of the fact that his earnings have been
subjected to garnishment, and if that employer does, he can be fined and/or imprisoned

Judgment Liens by Recordation: In almost all states, special procedures exist to obtain a lien of J-Ds property
quickly without going through the full blown execution process. For instance, a judgment lien against real
property is obtained by filing a lien with the County Deed Office.
o Advantages
Cost effective the process is extremely cost effective, because the J-C does not have to go out
and physically seize the J-Ds assets
Leverage acts as an effective leverage device because no one wants to purchase property from a
J-D with this sort of encumbrance attached

Basic Priorities: Which J-C will get to collect from the J-D first? The usual rule is that First in Time, is First in
Right, so the J-C that perfects first will have priority of the J-Ds assets
o Definition the ranking of liens and other interests in the same property
o Unsecured J-C vs. Unsecured J-C An unsecured J-C must first get a judgment and then levy. The levy
perfects the judgment lien on the particular piece of property, therefore, between the two J-Cs, the first to
levy (i.e., perfect) will win.
o Unsecured J-C vs. Secured Creditor The priority here is determined again by who perfected first. The
critical issue then is what constitutes perfection for a S-C? The secured creditor perfect when it records its
consensual lien according to the statutory rules. If the J-C perfection is later than this, it loses to the S-C,
but if the J-C perfection is sooner than this, it wins.
o Unsecured J-C and S-C vs. Buyers The general rule is again First in Time, is First in Right, and is again
measured by perfection with J-C (levy on lien), S-C (proper recordation), and Buyer (proper recordation)
vying for perfection.
o Statutory Lien/Trust Priority Sometimes, statutes will mandate that certain trusts or liens will get priority
over other creditors, even if those creditors were First in Time; this has to do with public policy and the
lobbying efforts of certain groups (e.g., Artisans Liens, etc.)
o Unsecured J-C and S-C vs. the TIB Consenual (S-C) and J-C creditors will face rigorous tests as to the
validity of their debts from the TIB; more often than not, J-C liens will be avoided in Bankruptcy.

2. Basics of prejudgment remedies

Common situation if debtor has demonstrated willingness to hide assets or transfer them away and plaintiff is
confident that they will prevail on the merits plaintiff can go to court and request authorization of creation of a
lien as a way of ensuring that property will be available once the plaintiff prevails
Can be problematic, because liability hasnt even been established yet
o More controversial than getting a post judgment remedy because of constitutional protections
Limitations
o Certain procedural hurdles need to be crossed
Creates leverage
Writ is sometimes called a lien attachment or writ of attachment

3. Fraudulent conveyances under UFTA

J-D may attempt to avoid the consequences of the J-C levying on his property by conveying it to another (e.g., a friend or
relative) with the understanding that the property will eventually be returned to him after his credit troubles have ended.
Typically, J-D will transfer non-exempt property which otherwise would have been subject to sale and seizure by the J-Cs.
The purpose of the Uniform Fraudulent Transfer Act is to determine whether the J-D has shown sufficient intent to delay,
hinder or defraud creditors, such that what J-D has done is fraudulent. The UFTA developed the concept of constructive
fraud.
Constructive Fraud & Quasi-Constructive Fraud: Permits a J-C to set aside a transfer even though the J-D was
entirely innocent of any fraudulent intent. Such a transfer is regarded as unfairly disadvantageous to the J-Cs
regardless of intent
o UFTA 5(a) - Constructive Fraud Permits J-C to avoid any transfer made by J-D at a time when:
the exchange was made for an unfairly low consideration, AND
when the J-D was insolvent
o UFTA 4(a)(1-2) Quasi-Constructive Fraud The J-D has a blameworthy intent, but no specific intent
to defraud can be shown. 4(a)(1) sets forth the actual fraud provisions (badges of fraud), and 4(a)(2)
sets forth the quasi-constructive provisions.
Basic Provisions of the UFTA:
UFTA 1 Definitions Page 269-70 of Statutory Supplement. (Affiliate, Asset, Claim, Creditor, Debt, Debtor,
Insider, Lien, Person, Property, Relative, Transfer, Valid Lien)
o 1(2)Asset: means property of a debtor, but does not include
1(2)(i) property to the extent it is encumbered by a valid lien
1(2)(ii)property to the extent it is generally exempt under nonbankruptcy law or
1(2)(iii)an interest in property held in tenancy by the entirety to the extent it is not subject to
process by a creditor holding a claim against one tenant
o 1(3)Claim: means a right to payment, whether or not the right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured.
o 1(12)Transfer: means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of
disposing of or parting with an asset or an interest in an asset, and includes payment of money, release,
lease, and creation of a lien or other encumbrance.
UFTA 2 Insolvency J-D is insolvent when:
o (a) total liabilities > total assets at FMV
o (b) J-D is not paying bills as they come due is presumed to be insolvent
o (c) for partnerships, if aggregate of partnerships debts > aggregate of partnerships assets at FMV
o (d) assets do not include property that has been transferred fraudulently
5

o (e) debts do not include those debts that are secured by a valid s/i
UFTA 3(a) Value Value is given for a transfer or an obligation if, in exchange for the transfer or obligation,
property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed
promise made otherwise that in the ordinary course of business to furnish support to the debtor or another person
UFTA 4 Transfers Fraudulent as to Present and Future Creditors
o (a) A transfer is fraudulent whether claim of the J-C was incurred by J-D before or after the questionable
transfer if:
(1) J-D made the transfer with the actual intent to hinder, delay, or defraud; OR
To determine actual intent, the Court may look to the Badges of Fraud (4b):
o J-D made transfer to an insider (bad)
o J-D retained possession or control after transfer (bad)
o J-D disclosed (good) or concealed (bad) the transfer to J-C
o J-D was threatened with suit or sued before the transfer was made or debt
incurred
o J-D transferred substantially all of his assets
o J-D absconded
o J-D removed or concealed assets
o J-D got reasonably equivalent value for asset transferred or debt incurred (good)
o J-D was insolvent or became insolvent shortly after the transfer was made
o J-D made transfer shortly before or shortly after a substantial debt incurred
(2) J-D made the transfer without getting reasonable equivalent value in exchange, AND
(i) was engaged in a business for which the remaining assets of the J-D would make J-D
insolvent after the transaction, OR
(ii) intended to incur or reasonably believed he would have incurred debts beyond his
ability to pay as they came due (i.e., makes J-D insolvent)
UFTA 5 Transfers Fraudulent as to Present Creditors
o As to J-Cs whose claim arose before the transfer in question the J-Ds transfer is fraudulent if the J-D
made it:
(1) without receiving reasonably equivalent value in exchange AND
(2) the J-D was insolvent at the time, or became insolvent as a result of the transfer
o As to J-Cs whose claim arose before the transfer in question the J-Ds transfer is fraudulent if the J-D
made the transfer:
(1) to an insider for a pre-existing debt,
(2) the J-D was insolvent at the time, AND
(3) the insider had reason to believe that J-D was insolvent and bought the stuff, or let J-D incur
the debt to the insider anyway
UFTA 7 Remedies of Creditors If a fraudulent conveyance is found, a J-C may obtain:
o (1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditors claim
o (2) Attachment against the asset transferred
o (3)(i) Injunction against further disposition by the J-D or a transferee, or both, of the asset transferred or
of other property;
o (3)(ii) Appointment of a Receiver to take charge of the asset transferred or of other property of the
transferee; OR
o (3)(iii) Catchall any other relief the circumstances may require
o (b) Levy the J-C may levy execution on the asset transferred or its proceeds
UFTA 8 Defenses, Liability, and Protection of Transferee What a person who buys from J-D can assert as his
defense, and to what extent such a transferee is liable is covered here:
o (a) Transfer or obligation is not voidable under 4(a)(1) [actual intent] against a person who took in good
faith and for an reasonably equivalent value
6

(b) the J-C may get judgment for the value of the asset transferred, as adjusted under (c), or the amount
necessary to satisfy the J-Cs claim, whichever is less. The judgment may be entered against:
(1) the first transferee of the asset or the person for whose benefit the transfer was made; or
(2) any subsequent transferee other than a good-faith transferee or obligee who took for value or
from any subsequent transferee or obligee
(c) if the judgment under (b) is based upon the value of the asset transferred, the judgment must be for an
amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may
require
(d) A good faith transferee or obligee is entitled, to the extent of the value given to the J-D for the transfer
or obligation, to:
(1) a lien on the asset (or right to retain an interest in the asset),
(2) enforcement of any obligation incurred, OR
(3) a reduction in the amount of liability on the judgment (set-off), equal to the amount he spent
for the asset

4. State collective remedies (assignment for the benefit of creditors, compositions, extensions, and
receiverships)
A way for the interests of the collective to be represented outside of bankruptcy law. Each of the following devices are a
response to the recognition that grab law does not solve everything, and some sort of collective method that vindicates the
collective of the creditors and maximizes return to those creditors and also allows for the most economically maximal
outcome whole allowing the company to continue for the benefit of everyone is needed.
Assignments for the Benefit of Creditors:
D assigns non-exempt assets to an assignee and now, rather than going against D, C files claims against the
assignee who, as an officer of the court, manages all the claims and pays them out
o Creditors are paid back in a more equitable way
A major limitation of this is that it does not discharge D from unpaid portions of outstanding debts, since
Constitutionally, only federal law can discharge debts
Compositions:
Agreement between D and all of Cs that the Cs will accept a stated partial payment in full satisfaction of their
debts
o Sometimes, an ABC is the vehicle for a composition
Generally subject to the rules and principles of K law, and since it is a K, it is only binding on Cs who assent to it
o Important to get everyone on the same page
Extensions:
A K between D and C or Cs, under which D is allowed an extension of time in which to pay outstanding debts.
Often runs in conjunction with compositions.
Receiverships
If D mismanages property (e.g., trying to escape jurisdiction), under common/statutory law, you can get an officer
of the court to take charge of Ds finances or in a business their business operation in a way that preserves the
assets.
o Grounds for the appointment of a receiver must be shown, including a probability of success on the
underlying action and a likelihood that the property will suffer harm if it is not placed under the control
of an impartial administrator
7

A limitation is that if a receiver is appointed for mismanagement, they only have some powers

a. Trustee Stuff Misc

323 Role of trustee as representative of the estate
(a) Trustee in a case under title is representative of the estate
(b) Trustee in a case under title has capacity to sue and be sued
326(a) Guidelines on Trustees Compensation
In a case under chapter 7 or 11, the court may allow reasonable compensation under 330 to trustee for services,
payable after rendered, such services, not to exceed 25 percent on the first $5,000 or less, 10 percent on any
amount in excess of $5,000 but less than $50,000, 5 percent on any amount in excess of $$50,000 but less than $1
million and reasonable compensation not to exceed 3 percent of such moneys in excess of $1 million, upon all
moneys disbursed or turned over in the case by trustee to parties in interest, excluding the debtor, but including
holders of secured claims
330 Compensation of officers
(a)(1) after notice to parties in interest and trustee and after hearing, a court may award to trustee, consumer
privacy ombudsman appointed, examiner or professional person
(A) reasonable compensation for actual, necessary services rendered and
(B) reimbursement for actual, necessary expenses.
(a)(2): Court may on its own or by motion of trustee award less than amount requested
(a)(3): reasonable compensation to be awarded under chapter 11 based on relevant factors
(A) time spent on services
(B) the rates charged for such services
(C) whether the services were necessary to administration of or beneficial at the time at which the service
was rendered to the completion of a case under this title
(D) whether the services were performed within a reasonable amount of time
(E) with respect to a professional person if they are board certified etc
(F) whether the compensation is reasonable based on the customary compensation of comparably skilled
practitioners in same field.
5. Basic structure of Chapter 7
In a Chapter 7 liquidation, the D gives up all nonexempt assets, the Trustee in Bankruptcy sells these assets, the proceeds
are distributed pro rata to Cs, and D is then discharged from all pre-existing (unsecured) debts. This achieves two goals:
fair distribution of Ds assets and a fresh start for the D.
Basic Structure:
Once D files (surrenders nonexempt assets and gets a discharge of debts), 362 Automatic Stay is triggered
where Cs cannot act unilaterally against property of the estate
Under 541 Property of the Estate, all legal and equitable interests are property of the estate. A Trustee is
appointed and gathers assets
Eligibility to file for Chapter 7 - 707
D has a right to get exemptions
D ultimately wants a discharge of its pre-petition debts. If D gets a discharge, provided that there is no
reaffirmation of debt, there is a total fresh start. There are two ways in which the D might not get this:
o Disaster strikes and D is denied the discharge under 727
8

D loses part of the discharge under 523 when certain debts are rendered non-dischargeable

6. Property of the estate ( 541) (Step 1: Get everything into property of the estate and then sort things out)
At the moment a bankruptcy petition is filed (voluntary or involuntary commencement of the case under 301, 302,
303), an estate is created by operation of law. All the property owned by the D becomes property of the estate which
is a deliberately vague definition, designed to be as inclusive as possible. The estate is a legal entity distinct from the D.
541(a) lists what is included in the estate:
(1) all legal or equitable interests of the D in property as of the commencement of the case
(5) Any interest in property that would have been property of the estate if such interest had been an interest of
the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire
within 180 days after such date by: (AFTER CREATION OF ESTATE)
o Bequest, devise, or inheritance
o As a result of a property settlement or divorce decree with spouse
o As a beneficiary of a life insurance policy or of a death benefit plan
(6) Proceeds, product, rents, or profits of or from property of the estate, EXCEPT post-petition wages (earned,
not received) (basis for the fresh start)
(7) any interest in property that the estate acquires after the commencement of the case
541(b) lists the exceptions; Property of the estate does not include:
(1) - any power that the D may exercise solely for the benefit of an entity other than the debtor;
541(c)
Ipso Facto Clauses are restrictive clauses relating to an interest in property that provides within its own terms that
the interest in question may not be included in the Bankruptcy Estate.
(1) any provision in an agreement that restricts or conditions the transfer of a Ds assets in the event of a
bankruptcy, or that is conditioned on the insolvency or financial condition of D is invalid
o Intended to protect the estate from ipso facto clauses
Congress has permitted a few specific restrictions on alienation to be effective to keep property out of the
bankruptcy estate
(2) a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable
nonbankruptcy law is enforceable in a case
o Spendthrift trust exception a device by which a parent or other benefactor may preserve the interest of a
minor, spouse, or another beneficiary who may need financial protection; the benefactor wants to be
certain the trust will continue to perform this function.
Has also been expanded to retirement accounts that are ERISA qualified, or plans protected under
state law
541(d) Property in which D holds, as of the commencement of the case, only legal title and not an equitable interest,
such as a mortgage secured by real property, or an interest in such a mortgage, sold by D but as to which the D retains
legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under (a)(1) or
(2) only to the extent of Ds legal title to such property, but not to the extent of any equitable interest in such property that
D does not hold.
a. Filing
521(a)(1) Debtors duties.
9

(a)(1)(a) debtor must file, list of creditors

(a)(1)(b) unless the court orders otherwise (i) a schedule of assets and liabilities; (ii) a schedule of current income
and current expenditures (iii) statement of debtors financial affairs
521(b)(1) Debtor must also file a certificate from an approved non-profit budget and credit counseling service
under 109(h)
521(b)(2) Debtor must file a copy of the debt repayment plan, if any, developed under section 109(h) through the
approved nonprofit budge and credit counseling agency referred to in (b)(1).
521(a)(2) Debtor must state intention with respect to collateral.
(a)(2) if individual debtors schedule of assets and liabilities includes debts which are secured by the property of
the estate
(a)(2)(a): within 30 days after date of filing of petition in chapter 7 or on or before the date of the meeting
of creditors, whichever is earlier, or additional time for cause, a statement regarding the intention with
respect to the retention or surrender of such property and, if applicable, that property is claimed as
exempt, the intention to redeem or reaffirm; and
(a)(2)(b): within 30 days after the first date set for the meeting of creditors, or additional time court grants
for cause, perform his intention with respect to such property as specified in A.
521(e)(f) additional duties and paperwork required
(e)(1) in Chapter 7 or 13 and an individual and if creditor files with court at any time a request to receive copy of
petition, etc, the court must make available
(e)(2)(a): debtor shall provide:
(e)(2)(A)(i) a tax return for the most recent tax year not later than 7 days before date first set for first
meeting of creditors
(e)(2)(A)(ii): must provide to any creditor who requests in a timely fashion
(e)(2)(b): failure to comply with A means court shall dismiss the case unless debtor demonstrates that the failure
to so comply is due to circumstances beyond control of debtor.
(e)(2)(c): same as b except if fails to provide tax return.
(e)(3): under chapter 13 court must make available to a creditor a copy of the plan, at a reasonable cost and within
7 days.
(f): at request of course, the trustee, or party in interest in a case under 7 11 or 13 who is an individual shall file
with the court
(f)(1): if case is still pending any tax returns filed during must be provided to court.
(f)(2): if tax returns not filed for prior 3 years, then any returns filed after petition for preceding years must be
provided.
(f)(4): in chapter 13:
(f)(4)(a): on the date that is either 90 days after the end of such tax year or 1 year after the date of the
commencement of the case, whichever Is later, if a plan is not confirmed before such later date; and
(f)(4)(b): annually after the plan is confirmed until the case is closed, not later than the date is 45 days
before the anniversary of the confirmation of the plan, showing the income and expenditures of the debtor
during the tax year of the debtor most recently concluded before such statement is filed, and of how the
monthly income of the debtor, that shows how income, expenditures and monthly income are calculated.
(J)(1) if debtor fails to file tax return that becomes due after commencement of case or to properly obtain an
extension, the taxing authority may request the court enter an order converting or dismissing the case.
(j)(2): if debtor doesnt file required return in (j)(1) within 90 days after the request is filed by taxing authority,
court shall dismiss or convert the case, whichever is in the best interests of the creditors and estate.
10

1108(b) Extension of time, (tolling on nonbankruptcy time periods)

Except as provided in a, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding or an
agreement fixes a period within which debtor or individual file any pleading or similar acts and such period has
not expired before the date of filing of the petition, the trustee may only file, cure or perform as the case may be
before the later of
(1) The end of the nonbankruptcy period, including suspension of such period occurring on or after the
commencement of the case or
(2) 60 days after the order for relief.
7. Automatic Stay
Under 362, the Automatic Stay is imposed to prevent Cs from enforcing their claims against D. It is a fundamental
protection of D provided by the Bankruptcy Code. The Automatic Stay prevents the Cs attempts to continue to collect
from the D or the Ds property. It is likened to closing the windows and locking the doors to prevent property from leaving
the newly formed estate. Until the stay is lifted by court order or discharge, Cs must refrain from their collection activities.
The primary intention of the stay is to permit the parties to sort things out.
The stay comes into effect upon the filing of the petition
The stay is binding on all entities individuals, corporate entities of all kinds, and governmental units
The stay generally remains in effect until the case is closed or dismissed
The stay generally applies only to property of the estate
The stay applies regardless of the Cs knowledge it is in place (i.e., that C is still bound by it)
Sections 362(a) and (b) set out what activity is stayed and what is not. If a particular act is not mentioned in either
subsection, and 362(a) cannot be interpreted to encompass it, the act is not subject to the stay. To prevent it from
occurring, the debtor or trustee must convince the court to use its injunctive powers under 105.
Under 362(a), there are eight instances where the automatic stay applies:
(a)(1) the Automatic Stay applies to the commencement or continuation of any action or proceeding that (1) was
or could have been begun against the D before the petition was filed; or (2) is to recover a claim that arose before
the petition.
(a)(2) a judgment obtained before the case cannot be enforced against the D or the Estate property
(a)(3) any act to obtain possession of property of the estate, or to exercise control over the property of the estate
is halted
(a)(4) - a lien against property of the estate may not be created, perfected or enforced after the stay is imposed
(i.e., after filing)
(a)(5) Cs may not enforce, perfect, or create a lien against the property of the D once the petition is filed (as
opposed to (a)(4) above which applies to property of the estate); this protects Ds exempt property from
attachment once the stay is imposed
(a)(6) the Automatic Stay applies to any act to collect, assess, or recover a claim against the D that arose
before the commencement of the case
(a)(7) If D owed money to C before Ds petition is filed, C is stayed from setting off debt that C owes to D (e.g.,
a bank owed money by D may not, once the stay is in place, set off any checking accounts or savings accounts in
Ds name against the debt owed the bank)
(a)(8) A special provision applies the automatic stay to proceedings before the Tax Court; Bankruptcy Code
trumps the Internal Revenue Code in this instance
Under 362(b), there are a number of situations in which the automatic stay does not stop pre-filing actions:
11

(b)(1) the Automatic Stay does not affect criminal actions or proceedings against D (e.g., Before the bankruptcy,
D gives C a bad check; as long as a criminal prosecution arising from this is not motivated by C trying to collect
the debt the stay will not prevent the prosecution.)
(b)(3) of any act to perfect, or to maintain or continue the perfection of, an interest in property to the extent that
the trustees rights and powers are subject to such perfection under 546(b) or to the extent that such act is
accomplished with the period provided under 547(e)(2)(A) (when transfer occurred is what this covers)
o Translation: the C may perform acts to perfect or to maintain or continue perfection if that action is
recognized by 546 or 547 as binding on the estate
o The stay does not affect certain specified actions taken by a creditor under nonbankruptcy law to perfect
or consolidate rights against the debtor of the estate. Rationale: these are merely legal procedures that the
creditor is entitled to take under nonbankruptcy law to validate a legitimate claim.

Under 362(c), the duration of the Automatic Stay is as follows:

(c)(1) the stay of an act against property of the estate under (a) continues until such property is no longer
property of the estate;
o Property may be released by the estate for different reasons: trustee may sell it in the course of
liquidation; it may be abandoned to a claimant because neither the D nor the estate has any equity in it; it
may be abandoned to the D as exempt
(c)(2) the stay of any other act under (a) continues until the earliest of:
o The time the case is close;
o The time the case is dismissed;
o The time a discharge is granted or denied
8. Relief from the Stay
Under 362(d), on request of a party in interest and after notice and a hearing the court shall grant relief from the stay
provided under (a), such as terminating, annulling, modifying, or conditioning such stay
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
o Confined to claimants such as secured creditors, lessors who have leased property to the D, co-owners of
Ds property, and other with a valid interest in property
o Adequate protection is designed to reduce the SCs risk of loss from the stay by requiring the trustee to
take action to protect the collaterals value
o Factors to consider:
Present value of the property in relation to debt
Calculations of the rate of increase or decrease of the debt and a comparison to the future value of
the collateral
Likelihood of a successful rehabilitation
(2) with respect to a stay of an act against property under (a), if
o (A) the D does not have an equity in such property; and
o (B) such property is not necessary to an effective reorganization
Under Chapter 7, this is automatic, since there is no reorganization
Termination: Lifting of the stay so that the applicant can commence or resume the suspended activity
Annulment: Terminates the stay retroactively, so the stay is treated as if it was never in effect, prior acts in
violation of the stay become valid (only used in exceptional circumstances)
Modification: Appropriate when court decides to permit some activity but not to allow the applicant full rights to
proceed with the enforcement of the claim
Conditioning: Leaves the stay in effect, subject to the D or trustee satisfying some condition
12

361 examples of adequate protection

When adequate protection is required under 362, 363, 364, adequate protection may be provided by
(1) Requiring trustee to make a cash payment or periodic cash payments to entity, when results in a decrease
in the value of entitys interest in property
(2) Providing to an entity an additional or replacement lien to extent that such stay, use, sale, lease or grant results
in decrease in the value of entitys interest in such property
(3) Granting such other relief, other than entitling such entity to compensation allowable under 503(b)(1) of this
title as an administrative expense, as will result in the realization of such entity of the indubitable equivalent
of such entitys interest in such property.
Under 362(e)(1), thirty days after a request for relief from the stay, such stay is terminated with respect to the party in
interest making such request, unless the court, after notice and a hearing, orders such stay continued in effect pending the
conclusion of, or as a result of, a final hearing and determination.
Under 362(h)(1), for individuals, the stay is terminated with respect to personal property of the estate or of D securing in
whole or in part a claim, and such personal property shall no longer be property of the estate if D fails within the
applicable time set by 521(a)(2)
(A) to file timely any statement of intention required under 521(a)(2) with respect to such personal property
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period
for taking action, unless such statement specifies Ds intention to reaffirm such debt on the original contract terms
and C refuses to agree to the reaffirmation on such terms
Under 362(k), an individual injured by any willful violation of a stay shall recover actual damages, including cost and
attorneys fees, and, in appropriate circumstances, mat recover punitive damages
9. Eligibility under Chapter 7
707 Dismissal of a Case or Conversion to a Case under Chapter 11 or 13
Under 707(a), a court may dismiss a case after notice and a hearing provided that there is cause for doing so. Cause can
be shown by the presence of:
(1) unreasonable delay by D that is prejudicial to Cs;
(2) nonpayment of any fees or charges requires under 28 USC 123; AND
(3) failure of D in a voluntary case to file, within 15 days or such additional time as the court may allow after the
filing of the petition commencing such case, the information required by paragraph (1) of 521(a), but only on a
motion by the U.S. trustee.
o List of creditors, schedule of assets and liabilities, schedule of current income and expenditures, statement
of financial affairs
Petitions can be dismissed if it is found that there was substantial abuse of its provisions. Sometimes, courts, based on Ds
income, will close off Chapter 7 even if there was no substantial abuse or wrongdoing to force D to file Chapter 13
Reorganization instead.
The 2005 Amendment to the Code created a semi-automatic analysis to determine whether there exists a presumption that
D is abusing the system by looking at Ds income if they have a lot of income, want to see how much they have left over
after given reasonable expenses to pay back pre-petition Cs. If they have a fair amount left over, D should not be in
Chapter 7.
13

 101 (10A) Current Monthly Income: the average monthly income from all sources that D receives during the 6 month
period ending on the last day of the calendar month preceding the filing
Does not matter whether or not the income is taxable, and it includes regular payments made by another entity to
D for household expenses
Ds average monthly income is then multiplied by 12 to get Ds average annual income, which is then compared
to the median family annual income
o If Ds income is greater, any party in interest can move for dismissal of the case, and the formula set out
in (b)(2) most be used to decide if the presumption applies.
o If Ds income is lower, the standing to move for relief is narrowed under (b)(6). Also, if Ds income is less
than the family median, D falls within the safe harbor of (b)(7)
101 (39A) Median Family Income the median family income as calculated and reported by the Bureau of the Census
for the most recent year.
707(b)(1) states that after notice and a hearing, a court, on its own motion or on a motion by the U.S. trustee, trustee, or
any party in interest, may dismiss a case filed by an individual D whose debts are primarily consumer debts, or with Ds
consent, convert to a Chapter 11 or Chapter 13, if it finds that the granting of relief would be a substantial abuse of
Chapter 7.
Consumer debt ( 101(8)) means debt incurred by an individual primarily for personal, family, or household
purpose.
707(b)(2) The Means Test
Makes it easier to establish abuse by creating a presumption of abuse under prescribed circumstances, which
arises if, based on the formula set out in this provision, Ds disposable income would be sufficient to support a
payment plan under Chapter 13
o If D is shown to have a disposable income in excess of that prescribed by the formula, a presumption
arises that D is abusing the provisions of Chapter 7. Unless D can rebut the presumption, grounds for
dismissal under 707(b)(1) are established
Formula as set out in 707(b)(2)(A)(i)
o Calculate Ds current monthly income as defined in 101(10(a))
Average of the monthly income that D derived from all sources within 6 months before filing the
petition
o Deduct from this monthly income Ds monthly expenses, which are determined by adding together the
amounts allowed under 707(b)(2)(A)(ii), (iii), (iv)
This will provide a figure for Ds net monthly income (disposable income)
(ii) Monthly expenses
Reasonably necessary health insurance, disability insurance, and health savings account
expenses
Does not include payments for debts
Also includes
o Reasonably necessary expenses incurred to maintain the safety of D and family
of D
o If reasonably necessary, an additional allowance for food and clothing up to 5%
of the food and clothing categories as specified by the National Standards issued
by IRS
o Reasonably necessary expenses for care and support of elderly, chronically ill, or
disabled household member or member of Ds immediate family
14

Administrative expenses for Chapter 13 up to amount of 10% of projected plan

payments
o Actual expenses of each dependent child up to $1,175 per year per child to
attend public or private school need detailed explanation as to why reasonable
o Allowance for housing and utilities
(iii) Ds average monthly payments on account of secured debts shall be calculated as the sum
of
Total of all amounts scheduled as contractually due to secured creditors in each month of
the 60 months following the date of the petition; and
Any additional payments to secured creditors necessary for the D in filing a plan under
Chapter 13 to maintain possession of Ds primary residence, car, or other property
necessary for the support of D and Ds dependents, that serves as collateral for secured
debts; divided by 60
(iv) Ds expenses for payment of all priority claims (including priority child support and
alimony claims) shall be calculated as the total amount of debts entitled to priority, divided by 60
Disposable income is then multiplied by 60 to provide a 5 year total figure for D/s net disposable income
This 60 month disposable income figure is then compared to the prescribed standards. Abuse is presumed
if the figure is not less than the lesser of:
25% of Ds non-priority unsecured claims in the case, or $7,025, whichever is greater; or
$11,725.
Note: If disposable income is high enough (above $200), you know a presumption of abuse will arise.
Conversely, if the disposable income is low enough (below $200), you know a presumption of abuse will
not arise.
o

o
o

Rebutting the Presumption of Abuse If the presumption of abuse arises because Ds 60 month disposable income
exceeds the limits set out by 707(b)(2), D has an opportunity to rebut the presumption (If the presumption is rebutted,
the court must decide whether to dismiss the case under the considerations set out in 707(b)(3))
707(b)(2)(B) sets out what D must show to rebut the presumption
o (i) provides that the presumption of abuse may only be rebutted by demonstrating special
circumstances, such as a serious medical condition or a call to active military duty, and only to extent that
the special circumstances justify an increase in expenses or an adjustment to current monthly income for
which there is no reasonable alternative
o (ii) places the burden on D to provide full itemization, documentation, and an explanation of any claim
of adjustment
o (iii) requires D to attest under oath to the accuracy of the information
o (iv) provides that the presumption of abuse may only be rebutted if the adjustments established by D
have the effect of reducing Ds disposable income to a level below that which gave rise to the
presumption in the first place
Presumption is only rebutted if the ultimate figure, as adjusted, shows a low enough 60-month
disposable income to pass the means test
707(b)(3) Even in a situation where a presumption does not arise under the mechanical test, a court might still find
abuse if D filed under bad faith or if under the totality of the circumstances, Ds financial situation demonstrates abuse.
In cases where the presumption of abuse does not arise or is rebutted, the court may nevertheless dismiss the Ch.
7 case for abuse under 707(b)(1) if the applicant for dismissal establishes, or the court on its own motion
determines, that the filing is abusive.
707(b)(3) provides guidelines on what the court should consider in deciding if there has been abuse in the
absence of the presumption
15

(B)(3)(A)Bad faith - covers situations in which Ds conduct shows improper motives for filing the
petition
Absence of any attempts to pay creditors
Failure to reduce living expenses to a reasonable level
Manipulation of assets and finances
Lack of candor in dealing with creditors or the court
Ability to make substantial payments to creditors under Ch. 11 or Ch. 13
(B)(3)(b)Totality of the Circumstances allows the court to consider a variety of factors to decide if, on
balance, the filing constitutes an abuse of the Code.
Whether petition was a response to sudden illness or calamity
Whether D made excessive consumer purchases or racked up debt before filing
Whether Ds budget is reasonable
Whether D made attempts to deal with creditors through negotiation or state law remedies
Whether Ds schedules are accurate

707(b)(6) Only the court (judge or U.S. trustee) can bring a motion under 707(b) if the current monthly income of D
is equal to or less than the median debtor.
Motion to dismiss may not be made be made by the other parties in interest who would otherwise have standing to
move for dismissal
Even though the below median D is not subject to the Means Test, there are certain parties that can use 707(b)
(3) to find actual abuse
707(b)(7) If Ds current monthly income is equal to or less than the median income, then no one can file a motion to
dismiss the petition based upon the means test.
Safe harbor precludes application of the presumption of abuse where Ds current monthly income (for this
purpose, combined with that of his spouse, even if the petition is not a joint petition) is less than the applicable
median family income
Below median D is not subject to the Means Test
10. Exemptions under state law and the Bankruptcy Code
Once the Bankruptcy Estate has been created, and is in protection of the Automatic Stay, the TIBs process of assembling
the Estate for eventual liquidation and distribution to Cs begins. The first step for the TIB is to divide the property in the
estate between that reserved for Ds fresh start, and that available for liquidation for the benefit of the Cs. The property
reserved for D is exempt property, and all property not listed as exempt is denominated as non-exempt and will be sold by
the TIB so that the proceeds can be distributed to the C.
The Bankruptcy Code provides for federal exemptions, so that D can choose either state or federal exemptions, depending
on Ds circumstances. States, however are authorized to opt out if they want from the federal scheme under 522(b) if
they want to make the state exemption the only one available to D. 522(b) is known as the opt-out clause.
Under 522(a)(2), value means FMV as of the date of the filing of the petition or, with respect to property that
becomes property of the estate after such date, as of the date such property becomes property of the estate.
Some courts say liquidation is the correct valuation

Under 522(d), the following are exempt:

(1) Ds aggregate interest in real or personal property that D uses as a residence up to $21,625
16

(2) One motor vehicle, not to exceed $3,450

(3) Ds interest in household furnishings, household goods, wearing apparel, appliances, books, animals,
crops, or musical instruments, held for primarily personal use of D or his dependent family up to $11,525 in
aggregate, but only $550 in each item
(4) Ds interest in jewelry held for family use not to exceed $1,450
**(5) WILDCARD Ds interest in any property, not to exceed $1,150 PLUS up to $10, 825 of any of the
unused Residence Exemption ( 522(d)(1))
(6) Ds interest in tools of the trade not to exceed $2,175
(7) Ds interest in an unmatured life insurance K in any amount
(8) Ds interest in a Dependents unmatured life insurance K up to $11,525
(9) Professionally proscribed health aids up to any amount
(10) Ds rights to receive (A) SS Benefit; (B) VA Benefit; (C) Disability Benefit; (D) Alimony, support
maintenance to extent necessary to support D; (E) Pension or Death Benefit
(11) Ds right to receive (A) an award under a crime victims reparation law; (B) payment to D for an
award of wrongful death of someone upon whom D was dependent; (C) payment under a life insurance K
to D for someone upon whom D was dependent; (D) payment up to $21, 625 for bodily injury actions; (E)
payment for lost future earnings owed to the individual
(12) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under
the Internal Revenue Code
Wildcard Exemption - 522(d)(5) is an exemption in ANY PROPERTY, not just listed in 522(d), and the amount is
determined by the extent to which the debtor uses up the homestead exemption under 522(d)(1) up to $10,825.
Under 522(l), D files a list of property that D claims as exempt under (b) and unless a party in interest objects, the
property claimed as exempt on such list is exempt.
Under 522(m), subject to the limitation in (b), this section apples separately with respect to each debtor in a joint case.
11. Debtors avoidance power under 522(f)
Under 522(f), D is granted limited rights to avoid certain types of liens on property to the extent that it impairs an
exemption to which D would otherwise be entitled.
522(f)(1)(B) is a very limited exception to the general rule that consensual liens take priority over an exemption in the
collateral A non-possessory (i.e., C has not taken possession of the collateral as part of the agreement), non-purchase
money s/i upon any of the following is avoidable for policy reasons:
Household Furnishings, Household Goods, Wearing Apparel, Appliances, Books, Animals, Crops, Musical
Interests, or Jewelry held for family purposes
Tools of the Trade
Professionally Proscribed Health Aids for D or dependents
Policy rationale: The reason that D can avoid such liens is that traditionally, they were used by Cs as arm-twisting
measures to get D to pay other loans, since there is really not much market value in any of these items; they are simply
garnered by C for leverage against D.

17

Essentially, rather than the s/i coming first and the remainder going back to D, the outcome is such that the exemption is
preserved in total and the secured party only has a s/i to the extent that it can assert it with respect to this. The s/i is
avoided, but only to the extent necessary to fully protect the exemption.
12. Claims (bifurcation and treatment of claims for interest and attorneys fees)
101(5) Claim: means
101(5)(A): right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal equitable, secured, or unsecured or
101(5)(B): right to an equitable remedy for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, or unsecured.
Once it is clear what property belongs to Ds estate and what property D may properly exempt, the TIB begins assembling
any nonexempt property for sale in satisfaction of Cs claims. The proceeds will be distributed pro rata to the Cs.
If proof of claim or interest is properly filed by C under 501, it is deemed allowed under 502(a), unless a party in
interest objects to Cs claims. If a TIB objects, most often the argument is that there was no valid debt under state law
(502(B)(1)), or that the amount of the debt was lower than the C claimed.
Under 502(b)(2), no post-petition interest is allowed on unsecured claims, because that would be an interest
unmatured on the date of the Bankruptcy
If you have an unsecured claim, you get no post-petition interest, but you can get pre-petition interest to the extent
in the contract. Also, you cannot, as a general rule, get post-petition attorneys fees. A holder of an unsecured
claim cannot get that on account of their unsecured claim.
If Cs debt arises post-Bankruptcy, the interest can be claimed as a 503 administrative expense
506(a) sets forth the special rights of Secured Cs in making claims. A valid secured claim is an allowable secured
claim. An allowed secured claim will be equal to (1) the amount of the debt; or (2) the value of the collateral, whichever
is less.
Bifurcation many claims made by Secured Cs are actually both secured claims and unsecured claims:
If the collateral is worth less than the total debt owed, then Cs debt to the extent of the value of the collateral is
secured, while the amount that the debt exceeds the collateral is unsecured
If the collateral is worth more than the total debt owed, then Cs debt is recovered to its full extent, and the
remainder goes into the general fund for distribution to the unsecured Cs
506(a)(2) Valuation of the collateral determines the extent of Cs claim. Determined by Replacement Value price a
retail merchant would charge (considering age and condition) Only applies to individual debtors under chapter 7 or 13.
Under 506(b), if the secured C is oversecured (i.e., if the value of the collateral exceeds the debt is secures, including
pre-Bankruptcy interest), then the secured C can receive post-Bankruptcy interest at its contract rate, until the value of the
collateral is exhausted.
Once the collateral runs out, they can no longer post-petition interest on account of their claim, because they have
used up their secured claim and are trying to get post-petition interest on their unsecured claim.
18

Creditor Ability to Claim Attorneys Fees (Both Pre and Post Petition)
Attorney fees incurred prior to the filing of the bankruptcy petition are treated the same as pre-petition interest: if
a C, secured or unsecured is entitled to pre-petition attorney fees either by K or state law, then the attorney fees
are simply part of the C total secured or unsecured claim
Post petition attorney fees situation is much less clear:
o Secured Cs who are oversecured clearly entitled to post-petition attorney fees, until the value of the
collateral is exhausted ( 506(b))
o Unsecured Cs should not be able to claim post-Bankruptcy attorney fees because they cannot claim
things like post-Bankruptcy interest, and interest and attorney fees are both akin to administrative
expenses which are controlled by 503. 503 only permits recovery of attorney fees in special
circumstances.
13. Priority claims
After the Secured Cs have been satisfied by the sale of their collateral, the unsecured Cs being the process of dividing the
remaining assets. The unsecured Cs (to the extent that the sale of the collateral did not satisfy their allowed secured
claims) join in the process.
Under 507, there is a system of priorities under which some obligations are deemed of greater social importance than
others, and as such, those claims will be paid ahead of others. Ex. Payments to a former spouse will precede those paid to
the general creditors. Note: The priority claims of 507 only deal with unsecured Cs.
Order of Priorities under 507(a):
(1)
o unsecured claims for domestic support obligations that, as of the date of the filing, are owed to or
recoverable by a spouse, former spouse, or child of D
o administrative expenses of the trustee allowed under (1), (2), and (6) FIRST PRIORITY
(2) - administrative expenses allowed under 503. These are expenses of the Estate, and arise post-Bankruptcy,
and generally cover wages of employees or the Estate, rent paid on leases in the Estate, repayment for money
borrowed by the Estate, etc.
(4) unsecured claims to the extent of $11,725 (does not mean recovery is limited to this, any remainder owed
will be placed into the unsecured general fund for distribution with the other Cs) for each individual or
corporation earned within 180 days before the date of the filing or the date of the cessation of Ds business,
whichever occurs first, for:
o (A) - Wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an
individual; or
o (B) - sales commission earned by an individual or a corporation with only one employee, is and only if,
during the 12 months preceding, at least 75% of the amount that the individual or corporation earned by
acting as an independent contractor in the sale of goods or services was earned from the debtor.
(7) unsecured claims of consumers who made deposits before the bankruptcy case in connection with a security
deposit, other leases, property, for goods or services, etc. that were not performed or satisfied. The amount of
these claims is limited to $2,600 per person.
(8) unsecured claims of governmental units, only to the extent that such claims are for:
o (A) a tax on or measured by income or gross receipts for a taxable year ending on or before the date of
the filing of the petition
For which a return is last due after 3 years before the date of the filing of the petition
Assessed with 240 days before the date of the filing of the petition
19

(B) a property tax incurred before the start of the case and last payable without penalty after one year
before the date of the filing of the petition
o (C) a tax required to be collected or withheld and for which the debtor is liable in whatever capacity
o (D) an employment tax on a wage, salary, or commission of a kind specified in (4) earned from D
before the date of the filing of the petition, whether or not actually paid before such date, for which a
return is last due, under applicable law or under any extension, after three years before the date of the
filing of the petition.
507(b) failure of adequate protection:
If the trustee, under 362, 363, 364, provides adequate protection of the interest of a holder of a claim secured by a
lien on property of the debtor and if, notwithstanding such protection.362 363 364(d) Then such creditors
claim under such subsection shall have priority over every other claim under such subsection.
o

14. Exceptions from discharge under 523

Discharge in general
From Ds perspective, the purpose of a liquidation bankruptcy is almost always to discharge outstanding debt.
Once all Cs claims have been paid to the extent possible, D anticipates discharge from all remaining debts.
However, D is not entitled to discharge as a matter of right, but the discharge will be granted unless it is
challenged by the TIB or any C
o TIB or Cs may object to Ds discharge in particular debts ( 523) or in all of the debts ( 727)
523 if granted, renders only the debt objected to non-dischargeable (applies to all Chapters of
Bankruptcy)
727 if granted, renders all of Ds debts non-dischargeable (applies only to Chapter 7
liquidation)
523(a) (Marksmans Approach) lists a series of debts that are not dischargeable for various reasons, including public
policy and the behavior of D at the time when he incurred the debts. If a particular claim is non-dischargeable under
523, once the Bankruptcy is finished (i.e., D is discharged on other debts, or if no other debts discharged, Cs are paid to
the fullest extent), C may pursue the collection of that debt as if the Bankruptcy never occurred.
(1) Tax and customs duty debt that are excluded form discharge include:
o Those arising in the ordinary course of Ds business during the Gap period;
Gap period time period between the filing of the petition and the order for relief date
o Taxes for which returns were due (whether or not filed) for three years before the Bankruptcy petition
filed;
o Taxes due as to which a return was not filed or was fraudulently filed (with no time limit)
(2) Fraudulent Representations in Gaining Credit: Upon application to the Court by C claiming nondischargeability, debts which D obtained from C in money, property, services or extension of credit can be made
non-dischargeable if obtained through fraud.
o Requirements For a fraudulent credit statement to be excepted from discharge, the credit statement
must:
Be materially false; AND
Have been reasonable relied upon (C must in face have relied upon the false statement itself and
not have discovered it later in an effort to avoid discharge); AND
Have been made by D with the intent to deceive (D did not make a reasonable and good faith
attempt to disclose his financial condition)
o Presumption of Fraud In two cases, 523(a)(2) creates a presumption of fraudulent conduct on the part
of D that will cause those debts to be non-dischargeable unless D can rebut the presumption; those cases
are where:
20

D (1) aggregated debts of more than $600; (2) to a single C; (3) for luxury goods or services; (4)
within 90 days before the order for relief; OR
D obtained cash advances under an open end credit plan (e.g., credit card, overdraft on bank
account) of more than $875 within 70 days before the order for relief
(4) Fraud, Defalcation, Embezzlement, Larceny Upon Cs application for the Court to determine whether the
debt is non-dischargeable, a debt will be denied dischargeability if it was incurred through fraud, etc., while D
was in a fiduciary capacity.
(5) Obligations for Support or Alimony If a debt is for alimony, maintenance or support stemming from a
separation agreement, divorce decree, or a court order, it will not be discharged
(6) Willful and Malicious Injuries Debts resulting from Ds willful and malicious injury of another (or
anothers property) will not be discharged.
(15) Further Limitations on Dischargeability of Alimony/Support If D has divorce or separation obligations
incurred in connection with an agreement or a court proceeding, they are generally not dischargeable

15. Global denial of discharge under 727

D has a right to discharge unless any one of the reasons below for denial is proved. Presence of any one of the reasons will
cause a discharge to be denied in full. If an individual is denied discharge under 727(a), all of Ds debts remain intact
except to the extent the Cs have already been satisfied by the liquidation of Ds assets. 727(a) should be distinguished
from 523(a) which denies discharge for particular debt.
(a)(1) D is not an individual: As state above, discharge is limited to individuals; corporations are disallowed
from getting a discharge
(a)(2) Fraudulent Transfers by D: a discharge will be denied if either D or TIB transfers, removes, destroys,
mutilates or conceals property (or has permitted these things to occur) with intent to hinder, delay or defraud Cs.
This provision applies both to transfers of Ds property made within one year before the filing and to transfers of
the Estate property after the filing.
o Intent is Key: the intent to hinder, delay or defraud is an essential ingredient of the act of preventing
discharge. There is no constructive fraud provision. It is usually impossible to prove fraudulent intent
other than by proving the facts to the court and demonstrating that no other motive can explain Ds
actions.
(a)(3) Inadequate Records: Discharge may be denied if F has concealed, destroyed, mutilated or falsified or
failed to keep or preserve any recorded information from which Ds financial condition or business transactions
may be ascertained, unless such failure of D was justified.
(a)(4) Crimes or Bad Acts Committed during a Bankruptcy Case: D knowingly made and fraudulently, in or in
connection with the case
o Made a false oath or account;
o Presented or used a false claim;
o Gave, offered, received, or attempted to obtain money, property, or advantage, for acting or forbearing to
act; or
o Withheld from TIB any recorded information relating to Ds property or financial affairs
(a)(5) Inadequate Explanation of Losses: Discharge will be denied if D has failed to satisfactorily explain any
loss of assets or the reasons for his inability to meet liabilities.
Scope:
Under 727(b), a discharge under (a) discharges D from all debts that arose before the date of the order for relief, and
any liability on a claim that is determined under 502 as if such claim had arisen before the commencement of the case,
21

whether or not a proof of claim based on any such debt or liability is filed under 501, and whether or not a claim based
on any such debt or liability is allowed under 502.
524 Effect of Discharge
524(a)(1): a discharge in a case under this title voids any judgment at time obtained, to the extent that such
judgment is a determination of the personal liability of the debtor with respect to debt discharged under 727
whether or not discharge is waived.
524(a)(2): a discharge operates as an injunction against the commencement or continuation of an action, the
employment process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor,
whether or not discharge of such debt is waived.
524(f): voluntary repayment Nothing in subsection (c) or (d) prevents debtor from voluntarily repaying the debt.
16. Post-discharge discrimination against bankruptcy debtor
Once the Bankruptcy court discharges the D, the effects of the bankruptcy on D may still linger. To reaffirm the positive
effects of discharge, certain acts are set forth in 525 that may not be executed against a discharged D.
Simply because an individual is or has been a debtor, has been insolvent, or has not paid a debt that is dischargeable:
525(a) Prohibitions Applicable to Governmental Units: governmental units may not deny, revoke, suspend, or
refuse to renew a license or similar grant, or discriminate with respect to a grant. Governmental units also may not
discriminate with respect to employment.
525(b) Prohibitions Applicable to Private Employers: private employers may not terminate the employment
of, or discriminate against.
o Note: if there are other factors which may explain the employers decision, then it is not solely based
upon the prior bankruptcy and not in violation of this provision
Broad Application of 525: Congress has accompanied 525 with its caution that it be read broadly and that the list of
examples of discrimination is not exhaustive. The courts are encouraged to expand 525 to prevent behavior that unduly
interferes with Ds fresh start.
17. Redemption, reaffirmation, and the possibility of ride-through
The financial position of D post-discharge is often surprisingly tangled with some of the same debt that forced them into
bankruptcy the first time around. The important thing to note is that discharge rids D of the unsecured obligations, but
leaves the secured creditors (and their liens) intact. This principle is expressed in 524, which expressly emphasizes that a
discharge voids personal liabilities, but not liens. This means that all unsecured debts are effectively vaporized, but a
secured debt remains attached to its collateral after bankruptcy, even though D cannot be sued for any deficiency should
the property by sold and C turn out to be undersecured.
If D does not does not wish to surrender his secured debt to C, D has only 3 options under the Code with respect to this
secured debt: Redemption, Reaffirmation or Ride-Through
Redemption of Assets by D - 722: Redemption is the right of an individual D to procure the release from lien and return
of property that is intended primarily for personal, family, or household use. To take advantage of redemption (and keep
the collateral), under Chapter 7, the property that D seeks to redeem will have to be either:
22

Fully exempt, (if partially exempt, must pay off the estate for the deficit between the exemption amount, and the
FMV minus the lien amount if TIB has not abandoned) OR
Abandoned by the TIB under 554
o 554 After notice and a hearing, the TIB may abandon any property of the Estate that is burdensome to
the Estate or that is of inconsequential value and benefit to the Estate
722 provides that D may keep the collateral by paying the amount of the allowed secured claim, which is always
the value of the collateral, not the value of the original debt

Breaking down 722 Redemption: 722 requires that property subject to redemption be:
Personal or Household Use Property property subject to redemption must be tangible personal property intended
primarily for personal , family or household use (no stocks, bonds, bank accounts, etc)
Property Must be Secured Property subject to redemption must be subject to a lien
Property Must be Fully Exempt or Abandoned as either burdensome or of inconsequential value to the estate
Making a Redemption - Assuming the asset has been properly valued, the D is given the right of first refusal to
purchase the property from C. The purchase price is determined as follows:
o Fair Exchange the amount of the allowed secured claim is the same as the amount of debt
o Oversecured Claims If C is oversecured (collateral > debt), the amount of the allowed secured claim is
also the same as the amount of the debt, so D pays the amount of the debt
o Undersecured Claims If C is undersecured (collateral < debt), the amount of the allowed secured claim
is equal to the value of the collateral, so D only pays the value of the collateral
Reaffirmation of Debts by D - 524(c) Under 524, a reaffirmation is an agreement with a C that D will become once
again legally bound to pay a pre-bankruptcy debt notwithstanding the discharge. Either a secured or unsecured debt may
be reaffirmed. Many Cs decided that it makes more sense to let D keep the property and continue the payments on it rather
than foreclose or demand repossession of that property in the event of default.
Requirements of Reaffirmation under 524: A reaffirmation agreement must:
o Be made before the discharge
o Contain a statement that D can rescind it at anytime before the discharge or within 60 days after the
agreement is filed with the Court, whichever occurs later
o Be filed with the Court, together with an affidavit of Ds lawyer that the agreement is voluntary and does
not impose undue hardship on D, that D is fully informed, and the lawyer has advised D of the effects of
the reaffirmation (Note: If D is not represented by a lawyer, the Court must then approve the reaffirmation
agreement unless it concerns a consumer debt secured by a lien on real property)
Under 524(d) governs what happens if the individual is not represented by a lawyer in a
reaffirmation.
Voluntary repayment of debt after discharge:
There are a number of reasons as to why D might forego the advantages of discharge of unsecured debts. For instance, D
might have concern about a relative who cosigned, and will be held liable if D doesnt pay or D might have concern about
being socially perceived as a deadbeat. D does not have to go through the reaffirmation process to pay back debts on
unsecured claims. Under 524(f), it is clear that D who has been discharged may voluntarily repay any debt. The
difference between voluntary payments and reaffirmation is that under voluntary repayments, there is no formal
agreement to continue to make those payments, and D may stop doing so at any time without adverse consequences.
Ride-Through!
As an additional way for D to keep property subject to a security interest, if D has not defaulted on payments on the
secured debt, some courts have allowed D to retain the collateral while continuing to pay installments to the secured party
as required by the K. This is known as a ride-through because the secured transaction rides through the bankruptcy
23

without being formally administered and dealt with as part of the estate. If D later defaults, the creditor can foreclose on
the collateral, but any deficiency would be discharged.
De Facto Ride Through Essentially, if there has not been a default and if C assents, D can continue to pay on
collateral, keep it, and ride through the petition.
18. Basic Structure of Chapter 13
Chapter 13 provides a form of reorganization that is considerably simpler than a Chapter 11, but is restricted to an
individual, or an individual and his spouse with regular income. Chapter 13 is never involuntary, and the individual can
never be forced into an involuntary Chapter 13. Chapter 13 is usually most appropriate for Ds who have many nonexempt assets that they wish to keep.
The major difference between Chapter 7 and Chapter 13 is that in Chapter 7, D finances the process by way of pre-petition
assets and gets to keep future assets, while in Chapter 13, the source of financing is in a large extent financed by future
earnings and discharge does not occur until after D completes payments under the plan. Under the plan, D keeps its assets,
but in exchange, must propose a plan subject to restrictions that pays Cs a certain amount over a 3-5 year period.
Provisions that carry over from Chapter 7:
362 Automatic Stay
541 Property of the Estate
522(d) Exemptions
522(f) Avoidance Powers
507 Priority Claims
506(a) Bifurcation
1302(b) - Duties of the TIB:
The main duties of the TIB are in connection with confirmation of the plan and distribution of payments unlike
in Chapter 7, the TIB acts more like Ds agents
o (1) perform all the duties specified in 704(a)
o (2) appear and be heard at any hearing that concerns:
Value of property subject to a lien;
Confirmation of a plan; or
Modification of the plan after confirmation
o (3) dispose of moneys received or to be received in a case under Chapter 8
o (4) advise, other than on legal matters, and assist D in performance under the plan
o (5) ensure that D commences making timely payments
o (6) if with respect to D there is a claim for a domestic support obligation, provide the applicable notice
specified in (d)
1303 Rights and Powers of Debtor:
Subject to limitations on a trustee under chapter 13, the debtor shall have, exclusive of the trustee, the rights and
powers of a trustee under sections 363(b), 363(d), 363(e), 363(f), and 363(l)
Commencement of a Chapter 13 Case: The following are the basic steps in the commencement of a typical Chapter 13
case:
Filing of a Petition: D (and only D) files a petition under 301; there is no provision or C to file an involuntary
Chapter 13 against D

24

Creation of an Estate: The filing of the petition creates an estate of all legal or equitable interests of D in the
property (541), and property acquired after commencement of the case, with D remaining in possession of the
assets (DIP). The Estate includes income earned by D while under the Plan.
o 1306 Property of the Estate (in chapter 13)
(a) Property of the estate includes, in addition to 541
(a)(1): all property of the kind specified in such section that debtor acquires after the
commencement of the case, but before the case is closed, dismissed or converted,
whichever comes first
(a)(2): earnings from services performed by the debtor after the commencement of the
case but before the case is closed, dismissed or converted to a case under chapter 7 or 11,
whichever occurs first
(b) except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in
possession of all property of the estate.
o The confirmation of the plan vests all of the property of the Estate in the DIP ( 1327(b))
Operation of the Automatic Stay: 362 restricts the actions of Cs against the property of the Estate or of D,
prohibiting most acts against or attempt to collect from D, by Cs or third parties
Filing of the Plan: D constructs a plan under 1321, 1322, and the TIB or C will recommend approval , denial,
or modification of the plan. The plan is put forth for approval at Cs meeting, and the TIB will thereafter make his
recommendations as to whether or not to confirm the plan.

The Plan - 1321 & 1322: The following elements are required by the Bankruptcy Code for an acceptable plan
Under 1321, D is required to file a plan
Under 1322(a), the Plan
o (1) shall provide for the submission of all or such portion of future earnings or other future income of D
to the supervision and control of the trustee as is necessary for the execution of the plan
Binds D to pay future earnings in an amount sufficient to execute the plan
o (2) shall provide for the full payment of priority claims under 507, unless the holder of the priority
claim agrees otherwise
Has to be cash payments, which can be deferred
o (3) while the plan is not required to classify claims, if the plan does so, then each claim within a class
must receive the same treatment
o (4) may provide for less than full payment of all amounts owed for a priority claim, only if the plan
provides that all of Ds projected disposable income for a 5 year period beginning on the date that the first
payment is due under the plan will be applied to make payments under the plan
If there is no disposable income, then D does not have to pay full amount of debts owed
1322(b) indicates what a plan may do (flexibility). The plan may o (1) designate a class or classes of unsecured claims, but may not discriminate unfairly against any class so
designated, but, it may treat claims for a consumer debt of D is an individual is liable on such consumer
debt with D differently than other unsecured claims
o (2) modify the rights of holders of secured claims, except for a claim secured only a by a s/i in real
property that is Ds principal place of residence (deals with short term debt and extends it to be completed
in 3-5 years)
Option 2: modify rights of holders of unsecured claims
Option 3: leave unaffected the rights of holders of any class of claims
o (3) plan may provide for the curing or waiving of any default;
Includes de-acceleration

25

(5) notwithstanding (2), may provide for the curing of any default within a reasonable time and
maintenance of payments while the case is pending on any unsecured claim or secured claim on which the
last payment is due after the date on which the final payment under the plan is due.
Long term debt not limited to 3-5 years
No discharge of this particular debt until payments have been completed
Generally dealing with mortgages
1322(c)(2) notwithstanding (b)(2) and applicable nonbankruptcy law, in a case in which the last payment on
the original payment schedule for a claim secured only by a s/i in real property that is the debtors principal
residence is due before the date on which the final payment under the plan is due, the plan may provide for the
payment of the claim as modified pursuant to 1325(a)(5)
o Situation is more common with second mortgages or equity loans D can modify whereas otherwise they
couldnt
o

1322(d) - Length of the Plan

If the combined current annual income of D and spouse is less than the median family income for a household of
Ds size, the plan cannot go beyond 3 years without the courts approval for cause
If the combined current annual income of D and spouse is higher than the median family income for a household
of Ds size, the plan may extend to 5 years
1325 Confirmation of Plan
1325(a) requires the court to confirm a plan if it meets the criteria set out in the section and if confirmation is
not precluded by 1325(b)
Under 1325(a), the following are criteria for confirmation
o (1) The plan must comply with Chapter 14 and all other applicable provisions of the Code
o (3) (7) D must both have filed the petition and proposed the plan in good faith, and the plan must not
violate the law GOOD FAITH TEST
o (4) The distribution to be paid to each unsecured claimant under the plan must be at least equal to what it
would have received had the estate been liquidated under Chapter 7. Because the payments under the plan
will be made over time, interest must be added to the amount distributed to each claimant so that the
claimant receives the present value of its hypothetical Chapter 7 distribution BEST INTERESTS
TEST
o (5) Unless a secured claimant accepts different treatment, the plan must either provide for the collateral to
be surrendered to the claimant, or it must preserve the claimants lien and provide for full payment of the
present value of the secured claim. Present value is determined by adding interest to the face amount of
the claim MINIMUM VALUE TEST
Lien stripping (gives secured creditor a hair cut)
Under this provision, the holder of the secured claim, if you modify, (assuming the secured
creditor isn't getting the collateral) still must be paid in the amount of the present value of the
allowed secured claim.
Here, you can also follow through on the bifurcation, and pay only the allowed secured
claim rather than the full obligationthis is known as lien stripping. To the extent the
debtor can strip the lien, it can limit the amount they have to pay on the claim. It is a
follow through on 506(a)the debtor essentially modifies the claim and the rest of the
claim, that isn't secured by the collateral (which is burned up) is unsecured.
How to determine present value of collateral
o Rash Replacement Value
o Till Formula rate/riskless or prime rate and add for risk
26

Bifurcating the 1325(a)(5) claim under 506(a) is limited in some instances by 1325(a)(9.5)--and
you MUST PAY the full obligation rather than bifurcating (The HANGING PARAGRAPH!!!)
This applies when there is a PMSI in collateral for a debt that was incurred in the 365 day
period prior to filing for bankruptcy. THEN, it cannot be bifurcated and the secured claim
must be paid in full. If the collateral for the PMSI is a motor vehicle and the debt was
incurred 2.5 year prior to bankruptcy, you cannot bifurcate the claim--you must pay the
secured claim in full, even if the secured creditor is undersecured.

19. Treatment of secured claims under Chapter 13 plan (modification, cure/reinstatement, and minimum
payment requirements)
One of the most common reasons why D would choose a Chapter 13 is Ds desire to keep property that is subject to a s/i.
The secured C in a Chapter 13 is better protected than his unsecured counterpart. There are two concerns of the secured C
that are provoked by a Chapter 13 filing: (1) Adequate Protection of the collateral while D is in possession; and (2)
Adequate Payment of Value to the Secured Party as measured by the present value of the collateral
C can move to have the Automatic Stay lifted under 362(d), claiming that the collateral is not adequately
protected OR C can object to the Plan and ask that it not be confirmed on inadequate payment of value grounds.
Adequate Protection - 362(d)(1): Since D will keep the property under a Chapter 13 plan, the secured party is naturally
concerned about the risk that the collateral will lose its value over the life of the plan. Cs concern is that if D defaults
under the Chapter 13 plan, and C is compelled to repossess, C could be left with property that has seriously declined in
value since the initial filing of the bankruptcy.
The two principle risks are that (1) the collateral will be destroyed; and (2) the collateral will seriously decline in
value
Under 362(d)(2), a secured C can get the stay lifted in a reorganization if:
o (1) D has no equity in the property (i.e., he owes more than the property is worth to the C); or
o (2) The property is not necessary to an effective reorganization
Adequate Payment - 1322(b)(2) & 1325(a)(5): The Adequate Payment of the secured C under the Plan is another point
where litigation occurs. This issue focuses on the amount the secured party is entitled to receive under Ds plan if D
succeeds in making all of the payments.
1322(b)(2)gives D the power to modify the original K between parties. Many Ds will structure their plans around saving
their homes to avoid foreclosure, but the D in Chapter 13 does not have the freedom to create a new payment schedule or
principal amount due for the home mortgage even if the home is worth less than the outstanding mortgage. Basically, this
means that the plan must anticipate payment of the loan balance in full (not just to the value of the home) if D wishes to
keep the home.
The only relief in Chapter 13 for D as to his mortgage is to Cure and Maintain
o The power to cure any default in 1322(b)(3) & (5) is not limited by the ban against modifying a home
mortgage in 1322(b)(2) because curing defaults is not a modification of the terms of the mortgage
o By curing a past default on a mortgage, and then continuing to make the regularly scheduled payments, D
is able to keep the collateral from foreclosure.
20. Treatment of unsecured claims under Chapter 13 plan (good faith, best interests, and disposable income
tests)

27

To save secured property, D must make special accommodation for secured C in Chapter 13, but this is not so for
unsecured Cs in Chapter 13. The only real argument that unsecured Cs have is that D should be required to make larger
payments to them under the Plan. There are three tests that must be met by D in paying unsecured Cs and these serve as
the basis for the unsecured Cs argument:
1325(a)(4) Best Interest of C Test
o A plan will be confirmed by the court only if it can be demonstrated that C will receive at least as much as
they would have received in a Chapter 7 liquidation. The court must, on the effective date of the Chapter
13 plan, compute what each C would get under a hypothetical Chapter 7.
This process takes into account such aspect as
Claims not allowable under 502
Exemptions claims under 522
Hypothetical damages for pending lawsuits must be considered, etc.
o If the Chapter 7 estate would have been so badly insolvent that general unsecured claims would have
received no distribution the best interests test provides no relief
1325(b) Disposable Income Test
o Disposable income is defined as whatever income is left over after Ds (and dependents) personal and
business requirements are met. Personal requirements may include such modest luxury expenses as are
appropriate for Ds income bracket. By requiring that D commit all disposable income to the plan for 3
years, the Code essentially eliminates the claim that the % payment is too low (but it can still arise under
good faith rubric where D inflates his living expenses)
Under this provision, an unsecured C cannot be forced to accept a zero payout unless it represents
a commitment of all of Ds disposable income for at least 3 years
o In essence, this provision forbids court approval of the plan unless the plan commits all the debtors
projected disposable income for a 3 year period, or in some cases, 5 year period, to the payment of
unsecured claims
o BAPCA 2005 Amendments
Increased total amount of disposable income to be committed to the plan from 3 years to 5 years
worth where Ds income exceeds the median family income
Ex. Suppose Ds monthly disposable income is calculated at $200. If Ds current annual
income is over the state median, he must pay a total of $200 x 60 months ($12,000) over
the term of the plan. If his current annual income is under the state median, he must pay a
total of $200 x 36 months ($7,200)
Created a more rigid formula for determining Ds projected income
To calculate Ds projected disposable income, the amounts necessary to be expended for
the maintenance or support of D or a dependent must be deducted from income
To determine what amounts qualify as necessary to be expended for the maintenance or
support of D or any dependents, we must combine 1325(b)(2) and (3)
o 1325(b)(2) sets out three types of expenses that are claimable in all cases
Domestic support obligations that first become payable post petition
Qualifying charitable contributions
Any amounts reasonably necessary to pay the expenses of continuing,
preserving, or operating the business
o 1325(b)(3)
If Ds current annual income is less than the applicable family median
income, the court evaluates Ds budget and decides, using its discretion
as before, whether the claimed expenses are appropriate
If Ds current annual income exceeds the applicable family median
income, the expense formula used in 707(b)(2)(A) and (B) is used
28

List of expenses based on the National and Local Standards

promulgated by the IRS for the area of Ds residence, combined
with those additional expenses authorized by 707(b)(2)(A) and
adjusted for special circumstances established by D under
707(b)(2)(B)
Where D earns more than the median family income, it limited the courts discretion in evaluating
Ds budget by using the same standardized formula for both income and expenses that have been
adopted for means testing under 707(b)
1325(a)(3) Good Faith Test
o Requires the plan to be proposed in good faith and not by any means forbidden by law
o 1325(a)(7) filing of the petition must be in good faith
o The scope and meaning of good faith is not defined by the Code, but it has been developed judicially. The
inquiry is directed at Ds state of mind in seeking Chapter 13 relief or in proposing the plan. Some areas
that are often the subject of inquiry:
The accuracy and honesty of Ds financial disclosures
Circumstances under which debts were incurred
Ds prepetition dealings with Cs (dilatoriness)
Ds dealings with property (avoidable preferences, fraudulent transfers, attempts to conceal
assets)
Reason for Ds financial distress (unfortunate circumstances or irresponsible dealings)
Advantages sought by D in choosing relief under Chapter 13, but not under Chapter 7
Ds financial history
Degree of effort undertaken by D to pay claims and to give Cs fair treatment

21. Treatment of priority claims in Chapter 13

Under 1322(a)(2), full payment of all claims under 507 is required, so the order of priorities does not matter as much in
Chapter 13 as it does in Chapter 7
22. Scope of discharge under Chapter 13
Under 1328(a), after completion by D of all payments under the plan, along with the payment of domestic support
obligations, the court shall grant D a discharge of all debts provided for by the plan with the exception of any debt:
(1) Provided for under 1322(b)(5);
(2) of the kind specified in 507(a)(8)(C) or in 523(a)(1)(B), (a)(1)(C), (a)(2), (a)(4), (a)(5), (a)(8), (a)(9);
o Note: For our purposes, only the following apply
507(a)(8)(C) - taxes
523(a)(1)(B) where a return, or equivalent report or notice if requires was either not filed or
filed late
523(a)(1)(C) D made a fraudulent return or willfully attempted to evade or defeat such tax
523(a)(2) obtaining money, property, services, or an extension through false pretenses,
representation, or actual fraud
523(a)(4) fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny
523(a)(5) domestic support obligation
(3) for restitution, or a criminal fine, included in a sentence on Ds conviction of a crime; OR
(4) for restitution, or damages, awarded in a civil action against D as a result of willful or malicious injury by D
that caused personal injury to an individual or the death of an individual - 523(a)(6)

29

23. Modification and dismissal of Chapter 13 plans

1329(a) Modification of Plan After Confirmation
At any time after confirmation of the plan but before the completion of payments under such plan, the plan may
be modified, upon request of D, C, or TIB to
o (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
o (2) extend or reduce the time for such payments
1307 Conversion or Dismissal
Under 1307, the Chapter 13 D may at any time convert to a Chapter 7 or have the case dismissed. Also, only a D
may convert a case filed under another Chapter to a Chapter 13
(c) On request of a party in interest or the US Trustee and after notice and a hearing, the court may convert a case
from Chapter 13 to Chapter 7, or may dismiss a case, whichever is in the best interest of creditors and the estate,
for cause, including
o (1) unreasonable delay by D that is prejudicial to creditors
o (2) nonpayment of any fees and charges required
o (3) failure to file a plan timely under 1321
o (4) failure to commence making timely payments under 1326
Within 30 days of filing of plan or order for relief, whichever is earlier.
In amounts proposed by the plan
Scheduled in a lease of personal property directly to the lessor for the portion of the
obligations that becomes due after the order for relief
That provides adequate protection directly to a creditor holding an allowed secured claim
by personal property to the extent the claim is attributable to the purchase of such
property by the debtor for that portion of the obligation that becomes due after the order
for relief.
o (5) denial of confirmation of a plan under 1325 and denial of a request made for additional time for
filing another plan or a modification of a plan
o (6) material default by D with respect to a term of a confirmed plan
o (7) revocation of the order of confirmation under 1330, and denial of confirmation of a modified plan
under 1329
o (8) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan other
than completion of payments under the plan
o (9) only on request of the US trustee, failure of D to file, within 15 days, or such additional time as the
court may allow, after the filing of the petition commencing such case, the information required by (1) of
521(a)
o (10) only on request of US Trustee. Failure to timely file the information required by (2) of 521(a)
o (11) failure of D to pay any domestic support obligation that first becomes payable after the date of the
filing of the petition

24. 109 - Chapter 13 eligibility

To ensure that Chapter 13 will deal only with smaller bankruptcy clams, fairly restrictive ceilings on the amount of debt
that may be owed are imposed by 109. Also, 109 states that Chapter 13 applies only to individuals. 109(e) limits
access to Chapter 13 to natural persons with (1) limited debts and (2) regular income. Those owing large amounts of debt
will be denied access to Chapter 13 and must choose Chapter 7 or 11. Businesses (corporations, not sole proprietorships)
are also excluded from Chapter 13 and must make the choice between chapter 7 and 11.
30

Regular Income Defined Under 101(30) and 109(e): The term individual with regular income is defined in
101(30) as an individual whose income is sufficiently stable and regular to enable him to make payments under a
Chapter 13 plan. It is clear that D need not be employed. Whether the income will be considered regular will
depend on the facts of each case.
Limited Debt Threshold of 109(e): To file for Chapter 13, an individual alone, or with his spouse may have: (a)
no more than $383,175 in unsecured debts, and (b) no more than $1,149,525 in noncontingent, liquidated, secured
debts.
o Contingent whether all the events have occurred to establish liability

25. Structure of Chapter 11

The process of the Chapter 11 Reorganization is, in many ways, similar to the Chapter 13 Plan Process. Under the Chapter
11, Business D wants to reorganize its debt by extending the time in which to pay it, and reducing the total amount of the
debt it must pay. Most of the Chapter 11s filed fail, and result in a conversion to a Chapter 7. In principle, because
management wants to save their jobs that will surely end if a Chapter 7 is filed, a business will almost always begin by
filing a Chapter 11.
Basic Idea: D will generally keep their assets and in exchange will propose a plan of payments that will be financed by the
income of the business going forward.
What a Chapter 11 Can Do For D:
Terminate some burdensome Ks
Recover assets transferred away in preferential or fraudulent transfers
Revamp its operations
D will get breathing room for the Automatic Stay (trim excess staff, close or sell non-profitable divisions, etc.)
The Mechanics of Chapter 11: Overview
Initial Steps Filing of Petition, Automatic Stay of 362 is imposed, and the business continues to operate with
the DIP
o Chapter 11 may be either voluntary or involuntary
o 1121: exclusivity period for filing of debtor plan
(a) the debtor may file a plan with a petition commencing a voluntary case, or at any time in a
voluntary case or an involuntary case
(b) except as otherwise provided in 1121 only the debtor may file a plan until after 120 days after
the date of the order for relief under this chapter.
Estate a new entity is formed for the DIP to control, namely the estate. The old business from a legal standpoint,
ceases to exist, and the senior management of the company now runs the estate.
o Under 1104(a), in situations of mismanagement, fraud, incompetence, etc., courts are given grounds to
appoint a TIB instead of allowing the DIP to control the corporation.
Limitations on DIP the DIP may be limited in its use of assets that are secured by a security agreement, and the
DIP faces similar challenges of the stay-lifting procedure, unless they can provide Adequate Protection
Avoiding Powers DIP has the avoiding powers of the TIB, which include the power to avoid preferences, lateperfected s/i, fraudulent conveyances, etc. under 547, 548, 544(b), etc.
1102(b)(1) Creditors Committee Appointed Once things have settled down and stability is achieved, D beings
negotiations with C, who are grouped by the court into a Creditors Committee; The first committee usually
consists of the seven largest unsecured creditors
Plan Proposed by D D will propose a plan of reorganization, in which it will propose to pay each class of Cs
certain percentages of the debt owed them
31

o Plan and the Disclosure Statement are distributed to all Cs who have filed claims
Plan Approval - 1126(c): If the plan is approved by the Creditor Committee for each class; it will be confirmed
by the court if it meets the requirements of 1129 which requires:
o Best Interest Test: Cs get at least as much as they would get in a Chapter 7
Discharge Upon the courts confirmation of the plan, D is discharged from all of its pre-petition debts except as
provided in the plan
o Contrast from Chapter 13 in that the discharge here occurs at the beginning of the plan
1107(a) Rights and powers of DIP
o Subject to limitations on a trustee serving in a case of chapter 11, a debtor in possession shall have all
rights other than the right to compensation, and shall perform all functions of a trustee
1108 Authorization to Operate a business:
o Unless the court, on request of a party in interest and after notice and hearing, orders otherwise, the
trustee may operate the debtors business.
1141(a) Effect of confirmation:
o Binding upon the debtor.

26. Use, sale, or lease of property of the estate, including non-cash collateral and cash collateral
363(a) Definition of cash collateral
Cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever
acquired in which the estate and an entity other than the estate have an interest and includes the proceeds,
products, offspring, rents, or profits or property and the fees, charges, accounts or other payments for the use or
occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a s/i,
whether existing before or after the commencement of the case
363(c)(1) Sale, Use, or Lease Inside the Ordinary Course of Business
If in the ordinary course of business, a trustee may sell, use, or lease property of the Estate without a notice and a
hearing
363(b)(1) Sale, Use, or Lease Outside the Ordinary Course of Business
For sales, use, or lease of property of the Estate outside of the ordinary course of business, there must first be
notice and a hearing
363(e) Use, Sale, or Lease of Property in Which Another Entity has Interest
If the property debtor wants to use/transfer is encumbered by a prepetition SI, and the collateral securing the
obligation is Non-cash (equipment/accounts/inventory) the debtor can use it in the ordinary course without
affirmatively getting permission of secured creditor (363e) but 363e makes clear that if secured creditor wants to
go to court and challenge for adequate protection, they can do that.
363(c)(2)-(4) Restrictions on the Use of Cash Collateral
Under 363(c)(2), the trustee may not use, sell, or lease cash collateral per 363(c)(1) unless:
o (A) each entity that has an interest in the cash collateral consents, OR
o (B) the court, after notice and hearing, authorizes such use, sale, or lease
Here, creditors get additional protections if debtor uses cash collateral subject to a pre-petition SI. Protections include
negotiations of an arrangement where creditor gets adequate protection by a replacement lien or additional lien or other
payments, or lockbox arrangement, Earthlight case shows this.
32

Subsection under either 363(e) (non-cash property) AND 363(c)(2) Generally, pre-petition security interests continue
in post-petition proceeds of the original collateral.
Under 552(b), the pre-petition interest continues in proceeds from the non-cash collateral or non-cash collateral.
In contrast, under 552(a), a pre-petition interest in after-acquired property (property procured after petitioning) is
unenforceable if the property is acquired by the debtor after petitioning.

Under 363(c)(3), if the hearing from 363 (c)(2)(B) is a preliminary hearing, the court may authorize such use,
sale, or lease only if there is a reasonable likelihood that the trustee will prevail at the final hearing under (e).
Under 363(c)(4), the trustee shall segregate and account for any cash collateral in the trustees possession,
custody, or control

27. Setoff rights in bankruptcy

Subject to qualifications noted in 553(a), they have all the rights and obligations provided for under nonbankruptcy law.
So 553 establishes a general rule--defer to nonbankruptcy setoff rights which arose before commencement of case-subject to stated exceptions.
553(a)(1): the claim of such creditor against debtor is disallowed
553(a)(3): the debt owed to the debtor by such creditor was incurred by such creditor
(A) After 90 days before the date of the filing of the petition
(B) While the debtor was insolvent and
(C) For the purpose of obtaining a right of setoff against the debtor
The nonbankruptcy rights to setoff are treated as if they secured claims under 506(a). Because those rights of setoff
encumber cash, the debtor's right to use this cash is subject to the constraints that apply to the use of cash collateral under
363(c)(2).
28. Post-petition financing
Debtor can encourage lender through giving a lien on unencumbered property, equal lien on encumbered property, give a
senior lien, or give 364c1 protection (meaning that the creditor has priority over 507(b) administrative expenses, which
means that under 507(a)(2) you have priority over administrative expenses, which is still below 507(a)(1) Trustees
expenses for DMSOs and DMSOs)
364 Obtaining credit
(a): trustee authorized to operate business of debtor, may obtain unsecured credit and incur unsecured debt in
ordinary course of business allowable under 503(b)(1) as administrative expense
(b) if not in ordinary course, court may authorize as allowable 503(b)(1) administrative expense
(c) if unable to obtain unsecured credit allowable under 503(b)(2), the court after notice and hearing may
authorize obtaining of credit or incurring debt
(1) with priority over any or all administrative expenses of the kind specified in 503(b) or 507(b)
(2) secured by a lien on property of the estate that is not otherwise subject to a lien; or
(3) secured by a junior lien on property of the estate that is subject to a lien
(d)(1): court may authorize after notice and hearing, obtaining of credit or incurring of debt secured by a senior or
equal lien on property of the estate that is subject to a lien only if
(a)the trustee is unable to obtain such credit otherwise
33

(b) there is adequate protection of the interest holder of the lien on the property the estate on which such
senior is equal lien is proposed
(d)(2): in any hearing the trustee has burden of proof on adequate protection.
503(b) allowance of administrative expense
(b)(1)(A)(i) wages, salaries, and commissions for serviced rendered after the commencement of case
(b)(2): compensation and reimbursement awarded under 330(a)
Relates to compensation of trustee and other professional persons.
(b)(4)reasonable compensation for professional services rendered by an attorney or an accountant
29. Strong arm clause
The Strong-arm clause gives DIP rights and powers of lien creditor (that is first part), but those rights and powers are
(second part) determined by non-bankruptcy law (9-317 becomes important here) but 9-317(a) basically gives priority to
the secured party who either perfects or gets a financing statement and agreement plus prior to lien creditor coming into
existence. 9-317(a) shows us that a creditor who has not filed yet loses under 9-317(a), but under 9-317(e), the holder of a
PMSI who has not yet filed/done perfection step at a time when a person becomes a lien creditor can beat out the lien
creditor if they perfect within 20 days of the time the debtor receives collateral.
Relevant provisions: 544(a), 546(b)(1) UFTA 9-317(a) and (e)
544 is known as the strong arm clause and confers three hypothetical roles on the trustee: those of judicial lienholder,
unsatisfied execution creditor, and bona fide purchaser of real property. The trustee assuming these positions is not
dependent on the existence of an actual creditor or purchaser, but assumed the position as a matter of law.
544(a)(1) gives the trustee the power to avoid any transfer of property or any obligation incurred by D that would be
avoidable in non-bankruptcy law by C who has a judicial lien on all Ds property as of the date of the petition.
101(36) defines Judicial Lien as a lien arising out of judgment, levy, or some other judicial process
544(a)(3) gives the trustee the avoidance power that would be available in nonbankruptcy law to a bona fide purchaser
of real property from D who obtained and perfected that status on the date of the petition.
Employs the fiction that the trustee is a perfected bona fide purchaser of realty as of the date of the petition. If,
under nonbankruptcy law, such a bona fide purchaser of real property would take precedence over the preexisting
interest in it, the trustee can avoid Ds transfer of that interest.
Under 544(b)(1), the trustee may avoid any transfer made or obligation incurred by D that is avoidable in prevailing
nonbankruptcy law by a C holding an allowable unsecured claim.
Trustee cannot use this provision to acquire the more powerful rights of a lienholder. Only applies against
unsecured creditors
Most cases involve fraudulent transfers
Under 546(b)(1) action under 544 are subject to any generally applicable law that (A) permits perfection of an interest
in property to be effective against an entity that acquires rights in such property before date of perfection or (B) provides
for the maintenance or continuation of perfection of an interest in property to be effective against an entity that acquires
rights in such property before the date on which action is taken.
30. Preferences, including general rule and exceptions (c)(1)-(3)
34

The TIB/DIP is given the power to avoid preferential transfers made by D during the 90-day (or 1-year for insiders)
period prior to the filing of the bankruptcy petition. The intent of the parties in making the transfers is largely irrelevant. If
an avoidable transfer has occurred, the TIB may demand that C return the preferential payment to the estate.
The categories of avoidable preferences are covered in 547(b)
Some preferences, although covered by 547(b), will nonetheless by permitted to stand because they are
excepted by 547(c)
Transfers that are avoidable preferences might be valid under state law
Strategic Advantage: A DIP may be able to use the voidable preference to exert leverage in its negotiations; for
those Cs who have been paid recently, etc., the threat by the D that they will seek a return of that payment may
exert considerable leverage in favor of D.
Mechanics of Preferences: According to 547(b), a preference involves the (1) Transfer of a (2) Ds property. The TIB is
given the power to avoid any transfer of the D in property that has any of the following preferential properties:
Under 101(54), transfer is defined as the:
o Selling of goods
o Making a money payment
o Giving a s/i to stand behind an obligation
Under 547(e)(2), a transfer occurs
o (A) at the time the transfer takes effect between the transferor and the transferee so long as the transfer is
perfected at or within 30 days after
o (B) at the time such transfer is perfected, if such transfer is perfected after such 30 days
o (C) immediately before the date of the filing of the petition, if such transfer is not perfected at the later of
(i) the commencement of the case; or
(ii) 30 days after such transfer takes effect between the transferee and the transferor
Under 547(b), the trustee may avoid any transfer of an interest of the D in property
o (1) to or for the benefit of C;
There must be some evidence of a transfer to the C of Ds property
o (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
Cannot be a transfer based on a contemporaneous debt
o (3) made while D was insolvent;
At the time when D is healthy, the Code permits payments to the C as D chooses; it is only when
there is financial difficulty that the selection of one C over another becomes an issue
547(f) Presumption of Insolvency D is presumed to have been insolvent on and during the
90 days immediately preceding the date of the filing of the petition
Element is automatically satisfied for the TIB unless C proves Ds insolvency affirmatively
o (4) made
(A) on or within 90 days before the date of the filing of the petition; or
(B) between 90 days and One year before the date of the filing of the petition, if such C at the
time of such transfer was an insider; AND
101(31) defines insider as relatives, partners, and affiliates, and in the case of
corporations, officers and directors
o (5) that enables such C to receive more than such C would receive if
(A) the case were a case under Chapter 7;
(B) the transfer had not been made; and
(C) such C received payment of such debt to the extent provided by the provisions of this title
Exceptions to Avoidable Preferences - 547(c) If 547(b) had no exceptions, then even transactions that were
beneficial to the business (and ultimately to all of Cs) would be avoided. To prevent this, the Code has 8 Exemptions to
the Avoidable Preferences Rules of 547(b)
35

Substantially Contemporaneous Exchanges - 547(c)(1): If D received new value (e.g., money, or moneys
worth of what D paid to C in goods, services, or new credit) in a contemporaneous exchange, D has exchanged his
payment to C for new goods, services, etc. Such exchanges are not for antecedent debt as required for a voidable
preference under 547(b); D has not preferred one C over another.
o This exception applies to a transfer that (1) was intended by the parties to be a contemporaneous
exchange for new value Subjective Test, and (2) was in fact a substantially contemporaneous exchange
o Ultimately, this exception requires evaluation by the court of the facts and circumstances
Ordinary Course Payments - 547(c)(2): This exception denies voidability to a transfer that was:
o In payment of a debt incurred in the ordinary course of business of financial affairs of D and C
o Actually made in the ordinary course of business affairs
o Made according to ordinary business terms
Purchase Money Loans - 547(c)(3): We are talking about PMSIs here. Purchase Money Secured Cs will be
provided with extra protection in bankruptcy. The rationale is that the Code should favor those that allow new
property to come into the estate. The concept with this exception is that C lends money to D to enable D to
purchase a specific item. The requirements of the loan must be that it is:
o Made at the time of or after a security agreement describing the property as collateral is signed
o Made by the secured party to enable D to acquire collateral under that agreement
o Actually used to acquire the item (car, house, etc.)
o Note: The PMSI must be perfected within 20 days after D receives possession of the goods bought

31. Executory contracts and unexpired leases - 365

Almost every D will bring into bankruptcy a variety of continuing Ks and agreements. Some of these may be prudent
commitments that the TIB/DIP may wish to honor, while others will represent burdens that the TUB will wish to disallow.
The TIB/DIP has a statutory right under 365 to (1) assume or (2) reject the class of Contracts deemed Executory
Contracts.
Executory Contracts is one in which performance remains on both sides.
Assume: estate will be liable for a breach if one occurs post
Reject: breach of contract, but significantly, post petition breach will be treated as if it occurred pre petition.
Under 365(a), permission to assume or reject a K must be obtained from the court. The standard for the decision is the
good business judgment of the TIB.
Rules for Assumption of Executory Contracts - 365(b)
(1) If in breach, DIP must cure defaults, and then make assurances
o If not in breach, D can assume, but still must make assurances
o Cure is necessary cannot simply assume and discharge unpaid amounts
(2) Paragraph (1) does not apply to a default that is a breach of a provision relating to
o (A) the insolvency or financial condition of D at any time before the closing of the case;
o (B) the commencement of a case
o (C) the appointment of or taking possession by a trustee in a case
o (D) the satisfaction of any penalty rate or penalty provision relating to a default arising from any failure
by D to perform nonmonetary obligations under the executory contract or unexpired lease
Assumption of contract is constrained, trustee must promptly cure any defaults which exist. Non monetary
default and really curable can still be cured if the action is done later. Problem 25.3 forgot to get insurance, will
pay for insurance now. Makes clear with at least this type of circumstance, under 365(b), purchasing insurance is
probably acceptable to cure
36

Contracts Excluded from Assumption or Assignment - 365(c)

The trustee may nor assume or assign any executory contract or unexpired lease of D, whether or not such
contract or lease prohibits or restricts assignments of rights or delegation of duties, if
o (1)(A) applicable law excuses a party, other than D, to such contract or lease from accepting performance
from or rendering performance to an entity other than D or DIP, whether or not such contract or lease
prohibits or restricts assignment of rights or delegation of duties; AND
o (1)(B) such party does not consent to such assumption or assignment; OR
o (2) such contract is a contract to make a loan, or extend other debt financing or financial
accommodations, to or for the benefit of D, or to issue a security of ; OR
o (3) such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy
law prior to the order for relief.
Time Periods for Assumption - 365(d)
(2) For a Chapter 11, the trustee may assume or reject an executory contract or unexpired lease at any time before
the confirmation of a plan, but the court, on the request of any party to such contract or lease, may order the
trustee to determine within a specified period of time whether to assume or reject such contract or lease
Ipso Facto Clauses - 365(e)
An executory contract or unexpired lease of D may not be terminated or modified at any time after
commencement of the case solely because of a provision in such contract or lease that is conditioned on
o (A) insolvency or financial condition of D at any time before the closing of the case
o (B) the commencement of a case
o (C) the appointment of or taking possession by a trustee in a case
Rules Governing Assignment of Executory Contracts - 365(f)
(2) The trustee may assign an executory contract or unexpired lease only if
o (A) the trustee assumes such contract or lease in accordance with the provisions of this section; AND
o Adequate assurance of future performance by the assignee of such contract or lease is provided, whether
or not there has been a default in such contract or lease
502(g)(1) Damages for breach of executory contract
As allowed by 502a, b, c. (small bankruptcy dollars)
As disallowed by 502(d)(e)
32. Fraudulent conveyances under 548 and 544(b)
The law of fraudulent conveyances as codified in 544(b) and 548, where the DIP/Trustee exercises the non-bankruptcy
power to avoid fraudulent conveyances made by the debtor. He does so for the benefit of unsecured creditors as a class,
because the debtor/business who wants a fresh start must do so with the interests of the unsecured creditors in mind. This
bankruptcy code version of FC law stands in contrast to state FC law, where a creditor has the ability to target a debtors
property that debtor transferred away in a fraudulent fashion. The policy, however, is the same both bankruptcy FC law
and non-bankruptcy FC law protect unsecured creditors.
Under the bankruptcy code, there are two provisions under which the Debtor-in-possession can exercise his power to
avoid fraudulent conveyances.
544(b) (Two step analysis1) Trustee gets rights of actual creditor, 2) Figure out what those rights are under nonbankruptcy law using 502, the UFTA, and other law)
37

(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding
an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section
502 (e) of this title. (In other words, the DIP has the avoidance powers of any actual creditor that exists
regarding the particular estate and has a right under the UFTA or other law to avoid a transferhe steps
into the creditors shoes)
o (2) Does not apply to a charitable contribution as defined in 548(d)(3).
o 502 -The claim is not allowable if unenforceable under agreement/applicable law other than for the reason
that it is unmatured/contingent; such claim is for unmatured interest (one cannot get post-petition interest on
account of an unsecured claimthis is not allowable), tax issues, exceeds reasonable value for an services of
an attorney or insider, etc. See Code for More.)
548 Only in federal cases, there are two grounds on which a DIP can avoid a pre-petition transfer by the creditor.
o (a)(1)(A) - where debtor voluntarily or involuntarily made such transfer or incurred such obligation with
actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date
that such transfer was made or such obligation was incurred, indebted; OR (look at the badges of fraud too relative, insider, hidden, less than reasonably equivalent value as a factor of intent, etc.)
o (a)(B)(i) and (ii)(I) where debtor received less than a reasonably equivalent value in exchange for such
transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was
incurred, or became insolvent as a result of such transfer or obligation; (See Image Marketing for example
of this provision in application).
o (c) a transferee or obligee of such a transfer or obligation takes for value and in good faith, has a lien on
or may retain any interest transferred or may enforce any obligation incurred as the case may be, to the
extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.
o Protection of good faith purchasers for value.
o (d)(2)(A): value means property or satisfaction or securing of a present or antecedent debt of the debtor,
but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.
o

550: Liability of Transferee of avoided transfer

550(a): except as otherwise stated, to the extent that a transfer is avoided under 544, 547, 548, 553(b), the trustee
may recover, for the benefit of the estate, the property transferred, or if the court so orders, the value of such property
from
550(a)(1): the initial transferee of such transfer or the entity for whose benefit such transfer was made or
550(a)(2): the immediate or mediate transferee of such initial transferee
550(b): the trustee may not recover under (a)(2) of this section from
550(b)(1): the transferee that takes for value, including satisfaction or securing of a present or antecedent debt in
good faith without knowledge of the voidability of the transfer avoided or
550(b)(2): any immediate or mediate good faith transferee of such transferee
550(d) the trustee is only entitled to a single satisfaction under subsection 550(a)
33. Legal requirements for confirmation, including best interests of creditors test and feasibility
The attorney, after negotiating the situation with the Cs and assessing the financial condition of D and all of the leverage
opportunities, must construct a Plan which is a product of the negotiation. 1129 contains 13 separate requirements which
must be satisfied before the Plan is adopted. At the confirmation hearing held by the court, the bankruptcy court assesses
the following in deciding whether to confirm a plan:
1129(a)
(3) Plan must be proposed in Good Faith plan is not in violation of other laws, reasonable likelihood the plan
with achieve a result consistent with the Code
38

(7) Best Interests of the C Test

o This test applies to each C, not only to each class of Cs.
o As in Chapter 13 cases, C must receive in Chapter 11 as much (in PV terms) as he would have received in
a Chapter 7
This test applies in all cases, but as a practical matter, will only effect the objecting Cs (i.e., the
yes-voting Cs can agree to accept less than a Chapter 7, but the objecting Cs must get at least this
amount)
(8) Each class must accept the plan or be unimpaired under the Plan
o 1124 defines impaired class under a plan
(1) must leave unaltered the legal, equitable, and contractual rights to which such claim or interest
entitles them to such claim or interest or
(2)(a) if not cured by plan
(2)(b) if claim maturity not reinstated
(2)(c) if not compensated for any damages incurred as a result of any reasonable reliance by
holder
(2)(d)if claim or interest arises from any failure to perform a non-monetary obligation other than
default from failure to operate a non-residential real property
(2)(e) impaired unless the plan does not otherwise alter the legal equitable or contractual rights to
which such claim or interest entitles the holder of such claim or interest.
(10) Plan must be accepted by at least one class of impaired Cs this provision is vital to the use of the
1129(b) Cramdown
(11) Feasibility Test
o The requirement of feasibility means that the Plan is not likely to result in liquidation of D or the need for
further reorganization, unless it is a proposed part of the Plan.
Helps to ensure that the Plan is workable and not a visionary plan
o It is the likelihood that the plan will succeed, and the business will survive long enough to make payments
o Applies even in cramdowns
o Applied on a case-by-case basis
o Feasibility is determined with the tools of financial analysis
Adequacy of the capital structure of the plan
Earning power of the (continuing) business
Economic conditions (of the market or otherwise)
The ability of the corporations management

34. Classification and voting

Classification - 1123(a)(1) (4): Cs are divided into classes under 1123(a)(1)-(4) for the purposes of voting and
distribution, with those Cs within the class sharing similar legal status and pro rata distribution
(1) a plan shall designate classes of claims and interests
(2) a plan shall specify any class of claims or interests that is not impaired under the plan;
(3) a plan shall specify the treatment of any class of claims or interests that is impaired under the plan;
(4) a plan shall provide the same treatment for each claim or interest of a particular class, unless the holder of a
particular claim or interest agrees to a less favorable treatment of such particular claim or interest.
1123(b) Subject to 1123(a) a plan may:
(1) Impair or leave unimpaired any class of claims, secured or unsecured, or of interests;
(2) Subject to section 365, provide for assumption, rejection, or assignment of any executory contract or
unexpired lease of debtor not previously rejected
(3) Provide for
39

a. (A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate
b. (B) the retention and enforcement by the debtor, trustee, representative of estate any claim or interest
(4) Provide for the sale of all or substantially all of the property of the estate and the distribution of the proceeds
of such sale among holders of claims or interests
(5) Modify the rights of holders of secured claims, other than a claim secured only by a security interest in real
property that is the debtors principle residence, or of holders of unsecured claims, or leave unaffected the
rights of holders of any class of claims and
(6) Include any other appropriate provision not inconsistent with the applicable provisions of this title.
Under 1122(a), all claims in a class must be substantially similar to each other. This has been construed to mean at a
minimum that secured and unsecured claims must be segregated from one another, and that unsecured claims put into the
same class must be of the same priority level. However, two similar claims need not always be in the same class.
If there is a reasonable basis for separating similar claims into different classes, it can be done
Small Claims Under 1122(b): A class can be created of all claims below an amount set by the court; this is considered
an appropriate administrative procedure to handle many minor maters together. It can be an exception to the rule that
claims in a class be similar.
Secured Claims Typically, each secured C will be put into a different class because each item of security is different
from all other times. However, if the security for several secured Cs is essentially the same, they may be put in the same
class.
Voting - 1126 and 1129(a)(8): Under 1126(c), a plan is accepted by a class if the plan has been both:
Accepted by Cs in that class holding 2/3 of the $$$ amount of the claims in the class AND
Accepted by a majority (50% + 1) of the claims holders in that class (never set up a class with only 2 members
deadlock)
Note: If the voting results do not meet these requirements, the plan is deemed to be rejected by that class
Under 1129(a)(8), for the plan to be confirmed, each and every unimpaired class must accept the plan (since a class that
is not impaired is deemed to accept the plan). On its face, 1129(a)(8) requires acceptance by 100% of the classes in the
plan.
Because of the harsh results that would attend D in having to get 100% approval, the Code under 1129(b)
permits cramdowns if certain conditions are satisfied
Under 1126(d), equity holders can accept the plan if at least 2/3 of them approve
Under 1126(g), if a class receives nothing under the plan, it is deemed under 1126(f) to reject the plan, however, this
presumption of rejection can be overcome voluntarily
Under 1126(f), if a class of claims (or C) is paid in full, that class (or C) gets no vote (why should they? They are getting
all they could hope for)
Impairment: In general, impairment refers to whether a C class will be completely protected (by full payment of the
claims that are owed to them) under the plan. Cs are either impaired or they are unimpaired.
Unimpaired Claims - 1126(f): An unimpaired class is getting paid the full value of their claims against D.
Unimpaired claims are simply not entitled to vote. By definition, they meet the Best Interest of the C test. The
unimpaired claims are not being deprived of their non-bankruptcy rights, so they should not be required to
approve the plan
40

Impaired Claims - 1124: Impairment simply means that a claim or interest has been altered; C is going to
receive less in the Chapter 11 that he would have received under the pre-bankruptcy agreement with D. Impaired
claims must be identified by the plan, and each class of impaired Cs must be given the right to vote on and accept
or reject the plan.

35. Solicitation and disclosure

Disclosure of the Plan under 1125: Under 1125, information concerning the Chapter 11 plan must be disclosed to the
holder of claims and interests who will vote on the plan. The disclosure requirement can produce much litigation:
C could claim that D failed to disclose important financial/business information that was necessary for an
informed vote on the plan
C could claim that the plan has a flaw that will prevent confirmation and the disclosure statement is defective for
failing to disclose that the plan cannot be confirmed
Plan disclosure documents must be approved by the court, after notice and a hearing, as containing adequate
information
o (a) Adequate Information: The holders of claims and interests must receive adequate information in
order to make an informed vote; the amount of information required depends upon the complexity of the
reorganization. Mostly, it is left to the discretion of the courts, but there are some guiding factors for
what the Cs should be told
Description of the business
History of the debt prior to filing
Financials
Description of the Plan
Ds Liquidation Value
Projection of Business Operations
Litigation
Transactions w/Insiders
Probable Tax Consequences of the Plan if Confirmed
Documentation Required to be Sent to Claim Holders
o (b) the plan or a summary of the plan and written disclosure statement must be transmitted to the claims
and interest holders. This must be done before solicitation is made of the other Cs
The court must approve the adequacy of information offered by the disclosure documentation
o Under 1125(c), the same disclosure statement shall be transmitted to each holder of a claim or interest
of a particular class, but there may be transmitted different disclosure statements, differing in amount,
detail, or kind of information, in between classes
Good Faith Requirement
o Under 1125(e), although the Code affords great latitude to Cs to communicate among themselves, there
is a general good faith requirement with respect to voting and the solicitation of votes
36. Cramdown - 1129(b): The confirmation of a plan despite opposition from some creditors, where the plan
satisfies the Codes prerequisites for non-consensual confirmation.
Even if the Plan satisfies the Best Interest test from 1129(a)(7) and meets the test of Feasibility under 1129(a)(11) as to
every C both willing and unwilling to accept the plan, it still must be accepted by the statutory majority of Cs in each
Impaired Class under 1129(a)(8). While it seems like 100% of the classes must accept the Plan, there is relief from this
requirement. If one of the classes (who passes the B/I and Feasibility Test) rejects the plan, then the plan can be confirmed
only if it satisfies the two prongs of the Cramdown test.
41

As long as D has at least one consenting class ( 1129(a)(10)), it may try to Cramdown. There are two requirements or
prongs that must be met for a plan to be crammed down, and these tests must apply to each class of claims and interests
that have not voted in favor of the plan:
Unfair Discrimination Test - 1129(b)(1): Unfair discrimination under Chapter 11 has a meaning that is similar to
other areas of the law disparate treatment of those similarly situated without a rational basis for doing so
o Whether the discrimination is supported by reasonable basis
o Whether D can consummate the plan without resort to discrimination
o Court scrutiny of the classes and the effect of discrimination on each
Fair and Equitable Test - 1129(b)(2): sets forth the minimum requirements for a plan to be found fair and
equitable, leaving discretion with the court to find any other requirements that it deems necessary. The
enumerated minimum requirements are:
o 1129(b)(2)(A) governing Secured Cs
Oversecureds get full debt owed + interest
Undersecureds get value of collateral
o 1129(b)(2)(B) governing Unsecured Cs to be found fair and equitable, must get either:
Paid in full (unlikely)
If they are not paid in full (i.e., impaired), no C who is junior to them can get anything
(Absolute Priority Rule)
o 1129(C) governing Equity Holders
Also subject to Absolute Priority Rule if not paid in full
Unsecured Cs/ Equity Holders & Absolute Priority Rule: One in a senior position must be paid in full before anyone
junior can receive anything. To cramdown a no voting unsecured C, D must either pay them in full, or provide that the
junior parties get nothing.
In effect, lower groups will want to get higher groups to support the plan, because if the higher group is impaired
and D wishes to force a cramdown, then the lower group will receive nothing under the Absolute Priority Rule
New Value Exception
One situation where come courts have allowed equity holders to retain their interests even though a senior
nonaccepting class has not received full payment:
o If the equity holders contribute new capital to D, that is equal or greater than the value of their interests,
the can retain stock in D in exchange for this new value.
o Contribution must be in money or moneys worth; it cannot take the form of a promise of managerial
services or other intangible benefits.
Effect: equity holders can preserve their equity by making a contribution of capital reasonably equivalent to the
value of their interests in D.
1325(a)(9) Limits on Cramdown
Remember that 1325(a) allows for 506(a) bifurcation for undersecured creditors, which ordinarily works for
underscored creditors under 1129(b)(2)(A). The hanging paragraph of 1325(a)(9) adds a wrinkle to this in that
it highlights two scenarios where a bifurcation will not be allowed. Those scenarios are when C holds a PMSI of
any property dating back within a year of filing or in the case of a motor vehicle, 2.5 years (910 days) of filing.
So, if the undersecured creditor in 1129(b)(2)(A) is the holder of one of these two PMSIs, then bifurcation will
not be allowed which will halt the cramdown process.

42