BLH Bankruptcy

§101(5) Claim Means

• A right to payment

• Right to an equitable remedy if creditor has an alternative right to payment if performance under injunction doesn’t occur

• A claim can be a judgment, liquidated, fixed, contingent, matured, unmatured, disputed

Unsecured claim definition

If the creditor hasn’t obtained a lien/collateral, or if property value of property subject to lien is less than debt owed

How chapter 7 unsecured debts are handled

Proceeds from the sale of debtors estate

How chapter 13 unsecured debts are handled

The plan controls the payments to holders of unsecured claims

• Only debtor can file plan, (creditors don’t vote), requires court approval

How chapter 11 unsecured debtors are handled

Plan controls payment to holders of unsecured claims 

• creditors may file and vote on plan

• Doesn’t require all debtors disposable income

(§506(a)(1) Secured claims definition

Secured to extent of value of collateral, unsecured as to the rest (bifurcated)

Valuation of secured claims under Chapter 13 and 11 (3 options under (§1325(a)(5))

1. obtain secured creditor’s consent to its treatment under plan

2. surrender collateral or

3. Plan may propose to cram down the claim

How debtor may cram down a claim

Secured creditor must retain its lien until the end of the plan, receive cash payments not less than the amount of the claim

• Requires the collateral

  • Must be valued under §506(a)(1) and 

    • Must determine as of when to value the collateral and method to value collateral

  • Discount rate or rate of interest must be set to ensure deterred payments have present value under plan

§506(a)(2) definition

If debtor is an individual, personal property = replacement value at time of filing (price retail merchant would charge for an object of the same age and condition)

*Also appropriate in chapter 11 business cases/cases involving real property (real v. wholesale price depends on type of debtor

§501

File a proof of claim

Exceptions when you don’t need to file a claim under §501

• Chapter 7 no asset case

• Chapter 11 if claim is scheduled by debtor and not listed as disputed, contingent, or if you agree with the amount in schedule

§521(a)(1)

requires debtor to file a list of creditors

• once claim is filed, it’s automatically deemed allowed UNLESS a party in interest objects

  • objecting party has burden and if proven, burden shifts to claimant

§502(b) and (d) 

Lists 9 grounds for disallowance 

§502(b) and (d) ground 1 for disallowance

If the claim is unenforceable against the debtor or the property of the debtor by reason of agreement or applicable law

• Ex: a non recourse loan

§502(b) and (d) ground 2 for disallowance

A claim for “unmatured” interest

• interest stops accruing when a bankruptcy petition is filed

§502(b) and (d) ground 3 for disallowance

If a claim is for an ad valorem property tax, it will not be allowed to the extent the claim exceeds the value of the estate’s interest in the property

§502(b) and (d) ground 4 for disallowance

If the claim is for services of the debtor’s attorney or an “insider”

§502(b) and (d) ground 5 for disallowance

If the claim is for post petition alimony or child support

§502(b) and (d) ground 6 for disallowance

If the claim is that of a landlord for future rent, it will be limited to the greater of 1 years payment or 15% of the payments for the balance of the lease, not to exceed 3 years payment total

• Doesn’t affect a claim for rentals due before the filing

§502(b) and (d) ground 7 for disallowance

Limitation on the allowable claim for termination of an employment contract - no more than back wages due at the time of the bankruptcy filing and 1 years of future compensation

§502(b) and (d) ground 8 for disallowance

If the claim is a federal tax claim which arises because the state unemployment tax is paid late

§502(b) and (d) ground 9 for disallowance

Claims that are not timely filed

Priority Claims

Administrative expenses and unsecured claims to be satisfied before other unsecured allowable claims

Priority in Chapter 7 Cases

Each 1st priority claim is to be paid in full before 2nd priority claims.

*If there is not enough money to pay all claims within a priority class, then it is paid pro rata

Priority in Chapter 11 and 13 Cases

Require the plan to provide for payment in full of all priority claims

Unsecured claim holders are paid only if…

1. Lien holders have been paid for encumbered property
2. Exempt property is removed from the estate, and
3. The cost of bankruptcy administration have been paid.

§507(a)

Lists the order of priority for unsecured creditor payment

§507(a) priority 1

Allowed unsecured claims for domestic support obligations

§507(a) priority 2

Admin expenses allowed under 503(b) after notice and hearing

Administrative expenses allowed under 503(b)

1. The actual, necessary costs and expenses of preserving the estate including wages, salaries, commissions, rendered after the commencement of the case

2. Compensation reimbursement of expenses rendered by the trustee, examiner, professional person or attorney

3. Value of goods received by debtor 20 days before start of case where goods were sold to debtor in the ordinary course of business

§507(a) priority 3

Claims arising in the ordinary course of debtor’s business after creditor files an involuntary petition but before the earlier of an order for relief for the appointment of a trustee

§507(a) priority 4

Pre petition wages and salaries owed to an employee earned in 180 days before filing of bankruptcy case - cap of $13,650 per employee

§507(a) priority 5

Contributions to an employee benefit plan with limitations

§507(a) priority 6

Grants farmers priority for claims against grain storage facilities and fisherman against fish processing facilities

§507(a) priority 7

Consumers who made a money deposit for property or services that were never provided

§507(a) priority 8

Certain specified tax claims

§507(a) priority 9

Claims based upon a commitment to regulatory agencies to maintain institutions capital - only applies in bankruptcies related to insured federal depository institutions

§507(a) priority 10

Claims for personal injuries or death caused by the debtor’s operation of a motor vehicle, boat, or airplane while under the influence of alcohol or drugs

Subordination definition

Certain claims are moved to the back of the line

§510 requires subordination in 2 instances…

1. Where there is a subordination agreement that would be enforceable under non-bankruptcy

2. When a seller/purchaser of equity securities seeks damages or rescission

Subordination & The Court’s Discretion

Court has discretion, after notice and a hearing to subordinate any claim —> they look to the holder of the claim to see if the purchaser is a fiduciary or insider

§541(a)

Filing of a bankruptcy petition automatically creates an estate — including all forms of property, real and personal, tangible and intangible, and wherever located/by whomever held 

Property of the Estate: Chapter 7

Estate is collected by trustee and sold 

Property of the Estate: Chapter 11

Debtor remains in possession of property (DIP
No trustee, unless request is made by a party in interest — requires notice and hearing 

Property of the Estate: Chapter 13

Trustee appointed, but does not take possession (§1306(b))

*However, the use and sale of the estate is subject to court supervision (§363)

Post-petition Property included in the Estate (§541(a))

1. Any interest in property the trustee recovers 

2. Proceeds, product, offspring, rents or profits of or from the estate 

3. Earnings from services an individual debtor acquires after filing a Chapter 11 or 13 petition 

4. Property that debtor acquires/becomes entitled to within 180 days before filing by:

   1. bequest, devise, or inheritance

   2. property settlement or divorce

   3. as beneficiary of a life insurance

5. Lawsuits are property of the estate

Property Excluded from the Estate (§541(b) &(c))

1. Funds in educational retirement account at least 365 days prior to bankruptcy filing within limits established by IR code for benefit of debtor’s kids/grandkids 

2. Spendthrift trusts and ERISA accounts from property of estate 

3. Exemptions 

Additional Property of Estate in Chapter 11 and 13 Cases

1. All property/earnings the debtor acquires after commencement of the case, but before the case is closed, converted, or dismissed, and

2. Except as provided in a confirmed plan, or order confirming a plan, the debtor shall remain in possession of all property of the estate

Turnover of Property under §542(a)

Anyone other than a custodian (receiver/trustee of any property of the debtor; assignee) in possession of the property, that the trustee may use, must deliver it to trustee, unless the property is of inconsequential value

Turnover of Property under §543(b)

A custodian must turn over property, proceeds, profits, or rents in its possession/control over the trustee on the date custodian learns of the case

Exemptions Generally 

Both state law and federal law have exemptions 

-Most states allow debtor to choose one or the other 
-Some states only allow their state exemptions 

§522(b) - Exemptions in joint filing

In a joint filing, each spouse will get their own exemptions, but both have to agree on either state or federal

Exemption Limitations §522(b)(3)

• 2 year residency for state exemptions

  • If not, the state where the debtor resided the most within 2.5 years of filing

4 Groups of Pre-petition Creditors who can Reach Exempt Property under §522(c)

1. Creditors with tax claims excepted from discharge by §523(a)(1)

2. Spouses/former spouses/children of the debtor with domestic claims under §523 (a)(5)

3. Creditors whose claims arise from the debtor’s fraud in obtaining funding for higher education

4. Creditors with liens on exempt property that aren’t avoided/extinguished through redemption

Redemption under §722

Authorizes individual debtor to redeem/extinguish a lien on exempt property by paying lienor in cash the replacement value of the encumbered property
- Leftover debt is unsecured claim
-Rare debtor keeps their car because of this

Automatic Stay definition

The filing of a petition automatically prevents creditors to collect their claims even if creditor is unaware of the filing

§362(a)

Scope of the automatic stay

§362(b)

What is not covered under the automatic stay

§105

Grants court the power to grant an injunction

§362(c): Termination of Stay

(1) Stay continues until property is no longer part of the estate
(2) Stay ends when bankruptcy case is closed/dismissed when debtor receives discharge
(3) If another case is pending 12 months before this case, stay is effective for 30 days
(4) If 2 or more filings within 12 months, no stay

How to extend automatic stay

Must file a motion and show clear and convincing evidence

Result of violation of automatic stay

Any action that violates automatic stay must be undone 

§362(k)

Debtor injured by willful violation of automatic stay shall recover actual damages (ex. cost of attorney’s fees) and may recover punitive damages (only if creditor acted in bad faith)

§362(d)

Relief from the automatic stay — court can grant relief on the request of a party in interest

*Relief = terminating/ annulling/ modifying/ conditioning the stay

2 ways to get relief from the automatic stay

1. Under §362(d)(1) — “for cause” (determined by Sonnax factors)

2. Under §362(d)(1) — “lack of adequate protection of an interest in property” (invoked by creditor with a lien)

§362(d)(1)

Does not define adequate protection but 361 provides for 3 non exclusive methods of providing adequate protection

§361 method 1

Periodic cash payment to lien holder equal to the decrease in value of the creditor’s interest in the collateral

§361 method 2

An additional or substitute lien on other property

§361 method 3

Grants debtor in possession or trustee flexibility in providing adequate protection. Allows for whatever will result from the “indubitable equivalent” of the value of it’s interest in the collateral

What happens if judge is wrong and adequate protection is not enough

The judge will grant an administrative expense priority for the losses to creditor

What if judge is wrong and adequate protection is too much

If over secured, depreciation doesn’t affect interest

§362(d)(2)

A lien creditor may obtain relief from the stay if

1. The debtor has no equity in the encumbered property AND

2. Encumbered property is not necessary to an effective reorganization

§524

Discharge - essentially gives debtor a fresh start

§524(a)(1)

Voids any judgment at any time obtained

§524(a)(2)

Operates as an injunction against commencement/continuation of an action, the employment process, or an act to collect/recover/offset any debt from the debtor personally

§524(a)(3)

Bars attempts to collect pre petition debt

§524(e)

Discharge for debtor doesn’t affect the liability/property of other entitites

§524(f)

Nothing prevents debtor from voluntary payment

§525

Protection against discriminatory treatment

1. Government can’t discriminate solely because person was or is a debtor

2. No private employer may terminate or discriminate solely because person was or is a debtor

§727(a)

Can only get discharge every 8 years from date of prior filing

§727(a)(1)

Businesses don’t receive chapter 7 discharge

§727(a)(2)-(a)(12)

Reasons to deny an individual’s discharge

§727(a)(2)

Transfers property within 12 months before petition with intent to hinder/delay/defraud 

§727(a)(3)

Unjustified failure to keep/preserve financial records

§727(a)(4)

Lists 4 acts which tend to deprive trustee of property of the estate/information necessary to collect property - requires intent

1. making false oath

2. presenting/using false claim against estate

3. receiving/giving consideration for action/inaction in bankruptcy case

4. withholding books/records from trustee

§727(a)(5)

Failure to explain any loss or deficiency of assets

§727(a)(6)

Debtor refuses to testify after being granted immunity or after improperly invoking 5th amendment 

§727(a)(7)

If  a2-a6 were violated in a family members/related case

§727(a)(8)-(9)

Limit frequency of discharge relief

§727(a)(10)

Recognizes waivers of discharge only if

1. in writing

2. executed after filing

3. approved by court

§727(a)(11)

Failure to complete approved financial management course

§727(a)(12)

Delays discharge if there is a civil/criminal case against debtor and reasonable they will be found guilty/liable

Chapter 11 discharge for businesses

No discharge until confirmation of plan

Chapter 11 discharge for individuals

Section 1141(d)(5)(A) generally postpones discharge until completion of plan but court has discretion to grant earlier

Chapter 13 discharge

Discharge when all payments are made/judicially excused

Objections to discharge under Chapter 7

Chapter 7 trustee/US trustee/creditor can object (727(c)(1))

• Objections initiated by complaint, filed within 60 days of first date set for the meeting with creditors (but may be extended for cause)

• If objection is filed court tries the issue in an adversary proceeding

Objections to chapter 11 business cases

Will be denied discharge under 1141(d)(3) if

1. plan provides for liquidation for all/substantially all property of the estate

2. debtor doesn’t engage in business after consummation of the plan

3. debtor would be denied discharge in a chapter 7 case

Chapter 13 hardship discharge

Courts will consider

1. holders of unsecured claims have already received as much as they would in a chapter 7

2. debtor couldn’t be justly held accountable for their inability to complete planned payments

3. plan modification is not practicable

Chapter 13 objections to discharge

• denies discharge if previous violation during a chapter 13 case 2 years prior to filing or a chapter 7/11 case in the 4 years prior to filing

• can be denied for failure to complete a course

• can be delayed if criminal or civil proceeding against the debtor

§523

Lists objections to discharge