Understanding Bankruptcy: Chapters, Claims, and the Estate
Understanding Bankruptcy Law
What is bankruptcy?
Bankruptcy is governed by statutory law – specifically, Title 11 of the United States Code.
Key changes were introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Differences Between Bankruptcy Code & State Debtor-Creditor Code
State debtor-creditor law focuses on individual actions by a particular creditor. By contrast, the bankruptcy code is a collective process, focusing on what happens to creditors generally.
In the bankruptcy code, the “debtor” is the person who is in bankruptcy.
Types of Bankruptcy
- Chapter 7 – Liquidation Bankruptcy: The assets of the debtor at the time of filing for bankruptcy are taken by a court-appointed trustee and sold, with the proceeds used to pay creditors.
- Chapter 11: A court-approved plan of payment in the future from future earnings.
Adequate Protection of an Interest in Property: If a person other than the debtor has not only a contract law right but a property interest, primarily a lien, bankruptcy law recognizes that property right.
Not every person who files for bankruptcy receives a discharge.
When a discharge is given depends on the type of bankruptcy case.
Claims: A holder of a claim has a right to payment.
Secured Claim: Must be secured by a lien on property in which there is an interest, or that is subject to a set-off under section 553.
While bankruptcy can change contract obligations, bankruptcy generally respects other parties’ rights in property, such as a lien.
A stay lasts as long as the bankruptcy case lasts.
“Lack of Adequate Protection of an Interest in Property of Such Party in Interest” – focused on what is happening to the collateral people concerned with the bankruptcy process.
Debtor: Person against whom the bankruptcy is filed.
Debtor in Possession: Debtor in a Chapter 11 bankruptcy case.
Creditor: The holder of the claim.
Trustee: In every Chapter 7 case, there is a trustee. The trustee is charged with gaining control of the property of the estate, selling it, and distributing the proceeds.
Where Do Lawyers Practice Bankruptcy Law?
Allocation of Judicial Power Over Bankruptcy
Bankruptcy Reform Act of 1978: The policy decision was made that the bankruptcy court should be one of pervasive jurisdiction. An individual debtor has to do the following before filing a bankruptcy case:
- Credit counseling
- Bankruptcy education
Schedules that the debtor must file in addition to the petition.
During the Bankruptcy Case
Chapter 7 Case
The trustee has an obligation to collect and sell the property of the estate. State law typically applies to determine whether or not property is exempt.
Each state has the opportunity to opt out – an individual debtor in a state that has opted out cannot use the bankruptcy exemptions.
If there is a debtor who has been in the same state as she is in now, for the past 730 days preceding bankruptcy, then that state’s exemption laws control.
If there is a debtor who sometime in the past 2 years has lived in more than one state, go back 180 days before the 730 days to determine which state’s law governs.
Which Property is Exempt?
- Most retirement funds
Insolvency Planning – Homestead: Looks back on the 10-year period prior to bankruptcy – if there has been a build-up in the homestead over the 10-year period prior to the bankruptcy with the intent to hinder, delay, or defraud creditors, that build-up will be lost.
Which Creditors Are Affected by Exempt Property?
Two groups not affected by exempt property:
- Creditors having domestic support claims
- Creditors who have liens on exempt property
Trustee’s distribution of proceeds pursuant to statutory guidelines.
Section 726: Distribution of the property of the estate.
Property of the Estate: Debtor’s interest in property.
Secured creditors get paid first for their property.
Priority claims get paid next – often not enough left to pay the priority claims.
Chapter 7 Discharge
Discharge: Protects the debtor from any further personal liability of a debt.
Availability of a discharge depends on section 727 – objections to discharge.
If the debtor is any kind of business entity, it cannot receive a Chapter 7 discharge. The debtor did before going into bankruptcy.
Debtor’s Bankruptcy Past
The debtor may have done bad things before bankruptcy, such as a transfer with the intent to hinder, delay, or defraud. A debtor does in the bankruptcy case, such as making a false oath.
Chapter 13 Bankruptcy Case
“Plan”
The debtor’s attorney files a “plan” proposing who is going to be paid and how they are going to be paid.
Priority claims must be paid in full.
With respect to secured claims, Chapter 13 distinguishes between secured claims that are secured by the house which is the debtor’s principal residence, claims that are secured by automobiles, and claims secured by other collateral.
- House: Chapter 13 plan cannot modify or alter the payment obligations.
- Cars: Chapter 13 plan cannot modify or alter the payment obligations.
- Other: It is possible for a Chapter 13 plan to force down changes on these other obligations.
Other unsecured claims must get as much as they would be getting in a Chapter 7 case, and the debtor must be committing all disposable income.
Chapter 13 Discharge
Contemplates that the debtor will get a discharge after completion of the payments under a claim.
Hardship Discharge: Can be granted by the court if the debtor has already paid as much as the creditor would have received in a Chapter 7 case, and the debtor’s failure to complete the payments is due to circumstances for which the debtor is not accountable.
Section 364c: Obtaining new secured credit.
Section 364d: Obtaining new secured credit with a super-priority.
Selling Assets – Section 363
Compare section 363b(1) with section 363c(1)
Section 363b(1): Property is used or sold other than in the ordinary course of business and requires bankruptcy court approval.
Adequate protection of the creditor’s interest in property.
Developing a Plan of Restructuring
Who May File a Plan?
A debtor has an initial exclusive period of 120 days in which only the debtor can file a claim. If the debtor files a plan, then the debtor has 180 days from the time of the filing of the petition to gain creditor approval of the plan.
Absolute Priority Rule
Secured Claims: Holder of the secured claim must be paid an amount that has a present value equal to the value of its collateral.
Three Most Frequently Tested Areas
Fraudulent Transfers & Obligations
Section 548: A debtor, before filing for bankruptcy, has somehow sold or transferred what would ordinarily be property of the estate. Has happened 90 days before bankruptcy, unless the creditor was an insider. Keep the lease property and must keep up the payments.
The other party to the lease has an unsecured claim.
The other debtor party has an administrative expense priority for the remaining lease payments.
Courts are more careful in approving assumption decisions than rejection decisions.
Chapter 7 case with anything other than a commercial lease initial 60-day time period.
Chapter 11 & Chapter 13 cases, and it is something other than commercial real estate – no time period. Any time up to the time the plan is confirmed by the court.
Limitations on the Effect of Rejection
Debtor is a Landlord: Landlord cannot use bankruptcy to evict its tenants.
Debtor is the Licensor Under an Intellectual Property License: If there is a situation where a patent owner has licensed its patent to another party, and the patent owner files for bankruptcy, the patent owner cannot use the bankruptcy as a way of ending the rights of the licensee to use the intellectual property.
Contract Limitations on Assumption & Assignment
Bankruptcy termination clauses have no cause or effect.
If the law outside of bankruptcy is that the debtor