Intro to Bankruptcy Law & Practice Class #2

Intro to BankruptcyLaw & PracticeClass #2 Brenda Di Ioia, Adj Professor diioia@nova.edu

PRE-2005: Bankruptcy was seen as being too debtor friendly and overflowing with abuse POST - 2005: Chapter 7 Imposes stricter standards on who is eligible Invented the “means test” as a Ch 7 threshold Requires credit counseling within 180 days of filing Requires a completion of a financial management course to get a discharge Must wait 8 years to file for Ch 7 again (used to be 6 years) Trustee or any party in interest can file a Motion to Dismiss Added a “presumption of abuse” if the debtor does not meet the Chapter 7 means test Chapter 13 Tries to increase $$ for the unsecured creditors in Ch 13 by using a “means test” Chapter 12 It expanded the list of “non-dischargeable” debts It stopped the “sunsetting” of Chapter 12; extended protection to “family” farmers & fisherman, increased eligibility THE BAPCPAThe Bankruptcy Abuse Prevention & Consumer Protection Act of 2005

THE BAPCPA Continued • Attorneys are “debt relief agents” and must comply with those regulations too • Penalizes abusive creditors • Requires detailed disclosures in reaffirmation agreements and court approval of these agreements if the agreement appears to impose an “undue hardship” on the debtor.

Key Concept #1 The Automatic Stay

The Automatic Stay • It is an injunction that arises by operation of law immediately upon the filing of a bankruptcy petition (protects the debtor & the property of the estate) • No motion, hearing or court order is needed to obtain the automatic stay • Purpose = gives debtor a fresh start and treats creditors equally, prevents the depletion of the debtor’s estate, allows all actions to happen under one court • The stay is binding on all entities (individuals, corporations and the government) • The stay remains in effect for the duration of the bankruptcy case • The stay applies to allChapters in bankruptcy • The stay binds the creditors when the petition is filed, even if they find out about it later. Innocent violations of the stay are voidable, meaning the court can compel the return of certain property. Deliberate violations are sanctionable. The debtor can also seek damages and attorneys fees against the creditor for violation of the automatic stay. • 11 USC Sec 362(a)

STAYED Activity against the debtor relating to collection of claims that arose BEFORE the petition (including “in progress” collection cases, garnishments, utility shut-offs) Activity against the property of the debtor (no perfection or enforcement of liens) Activity against property of the estate (foreclosures, evictions) NOT STAYED Criminal cases against the debtor Certain actions taken by creditors under non-bankruptcy law Determination of tax liability Eviction of a tenant from non-residential property Child support, alimony & other domestic support obligations To stay or not to stay

Evictions & the Stay • Have special procedures; the stay prevents the landlord from trying to collect back rent from the debtor personally & limits the action the landlord can take to regain possession • If the petition for bankruptcy is filed before the judgment for possession is entered the eviction case is stayed • If the petition for bankruptcy is filed after the judgment for possession is entered the eviction is stay for a period of 30 days only AND the debtor must certify that he/she • Has the right under state (or other non-bankruptcy law) to cure the default • Has deposited the rent with the bankruptcy court that will come due during the 30 day stay (usually 1 month’s rent) • In order to extend the stay passed the 30 days the debtor must pay the landlord all of the back rent owed (the amount stated in the judgment of possession)

No Stay, No Way However, the 2005 BAPCPA law places new limits to the level of protection the automatic stay provides in certain situations. The following is a list of circumstances that will lead a court to limit or cancel your automatic stay. • Second Time Filing for a Chapter 7 or Chapter 13 Bankruptcy If you unsuccessfully filed for either a Chapter 7 or Chapter 13 bankruptcy within the past year, the courts automatically assume that your second bankruptcy is in bad faith. The courts will then limit the application of the automatic stay to 30 days when you file for bankruptcy again. You can try to extend the automatic stay by proving to the court that you have filed in "good faith.” If your previous bankruptcy was dismissed for failure to provide required documents without an excuse, the courts could say that your new bankruptcy is in bad faith. This is also true if your financial situation has not changed enough to allow a financial discharge or completion of a bankruptcy plan. Note that the courts will not limit your automatic stay to 30 days if you were forced into filing a Chapter 13 bankruptcy after failing the Chapter 7 means test.

No stay, No way • Third or Fourth Time Filing for a Chapter 7 or Chapter 13 Bankruptcy If you have had two or more bankruptcy cases within the last one year and you file for bankruptcy again, the courts will not grant you an automatic stay at all. In order for you to benefit from an automatic stay, you will have to prove to the courts that your new bankruptcy is in good faith and must make an application with the court to impose the stay on your creditors. Thus, if you wait until the eve of a foreclosure sale, it could be too late. • Failure to Provide a Statement of Intent within 30 Days If you owe debt on a secured property, such as a car or home, you will have to state what you plan to do with the debt. This is called a statement of intent. If you do not file a statement of intent within 30 days, the courts will take away your automatic stay with regard to the secured creditors. However, the trustee could ask the courts to extend your automatic stay if your secured property is valuable to your estate and your creditor would be adequately protected. THERE IS A PRESUMPTION THAT THESE TYPE OF CASES ARE FILED IN BAD FAITH AND NOT WORTHY OF THE STAY. UPON MOTION IF YOU CAN CONVINCE THE COURT THAT THE FILING IS IN GOOD FAITH YOU CAN GET YOUR STAY.

Relief from Stay • The stay is effective against the debtor’s property until the property is no longer in the estate possession, the case is dismissed, or the discharge is granted or denied • The court can lift the stay upon motion by a party & a hearing • Relief from stay for cause (abusive behavior etc) • Relief from stay because debtor has no equity (no reason to have it in the estate can’t help the creditors, has no value) • Relief from stay because the property is not needed (the property does not provide for anything in the reorganization plan)

Key Concept #2 The Bankruptcy Estate

Property of the Estate • The estate is automatically created at the time of the filing of the petitionand the debtor’s interest in the property ceases • It is a separate legal entity • The estate is all legal or equitable interest of the debtor in property as of the date of the filing of the petitionSec 541 • All assets and property interests of the debtor become part of the bankruptcy estate and are subject to being administered for the benefit of creditors if not exempt. • Intangible, contingent, future property interest, interest in lawsuits, anticipated tax refunds etc • In a Chapter 13, property and earnings acquired while the case is pending are part of the bankruptcy estate • Only property “owned” by the debtor is part of the estate. Ownership is defined as the right of a person to possess and use a thing to the exclusion of all others.

Property of the Estate Seven types of property that are not part of the bankruptcy estate: • Any power that the debtor may exercise solely for the benefit of an entity other than the debtor; • Any interest of the debtor as a lessee under a non-residential lease whose term ends before the commencement of the bankruptcy case; • Any eligibility of the debtor to participate in programs of the Higher Education Act of 1965, accreditation, or state licensure of the debtor as an educational institution; • Any interest of the debtor in liquid or gaseous hydrocarbons; • Any interest in cash or cash equivalent that constitute proceeds of sale by the debtor of a money order that is made; • A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law • Earnings from services performed by an individual debtor after the commencement of the bankruptcy

Property of the Estate • Location: The US Bankruptcy Court has where the case is filed has exclusive jurisdiction over all the property of the debtor, regardless of where it is physically located. • Contracts that limit transfers due to bankruptcy: the contract usually reads that the debtor forfeits their interest in the contract when they file a bankruptcy petition. Sec 541 eliminates these clauses the remainder of the is then enforceable. • Possession: The Code defines property of the estate without regard to actual possession. The trustee can reach property that belongs to the debtor but is in the possession of others.

Value of the Property • Under the Code means “fair market value”. The “value” is assessed as of the date the property becomes part of the estate, whether it is at the time the petition is filed or at a later date. • The original cost of the property is not considered, what it can be sold for at the time of filing governs.

The Bankruptcy Estate • The Trustee has the power to compel delivery of items into the estate this is called “turnover” and is usually accomplished by US Marshals. • If the debtor’s property is of no value or benefit to the estate it can be “abandoned” by the Trustee. • The debtor may claim certain property of the estate as “exempt”. • The income and property the debtor gets post petition may or may not be part of the bankruptcy estate depending on which Chapter the case is filed under (in Ch 7 they are not part of the estate, they are part of the debtor’s fresh start) • Property acquired within 180 days after filing belongs to the estate UNLESS there is an exception • Inheritance • Life insurance benefits • Divorce property settlements • The Federal Rules of Bankruptcy Procedure 1007 (h) requires the debtor to file a supplemental schedule within 10 days of acquiring any interest in property

Key Concept #3 Exemptions

Bankruptcy Exemptions • Are only available to individual debtors (no corporations, partnerships, municipalities) • Used mostly in Ch 7 cases • Debtor must file a list of exemptions to claim them, interest parties can file objections.

State v. Federal ExemptionsUSC Sec 522 • The debtor has a choice of the state exemption laws plus the non-bankruptcy laws OR • The list of Code exemptions • States can “opt out” meaning that debtors in those states can only use the non-Code exemptions • The BAPCAP changed the domicile requirements to prevent debtors from moving to an exemption favorable state before filing • To determine which state governs the state where the debtor spent the last 730 days (2 years) If the debtor has not lived in one place for 2 years before the filing, it is the state where the debtor lived for 2 years plus 180 days

Florida is an Opt out state Can still use the “special” federal exemptions for pension plans and personal IRAs Debtor gets all state law exemptions (however federal law limits the homestead exemptions) Under the BAPCAP, you must live in a state for at least two years prior to filing in order to use that state's exemption laws Federal/Code Exemptions 11 USC Sec 522 If both a Husband & Wife file jointly they must elect the same exemption option State v. Federal ExemptionsUSC Sec 522

Exemptions • Definition: A right granted to an individual debtor to protect certain types of property for seizure and sale by a creditor or the trustee. They are intended to provide the debtor to keep those assets needed for a fresh start. • Florida state law bankruptcy exemptions (aka personal property exemptions) • Homestead creditor exemption – protects up to 160 acres of rural land and up to an acre of land + your house in the city. • Motor Vehicle exemption – protects $1,000 in value of any car you list in your bankruptcy • Life Insurance exemption – protects the amount of money necessary for your support and the support of your dependent (s). • Qualified retirement plan exemption – protects qualified retirement plans that are made up of stocks, pensions, profit sharing and annuities • Unemployment benefit exemption – protects your unemployment check from all creditors EXCEPT child support will still be deducted. • Worker’s comp benefit exemption – worker comp case proceeds are 100% protected • Wildcard exemption – protect up to $1,000 of any type of personal property

Exemptions • Property can be exempt even if it is secured or subject to a lien. The value of the property is equal to the unencumbered portion for exemption purposes. • Exempt property is not protected from tax claims, valid liens, alimony, child support or other maintenance that are not dischargeable.

Exemption Planning • Arranging the debtor’s affairs so that the maximum amount of property can qualify as exempt to minimize what is lost to the creditors. • Excessive transfers of property can be found to be “bad faith”. If done properly it is legal and good practice to assist the debtor. • All transfers of property within 2 years before the filing must be disclosed • Most important is the timing of the filing • Tax refunds and earned income credits are property of the estate may want to delay filing until after it is received and debtor has used the funds for ordinary expenses

Other ways the debtor can keep property Redemption & Reaffirmation • A debtor may “redeem” property by filing a motion and by paying the creditor in full for the property (the amount the creditor gets is limited to the value of the collateral). • A “reaffirmation” is a contract between the debtor and the creditor under which the debtor agrees to pay a debt that would otherwise be dischargeable. There are specific requirement for the agreement to make it enforceable.

Conversion • The courts have permitted the debtor to convert non-exempt property to exempt if the conversion occurs before the filing of the petition. Cannot be done on the “eve” of bankruptcy seen as “fraudulent per se”.

Waiver • A debtor can waive his/her right to claim an exemption • Result: the property that would come out of the bankruptcy estate stays in it • Debtors cannot make a waiver in favor of an unsecured creditor - the court deems this waiver unenforceable • Debtors cannot waive his/her rights in property recovered by the trustee’s avoidance powers - the court deems this waiver unenforceable

Key Concept #4 Eligibility

Debtor Eligibility • Who can file bankruptcy? Sec 109 • A debtor must meet all of the threshold qualifications + any chapter requirements • Four types of debtors under the code 

Eligibility Part I: Threshold Qualifications • Must be a resident, domiciled, conducting business or owns property in the United States • Must be one of the four types of debtors: individual, corporation, partnership or municipality • Cannot be a successive filer (if the debtor has a case dismissed for bad behavior or a creditor got the automatic stay lifted & the court dismissed that debtor cannot file again for 180 days from the date of the dismissal) • Must receive credit counseling from an approved non-profit agency during the 180 days prior to filing the petition. Can be individual, in a group, in person, by phone, or by internet. Can be excused in limited circumstances: • No one can reasonably provide the services • Debtor has urgent need to file, court grants an extension of up to 30 days post petition • Debtor establishes that because of incapacity, disability, or active military duty in a combat zone

Credit Counseling Requirement Is Not Deterring Bankruptcy Filings March 20, 2006 Congress rewrote the bankruptcy laws last year to impose legal hurdles on those trying to wipe away their debts by filing bankruptcy, it probably did not envision what has happened since. A major component of the reform is a new credit counseling requirement that debtors must complete before filing for bankruptcy. It was one of the hurdles Congress hoped would push would-be filers away from bankruptcy. It has not turned out that way. Only 3.3% of Debtors Qualify for Debt Management Plans The National Association of Consumer Bankruptcy Attorneys (NACBA) released the key findings of its study on February 22, 2006, in which it surveyed six major credit counseling agencies that have dealt with a total of 61,335 consumers under the new federal bankruptcy law. The NACBA study reports that the credit counseling requirement is a waste of time and money and that abuse of the system is a rare exception.The NACBA study concluded that almost none of those seeking bankruptcy are able to pay their debts. Just 3.3 percent of those who sought the required counseling were a potential candidate for paying the debt off in a debt management plan, and thereby forgoing bankruptcy. The remaining 96.7 percent still needed to file bankruptcy just like they would have before the law change took effect. Additionally, many of the 3.3 percent who may have been eligible for a debt management plan needed bankruptcy relief to prevent immediate harm such as foreclosure, garnishment, or repossession.

Credit Counseling Requirement Is Not Deterring Bankruptcy Filings Continued Credit Counselors Say Most Bankruptcies Are Caused By Uncontrollable Circumstances The survey of credit counselors also concluded that the great majority of bankruptcy filers are victims of unfortunate circumstances beyond their control. Four out of five debtors who seek relief suffer from such circumstances that include loss of job, death, medical expenses, divorce and predatory lending. The study concludes, "ﾉthe masses of expected deadbeats who were supposed to be identified under the new law and forced into debt management have not materialized Most Cannot Qualify for Debt Management Plan The conclusions made by NACBA are consistent with statements made by various representatives of the credit counseling agencies to the media in recent months. The general consensus is that most debtors are in such deep debt that they cannot qualify for a debt management plan. Ivan Hand Jr., the president and chief executive of Money Management International Inc. (MMI), the nation's largest credit counseling organization told the Washington Post, "Typically, consumers are too far gone by the time they get to us." The President of the Consumer Credit Counseling Service of Greater Atlanta reported also that virtually none of the 12,539 sessions it had conducted found debtors that qualified for anything other than bankruptcy.

Eligibility Part II: Chapter Requirements • Chapter 7: • Cannot be a railroad, insurance company, bank, banking or savings institution • If the debtor can make payments the Chapter 7 will be dismissed • Chapter 9: • Must be a municipality • Chapter 11: • Includes railroads, no stockbrokers, or commodities brokers • Chapter 13: • Must have an income within Sec 109 limits • Has to be an individual (no businesses) • Has to have a regular income • Total debt at filing must not exceed Sec 109 limits • No stockbrokers, or commodities brokers

Not eligible • Certain entities excluded from the Code: • Insurance Companies • Banks • Savings & Loans • Credit Unions

Key Concept #5 Claims

Claims Against the Estate Let’s get ready to rumble! • Claim = any secured or unsecured right to payment arising in law or equity. Non-monetary rights are not claims (like injunctions) unless they have a provision for the payment of money if the order is not obeyed. • Types of claims: • Unliquidated = amount owed in not fixed or certain (ex. A tort claim) • Contingent = the debtor’s liability is conditional upon the happening of a future event (ex. Surety/guarantor contract) • Unmatured = the status of the claim until the time for payment comes about. • Disputed = when the debtor challenges the existence or extent of liability. The claim covers the debtor’s personal obligations and the debtor’s actual property. • Disputed claim = a claim by a creditor that is contested by the debtor.

Timing • A creditor must file a proof of claim on or before the 1st date set for the meeting of the creditors or the trustee can file it within 30 days after this deadline. FRBP 3004

Claims Against the Estate Continued Types of Debts: • Pre-petition = generally only pre-petition debts are claims against the estate • Post-petition = generally debts incurred after the petition are new charges against the debtors fresh start • EXCEPTION: Claims that arose from the administration of the estate or from conducting the debtor’s business ARE part of the estate • EXCEPTION: For Ch 13 only governmental units can prove tax owed post-petition; person who extended credit to the debtor post-petition so the debtor could perform under the plan

Proof of Claim the creditors formal submission of a claim against the estate. Also called Proofs of Interest All unsecured creditors must file proof of claims before the deadline otherwise they are barred. EXCEPTION: Ch 11 creditors do not have to file proof of claim unless they are disputed, contingent or unliquidated Allowance once a claim if proved it is allowed UNLESS a party files a timely objection Claims can be completely disallowed or reduced The Chapters govern how to disallow a claim, and they have different rules Unmatured interest is disallowed (interest that has not yet been earned) there are 3 exceptions listed in the Code Proof & Allowance of Claims

Claims Classification • We know that secured claims are satisfied by collateral/property or its proceeds. All other claims are paid from the general fund of the estate according to their priority. • The general rule is that all creditors of a certain class are paid in full, then to the next class. If there is not enough to pay everyone in the class in full, the class is paid pro rata. • EXCEPT: administration fees and support obligations they get paid in full off the top • The ranking or classification of claims is the same in all Chapters of Bankruptcy BUT the priorities are different. • For plan Chapters (11,12,& 13) all priority claims must be paid first. The plan will not be approved unless it provides for payment of these claims first. • For Chapter 7 cases the class of creditors with priority gets paid in full first, then if anything is left the next class takes and so on…. • Unsecured Creditors usually get only a portion of their debt paid or they are discharged completely with nothing

Questions?

Intro to Bankruptcy Law & Practice Class #2