Basic Bankruptcy Law for Paralegals Seventh Edition David L. Buchbinder

Chapter One. A Short History of Bankruptcy After reading this chapter, you will be able to: Define bankruptcy Understand why the United States Bankruptcy Code emphasizes notions of both debtor relief and debt collection Understand the foundational terms and concepts necessary to approach a study of the bankruptcy system

Bankruptcy Systems Methods developed by societies to resolve the effects of financial crisis.

Common Reasons for Individual Bankruptcy Filings Death in the family Divorce Catastrophic illness Unanticipated unemployment Excessive credit card debt

Common Reasons for Business Bankruptcy Filings Obsolete products Failure to compete in the industry Mismanagement Sudden catastrophe Insider disputes Fraud A poor general economy

Debt Collection The primary focus of the debt collection features of bankruptcy systems has always been to formulated a body of rules to provide for the collection of assets of a debtor and the equitable distribution of the proceeds of those assets among multiple creditors.

Debtor Relief The primary focus of the debtor relief features of bankruptcy systems has vacillated throughout history from the extremes of punishment to forgiveness.

Discharge Legal relief from debt

Exemption Statutorily defined property that an individual debtor may protect from administration by a bankruptcy estate. Exempt property is not available for liquidation to pay a dividend to creditors. Exemptions are a primary element of debtor relief.

Liquidation The sale of an estates assets to repay creditors.

Composition Agreement An agreement between a debtor and multiple creditors for the repayment of debt.

Chapter Two. Introduction to the Bankruptcy Code After reading this chapter, you will be able to: Provide an organizational overview of the Bankruptcy Code Define basic bankruptcy terms, including creditor, debtor, and trustee Understand the two basic types of bankruptcy proceedings: liquidations and reorganizations List alternatives to bankruptcy

Bankruptcy Code The name of the bankruptcy laws in effect in the United States since October 1, This code has been significantly amended four times, in 1984, 1986, 1994, and 2005.

Creditors and Debtors Creditor: An entity with a claim arising before the filing of a bankruptcy petition. Claim: A right to payment of any kind or a right to performance that may be compensated by damages. Debtor: An entity that owes a debt (a liability upon a claim). The entity filing a voluntary bankruptcy proceeding or against whom an order for relief is entered in an involuntary bankruptcy is known as the debtor.

Trustee An independent third party who liquidates the estate’s assets and distributes dividends to the creditors.

Practice Pointer To the extent that a specific provision of Chapters 7, 11, 12 or 13 conflict with a general provision in Chapters 1, 3 and 5, the specific provision will generally control over the general provision.

Liquidation Proceeding In a liquidation proceeding, all the non- exempt assets of a debtor are sold. The proceeds are distributed to creditors according to their ranking.

Reorganization Proceeding In a reorganization proceeding, a debtor seeks to avoid liquidation by proposing a viable plan of reorganization to the creditors that is successfully confirmed and performed.

Bankruptcy Code Flow Chart

Bankruptcy Alternatives Bankruptcy alternatives primarily seek a marshaling of assets for equitable distribution to the creditors and a full or partial release from the remaining debts of the debtor. These alternatives are composition agreements and assignments for the benefit of creditors. Sometimes, the effective use of these alternatives can accomplish the same results as a bankruptcy without ever having to file one.

Composition Agreement Any transaction in which a debtor and creditor agree to a revision of their legal obligations to one another is a form of composition. Examples: Picking up the telephone and getting an extra month to pay a bill Debt consolidation A formal composition agreement comes into being when a debtor and multiple creditors agree to a revision of existing obligations.

Assignment for the Benefit of Creditors Takes place when a debtor, which may or may not be in financial distress, assigns its assets to a third party in trust to sell the assets and apply the proceeds to the payment of the creditors’ claims. The third party is known as the assignee.

Chapter Three. Filing a Petition After reading this chapter, you will be able to: Describe the “gatekeeper” provisions in individual bankruptcy cases Understand how a bankruptcy is initiated, by filing of a voluntary or involuntary petition Define prepetition credit counseling Describe how a voluntary bankruptcy petition is filed by a debtor Describe how an involuntary petition is filed by creditors Define an “order of relief”

Prepetition Credit Counseling Prerequisite to an individual debtor seeking bankruptcy relief. An individual seeking bankruptcy relief may not be a debtor and must participate in an individual or group credit counseling session from an approved credit counseling agency within 180 days prior to the filing of a petition.

Exceptions to Prepetition Credit Counseling First, the United States Trustee may exempt a district from the requirement if the Trustee determines that approved credit counseling services in a district are not reasonably able to provide counseling services to individuals. Second, a debtor may file a certification with the court at the time of filing stating that ‘‘exigent circumstances’’ merit a waiver of the rule, provided that the debtor has made a request for counseling services and could not obtain them within five days of making a request from a counseling agency. The third exception to the prepetition credit counseling requirement arises if, after notice and a hearing, the court finds that a debtor is not able to comply with the requirement due to mental incapacity, physical disability, or active military service in a military combat zone.

Practice Pointer It is important to check the local rules for your jurisdiction. Some courts will dismiss the case automatically without a hearing if the certification seeking a waiver is not filed with the petition.

Debt Relief Agency A debt relief agency is any person, including a bankruptcy attorney or bankruptcy petition preparer, providing bankruptcy assistance to assisted persons for money or other valuable consideration pursuant to 11 U.S.C. §101(12A). Debt relief agencies are subject to written retainer and disclosure requirements of 11 U.S.C. §§527 and 528

Voluntary Bankruptcy A bankruptcy proceeding initiated by a debtor filing a petition for relief. Also known as a voluntary petition. Most bankruptcy proceedings are voluntary.

Venue A proceeding may be commenced in any district meeting one of the following qualifications: (1) the district in which the petitioner is domiciled, resides, or has its principal place of business (2) the district in which the debtor’s principal United States assets are located (3) the district in which the debtor has complied with either of the above for the greatest portion of the 180 days preceding the petition’s filing

Involuntary Bankruptcy A bankruptcy proceeding initiated by one or more creditors by filing a petition seeking the entry of an order of relief, a judgment that the debtor is bankrupt. Also known as an involuntary petition.

Practice Pointer Under the Code, ‘‘insolvent’’ means a financial situation in which the debtor’s debts are greater than the fair valuation of all of his/her assets, exclusive of any exempt property or property improperly transferred or concealed. See 11 U.S.C. §101(32).

Chapter Four. Chapter 1—General Provisions After reading this chapter, you will be able to: Describe the basic motion procedures used in Bankruptcy Courts List the essential qualifications to qualify as a debtor under a particular Chapter of the Code Identify the remaining provisions of Code Chapter 1.

Notice and Hearing Signifies that due process must be given to various parties involved in the proceeding before a court order authorizing the action is sought to be performed can be obtained. In the context of a bankruptcy proceeding, due process often means that the affected parties must merely be given notice and an opportunity to be heard.

Get the Procedure Right the First Time! Errors can be costly.

Ex Parte An application made to the court without notice or with limited notice to limited parties. Ex parte applications are specifically permitted for various ministerial functions. In other circumstances, a legitimate extraordinary circumstance must exist for the court to consider ex parte relief.

Evidentiary Hearing A hearing held to take sworn testimony to permit a Bankruptcy Court to make a decision in a contested matter that is not a separate adversary proceeding. An evidentiary hearing is similar to a trial in a nonbankruptcy environment. A “trial” on a contested motion for relief from the automatic stay is properly called an evidentiary hearing.

Who May be a Debtor? Only persons may be debtors An individual is a person A corporation can be a person A partnership can also be a person A person has to reside or be domiciled in the United States or have a place of business or property in the United States.

Practice Pointer Chapter 7 debtors can be individuals, corporations, and partnerships, but not railroads, banks or insurance companies. Chapter 9 debtors are municipalities. Chapter 11 debtors include anyone who could have filed under Chapter 7 plus railroads and certain banks. Chapter 12 debtors are family farmers or family fishermen. Chapter 13 debtors can only be individuals with regular income with less than certain specified debt.

Chapter 5. Needs Based Bankruptcy or “Means Testing” After reading this chapter, you will be able to: Discuss means testing in detail Understand why means testing is the centerpiece of the BAPCPA legislation. Describe how paralegals play a significant role in the means testing process, by compiling and organizing data and assisting in performing the required calculations. Describe the various formulas used in making the means testing calculation by discussion of the statute, form, and text examples. Understand the need to maintain and organize the data used to perform the means testing calculations for a particular debtor.

Needs Based Bankruptcy The essence of means testing is that if an individual debtor can repay at least 25% of general unsecured debt over a 60-month period with minimum monthly payments of $ ($6,575), or if a debtor can pay $10,950 or more over 60 months without regard to the percentage repaid, then a Chapter 7 petition is subject to dismissal for abuse unless the debtor consents to or voluntarily converts the case to a Chapter 13

Current Monthly Income 11 U.S.C. §707(b)(2)(A) contains the formula that determines when a Chapter 7 debtor’s filing will be presumed an abuse of Chapter 7. The first element in the formula is the debtor’s current monthly income as defined by §101(10A). This provision generally defines current monthly income as a debtor’s average monthly income received from all sources in the 180 days prior to filing, without regard to whether or not the income is taxable. Current monthly income also includes amounts regularly paid by an entity other than the debtor for the household expenses of the debtor or a dependent of the debtor, but does not include Social Security benefits or payments to victims of terrorism.

Practice Pointer Information important to means testing that changes on a regular basis, such as household median income and allowable expenses as calculated by various IRS collection standards, can be found on the United States Trustee Program website:

Deductions The second step in the formula is to deduct three groups of expenses from the current monthly income. The first group of deductions is the debtor’s monthly expenses as calculated according to Internal Revenue Service collection guidelines, excluding payments for debts. The second group of deductions is the debtor’s average monthly payments contractually due to secured creditors during the 60-month period following the petition. The third group of deductions is the debtor’s expenses for payment of priority claims.

Special Circumstances A debtor may rebut the presumption that a case is an abuse of Chapter 7 only by demonstrating the existence of ‘‘special circumstances’’ requiring an adjustment to current monthly income. To establish ‘‘special circumstances,’’ a debtor must itemize each additional expense, provide documentation for each expense, and provide a detailed explanation of the special circumstances making the expense reasonable.

Chapter Six. Useful Definitions—Section 101 After reading this chapter, you will be able to: List what is included in Section 101 of the Bankruptcy Code Define of a number of important terms as they are used throughout the Bankruptcy Code Identify the different usages of the term lien as it is used in the Bankruptcy Code

What is Section 101? Section 101 of the Bankruptcy Code is critical because it contains definitions of many terms that are used frequently throughout the Code. Reference to a Section 101 definition will sometimes save substantial research time and will help to explicitly resolve questions only answered implicitly by other Code provisions.

Terms Defined by Section 101 Affiliates Claim Community Claim Corporation Creditor Current Monthly Income Custodian Debt Debt Relief Agency Domestic Support Obligations Equity Security Holder Individual with Regular Income Insiders Insolvency Judicial Lien Lien Median Family Income Person Security Security Agreement Single Asset Real Estate Statutory Lien Transfer

What is a Lien? A lien is a right to property to secure repayment of a debt or the performance of an obligation. A lien may be Judicial Consensual or Statutory

What is a Security? Securities are commercial documents used to evidence an ownership interest in an entity, among other things.

Insider An insider is an entity in control of a debtor or a debtor’s relatives. The definition of an insider will vary depending upon the debtor’s identity as an individual, partnership, or corporation.