CHAPTER 22: BANKRUPTCY LAW 11
are excluded from bankruptcy proceedings, just as employer-sponsored savings and pension plans known as
are also now partially outside the reach of creditors in a bankruptcy.
BACPA protected an unlimited amount of funds rolled over into IRAs from employer–sponsored retirement
plans, as well as up to $1 million in new contributions. BACPA also protected Roth IRAs.
One of the purposes behind these exemptions was to encourage individuals to save more for retirement
whole or in part.
whole or in part.
classes lower in priority receive nothing. Any amount remaining goes to the debtor. The order of
• Unsecured claims for contributions to employee benefit plans.
• Consumer deposits.
• Certain government taxes and penalties.
• Claims for death or injury resulting from the unlawful operation of a motor vehicle.
• Claims of general creditors.
Claims for back taxes accruing within two years prior to bankruptcy.
Claims for amounts borrowed r to pay federal, or any non-dischargeable, taxes.
Claims against property or money obtained by the debtor under false pretenses or by false rep-
resentations.
Claims based on fraud or misuse of funds by the debtor or claims involving the debtor’s em–
2. Objections to Discharge
The following circumstances (relating to the debtor’s conduct and not to the debt) will cause a
discharge to be denied—
Proceedings in which the debtor could be found guilty of a felony.
When a discharge is denied, the assets may still distributed to creditors. After the bankruptcy
proceeding, the debtor remains liable for the unpaid portions of all claims.
whole or in part.
whole or in part.
CHAPTER 22: BANKRUPTCY LAW 15
accordingly. Having an acceptable plan prepared before you file will expedite the proceedings and thus save
substantially on costs.
CHECKLIST FOR THE SMALL-BUSINESS OWNER
1. Try to negotiate workouts with creditors to avoid costly Chapter 11 proceedings.
2. If your business is a small corporation, see if a major investor will loan you funds to help you pay
bankruptcy costs in return for stock ownership.
3. Consult with creditors in advance, and have an acceptable Chapter 11 plan prepared before filing to
expedite bankruptcy proceedings and save on costs.
IV. Bankruptcy Relief under Chapter 13 and Chapter 12
A. INDIVIDUALS’ REPAYMENT PLANS
Individuals (not partnerships or corporations) with regular income who owe fixed unsecured debts or
fixed secured debts of less than certain statutorily specified amounts may use Chapter 13.
2. Good Faith Requirement
A debtor must act in good faith at the time of the filing of the plan and the filing of the petition.
CASE SYNOPSIS—
Case 22.1: In re Welsh
David and Sharon Welsh filed a Chapter 13 petition. The bankruptcy trustee objected to the Welshes’
proposed plan on the ground that it was not proposed in good faith because of the “minuscule” payments to
unsecured claims while they were living in a $400,000 home, making payments on various luxury and
unnecessary items, and failing to commit 100 percent of their disposable income—from which their Social
Security income was excluded—to the plan (which would pay off about $14,700 of $180,500 of the debt).
From a judgment in the Welshes’ favor, the trustee appealed.
The U.S. Court of Appeals for the Ninth Circuit affirmed. “Under the Bankruptcy Abuse Prevention and
Consumer Protection Act (BAPCPA), the calculation of ‘disposable income’ incorporates the definition of
‘current monthly income,’ and the definition of ‘current monthly income’ excludes Social Security income.”
………………….………….………………………….………….………………………….………………..…………….
Notes and Questions
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
Should a debtor be required to attempt to negotiate a repayment plan with a creditor to show good
faith? Why or why not? No. A debtor’s effort to negotiate a repayment plan certainly demonstrates good
faith, but courts have rejected a rule that a debtor’s failure to make such an attempt shows a lack of good
faith. It is possible that, for example, a debtor might not know about alternative repayment options. A better
picture emerges from a debtor’s living conditions, assets and liabilities, ability or inability to work, and
attempts to find work.
ANSWERS TO THE LEGAL REASONING
QUESTIONS AT THE END OF CASE 22.1
1. What Bankruptcy Code requirements were at the center of this case? There were two Bankruptcy
Code requirements at the center of this case—good faith and the calculation of “disposable income” under
Chapter 13.
The Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition
and the time of the filing of the plan. Good faith is not defined, but if the circumstances on the whole indicate
bad faith, a court can dismiss a debtor’s bankruptcy petition.
Debtors with above-median income are required to calculate their “disposable income” by subtracting
specific expenses from “current monthly income.” Expressly excluded from “current monthly income” are
Social Security benefits. In other words, a debtor who receives Social Security income does not have to
account for that income when calculating “disposable income.” The debtor then subtracts living expenses
based on the Internal Revenue Service’s “Collection Financial Standards,” a detailed series of averages for
living expenses that the Service uses to calculate necessary expenditures for delinquent taxpayers. The
debtor also subtracts his averaged payments to secured creditors due during the following sixty months.
These calculations were added to the Code in the Bankruptcy Abuse Prevention and Consumer Protection
Act, which Congress enacted in 2005.
2. On what ground did the trustee contend that the debtors had not proposed their Chapter 13 plan
in good faith? The trustee argued that, in determining whether the Welshes proposed their Chapter 13 plan
in good faith, the bankruptcy court should have considered Welsh’s Social Security income. According to the
trustee, the Welshes’ failure to dedicate this income to the payment of unsecured creditors compels the
conclusion that the plan was not proposed in good faith.
3. How did the court rule with respect to the trustee’s argument? Why? The court concluded that the
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which expressly excludes Social
Security benefits from the calculation of “current monthly income” and “disposable income,” “forecloses a
court’s consideration of a debtor’s Social Security income * * * as part of the inquiry into good faith.”
The court reasoned that to conclude otherwise “would be to allow the bankruptcy court to substitute its
judgment of how much and what kind of income should be dedicated to the payment of unsecured creditors
for the judgment of Congress. Such an approach would not only flout the express language of Congress, but
also one of Congress’s purposes in enacting the BAPCPA, namely to reduce the amount of discretion that
bankruptcy courts previously had over the calculation of an above-median debtor’s income and expenses.
4. In evaluating a debtor’s petition, what factors should be part of a good faith analysis? Should
consideration of the calculation of disposable income play a role? Why or why not? The Bankruptcy
CHAPTER 22: BANKRUPTCY LAW 17
Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition and the
time of the filing of the plan. The Code does not define good faith, but if the circumstances on the whole
indicate bad faith, a court can dismiss a debtor’s Chapter 13 petition. According to the Welsh court, a good
faith analysis could include whether: (1) the debtor misrepresented the facts, manipulated the Bankruptcy
Code, or filed in an inequitable manner; (2) the debtor previously filed for bankruptcy; (3) the debtor intended
to frustrate the collection of a state-court judgment; and (4) egregious behavior is present. “In sum, the inquiry
focuses on the debtor’s motivation and forthrightness with the court in seeking relief.”
In contrast, the disposable income requirement focuses on the amount of funds that Congress expects a
debtor to devote to paying off unsecured creditors. These two inquiries are * * * separate and distinct.
Therefore, consideration of disposable income—now defined in great detail by Congress—has no role in the
good faith analysis.
3. The Repayment Plan
Only a debtor may file a plan. This plan may provide for the payment of all obligations in full or for
payment of an amount less than 100 percent. The plan must provide for—
• Turnover of the debtor’s future earnings or income to the trustee to execute the plan.
• Full payment all claims entitled to priority. Payments must be completed within three to five
years, depending on the debtor’s family income.
• The same treatment of each claim within a particular class of claims.
Court in the Ransom case, between allowing and disallowing the $471 per month deduction that Ransom
Court in the Ransom case, between allowing and disallowing the $471 per month deduction that Ransom
whole or in part.
attempted to claim would be approximately $28,000 more for his unsecured creditors.
ANSWER TO “THE ECONOMIC DIMENSION”
QUESTION IN CASE 22.2
Should debtors with older vehicles be allowed to take an additional deduction for operating
expenses? Explain. Yes. Debtors with older vehicles should be allowed additional amounts for operating
expenses. In fact, under the standards mentioned in the Ransom opinion, debtors may opt for an additional
$200 deduction for operating expenses for older vehicles. There might be a debate as to what constitutes an
“older vehicle.” The standards define an older vehicle as a car more than six years old or with more than
75,000 miles.
ANSWER TO “THE CULTURAL DIMENSION”
QUESTION IN CASE 22.2
What argument might be made in favor of allowing a debtor who lives outside an area with mass
transit to claim a deduction in the “Ownership Costs” category for a car that he or she owns free and
clear? In most of the United States, a car is nearly a necessity. An individual who lives outside a large, urban
area with mass transit almost invariably needs a car to find and keep a job. A debtor who is employed is more
likely to represent assurance to unsecured creditors that they will receive certain amounts of payments over
the term of a plan.
a. Length of the Plan
Subject to the means test for family median income, the time for payment may not exceed
three years unless the court extends it to five years.
b. Confirmation of the Plan
A plan will be confirmed in a hearing within twenty to forty-five days after the creditors’ meeting
if—
within 910 days of a petition retain their liens until they are paid in full and (b) other personal
property bought within one year.
c. Discharge
Most debts are dischargeable, except—
whole or in part.
• Debts related to injury or property damage caused while driving under the influence of
whole or in part.
classes lower in priority receive nothing. Any amount remaining goes to the debtor. The order of
• Unsecured claims for contributions to employee benefit plans.
• Consumer deposits.
• Certain government taxes and penalties.
• Claims for death or injury resulting from the unlawful operation of a motor vehicle.
• Claims of general creditors.
Claims for back taxes accruing within two years prior to bankruptcy.
Claims for amounts borrowed r to pay federal, or any non-dischargeable, taxes.
Claims against property or money obtained by the debtor under false pretenses or by false rep-
resentations.
Claims based on fraud or misuse of funds by the debtor or claims involving the debtor’s em–
2. Objections to Discharge
The following circumstances (relating to the debtor’s conduct and not to the debt) will cause a
discharge to be denied—
Proceedings in which the debtor could be found guilty of a felony.
When a discharge is denied, the assets may still distributed to creditors. After the bankruptcy
proceeding, the debtor remains liable for the unpaid portions of all claims.
whole or in part.
whole or in part.
CHAPTER 22: BANKRUPTCY LAW 15
accordingly. Having an acceptable plan prepared before you file will expedite the proceedings and thus save
substantially on costs.
CHECKLIST FOR THE SMALL-BUSINESS OWNER
1. Try to negotiate workouts with creditors to avoid costly Chapter 11 proceedings.
2. If your business is a small corporation, see if a major investor will loan you funds to help you pay
bankruptcy costs in return for stock ownership.
3. Consult with creditors in advance, and have an acceptable Chapter 11 plan prepared before filing to
expedite bankruptcy proceedings and save on costs.
IV. Bankruptcy Relief under Chapter 13 and Chapter 12
A. INDIVIDUALS’ REPAYMENT PLANS
Individuals (not partnerships or corporations) with regular income who owe fixed unsecured debts or
fixed secured debts of less than certain statutorily specified amounts may use Chapter 13.
2. Good Faith Requirement
A debtor must act in good faith at the time of the filing of the plan and the filing of the petition.
CASE SYNOPSIS—
Case 22.1: In re Welsh
David and Sharon Welsh filed a Chapter 13 petition. The bankruptcy trustee objected to the Welshes’
proposed plan on the ground that it was not proposed in good faith because of the “minuscule” payments to
unsecured claims while they were living in a $400,000 home, making payments on various luxury and
unnecessary items, and failing to commit 100 percent of their disposable income—from which their Social
Security income was excluded—to the plan (which would pay off about $14,700 of $180,500 of the debt).
From a judgment in the Welshes’ favor, the trustee appealed.
The U.S. Court of Appeals for the Ninth Circuit affirmed. “Under the Bankruptcy Abuse Prevention and
Consumer Protection Act (BAPCPA), the calculation of ‘disposable income’ incorporates the definition of
‘current monthly income,’ and the definition of ‘current monthly income’ excludes Social Security income.”
………………….………….………………………….………….………………………….………………..…………….
Notes and Questions
16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
Should a debtor be required to attempt to negotiate a repayment plan with a creditor to show good
faith? Why or why not? No. A debtor’s effort to negotiate a repayment plan certainly demonstrates good
faith, but courts have rejected a rule that a debtor’s failure to make such an attempt shows a lack of good
faith. It is possible that, for example, a debtor might not know about alternative repayment options. A better
picture emerges from a debtor’s living conditions, assets and liabilities, ability or inability to work, and
attempts to find work.
ANSWERS TO THE LEGAL REASONING
QUESTIONS AT THE END OF CASE 22.1
1. What Bankruptcy Code requirements were at the center of this case? There were two Bankruptcy
Code requirements at the center of this case—good faith and the calculation of “disposable income” under
Chapter 13.
The Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition
and the time of the filing of the plan. Good faith is not defined, but if the circumstances on the whole indicate
bad faith, a court can dismiss a debtor’s bankruptcy petition.
Debtors with above-median income are required to calculate their “disposable income” by subtracting
specific expenses from “current monthly income.” Expressly excluded from “current monthly income” are
Social Security benefits. In other words, a debtor who receives Social Security income does not have to
account for that income when calculating “disposable income.” The debtor then subtracts living expenses
based on the Internal Revenue Service’s “Collection Financial Standards,” a detailed series of averages for
living expenses that the Service uses to calculate necessary expenditures for delinquent taxpayers. The
debtor also subtracts his averaged payments to secured creditors due during the following sixty months.
These calculations were added to the Code in the Bankruptcy Abuse Prevention and Consumer Protection
Act, which Congress enacted in 2005.
2. On what ground did the trustee contend that the debtors had not proposed their Chapter 13 plan
in good faith? The trustee argued that, in determining whether the Welshes proposed their Chapter 13 plan
in good faith, the bankruptcy court should have considered Welsh’s Social Security income. According to the
trustee, the Welshes’ failure to dedicate this income to the payment of unsecured creditors compels the
conclusion that the plan was not proposed in good faith.
3. How did the court rule with respect to the trustee’s argument? Why? The court concluded that the
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which expressly excludes Social
Security benefits from the calculation of “current monthly income” and “disposable income,” “forecloses a
court’s consideration of a debtor’s Social Security income * * * as part of the inquiry into good faith.”
The court reasoned that to conclude otherwise “would be to allow the bankruptcy court to substitute its
judgment of how much and what kind of income should be dedicated to the payment of unsecured creditors
for the judgment of Congress. Such an approach would not only flout the express language of Congress, but
also one of Congress’s purposes in enacting the BAPCPA, namely to reduce the amount of discretion that
bankruptcy courts previously had over the calculation of an above-median debtor’s income and expenses.
4. In evaluating a debtor’s petition, what factors should be part of a good faith analysis? Should
consideration of the calculation of disposable income play a role? Why or why not? The Bankruptcy
CHAPTER 22: BANKRUPTCY LAW 17
Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition and the
time of the filing of the plan. The Code does not define good faith, but if the circumstances on the whole
indicate bad faith, a court can dismiss a debtor’s Chapter 13 petition. According to the Welsh court, a good
faith analysis could include whether: (1) the debtor misrepresented the facts, manipulated the Bankruptcy
Code, or filed in an inequitable manner; (2) the debtor previously filed for bankruptcy; (3) the debtor intended
to frustrate the collection of a state-court judgment; and (4) egregious behavior is present. “In sum, the inquiry
focuses on the debtor’s motivation and forthrightness with the court in seeking relief.”
In contrast, the disposable income requirement focuses on the amount of funds that Congress expects a
debtor to devote to paying off unsecured creditors. These two inquiries are * * * separate and distinct.
Therefore, consideration of disposable income—now defined in great detail by Congress—has no role in the
good faith analysis.
3. The Repayment Plan
Only a debtor may file a plan. This plan may provide for the payment of all obligations in full or for
payment of an amount less than 100 percent. The plan must provide for—
• Turnover of the debtor’s future earnings or income to the trustee to execute the plan.
• Full payment all claims entitled to priority. Payments must be completed within three to five
years, depending on the debtor’s family income.
• The same treatment of each claim within a particular class of claims.
whole or in part.
attempted to claim would be approximately $28,000 more for his unsecured creditors.
ANSWER TO “THE ECONOMIC DIMENSION”
QUESTION IN CASE 22.2
Should debtors with older vehicles be allowed to take an additional deduction for operating
expenses? Explain. Yes. Debtors with older vehicles should be allowed additional amounts for operating
expenses. In fact, under the standards mentioned in the Ransom opinion, debtors may opt for an additional
$200 deduction for operating expenses for older vehicles. There might be a debate as to what constitutes an
“older vehicle.” The standards define an older vehicle as a car more than six years old or with more than
75,000 miles.
ANSWER TO “THE CULTURAL DIMENSION”
QUESTION IN CASE 22.2
What argument might be made in favor of allowing a debtor who lives outside an area with mass
transit to claim a deduction in the “Ownership Costs” category for a car that he or she owns free and
clear? In most of the United States, a car is nearly a necessity. An individual who lives outside a large, urban
area with mass transit almost invariably needs a car to find and keep a job. A debtor who is employed is more
likely to represent assurance to unsecured creditors that they will receive certain amounts of payments over
the term of a plan.
a. Length of the Plan
Subject to the means test for family median income, the time for payment may not exceed
three years unless the court extends it to five years.
b. Confirmation of the Plan
A plan will be confirmed in a hearing within twenty to forty-five days after the creditors’ meeting
if—
within 910 days of a petition retain their liens until they are paid in full and (b) other personal
property bought within one year.
c. Discharge
Most debts are dischargeable, except—
whole or in part.
• Debts related to injury or property damage caused while driving under the influence of