Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
in whole or in part.
QUESTION IN THE FEATURE
INSIGHT INTO SOCIAL MEDIA—LEGAL CRITICAL THINKING—INSIGHT INTO TECHNOLOGY
(PAGE 423)
Are there any downsides to live chats with bankruptcy courts? If so, what are they?
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 22.1—LEGAL REASONING QUESTIONS (PAGE 436)
1A. What Bankruptcy Code requirements were at the center of this case? There were
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
in whole or in part.
CHAPTER 22: BANKRUPTCY LAW 3
in whole or in part.
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
order void, it would encourage dishonest debtors to abuse the Chapter 13 process. How
might such abuse occur? Discuss whether the possibility of such abuse affect the
Court’s decision. According to United, debtors could file plans proposing to dispense with the
undue hardship requirement in the hope that the bankruptcy court would overlook the proposal
and the creditor would not object. In the event the provision was discovered, the most that
impose penalties on debtors and attorneys for engaging in improper conduct during bankruptcy
proceedings. In the Court’s eyes, these penalties should deter bad-faith attempts to discharge
student loan debt without the required undue hardship finding. And, said the Court, should
existing sanctions prove inadequate to the task, Congress can enact additional provisions to
address the difficulties that United predicted would follow the Court’s decision.
approved nonprofit agency within the 180-day period preceding the date of filing a petition in
4 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
in whole or in part.
bankruptcy. Therefore, before Janet can file her petition, she needs to attend either an individual
or group briefing from an approved credit-counseling agency.
2A. Deadline to submit
Janet must file the required schedules within 45 days after filing her petition—unless she gets
an extension of up to 45 days. If she does not meet the deadline, then her case is automatically
dismissed.
3A. Steps to “substantial abuse”
To determine whether Janet’s petition is presumed to be “substantial abuse,” the court would
4A. Ability to pay
If a court found that Janet had an ability to pay a portion of her deceased husband’s medical
bills, a court would convert her bankruptcy case to a Chapter 13, individual repayment plan.
7 protection, the creditors’ costs rise. Consequently, all business that extend credit must raise
the interest rates they charge to all borrowers to cover these increased costs. Therefore,
allowing consumers to simply walk away from bone fide debts imposes extra burdens on all
other borrowers.
Not all borrowers default on their debt repayments just because they borrowed “too”
CHAPTER 22: BANKRUPTCY LAW 5
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. After graduating from college, Tina works briefly as a salesperson before filing for
bankruptcy. As part of her petition, Tina reveals her only debts are student loans, taxes
accruing within the last year, and a claim against her based on her misuse of customers’
funds during her employment. Are these debts dischargeable in bankruptcy? Explain. No.
Besides the claims listed in this problem, the debts that cannot be discharged in bankruptcy
include amounts borrowed to pay back taxes, goods obtained by fraud, debts that were not
ninety days (one year in the case of an insider or fraud) of a bankruptcy filing, can be recovered
if it gives a creditor more than he or she would have received in the bankruptcy proceedings. A
trustee can recover this preference using his or her specific avoidance powers.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
corporations that are liable on a claim held by a creditor, as well as individuals. The debtor does
not have to be insolvent to file a petition. Under the Code, a debtor is presumed to be insolvent
when his or her debts exceed the fair market value of nonexempt assets. Thus, even though
Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself
into bankruptcy.
6 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
22-2A. Preferences
(Chapter 22—Page 428)
A trustee is given avoidance powers by the Bankruptcy Code. One situation in which the trustee
can avoid transfers of property or payments by a debtor to a creditor is when such transfer
constitutes a preference. A preference is a transfer of property or payment that favors one
creditor over another. For a preference to exist, the debtor must be insolvent and must have
made payment for a preexisting debt within ninety days of the filing of the petition in bankruptcy.
The Code provides that the debtor is presumed to be insolvent during this ninety-day period. If
the payment is made to an insider (and in this case payment was made to a close relative), the
bankruptcy is a preference—as long as the debtor was insolvent at the time of payment. The
facts indicate that Peaslee probably was insolvent at the time he paid his father. If he was not,
the payment is not a preference, and the trustee’s avoidance of the transfer would be improper.
22-3A. Distribution of property
(a) $ 500—Administrative bankruptcy costs (Dietrich).
(b) $ 2,000—Claims for back wages (Elmer), limited to $2,000 per
claimant, provided the wages were earned within ninety days of the petition.
(c) $ 1,000—Taxes and penalties due and owing (Rock County).
(d) $10,000—General creditors:
example, for United Bank it is:
5,000
––––––– X $1,500 = $750
10,000
in whole or in part.
in whole or in part.
22–7A. Discharge in bankruptcy
Chapter 13 petition, Educational Credit Management Corp. (ECMC) filed an unsecured proof of
claim based on the loans. Hann believed that she had repaid the loans in full and objected. The
court held a hearing at which ECMC failed to appear, and Hann submitted correspondence from
the lender indicating the loans had been paid. The court then entered an order sustaining
Hann's objection to ECMC’s claim, in effect declaring that there was no obligation and the
the First Circuit affirmed.
22-8A. A QUESTION OF ETHICS—Discharge in bankruptcy
(a) The parties who might be considered at “ethical” fault for the investors’ losses in
this case include Edwards, ETS, the defendants, and the investors themselves. For obvious
their good offices to mediating disputes among wrongdoers” and “denying judicial relief to an
admitted wrongdoer is an effective means of deterring illegality.” A broad ethical application of
this doctrine to most of the parties in this case could result in each party suffering his or her
losses on his or her own, without collecting damages from the others. But would that be ethically
responsible? Aren’t Edwards and ETS “more” culpable? In terms of bankruptcy law, should ETS
Circuit, which affirmed the lower court’s decision. The appellate court explained that a trustee
“stands in the shoes of the debtor” and is subject to whatever defenses are available against the
debtor. In other words, “[i]f a claim of ETS would have been subject to the defense of in pari
CHAPTER 22: BANKRUPTCY LAW 9
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
delicto at the commencement of the bankruptcy, then the same claim, when asserted by the
trustee, is subject to the same . . . defense.” Here, ETS devised the scheme, transferred funds
from the defendants to itself, and assumed liability that it could not satisfy. These actions
“logically compel the conclusion that ETS [is] substantially . . . responsib[le] for [its] injury.” The
court added that “[i]t would be anomalous, to say the least,” to declare that the debtor violated
the law, “yet award the violator with treble damages.” Laddin's recovery “would not divest . . .
violators of their ill-gotten gains; it would result in a wealth transfer among similarly situated
conspirators.”
creditors under the repayment plan.
(b) Student loans are excepted from discharge unless the debtor can show “undue
hardship.”
(c) A fundamental goal of bankruptcy is to protect the debtor by giving him or her a
fresh start free from debt. It could be argued that a debtor who is burdened by student loans will
of the period. This suggests that the court might at least agree to a discharge of the student loan
debt on the completion of the plan.
in whole or in part.
CHAPTER 22: BANKRUPTCY LAW 3
in whole or in part.
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
order void, it would encourage dishonest debtors to abuse the Chapter 13 process. How
might such abuse occur? Discuss whether the possibility of such abuse affect the
Court’s decision. According to United, debtors could file plans proposing to dispense with the
undue hardship requirement in the hope that the bankruptcy court would overlook the proposal
and the creditor would not object. In the event the provision was discovered, the most that
impose penalties on debtors and attorneys for engaging in improper conduct during bankruptcy
proceedings. In the Court’s eyes, these penalties should deter bad-faith attempts to discharge
student loan debt without the required undue hardship finding. And, said the Court, should
existing sanctions prove inadequate to the task, Congress can enact additional provisions to
address the difficulties that United predicted would follow the Court’s decision.
approved nonprofit agency within the 180-day period preceding the date of filing a petition in
4 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
in whole or in part.
bankruptcy. Therefore, before Janet can file her petition, she needs to attend either an individual
or group briefing from an approved credit-counseling agency.
2A. Deadline to submit
Janet must file the required schedules within 45 days after filing her petition—unless she gets
an extension of up to 45 days. If she does not meet the deadline, then her case is automatically
dismissed.
3A. Steps to “substantial abuse”
To determine whether Janet’s petition is presumed to be “substantial abuse,” the court would
4A. Ability to pay
If a court found that Janet had an ability to pay a portion of her deceased husband’s medical
bills, a court would convert her bankruptcy case to a Chapter 13, individual repayment plan.
7 protection, the creditors’ costs rise. Consequently, all business that extend credit must raise
the interest rates they charge to all borrowers to cover these increased costs. Therefore,
allowing consumers to simply walk away from bone fide debts imposes extra burdens on all
other borrowers.
Not all borrowers default on their debt repayments just because they borrowed “too”
CHAPTER 22: BANKRUPTCY LAW 5
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. After graduating from college, Tina works briefly as a salesperson before filing for
bankruptcy. As part of her petition, Tina reveals her only debts are student loans, taxes
accruing within the last year, and a claim against her based on her misuse of customers’
funds during her employment. Are these debts dischargeable in bankruptcy? Explain. No.
Besides the claims listed in this problem, the debts that cannot be discharged in bankruptcy
include amounts borrowed to pay back taxes, goods obtained by fraud, debts that were not
ninety days (one year in the case of an insider or fraud) of a bankruptcy filing, can be recovered
if it gives a creditor more than he or she would have received in the bankruptcy proceedings. A
trustee can recover this preference using his or her specific avoidance powers.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
corporations that are liable on a claim held by a creditor, as well as individuals. The debtor does
not have to be insolvent to file a petition. Under the Code, a debtor is presumed to be insolvent
when his or her debts exceed the fair market value of nonexempt assets. Thus, even though
Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself
into bankruptcy.
6 UNIT FIVE: CREDITORS’ RIGHTS AND BANKRUPTCY
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
22-2A. Preferences
(Chapter 22—Page 428)
A trustee is given avoidance powers by the Bankruptcy Code. One situation in which the trustee
can avoid transfers of property or payments by a debtor to a creditor is when such transfer
constitutes a preference. A preference is a transfer of property or payment that favors one
creditor over another. For a preference to exist, the debtor must be insolvent and must have
made payment for a preexisting debt within ninety days of the filing of the petition in bankruptcy.
The Code provides that the debtor is presumed to be insolvent during this ninety-day period. If
the payment is made to an insider (and in this case payment was made to a close relative), the
bankruptcy is a preference—as long as the debtor was insolvent at the time of payment. The
facts indicate that Peaslee probably was insolvent at the time he paid his father. If he was not,
the payment is not a preference, and the trustee’s avoidance of the transfer would be improper.
22-3A. Distribution of property
(a) $ 500—Administrative bankruptcy costs (Dietrich).
(b) $ 2,000—Claims for back wages (Elmer), limited to $2,000 per
claimant, provided the wages were earned within ninety days of the petition.
(c) $ 1,000—Taxes and penalties due and owing (Rock County).
(d) $10,000—General creditors:
example, for United Bank it is:
5,000
––––––– X $1,500 = $750
10,000
in whole or in part.
in whole or in part.
22–7A. Discharge in bankruptcy
Chapter 13 petition, Educational Credit Management Corp. (ECMC) filed an unsecured proof of
claim based on the loans. Hann believed that she had repaid the loans in full and objected. The
court held a hearing at which ECMC failed to appear, and Hann submitted correspondence from
the lender indicating the loans had been paid. The court then entered an order sustaining
Hann's objection to ECMC’s claim, in effect declaring that there was no obligation and the
the First Circuit affirmed.
22-8A. A QUESTION OF ETHICS—Discharge in bankruptcy
(a) The parties who might be considered at “ethical” fault for the investors’ losses in
this case include Edwards, ETS, the defendants, and the investors themselves. For obvious
their good offices to mediating disputes among wrongdoers” and “denying judicial relief to an
admitted wrongdoer is an effective means of deterring illegality.” A broad ethical application of
this doctrine to most of the parties in this case could result in each party suffering his or her
losses on his or her own, without collecting damages from the others. But would that be ethically
responsible? Aren’t Edwards and ETS “more” culpable? In terms of bankruptcy law, should ETS
Circuit, which affirmed the lower court’s decision. The appellate court explained that a trustee
“stands in the shoes of the debtor” and is subject to whatever defenses are available against the
debtor. In other words, “[i]f a claim of ETS would have been subject to the defense of in pari
CHAPTER 22: BANKRUPTCY LAW 9
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part.
delicto at the commencement of the bankruptcy, then the same claim, when asserted by the
trustee, is subject to the same . . . defense.” Here, ETS devised the scheme, transferred funds
from the defendants to itself, and assumed liability that it could not satisfy. These actions
“logically compel the conclusion that ETS [is] substantially . . . responsib[le] for [its] injury.” The
court added that “[i]t would be anomalous, to say the least,” to declare that the debtor violated
the law, “yet award the violator with treble damages.” Laddin's recovery “would not divest . . .
violators of their ill-gotten gains; it would result in a wealth transfer among similarly situated
conspirators.”
creditors under the repayment plan.
(b) Student loans are excepted from discharge unless the debtor can show “undue
hardship.”
(c) A fundamental goal of bankruptcy is to protect the debtor by giving him or her a
fresh start free from debt. It could be argued that a debtor who is burdened by student loans will
of the period. This suggests that the court might at least agree to a discharge of the student loan
debt on the completion of the plan.
