978-1285770178 Solution Manual BL ComLaw 1e SM-Ch22

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

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

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.

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

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.