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Business Law Chapter 31 Homework Bankruptcy Abuse and Consumer Protection Act 

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11 pages
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5750 words
Book Title
Business Law: Text and Cases 14th Edition
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
Chapter 31
Bankruptcy Law
Bankruptcy law is designed to accomplish two main goals: to provide relief and protection to debtors who have
“gotten in over their heads” and to provide a fair means of distributing a debtor’s assets among creditors. Thus, the
law attempts to protect the rights of debtor and creditor, with an emphasis on requiring debtors to pay as many of their
debts as they can.
Bankruptcy—A Creditor’s Remedy?
Originally, bankruptcy represented a creditor’s remedy, not debtor’s relief. In Great Britain, in the
sixteenth century, creditors used the bankruptcy laws to obtain all of the property of a merchant behind in the
payment of debts. At the time, only merchants were subject to the bankruptcy laws. Creditors could seize a
debtor’s property, have the property sold, and if the proceeds from the sale were not enough, have the debtor
imprisoned until his or her friends or relatives could pay the rest. By the beginning of the eighteenth century,
the law began to permit the release of debtors from prison and discharge the unpaid balance of their debts.
For at least another hundred years, however, the bankruptcy laws were creditors’ remedies, and debtors
could still be imprisoned. Today, of course, the Bankruptcy Code attempts to strike a balance between the
interests of both debtors and creditors.
I. The Bankruptcy Code
The U.S. Constitution gave Congress the power to establish “uniform laws on the subject of bankruptcies
throughout the United States.” Federal bankruptcy laws (as amended most recently in the 2005 Bankruptcy
Reform Act) are called the Bankruptcy Code or the Code.
Bankruptcy Abuse and Consumer Protection Act (BACPA) of 2005
The most significant changes to bankruptcy law in nearly thirty years occurred in 2005, with the
enactment of the Bankruptcy Abuse and Consumer Protection Act (BACPA) of 2005.
For individual debtors, key changes from previous law included
Subject to a means test, many debtors must file for bankruptcy under the Bankruptcy Code’s Chapter
13 instead of the more commonly used Chapter 7, which often provided an almost complete discharge of
all debts. Under Chapter 13, as amended by BACPA, a debtor must comply with a repayment plan for up
to five years, according to a strict budget.
Debtors’ attorneys may be liable for inaccurate, incomplete, or other erroneous information in
documents filed with the court.
Creditors can review a debtor’s federal tax filings, to compare them against court-filed documents and
to challenge discrepancies.
Under Chapter 13, the entire amount of a secured claim, such as a car loan, must be repaid (instead
of, for example, reducing the amount to o current value).
Spousal and child support debts have top priority (except for a trustee’s expenses). The automatic
stay can be lifted to collect child support debts.
The amount of a homestead exemption was limited in a variety of ways, which were focused primarily
on attempts to defraud creditors or avoid crime-related or tort-based liability.
Protection was extended on retirement and college-savings plans (see an ADDITIONAL BACKGROUND
elsewhere in this chapter).
For small-business debtors, key changes from previous law included
Small-business debtors are those with $2 million or less in debt on the date they file for bankruptcy.
The deadline for filing a plan of reorganization under Chapter 11 is 300 days within the filing of the
initial petition. The time within which a small-business debtor has the exclusive right within which to file a
plan was extended to 180 days.
The U.S. Small Business Administration is expected to monitor the impact of BACPA on small businesses
and inform Congress of any needed changes.
Bankruptcy law has two main goals
To protect a debtor by giving him or her a fresh start without creditors’ claims.
To ensure equitable treatment of creditors competing for a debtor’s assets.
Bankruptcy proceedings are held in federal bankruptcy courts under the authority of the federal district
courts, to which rulings can be appealed.
 
Chatting on social media has become a way of life for most younger people in this country and
elsewhere. Online chats preceded social media and are still used at retail Web sites. Today, some tech-savvy
employees at bankruptcy courts are using the retail online chat model to answer questions about bankruptcy.
The U.S. Bankruptcy Court for the District of Arizona started live chatting several years ago. It added live
chat to its Web site as part of a strategic initiative to educate the public about bankruptcy. Rather than leaving
voice messages, people who access the court’s Web site can send and receive text messages via an easy-
to-use chat box. The court’s goal is to respond to a live chat request within thirty seconds.
In 2011, New Mexico became the second state to add online chatting to its bankruptcy court’s Web site.
Nevada followed with its live chat in 2012.
The courts that have adopted online chatting average about ten chats a day. Most chats last less than ten
At first, only individuals interested in filing for bankruptcy without an attorney used the live chat services.
When paralegals learned that they could get quick answers to their questions online, they also began to use
the services.
Then, during the real estate meltdown, many real estate lawyers expanded into the area of bankruptcy
law, often as a way to help their clients avoid foreclosure through bankruptcy filings. Many of these lawyers
also have used live chat to expand their knowledge of bankruptcy law.
In this age of expanding social media, many courts have created their own Facebook pages.
For example, the Supreme Court, Superior Court, and Tax Court have a Facebook page that covers
all three courts.
Increasingly bankruptcy courts are posting announcements on their Facebook pages. Anyone who has
signed up for Facebook can readily find announcements from the U.S. Bankruptcy Court for the Southern
District of Mississippi. Information from the bankruptcy courts for Hawaii, New Mexico, Rhode Island, and
Riverside, California, also is available on Facebook. .
Are there any downsides to live chats with bankruptcy courts? If so, what are they? Inexperienced
individuals attempting to file for bankruptcy without the help of a lawyer may not even know the right
questions to ask in an online chat. Moreover, they may not be able to understand the response. Additionally,
not every employee in a bankruptcy court has the same level of competence to answer questions posed in an
online chat room. Consequently, some of the answers given may not be accurate.
The Bankruptcy Code is in Title 11 of the U.S.C. and has eight chapters. Chapters 1, 3, and 5 include
definitions and provisions governing case administration, creditors, debtors, and estates.
Chapter 7 provides for liquidation.
Chapter 9 governs the adjustment of municipal debts.
Chapter 11 governs reorganizations.
Chapters 12 and 13 provide for the adjustment of debts by parties with regular incomes (family
farmers under Chapter 12).
A clerk of court must provide consumer-debtors (those whose debts arise primarily from purchases of
goods for personal or household use) with certain information (details in the text).
II. Liquidation Proceedings
In a Chapter 7 liquidation (an ordinary or “straight” bankruptcy), a debtor states his or her debts and turns his
or her assets over to a trustee, who sells nonexempt assets and distributes the proceeds to creditors. With
exceptions, the rest of the debts are discharged.
Within 180 days of receiving credit counseling from an approved nonprofit agency, a debtor can file a
voluntary petition. The debtor’s attorney must verify the information in the petition. A debtor does not
have to be insolventanyone liable to a creditor can file. A husband and wife can file jointly.
Voluntary Bankruptcy Information
In the case from which the following is excerpted, In re Riddle, 344 Bankr.702 (S.D. Fla. 2006), the court
held that the information provided by the debtors was complete and, thus their case was not subject to
automatic dismissal under the BAPCPA.
SECTION 521(a)(1)
A. JAY CRISTOL, Chief Judge.
Pursuant to 11 U.S.C. § 521(i), if an individual debtor in a voluntary case under Chapter 7 or 13 fails to
file all of the information required under 11 U.S.C. § 521(a)(1) within 45 days after the date of the filing of the
petition, the case shall be “automatically dismissed” effective on the 46th day after the date of the filing of the
The Court has reviewed the docket and the papers filed by debtors in this case and believes the
information required by 11 U.S.C. § 521(a)(1), and provided by the debtors, is complete. Moreover, no party
in interest has filed a request for an order of dismissal pursuant to 11 U.S.C. § 521(i)(2). Notwithstanding, the
Court feels compelled to comment on the unusual and confusing language in this statutory provision.
I do not like dismissal automatic,
It seems to me to be traumatic.
I do not like it in this case,
I do not like it any place.
As a judge I am most keen
to understand, What does it mean?
How can any person know
what the docket does not show?
What is the clue on the 46th day?
Is the case still here, or gone away?
And if a debtor did not do
what the Code had told him to
and no concerned party knew it,
Still the Code says the debtor blew it.
Well that is what it seems to say:
the debtor's case is then “ Oy vay! ”
This kind of law is symptomatic
of something very problematic.
For if the Trustee does not know
then which way should the trustee go?
Should the trustee's view prismatic
continue to search the debtor's attic
and collect debtors' assets in his fist
for distribution in a case that stands
After a dismissal automatic
would this not be a bit erratic?
The poor trustee cannot know
the docket does not dismissal show.
What's a poor trustee to do
except perhaps to say, “Boo hoo!”
And if the case goes on as normal
and debtor gets a discharge formal,
what if a year later some fanatic
claims the case was dismissed automatic?
Was there a case, or wasn't there one?
How do you undo what's been done?
Debtor's property is gone as if by a thief,
and Debtor is stripped but gets no relief.
I do not like dismissal automatic.
On this point I am emphatic!
I do not wish to be dramatic,
but I can not endure this static.
Dismissal automatic is not understood.
Something more in 521 is needed
for dismissal automatic to be heeded.
For all concerned this is not good.
Before this problem gets too old
it would be good if we were told:
What does automatic dismissal mean?
And by what means can it been seen?
Are we only left to guess?
Oh please Congress, fix this mess!
Until it's fixed what should I do?
How can I explain this mess to you?
If the Code required an old fashioned order,
that would create a legal border,
with complying debtors' cases defended
and 521 violators' cases ended,
from the unknown status of dismissal automatic,
to the certainty of a status charismatic.
The dismissal automatic problem would be gone,
and debtors, trustees and courts could move on.
As to this case, how should I proceed?
Review of the record is warranted, indeed.
A very careful record review,
tells this Court what it should do.
Was this case dismissed automatic?
It definitely was NOT and that's emphatic.
Based upon the Court's review, the Court has determined that the debtors have complied with the
information requirements of 11 U.S.C. § 521(a)(1).
Accordingly, it is ORDERED:
2. If any party in interest has any reason to contest the Court's finding that the debtors have filed all
information required by 11 U.S.C. § 521(a)(1), that party shall file a motion for reconsideration not later than
20 days from the date of the entry of this order, and serve such motion on the trustee, the United States
Trustee, debtors and debtors' counsel, if any. The motion should specifically identify the information and
document(s) required by 11 U.S.C. § 521(a)(1) that the debtors have failed to file.
3. Nothing in this Order shall excuse the debtors' duty to cooperate with the United States Trustee and
1. Chapter 7 Schedules
A voluntary petition must contain
A schedule of secured and unsecured creditors and what is owed to each.
A statement of the debtor’s financial affairs.
A list of the debtor’s property.
A statement of the debtor’s current income and expenses.
A certificate of credit counseling.
Copies of evidence of payments from employers within 60 days.
A statement of monthly income;.
A copy of the debtor’s most recent federal income tax return.
A photo i.d. and copies of other tax returns must be submitted if the U.S. trustee requires. The
schedules and other documents must be filed within forty-five days of the petition (except for the tax
return, which can be filed up to seven days before the first creditors’ meeting.
2. Tax Returns during Bankruptcy
A tax return must be filed each year while a case is pending, with a copy provided to the court.
3. Substantial AbuseMeans Test
A grant of relief cannot be “substantial abuse” of Chapter 7.
a. The Basic Formula
If a debtor’s family income is more than the median family income in the state in which the
petition is filed, the petition may be dismissed on a presumption of abuse.
b. Applying the Means Test to Future Disposable Income
Disposable income is calculated by subtracting living expenses and interest payments on
secured debt. Living expenses are amounts allowed under formulas used by the Internal
Revenue Service.
c. Can the Debtor Afford to Pay Unsecured Debts?
4. Additional Grounds for Dismissal
5. Order for Relief
The filling of the petition constitutes an order for relief (a discharge of debts). Creditors must be
notified within twenty days.
Creditors can force debtors (not farmers or charitable institutions) into involuntary bankruptcy.
1. Requirements
For an involuntary action to be filed
2. Order for Relief
If the debtor challenges the petition, the court will enter an order for relief if it finds
The debtor is not paying debts as they become due.
A general receiver, assignee, or custodian took possession of or was appointed to take charge
of substantially all of the debtor’s property within 120 days before the petition was filed.
If the petition is dismissed, creditors may be assessed costs and attorneys’ fees. If a petition is filed
in bad faith, a debtor may be awarded damages for injury to reputation and punitive damages.
The automatic stay protects a debtor’s property from creditors’ actions. A creditor’s willful violation of the
stay may entitle a party to recover compensatory and punitive damages, costs, and attorneys’ fees.
1. The Adequate Protection Doctrine
Secured creditors can ask the court to protect them from losing the value of their security as a
result of the stay. Debtors can be required to make cash [payments or provide additional collateral
to offset any loss in value.
Adequate Protection under Chapters 7, 11, and 13
A secured creditor is protected from losing his or her security as a result of the automatic stay by a
concept known as adequate protection. The following is the text of 11 U.S.C. Section 361, a section of the
Bankruptcy Code providing for adequate protection under Chapters 7, 11, and 13 (for adequate protection
rules that apply in Chapter 12 cases, see the ADDITIONAL BACKGROUND accompanying the section on Chapter
12 below).
§ 361. Adequate protection
When adequate protection is required under section 362, 363, or 364 of this title of an interest of an entity in
property, such adequate protection may be provided by
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that
(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or
grant results in a decrease in the value of such entity’s interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section
503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the
indubitable equivalent of such entity’s interest in such property.
(Pub.L. 95-598, Nov. 6, 1978, 92 Stat. 2569.)
(As amended Pub.L. 98-353, Title III, § 440, July 10, 1984, 98 Stat. 370.)
2. Exceptions to the Automatic Stay
3. Requests for Relief from the Automatic Stay
A creditor may be granted relief from the stay sixty days after requesting it.
a. Secured Property
A stay on a secured debt may be lifted forty-five days after the first creditors’ meeting unless
the debtor reaffirms the debt.
b. Bad Faith
Commencement of a Chapter 7 proceeding creates an estate in property, which consists of all the
debtor’s legal and equitable interests in property before the filing of the petition.
A trustee’s principal duty is to collect and reduce to money the property of the debtor’s estate and to
close up the estate as fast as is compatible with the parties’ best interests.
1. Duties for Means Testing
Within ten days of the first creditors’ meeting, the trustee must review the debtor’s filing and
determine whether it is abuse under the means test, and if so, notify all creditors. Within forty days
2. The Trustee’s Powers
Right to possessionThe trustee has a right to possession of the debtor’s property and can
require persons holding a debtor’s property when a petition is filed to give the property to the
3. Voidable Rights
A trustee can use any groundincluding fraud, duress, incapacity, and mutual mistakethat a
debtor can use to obtain return of the debtor’s property.
4. Preferences
A trustee can recover a debtor’s payment or transfer of property made to a creditor within ninety
days before the petition in preference to others.
a. Preferences to Insiders
Transfers to insiders within a year of the petition can be recovered, but the debtor’s insolvency
at the time of the transfer must be proved.
b. Transfers That Do Not Constitute a Preferences
certain amount without it constituting a preference. Domestic-support debts and transfers
under a credit-counseling service’s negotiated schedule are excepted.
5. Fraudulent Transfers
A trustee may avoid fraudulent transfers made within two years of the filing of the petition or made
with intent to hinder, delay, or defraud a creditor. Transfers made for less than reasonably
A debtor can exempt certain property from bankruptcy, choosing between exemptions provided under
state law and federal law. (States may bar the use of federal exemptions.) The Bankruptcy Code’s
exemptions include-
1. Federal Exemptions
Up to a certain amount (specific amounts are stated in the text) in equity in the debtor’s
residence and burial plot.
Interest in a motor vehicle up to a certain amount.
Interest, up to a certain amount for any particular item or a certain amount for all items
Exemption for Retirement and College Savings
According to a decision of the United States Supreme Court, individual retirement accounts (IRAs) could
not be seized during bankruptcy.a The Court explained that the IRAs were protected under 11 U.S.C. Section
522(d)(10)(E), which exempted “payment under a stock plan, pension, profit sharing, annuity, or similar plan
or contract on account of . . . age.” The Court reasoned that a right to payment from an IRA “is casually
connected to . . . age” and IRAs “provide income that substitutes for wages earned as salary or hourly
compensation.” Left open were questions concerning the amount of the assets that were exempt and whether
Roth IRAsa specific type of IRAwere also covered.
The Bankruptcy Abuse and Consumer Protection Act (BACPA) of 2005 preempted this decision to
provide protection for retirement and college-savings accounts. Under BACPA, most of the assets in IRAs
2. State Exemptions
To claim a state’s homestead exemption, the debtor must have lived in the state for two years be-
fore filing the petition.
3. Limitations on th4 Homestead Exemption
Certain other residency and dollar limits may apply. Home equity may not be protected if a debt
arose from a crime or tort indicating substantial abuse.
The U.S. trustee calls the creditors’ meeting within twenty and forty days of the petition. The debtor must
Normally, creditors must file proof of their claims within ninety days of the meeting. In a disputed or
unliquidated claim, the court sets the value. Any creditor’s claim is allowed automatically unless
1. Distribution to Secured Creditors
If collateral is surrendered, a secured party can accept it in full satisfaction of the debt or sell it,
apply the proceeds to the debt, and become an unsecured creditor for the difference.
Case 31.1: In re Anderson
Henry Anderson filed a voluntary petition in a federal bankruptcy court for relief under Chapter 11 of the
Bankruptcy Code. The U.S. Department of the Treasury, through the Internal Revenue Service (IRS), filed a
proof of claim against the bankruptcy estate for $997,551.80, of which $987,082.88 was secured by
Anderson’s property. Stubbs & Perdue, P.A., served as his counsel. During the proceedings, the court
approved compensation of $200,000 to Stubbs for its services. These fees constituted an unsecured claim
against the estate for administrative expenses. Later, Anderson’s case was converted to a Chapter 7
liquidation. The trustee accumulated $702,630.25 for distribution to the estate’s creditors—not enough to pay
Notes and Questions
Should federal and state statutes list in detail which debts take priority for discharge, payment,
and exemption under the Bankruptcy Code? Or should debtors, creditors, trustees, and judges be
given more discretion to debate and determine the priority in individual cases? Why?
2. Distribution to Unsecured Creditors
There is an order in which unsecured debts are paid. Each class must be paid before the next
class. If proceeds are insufficient to pay all creditors in a class, payment is proportional, and
classes lower in priority receive nothing. Any amount remaining goes to the debtor. The order of
priority is
Claims for domestic-support obligations.
Administrative expenses.
In an involuntary bankruptcy, expenses incurred in the ordinary course of business.
1. Exceptions to Discharge
The most important claims not dischargeable under Chapter 7 include the following
Claims for back taxes accruing within two years prior to bankruptcy.
Claims for amounts borrowed r to pay federal, or any non-dischargeable, taxes.
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
The debtor’s concealment or destruction of property with the intent to hinder, delay, or defraud
a creditor.
The debtor’s fraudulent concealment or destruction of records, or failure to keep adequate
records, of his or her financial condition.
Case 31.2: In re Cummings
Clarence and Pamela Cummings filed a petition for a Chapter 7 bankruptcy in a federal bankruptcy court.
After the Cummings filed two amended versions of the required schedules, the trustee asked for additional
time to investigate. The court granted the request. The Cummings then filed a third amended schedule in
which for the first time they disclosed the existence of First Beacon Management Co., LLC, “the new
corporate anchor of their post-petition fresh start.” The trustee claimed that the Cummings’ failure to disclose
their interest in First Beacon as debtor property was a “false oath relating to a material fact made knowingly
and fraudulently” in violation of the Bankruptcy Code. The court agreed and denied a discharge. The debtors
The Bankruptcy Appellate Panel and the U.S. Court of Appeals for the Ninth Circuit affirmed. “The
sequence of debtors' filings substantiates the presence of fraud.”
Notes and Questions
What might the debtors have done to avoid an unfavorable result in this case? The debtors should
have been more careful with their paperwork. They should have fully disclosed their interest in First Beacon in

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