BANKRUPTCY OVERVIEW
AND
BANKRUPTCY ABUSE PREVENTION & CONSUMER PROTECTION ACT OF 2005

A. Overview of United States Bankruptcy Code, Title 11 United States Code

1. Who May Be A Debtor, 11 U.S.C. § 109

a. Chapter 7: individuals, partnerships and corporate entities

b. Chapter 11: individual or corporate type entities, no jurisdiction limits

c. Chapter 12: family farmer or family fisherman with regular annual income

d. Chapter 13: individuals with regular income

Jurisdictional amounts non-contingent liquidated unsecured debts of less than $307,675, and/or secured debts of less than $922,975

2. The Automatic Stay, 11 U.S.C. § 362

a. Effect

1. Cessation of all collection actions including foreclosures

2. Levy and lien release and recovery of seized property

b. Release/Relief from automatic stay, 10 day response, hearing within 30 days

c. Limitations

3. Executory Contracts, 11 U.S.C. § 365

a. Right to assume or reject executory contracts and leases, § 365(a)

b. Right to cure § 365(b)(1)

c. Anti-Bankruptcy/Insolvency default provisions, § 365(b)(2)

4. Anti-Discrimination 11 U.S.C. § 525

a. A governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit charter franchise or other similar grant, or deny employment, or terminate employment who has been a debtor under this title (corp. or individual)

b. A private employer may not terminate or discriminate against a debtor

c. A guaranteed student loan issuer may not deny a student loan to a debtor

5. Chapter 7

a. Individuals

1. Discharge of Dischargeable Debts, see 11 U.S.C. § 523

2. Retention of Exempt Assets, see 11 U.S.C. § 522

(a). Federal Exemptions

(b). Massachusetts Exemptions

(1) Homestead

(2) Retirement Accounts

(3) Personal Property

(c). New Hampshire

(d). Maine

3. Chapter 7 Discharge, see 11 U.S.C. § 727

(a) Ch. 7 discharge allowed 8 years after last Ch. 7 or Ch. 11 discharge, 6 years after last Ch. 13 or Ch. 12 discharge

b. Corporations

1. No discharge

2. No exempt property

c. Administration

1. Chapter 7 Trustee

2. U.S. Trustee’s Office

6. Chapter 13

a. Comparison to Chapter 7

1. Allows Debtors to retain non-exempt property

2. Ability to pay arrearage over 36 to 60 months

3. Cost comparison

b. Chapter 13 Plans

1. Secured debt arrearage on property retained, must be paid in full

2. Priority debts must be paid in full

3. Unsecured debts paid 100 to 0 percent

4. Plan term 36 to 60 months

5. Must pay to unsecured creditors at least as much as in a Chapter 7

c. Discharge

1. 11 U.S.C. § 1328

2. Ch. 13 discharge allowable 4 years after prior Ch. 7, 11, or 12 discharge

3. Ch. 13 discharge allowable 2 years after prior Ch. 13 discharge

7. Chapter 12 Family Farmers and Family Fishermen

a. Limited use in New Hampshire and Massachusetts

b. Higher debt limits than Chapter 13

c. Plan term 36 to 60 months

d. Fees 10% on first $450,000.00 of distributions and 3% thereafter

e. Far less complicated than a Chapter 11 case

8. Chapter 11 Reorganization

a. No debt limit and immediate authorization to operate

b. Quarterly fees and Monthly Operating Reports

c. First Day Orders

d. No payment on pre-petition debt until Plan is confirmed

e. Plan contents

1. No longer than 60 months

2. Exclusivity period 120 days subject to extension

3. Plan calculation

(1) Full payment of secured debts

(2) Full payment of priority debts

(3) Unsecured debt payment subject to income/asset balance,

Plan must pay at least as much as if in a Chapter 7 and commit to a fair amount based on projected income

f. Plan acceptance, see 11 U.S.C. § 1129

(1) Plan approval by Court and U.S. Trustee

(2) Claim class participant acceptance

Two-thirds in amount and more than one-half in number of each allowed classes voting members (i.e. of the ballots received)

(3) "Cramdown"

g. Discharge/Confirmation, see 11 U.S.C. § 1141

B. Dischargeability of Tax Obligations

1. Trust Fund Taxes

a.. Identity, Sales and Withheld Employee Payroll Taxes.

b. Never dischargeable and will accrue interest during a Ch 11, Ch 12 or Ch 13 Plan.

c. May be included in Ch 11, Ch 12 or Ch 13 Plan Payments as Priority Taxes.

2. Income Taxes

a. To be dischargeable Income Taxes must meet five rules:

1. Three Year Rule, the most recent due date for filing the return is over 3 years old, including extension 11 U.S.C. § 507 (a)(A)(i). Ex. 2004 Tax Year would first be dischargeable April 15, 2008.

2. Two Year Rule, the debtor filed the tax return for the year in question more than 2 years prior to the bankruptcy filing. 11 U.S.C. § 523(a)(1)(B).

3. The assessment of the tax is over 240 days old on date of filing

11 U.S.C. § 507(a)(8)(A)(ii).

4. The Tax Return Must Not be Fraudulent, 11 U.S.C. § 523 (a)(1)(C).

5. The taxpayer must not have been guilty of a willful attempt to defeat or evade the tax. 11 U.S.C. § 523(a)(1)(C)

b. If an income tax is non-dischargeable it is a priority tax and will not be discharged in a Chapter 7, 11, 12 or 13, such debt either survives a Chapter 7, or must be paid in full in a Ch 11, Ch 12 or Ch 13 Plan.

c. Where the IRS/DOR has a non-avoidable lien on dischargeable income taxes, the lien will survive the discharge of the income tax, ie the Debtor is freed from the obligation but the IRS/DOR’s lien will be retained.

d. Interest and penalties associated with unpaid taxes are dischargeable where the income tax is dischargeable.

C. Bankruptcy Abuse Prevention And Consumer Protection Act of 2005

(The best Bankruptcy Act, Mastercard's and Citi-Bank's Money Could Buy)

1. Principal Purpose is to make consumer Chapter 7 Bankruptcy Filings more difficult and to promote filing of Chapter 13 Bankruptcy Filings.

2. Principal Changes

a. Third Party Credit Counsel Required Prior to any individual filing.

b. New Means Testing seeks to limit Chapter 7 filing based on fixed income and expense criteria.

1. Income limitation, received in prior 6 months.

a. Eastern Massachusetts

1. $51,543.00

2. $60,368.00

3. $75,099.00

b. New Hampshire

1. $47,051.00

2. $57,089.00

c. Maine, York County

1. $36,853.00

2. $47,228.00

3. $60,054.00

2. Means Testing appears to be ineffective as its is subject to many exceptions which allow Debtors to circumvent the provision’s intent.

a. Income manipulation.

b. Expense manipulation.

c. Protection of secured claims.

d. Form B-22

c. Limited the breath of Chapter 13 discharges, but retained dischargeability of Willful and Malicious Damage to Property 523 (a)(6) and Divorce Property Settlements.

d. Limited homestead exemptions on new property (acquired 760 days prior to filing (exemption jurisdiction) and 1215 days (exemption amount limitation) prior to bankruptcy filing)

e. Restrictions on multiple filings.

D. Current Considerations

1. Chapter 7 filings are rising toward their former levels.

2. Current shake out of the sub-prime mortgage scandal may yield more amendments to the Bankruptcy Code.

3. Punitive provisions in the 2005 act do not appear to be vigorously enforced by the US Trustee's Office, query no abuse?

4. Life after bankruptcy.

Timothy M. Mauser has practiced Bankruptcy Law for over 20 years, for both consumer and business bankruptcy clients. The attorneys and staff at the Law Offices of Timothy M. Mauser, Esq. practice bankruptcy law and consumer debt relief exclusively. Whether you are interested in a Short Sale or a Bankruptcy, please call Mr. Mauser to arrange for a personal free consultation.