Bankruptcy Law, The Law of Debtors and Creditors Problem Set Answers, Warren Westbrook Sixth Edition - Problem Set 14

 Problem Set 14, p.306

1. First there is an automatic stay for any repossession, so IC cannot take it at will.

Second, IC should bring a petition to lift the stay under §362(d), and he has two choices.

• IC can rely on §362(d)(1) for the cause of lack of adequate protection under §361.

• What can be the argument for lack of adequate protection? Like market drop, depreciation, tear and wear, etc.; but IC cannot get the opportunity cost and therefore ask for post-petition interest,
• What can the debtor do for the adequate protection? See §361: cash payment, replacement lien, additional insurance, and others.

• IC can also rely on §362(d)(2): the debtor has no equity in the property and the property is not necessary for the effective reorganization.

• We calculate the equity following the petition valuation.
• Under §1325, the secured creditors must be paid in full for the confirmation of plan; the debtors can pay the creditor lump-sum cash or installment with a market interest.

(Notes about the interest: Pre-bankruptcy, creditors get the interest; from bankruptcy to confirmation: no interest; from confirmation, post-confirmation over three years: you have interest)

2. First, what is LL’s allowed claim? $39980 (principal) + $12300 (pre-petition interest) = about $52K (Note: if it is oversecured claim, the creditor can be entitled to post-petition interest with the K rate)

Second, we bifurcate the claims: 41K secured claims to the extent of the value of the collateral; $11K unsecured claims

Third, for the secured claim, George had to pay back in full with the interest.

• What kind of interest should be paid? Prime interest rate + adjustment

3. First, it should be the replacement value without deduction of the costs of sale or marketing under §506(a)(2).

• Replacement value: the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.

Second, how much should the debtor pay? Under §1325(a)(9), she should pay the purchase money loan for the car within 910 days before the petition in full. Can't bifurcate claim into allowed secured and unsecured claim.

• Disputing point: §1325(a)(9) requires the car for personal use; but here it may be argued that it is for the use of business

Notes: No modification for houses: §1322(b) (2).

4. §1322(b) (2) you cannot modify the rights of holders of secured claims if the claim is only secured by the debtor’s principal residence. So the debtor has to pay the full mortgage of $182k and the market interest

§1322(b)(5) the debtor has to reinstate the mortgage and cure the defaults

This is pretty tough for the debtor, so why does the Congress do this? Good lobby from the mortgage capital.

5. How about the filing in bad faith? Does it still get the automatic stay? Yes, until it is dismissed.

• §109(h). §521(b). Credit counseling service? §521 certificate for credit counseling and the repayment plan. What is this for? Modification of the automatic stay. When you file for bankruptcy, the clerk will require the certificates; if not, the filing still gets the automatic stay until it is dismissed. Without the credit counseling certificate, it will be dismissed. So you cannot use the bankruptcy filing as an instant strategic tool any more.
•  Do they have a previous remedy under bankruptcy? §362(c)(3) limit the stay. The stay will terminate on the 30^th day after the filing if the debtor has a pending case within the proceeding 1 year but was dismissed. (c)(3)(B) requires good faith.
• §362(b)(22) stay on eviction between the lessor and lessee.

6. They can file for CH 13 and they can modify the claims in their repayment plan, including secured or unsecured; but they cannot modify the claims secured by their principal residence.

But the question is whether you advise them to file for CH 13 or Ch 7? What is the downside of CH 13?

• They cannot modify the home mortgage.
• The repayment is 3-5 years; very long.

For the CH 7, they can get rid of all the debts, but they cannot keep their equity. If they want to, they have to reaffirm the claims with the creditors, in which the creditors have more bargaining power.

The baseline to take CH 7 or CH 13 is

• If the mortgage is high, CH 7 is more favorable to the debtors? If the mortgage is low, CH 13 is better.
• File for Chapter 7 to get rid of unsecured debt. Try to get reaffirmation on mortgage. Bank can repossess but will likely negotiate a deal.

Problem Sets: Table of Contents
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