B-205847.OM, FEB 16, 1982

B-205847.OM: Feb 16, 1982

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BANKRUPTCY REFORM ACT OF 1978 WAS INTENDED TO MODERNIZE BANKRUPTCY LAW BY PROVIDING MORE EFFECTIVE RELIEF FOR OVERBURDENED CONSUMER DEBTORS. HAS REQUESTED THAT GAO EXAMINE THE OPERATION OF THE NEW ACT AND DETERMINE THE EXTENT TO WHICH THIS INCREASE IN CONSUMER FILINGS IS ATTRIBUTABLE TO THE CHANGES IN BANKRUPTCY LAW. THE PERCENTAGE OF THE CONSUMER FINANCE INDUSTRY'S LOSSES THAT IS ATTRIBUTABLE TO BANKRUPTCIES. ATTACHED IS OUR ANALYSIS WHICH PROVIDES GENERAL INFORMATION ON BANKRUPTCY LAW AND PROCEDURE. THE ACT IS CONTAINED IN TITLE 11 OF THE U.S.C. THE ACT IS EFFECTIVE FOR ALL CASES FILED AFTER OCTOBER 1. IT IS THE CULMINATION OF YEARS OF STUDY. STATUTORY SCHEME THE BANKRUPTCY REFORM ACT OF 1978 IS DIVIDED INTO FOUR TITLES.

B-205847.OM, FEB 16, 1982

SUBJECT: BANKRUPTCY REFORM ACT OF 1978 (FILE B-205847; CODE 188540) DIGESTS: 1. BANKRUPTCY REFORM ACT OF 1978 WAS INTENDED TO MODERNIZE BANKRUPTCY LAW BY PROVIDING MORE EFFECTIVE RELIEF FOR OVERBURDENED CONSUMER DEBTORS, EXPANDING JURISDICTION OF BANKRUPTCY COURTS, AND RELIEVING BANKRUPTCY JUDGES OF ADMINISTRATIVE RESPONSIBILITIES. 2. IN ENACTING BANKRUPTCY REFORM ACT OF 1978, CONGRESS SOUGHT TO INCREASE CONSUMER DEBTORS' USE OF CHAPTER 13 REPAYMENT PLANS BY ALLOWING FOR DISCHARGE OF DEBTOR UNDER CIRCUMSTANCES IN WHICH DEBTOR WOULD BE INELIGIBLE FOR CHAPTER 7 DISCHARGE, PROVIDING FOR DISCHARGE OF CERTAIN DEBTS THAT WOULD NOT BE DISCHARGEABLE UNDER CHAPTER 7, AND ELIMINATING BAR TO SUBSEQUENT DISCHARGE IN BANKRUPTCY. 3. IN ENACTING BANKRUPTCY REFORM ACT OF 1978 CONGRESS SOUGHT TO ENHANCE CONSUMER DEBTOR'S POST-BANKRUPTCY "FRESH START" BY ALLOWING DEBTOR TO CHOOSE FEDERAL EXEMPTIONS, THEREBY INSULATING MORE OF HIS PROPERTY FROM CREDITORS' CLAIMS THAN WOULD ORDINARILY BE EXEMPT UNDER STATE OR FEDERAL NONBANKRUPTCY LAW.

GAO EVALUATOR, GGD - RICHARD CARADINE:

SINCE THE ENACTMENT OF THE BANKRUPTCY REFORM ACT OF 1978, THE NUMBER OF CONSUMER BANKRUPTCY FILINGS NATIONWIDE HAS INCREASED DRAMATICALLY. AS A RESULT, CONGRESSMAN RODINO, CHAIRMAN OF THE HOUSE JUDICIARY COMMITTEE, HAS REQUESTED THAT GAO EXAMINE THE OPERATION OF THE NEW ACT AND DETERMINE THE EXTENT TO WHICH THIS INCREASE IN CONSUMER FILINGS IS ATTRIBUTABLE TO THE CHANGES IN BANKRUPTCY LAW. CHAIRMAN RODINO ALSO REQUESTED THAT WE DEVELOP DATA RELATING TO SUCH ISSUES AS THE MAJOR FACTORS LEADING TO BANKRUPTCY, THE PERCENTAGE OF THE CONSUMER FINANCE INDUSTRY'S LOSSES THAT IS ATTRIBUTABLE TO BANKRUPTCIES, THE PROFILE OF THE TYPICAL CONSUMER FILING FOR BANKRUPTCY, AND WHETHER THIS PROFILE HAS CHANGED SINCE THE NEW ACT.

THIS RESPONDS TO YOUR REQUEST THAT, AS BACKGROUND MATERIAL FOR YOUR AUDIT, OGC PROVIDE AN ANALYSIS OF THE NEW ACT, THE OPERATION OF THE BANKRUPTCY COURTS, AND THE INTENTION OF CONGRESS IN OVERHAULING THE SYSTEM. ATTACHED IS OUR ANALYSIS WHICH PROVIDES GENERAL INFORMATION ON BANKRUPTCY LAW AND PROCEDURE, AND HIGH-LIGHTS ISSUES THAT MIGHT BE ADDRESSED IN THE COURSE OF THE AUDIT. SPECIFICALLY, THE ATTACHMENT DESCRIBES THE STRUCTURE OF THE BANKRUPTCY REFORM ACT AND NEW TITLE 11 OF THE U.S.C. REVIEWS THE PROCEDURAL ASPECTS OF A CONSUMER BANKRUPTCY, OUTLINES THE EXEMPTIONS NOW AVAILABLE TO A CONSUMER DEBTOR, AND DISCUSSES SOME OF THE POLICY CONSIDERATIONS INVOLVED IN THE CHANGES AFFECTING VOLUNTARY REPAYMENT PLANS.

ANALYSIS OF BANKRUPTCY LAWS AND PROCEDURES AFFECTED BY THE BANKRUPTCY REFORM ACT OF 1978

ON NOVEMBER 6, 1978, PRESIDENT CARTER SIGNED INTO LAW THE BANKRUPTCY REFORM ACT OF 1978 (HEREINAFTER THE ACT) REPEALING THE BANKRUPTCY ACT OF 1898. THE ACT IS CONTAINED IN TITLE 11 OF THE U.S.C. (HEREINAFTER THE CODE). THE ACT IS EFFECTIVE FOR ALL CASES FILED AFTER OCTOBER 1, 1978, AND REPRESENTS THE MOST SIGNIFICANT DEVELOPMENT IN BANKRUPTCY LAW SINCE 1938. IT IS THE CULMINATION OF YEARS OF STUDY, HEARINGS, AND CONSIDERATION BY CONGRESS AND OTHERS IN AN EFFORT TO MODERNIZE THE LAW OF BANKRUPTCY.

STATUTORY SCHEME

THE BANKRUPTCY REFORM ACT OF 1978 IS DIVIDED INTO FOUR TITLES. TITLE I OF THE ACT ENACTS TITLE 11 OF THE U.S.C. WHICH NOW CONTAINS ALL OF THE SUBSTANTIVE AND MOST OF THE PROCEDURAL FEDERAL LAW RELATING TO BANKRUPTCY. TITLE II OF THE ACT CONTAINS A NUMBER OF AMENDMENTS TO TITLE 28, U.S. CODE, AND TO THE FEDERAL RULES OF EVIDENCE. TITLE III CONTAINS AMENDMENTS TO CERTAIN OTHER FEDERAL STATUTES. MOST OF THESE AMENDMENTS SIMPLY STRIKE THE WORK "BANKRUPTCY" AND SUBSTITUTE THE PHRASE "A CASE UNDER TITLE 11 OF THE UNITED STATES CODE." TITLE IV REPEALS THE PRIOR FEDERAL LAW ON BANKRUPTCY AND PROVIDES A NUMBER OF TRANSITIONAL RULES.

TITLE 11 OF THE U.S.C. AS ENACTED BY TITLE I OF THE ACT, IS DIVIDED INTO SEVEN ODD-NUMBERED CHAPTERS. THE TYPE OF RELIEF AVAILABLE TO A DEBTOR VARIES DEPENDING UPON THE CHAPTER UNDER WHICH RELIEF IS SOUGHT. BECAUSE THE VARIOUS TYPES OF RELIEF ARE KNOWN BY THEIR CHAPTER NUMBERS, IT IS IMPORTANT TO BE FAMILIAR WITH THE SCHEME OF THE TITLE 11 CHAPTERS.

CHAPTER 1 OF TITLE 11 CONTAINS 40 DEFINITIONS OF TERMS USED IN THE OTHER CHAPTERS. 11 U.S.C. 101. SOME OF THE MORE SIGNIFICANT DEFINITIONS ARE "CLAIM," WHICH IS DEFINED VERY BROADLY TO INCLUDE ANY RIGHT TO PAYMENT, "LIEN" WHICH IS A CHARGE AGAINST OR INTEREST IN PROPERTY TO SECURE PAYMENT OF A DEBT OR PERFORMANCE OF AN OBLIGATION, AND "TRANSFER" WHICH MEANS EVERY MODE OF DISPOSING OF OR PARTING WITH PROPERTY OR AN INTEREST IN PROPERTY. A "CREDITOR" IS GENERALLY A HOLDER OF A CLAIM, WHETHER SECURED OR UNSECURED, THAT AROSE BEFORE THE FILING OF THE PETITION. IN CERTAIN SPECIFIC CIRCUMSTANCES, A PERSON HOLDING CLAIMS THAT AROSE AFTER THE FILING OF THE PETITION MAY COME WITHIN THE DEFINITION OF CREDITOR.

CHAPTER 1 ALSO STIPULATES WHO MAY BE A DEBTOR UNDER THE BANKRUPTCY CODE. 11 U.S.C. 109. INDIVIDUALS MAY BE DEBTORS UNDER CHAPTER 7 (11 U.S.C. 701- 766). UNDER CHAPTER 13 (11 U.S.C. 1301-1330), INDIVIDUALS MAY BE DEBTORS ONLY IF CERTAIN INCOME AND DEBT LIMITATIONS ARE MET. 11 U.S.C. 109(E). FN1

CHAPTER 3 PROVIDES GENERALLY FOR THE ADMINISTRATION OF BANKRUPTCY CASES, INCLUDING PROVISIONS ON THE COMMENCEMENT OF A CASE, AND THE APPOINTMENT AND POWERS OF TRUSTEES. 11 U.S.C. 301-366. THE PROVISIONS REGARDING THE BANKRUPTCY ESTATE, CREDITORS, CLAIMS, AND THE RIGHTS AND OBLIGATIONS OF DEBTORS ARE CONTAINED IN CHAPTER 5. 11 U.S.C. 501-543. AS A GENERAL RULE, THE PROVISIONS OF CHAPTERS 1, 3, AND 5 APPLY TO CHAPTERS 7 AND 13 BANKRUPTCIES, AS WELL AS TO OTHER BANKRUPTCIES PROVIDED FOR IN TITLE 11.

CONSUMER BANKRUPTCY PROCEEDINGS

THE BANKRUPTCY REFORM ACT PROVIDES FOR THE FILING OF FOUR DIFFERENT CHAPTER PROCEEDINGS. ONLY TWO OF THESE PROCEEDINGS RELATE TO CONSUMERS, CHAPTERS 7 AND 13. ALTHOUGH THE RELIEF OFFERED BY BOTH OF THESE CHAPTERS, I.E., THE DISCHARGE OF ALL ELIGIBLE DEBTS, IS ESSENTIALLY THE SAME, THE ASSETS THAT THE DEBTOR MUST SURRENDER IN ORDER TO OBTAIN THE DISCHARGE SUBSTANTIALLY DIFFER.

IN A CHAPTER 7 PROCEEDING, OFTEN REFERRED TO AS STRAIGHT BANKRUPTCY, THE DEBTOR'S ASSETS ARE DESIGNATED AS EITHER EXEMPT OR NON-EXEMPT. EXEMPT ASSETS FORM NO PART OF THE BANKRUPTCY ESTATE AND ARE NOT AVAILABLE FOR THE PAYMENT OF CREDITORS' CLAIMS. THE DEBTOR SURRENDERS ALL NON-EXEMPT PROPERTY TO THE TRUSTEE FOR LIQUIDATION AND DISTRIBUTION TO HIS CREDITORS. IN A CHAPTER 13 PROCEEDING, THE DEBTOR'S ASSETS USUALLY ARE NOT INVOLVED IN THE PAYMENT OF HIS DEBTS; HE RETAINS ALL HIS ASSETS, BOTH EXEMPT AND NON-EXEMPT. INSTEAD, CREDITORS ARE PAID OVER TIME OUT OF THE DEBTOR'S FUTURE EARNINGS, BASED ON A REPAYMENT PLAN WHICH IS SUBMITTED TO AND APPROVED BY THE BANKRUPTCY COURT. BOTH CHAPTERS 7 AND 13 PROVIDE FOR THE DEBTOR TO RECEIVE A "FRESH START" UPON COMPLETION OF THE PROCEEDING. THE ESSENTIAL DIFFERENCE BETWEEN THE TWO CHAPTERS IS THAT IN A CHAPTER 7 PROCEEDING THE CREDITORS MUST LOOK TO THE DEBTOR'S NON-EXEMPT ASSETS FOR PAYMENT WHILE IN A CHAPTER 13 PROCEEDING PAYMENTS TO CREDITORS ARE MADE FROM FUTURE INCOME.

THERE ARE FOUR WAYS TO COMMENCE A BANKRUPTCY CASE. FIRST, A VOLUNTARY CASE MAY BEGIN WITH THE FILING OF A PETITION BY AN INDIVIDUAL DEBTOR. SECOND, THE ACT NOW PROVIDES FOR VOLUNTARY PROCEEDINGS TO BEGIN WITH THE FILING OF ONE JOINT PETITION BY A HUSBAND AND WIFE. BECAUSE A MARRIED COUPLE WILL ORDINARILY OWN MOST OF THEIR PROPERTY JOINTLY AND ALSO BE JOINTLY LIABLE FOR THEIR DEBTS, COMPLETE RELIEF IN BANKRUPTCY WILL USUALLY REQUIRE THE PARTICIPATION OF BOTH PARTIES. UNDER PRIOR LAW, A SEPARATE PETITION WOULD BE FILED BY EACH SPOUSE AND THE CASES WOULD THEN BE CONSOLIDATED. THE CHANGE PERMITTING A JOINT PETITION WAS INTENDED TO FACILITATE CONSOLIDATION AND THUS REDUCE ADMINISTRATIVE COSTS.

THE THIRD METHOD FOR COMMENCING A BANKRUPTCY PROCEEDING IS BY INVOLUNTARY PETITION UNDER CHAPTER 7. AN INVOLUNTARY PETITION MAY BE FILED BY CREDITORS HAVING CLAIMS THAT, IN THE AGGREGATE, EXCEED $5,000. FINALLY, WHEN A BANKRUPTCY PROCEEDING IS UNDERWAY IN ANOTHER COUNTRY AND THE DEBTOR HAS ASSETS IN THIS COUNTRY, A FOREIGN REPRESENTATIVE MAY FILE A PETITION TO BRING A CASE ANCILLARY TO A FOREIGN PROCEEDING.

A CONSUMER BANKRUPTCY PROCEEDING BEGINS WITH THE FILING OF A PETITION. IN A VOLUNTARY CASE, THE PETITION IS USUALLY ACCOMPANIED BY A LIST OF ALL THE DEBTOR'S ASSETS AND LIABILITIES. IF THE LIST IS NOT FILED WITH THE PETITION IT MUST BE FILED WITHIN 10 DAYS. THIS INFORMATION IS PROVIDED ON FORM 6, "SCHEDULES OF ASSETS AND LIABILITIES." SECURED AND UNSECURED CREDITORS ARE LISTED SEPARATELY. A SECURED CLAIM IS ONE WHERE THE DEBTOR HAS GRANTED A SECURITY INTEREST TO THE CREDITOR UNDER ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE. ESSENTIALLY, A SECURITY INTEREST IS AN AGREEMENT BETWEEN THE DEBTOR AND THE SECURED PARTY THAT, IN RETURN FOR AN EXTENSION OF CREDIT TO THE DEBTOR, THE SECURED PARTY WILL HAVE A PREFERRED CLAIM UPON SPECIFIC PROPERTY OF THE DEBTOR. BY COMPLYING WITH CERTAIN FORMALITIES SPECIFIED IN ARTICLE 9, THE SECURED PARTY MAY "PERFECT" HIS SECURITY INTEREST, THEREBY IMPROVING HIS CLAIM TO THE COLLATERAL AGAINST OTHERS WITH COMPETING CLAIMS. IN ADDITION TO THE DISTINCTION BETWEEN SECURED AND UNSECURED CLAIMS, SCHEDULE A-1 OF FORM 6 ALSO PROVIDES THE LISTING OF OTHER CREDITORS HAVING PRIORITY.

SECTION 362(A) OF TITLE 11 PROVIDES THAT THE FILING OF THE PETITION IN A BANKRUPTCY CASE OPERATES AS AN AUTOMATIC STAY, BARRING VIRTUALLY ANY ACTION BY CREDITORS TO COLLECT DEBTS OWED BY THE DEBTOR. CREDITORS MAY NOT FILE OR CONTINUE A LAWSUIT, ENFORCE A JUDGMENT OR LIEN, OR TAKE ANY ACTION TO COLLECT A CLAIM THAT AROSE PRIOR TO THE COMMENCEMENT OF THE BANKRUPTCY CASE. A CREDITOR MAY, HOWEVER, PETITION THE BANKRUPTCY COURT FOR RELIEF FROM THE STAY. UNLESS THE CREDITOR IS SUCCESSFUL IN OBTAINING RELIEF, THE AUTOMATIC STAY OF ACTS AGAINST SPECIFIC PROPERTY OF THE ESTATE CONTINUES UNTIL THE PROPERTY IS NO LONGER PART OF THE BANKRUPTCY ESTATE. THE STAY OF ANY OTHER ACT CONTINUES UNTIL A DISCHARGE IS GRANTED, OR UNTIL THE CASE IS CLOSED OR DISMISSED, WHICHEVER OCCURS FIRST. THE COVERAGE OF THE AUTOMATIC STAY IS EXTREMELY BROAD; THERE ARE BUT A FEW TYPES OF ACTIONS, SUCH AS A CRIMINAL PROCEEDING, THAT ARE NOT AFFECTED. THE AUTOMATIC STAY RESULTING FROM THE FILING OF A BANKRUPTCY PETITION THUS CONSTITUTES AN EFFECTIVE METHOD FOR A DEBTOR TO DELAY LEGAL ACTIONS OTHERWISE AVAILABLE TO CREDITORS.

THE ACT DEALS WITH THE PROBLEM OF HARASSMENT OF CO-DEBTORS BY EXTENDING THE AUTOMATIC STAY TO ANY INDIVIDUAL WHO IS LIABLE ON THE DEBT. THE AUTOMATIC STAY NOW PROVIDES THAT AFTER THE ORDER FOR RELIEF, NO CREDITOR MAY TAKE ANY ACTION TO COLLECT ANY PART OF A CONSUMER DEBT FROM EITHER THE DEBTOR OR CO-DEBTOR. THIS IS INTENDED TO PREVENT CO DEBTORS FROM BEING COERCED TO MAKE PAYMENTS WHILE THE DEBTOR IS PAYING ON A LESS ONEROUS SCHEDULE.

THE FILING OF A VOLUNTARY PETITION UNDER EITHER CHAPTER 7 OR CHAPTER 13 CONSTITUTES AN "ORDER FOR RELIEF." PRIOR LAW PROVIDED THAT THE FILING OF THE PETITION CONSTITUTED AN "ADJUDICATION." THE CHANGE APPEARS TO BE NOMINAL RATHER THAN SUBSTANTIVE. WITHIN A REASONABLE TIME AFTER THE ORDER FOR RELIEF A MEETING OF CREDITORS MUST BE HELD. THE ACT DOES NOT SPECIFY THE BUSINESS TO BE CONDUCTED AT THE MEETING OF CREDITORS; THE DETAILS CONCERNING THE MEETING ARE LEFT TO THE RULES OF BANKRUPTCY PROCEDURE. THE ACT DOES PROVIDE, HOWEVER, THAT THE BANKRUPTCY JUDGE MAY NOT PRESIDE AT OR ATTEND ANY MEETING OF CREDITORS. THIS PROVISION IS CONSISTENT WITH THE ACT'S POLICY TO RELIEVE JUDGES OF ATTENDING TO MERELY ADMINISTRATIVE MATTERS. THE PROVISION ALSO IS INTENDED TO REMOVE ANY POSSIBILITY THAT THE JUDGE WOULD BE PREJUDICED BY WHAT HE MIGHT HAVE HEARD IN THE NON- JUDICIAL FORMAT OF THE MEETING OF CREDITORS.

THE ACT REQUIRES THE DEBTOR TO APPEAR AT THE MEETING OF CREDITORS AND TO SUBMIT TO EXAMINATION UNDER OATH. ANY CREDITOR OR TRUSTEE MAY EXAMINE THE DEBTOR. THE ACT DOES NOT PROVIDE FOR THE SCOPE OF THE EXAMINATION, BUT RULE 205(D) PROVIDES THAT THE EXAMINATION MAY RELATE ONLY TO ACTS, CONDUCT, OR PROPERTY OF THE DEBTOR OR TO ANY MATTER THAT MAY AFFECT THE BANKRUPTCY PROCEEDING. THE DEBTOR MAY BE COMPELLED TO TESTIFY EVEN THOUGH HE INVOKES THE FIFTH AMENDMENT PRIVILEDGE AGAINST SELF-INCRIMINATION. THE PRIVILEDGE IS INVOKED, THE U. S. ATTORNEY MAY REQUEST THAT AN IMMUNITY ORDER BE ISSUED. UPON ISSUANCE OF THE IMMUNITY ORDER, THE DEBTOR WILL BE COMPELLED TO TESTIFY, BUT ANY TESTIMONY THUS OBTAINED MAY NOT SUBSEQUENTLY BE USED AGAINST HIM TO OBTAIN A CRIMINAL CONVICTION. SHOULD THE DEBTOR PERSIST IN HIS REFUSAL TO TESTIFY DESPITE THE GRANT OF IMMUNITY HE WOULD BE DENIED A DISCHARGE IN BANKRUPTCY.

THE COMMENCEMENT OF A BANKRUPTCY CASE CREATES AN ESTATE CONSISTING OF THE DEBTOR'S EXEMPT AND NON-EXEMPT PROPERTY, WHEREVER LOCATED. 11 U.S.C. 541(A). FN2 THE NEW PROVISION IS EXTREMELY BROAD AND INCLUDES ALL INTERESTS THAT A DEBTOR MAY HAVE WHETHER REAL OR PERSONAL, TANGIBLE OR INTANGIBLE, LEGAL OR EQUITABLE. IT REACHES CAUSES OF ACTION AS WELL AS PROPERTY DEBTOR'S INTEREST IN PROPERTY OWNED AS TENANT BY THE ENTIRETY OR AS JOINT TENANT ALSO IS INCLUDED. FN3 BOTH TYPES OF PROPERTY INTERESTS ARE INCLUDED IN THE BANKRUPTCY ESTATE EVEN THOUGH THE CO-OWNER OF THE PROPERTY HAS NOT FILED A PETITION IN BANKRUPTCY. THE THE ESTATE ALSO INCLUDES THE PROCEEDS, RENTS, OR PROFITS DERIVED FROM ESTATE PROPERTY SUBSEQUENT TO THE COMMENCEMENT OF PROCEEDINGS.

A DEBTOR IS REQUIRED TO FILE A LIST OF CREDITORS AND, UNLESS THE COURT ORDERS OTHERWISE, A SCHEDULE OF ASSETS AND LIABILITIES AND A STATEMENT OF THE DEBTOR'S FINANCIAL AFFAIRS. 11 U.S.C. 521(1). UNDER RULE 108, THESE DOCUMENTS MUST BE FILED WITH THE PETITION IN A VOLUNTARY CASE OR WITHIN 10 DAYS AFTER AN ADJUDICATION OF BANKRUPTCY IN AN INVOLUNTARY CASE. THE RULES PROVIDE THAT A VOLUNTARY PETITION FILED WITHOUT THE REQUIRED DOCUMENTS SHOULD BE ACCEPTED NONETHELESS, PROVIDED IT IS ACCOMPANIED BY A LIST OF THE NAMES AND ADDRESSES OF CREDITORS AND THE REQUIRED DOCUMENTS ARE FILED WITHIN 10 DAYS. AN EXTENSION OF AN ADDITIONAL 10 DAYS MAY BE GRANTED BY THE COURT. ANY FURTHER EXTENSION MAY BE GRANTED ONLY UPON A SHOWING OF GOOD CAUSE. SUPPLEMENTAL SCHEDULES ARE REQUIRED IN THREE INSTANCES IF INTERESTS IN PROPERTY ARE ACQUIRED WITHIN 6 MONTHS AFTER COMMENCEMENT OF THE BANKRUPTCY CASE: (1) WHERE PROPERTY VESTS IN THE DEBTOR BY BEQUEST, DEVISE, OR INHERITANCE; (2) WHERE PROPERTY HELD BY THE DEBTOR AND HIS SPOUSE BECOMES TRANSFERRABLE BY THE DEBTOR ALONE; AND (3) WHERE A NONASSIGNABLE INTEREST BECOMES TRANSFERRABLE. RULE 109 REQUIRES ALL PETITIONS, SCHEDULES, STATEMENTS OF AFFAIRS, AND AMENDMENTS TO ANY OF THESE DOCUMENTS TO BE VERIFIED. VERIFICATION SIMPLY MEANS AN AFFIRMATION MADE UNDER OATH THAT THE STATEMENTS CONTAINED IN THE DOCUMENT ARE TRUE. THE REAL TEETH IN REQUIRING THE DEBTOR TO REPORT TRUTHFULLY ALL HIS ASSETS AND LIABILITIES IS PROVIDED BY 18 U.S.C. 152, WHICH PROVIDES THAT IT IS A CRIME TO KNOWINGLY AND FRAUDULENTLY CONCEAL ANY PROPERTY OF THE BANKRUPTCY ESTATE FROM THE TRUSTEE, OTHER OFFICERS OF THE COURT OR CREDITORS. ALSO IS A CRIME TO KNOWINGLY AND FRAUDULENTLY MAKE A FALSE OATH OR ACCOUNT IN RELATION TO A BANKRUPTCY PROCEEDING. A FURTHER SANCTION DESIGNED TO ENCOURAGE COMPLETE REPORTING OF ASSETS AND LIABILITIES IS THAT ANY DEBT NOT LISTED IN THE REQUIRED SCHEDULES IS NOT SUBJECT TO DISCHARGE.

EXEMPTIONS

UPON COMMENCEMENT OF A BANKRUPTCY CASE, ALL PROPERTY OF THE DEBTOR BECOMES PART OF THE BANKRUPTCY ESTATE AND IS SUBJECT TO THE CONTROL OF THE TRUSTEE, UNLESS EXEMPTED. EXEMPTIONS WERE CONTROLLED ENTIRELY BY STATE LAW PRIOR TO ENACTMENT OF THE BANKRUPTCY REFORM ACT. ONE OF THE MOST SIGNIFICANT DEVELOPMENTS UNDER THE ACT IS THE CHOICE GIVEN DEBTORS IN DETERMINING WHAT PROPERTY WILL BE EXEMPTED.

THE DEBTOR NOW MAY CHOOSE EITHER OF TWO SETS OF EXEMPTIONS. UNDER SECTION 522(B)(1), THE DEBTOR MAY CHOOSE THE EXEMPTIONS PROVIDED FOR IN SECTION 522(D). THESE ARE COMMONLY REFERRED TO AS THE "FEDERAL EXEMPTIONS" AND ARE DISCUSSED MORE FULLY BELOW. THE DEBTOR MAY CHOOSE THE FEDERAL EXEMPTIONS UNLESS THE STATE OF HIS DOMICILE HAS PASSED A LAW SPECIFICALLY PROHIBITING THE ELECTION OF THE FEDERAL EXEMPTIONS. THIS PROVISION ALLOWING THE STATES TO "OPT OUT" OF THE FEDERAL EXEMPTIONS REPRESENTS A LEGISLATIVE COMPROMISE BETWEEN THOSE FAVORING A UNIFORM EXEMPTION SCHEME NATIONWIDE AND THOSE WHO WANTED TO PRESERVE THE OLD SYSTEM WHICH DEFERRED SUBSTANTIALLY TO STATE LAW.

THE OTHER EXEMPTION SCHEME THAT THE DEBTOR MAY CHOOSE IS PROVIDED FOR IN SECTION 522(B)(2). UNDER THIS SECTION, THE DEBTOR MAY EXEMPT:

- PROPERTY THAT IS EXEMPTED BY THE LAW OF THE STATE OF HIS DOMICILE;

- PROPERTY THAT IS EXEMPT UNDER OTHER FEDERAL LAW, SUCH AS SOCIAL SECURITY PAYMENTS, VETERANS BENEFITS, AND WAGES OF FISHERMEN, SEAMEN AND APPRENTICES;

- AN INTEREST IN PROPERTY AS A TENANT BY THE ENTIRETY OR AS A JOINT TENANT TO THE EXTENT THAT SUCH INTEREST IS EXEMPT FROM PROCESS UNDER APPLICABLE NONBANKRUPTCY LAW. FOR EXAMPLE, TENANCY BY THE ENTIRETIES PROPERTY IS EXEMPT FROM PROCESS ISSUED ON BEHALF OF A CREDITOR OF ONLY ONE OF THE TENANTS.

ONCE PROPERTY IS EXEMPTED, IT IS INSULATED FROM ALL CLAIMS THAT AROSE PRIOR TO THE FILING OF THE PETITION, EXCEPT CLAIMS THAT ARE NOT SUBJECT TO DISCHARGE, SUCH AS TAXES, ALIMONY, MAINTENANCE, AND SUPPORT. 11 U.S.C. 523(A)(1)-(9).

IN GENERAL, THE FEDERAL EXEMPTIONS ARE FAR MORE GENEROUS TO THE DEBTOR THAN WERE THE EXEMPTIONS AVAILABLE UNDER PRIOR LAW. IF THE DEBTOR ELECTS TO CLAIM THE FEDERAL EXEMPTIONS, THE FOLLOWING ASSETS WOULD NOT BE SUBJECT TO THE CLAIMS OF CREDITORS:

1. THE DEBTOR'S AGGREGATE INTEREST, NOT EXCEEDING $7,500, IN REAL OR PERSONAL PROPERTY THAT IS USED AS A RESIDENCE, EITHER BY THE DEBTOR OR HIS DEPENDENT. THIS IS COMMONLY REFERRED TO AS THE HOMESTEAD EXEMPTION. USE OF THE TERM "RESIDENCE" IN THE ACT COULD CONCEIVABLY BE USED TO EXEMPT SUCH PROPERTY AS VACATION HOMES, TIMESHARING CONDOMINIUMS, OR MOBILE HOMES ON THE THEORY THAT THESE PROPERTIES ARE USED AS RESIDENCES. THERE IS NO EXPRESS LIMIT IN THE CODE ON THE NUMBER OF PROPERTIES THAT MAY BE EXEMPTED AS RESIDENCES. THE STAFF SHOULD LOOK FOR SUCH EXEMPTIONS BY COMPARING THE ADDRESS OF THE EXEMPTED PROPERTY WITH THE DEBTOR'S ADDRESS AS LISTED ON THE PETITION.

2. THE DEBTOR'S INTEREST, NOT EXCEEDING $1,200, IN ONE MOTOR VEHICLE.

3. THE DEBTOR'S INTEREST IN HOUSEHOLD FURNISHINGS AND GOODS, CLOTHES, APPLICANCES, BOOKS, ANIMALS, CROPS, OR MUSICAL INSTRUMENTS THAT ARE HELD PRIMARILY FOR PERSONAL, FAMILY OR HOUSEHOLD USE OF THE DEBTOR OR HIS DEPENDENT. THERE IS A $200 LIMIT ON THE VALUE OF THE DEBTOR'S INTEREST IN ANY PARTICULAR ITEM THAT MAY BE EXEMPTED, BUT NO LIMIT ON THE TOTAL OF THESE ITEMS. TO ILLUSTRATE, SUPPOSE THE DEBTOR OWNS A REFRIGERATOR THAT IS VALUED AT $500. THE DEBTOR MAY ONLY CLAIM $200 OF HIS INTEREST IN THE REFRIGERATOR AS EXEMPT. THE REMAINING $300 IN VALUE WOULD BE AVAILABLE TO THE TRUSTEE TO DISTRIBUTE AMONG THE CREDITORS. TO CONVERT THE $300 VALUE TO CASH IN ORDER TO MAKE DISTRIBUTION THE TRUSTEE COULD SELL THE REFRIGERATOR AND PAY THE DEBTOR $200 IN CASH FOR THE EXEMPTION, OR THE DEBTOR COULD PAY $300 IN CASH TO THE TRUSTEE AND KEEP THE REFRIGERATOR.

4. THE DEBTOR'S INTEREST IN JEWELRY, NOT EXCEEDING AN AGGREGATE VALUE OF $500, HELD FOR USE BY THE DEBTOR OR A DEPENDENT.

5. THE DEBTOR'S AGGREGATE INTEREST (NOT EXCEEDING $400 IN VALUE PLUS ANY UNUSED PORTION OF THE HOMESTEAD EXEMPTION) IN ANY PROPERTY INTEREST NOT ALREADY EXEMPTED. THIS EXEMPTION WAS INSERTED IN ORDER TO PROVIDE FAIRNESS TO NONHOMEOWNERS. THE EXEMPTION ALSO WOULD BE OF USE TO HOMEOWNERS WHOSE EQUITY IN THE HOME IS LESS THAN $7,500.

6. THE DEBTOR'S AGGREGATE INTEREST, NOT EXCEEDING $750 IN VALUE, IN PROFESSIONAL BOOKS OR OTHER TOOLS OF THE TRADE OF THE DEBTOR OR A DEPENDENT.

7. ANY UNMATURED LIFE INSURANCE CONTRACT OWNED BY THE DEBTOR, OTHER THAN A CREDIT LIFE INSURANCE CONTRACT.

8. UP TO $4,000 IN DIVIDEND, INTEREST, OR LOAN VALUE OF A LIFE INSURANCE CONTRACT.

9. PROFESSIONALLY PRESCRIBED HEALTH AIDS FOR THE DEBTOR OR A DEPENDENT.

10. THE DEBTOR'S RIGHT TO RECEIVE CERTAIN FUTURE PAYMENTS. THESE INCLUDE SOCIAL SECURITY, UNEMPLOYMENT, WELFARE, VETERAN'S, OR DISABILITY BENEFITS. ALSO EXEMPT ARE ALIMONY, SUPPORT, OR SEPARATE MAINTENANCE PAYMENTS TO THE EXTENT THE PAYMENTS ARE REASONABLY NECESSARY FOR THE SUPPORT OF THE DEBTOR OR A DEPENDENT. ALSO EXEMPTED ARE PAYMENTS UNDER SOME STOCK BONUS, PENSION, PROFIT-SHARING, OR ANNUITY PLANS UNLESS THE CONDITIONS PROVIDED IN 11 U.S.C. 522(D)(11)(E) EXIST.

11. THE DEBTOR'S RIGHT TO RECEIVE, OR PROPERTY THAT IS TRACEABLE TO THE FOLLOWING:

(A)VICTIM'S REPARATION AWARDS;

(B) PAYMENTS FOR THE WRONGFUL DEATH OF A PERSON UPON WHOM THE DEBTOR WAS DEPENDENT;

(C) PAYMENTS UNDER A LIFE INSURANCE POLICY ON THE LIFE OF A PERSON UPON WHOM THE DEBTOR WAS DEPENDENT;

(D) PAYMENTS IN COMPENSATION FOR LOSS OF FUTURE EARNINGS OF THE DEBTOR OR SOMEONE OF WHOM THE DEBTOR WAS A DEPENDENT.

(E) PAYMENTS, NOT EXCEEDING $7,500, ON ACCOUNT OF PERSONAL BODILY INJURY, NOT INCLUDING PAIN AND SUFFERING OR COMPENSATION FOR ACTUAL PECUNIARY LOSS, OF THE DEBTOR OR A PERSON OF WHOM THE DEBTOR IS A DEPENDENT.

THE EXEMPTIONS LISTED IN PARTS (B), (C), AND (E) ABOVE ARE LIMITED TO THE EXTENT THAT SUCH PAYMENTS ARE REASONABLY NECESSARY FOR THE SUPPORT OF THE DEBTOR OR ANY DEPENDENT OF THE DEBTOR.

AN INTERESTING TWIST TO THE FIVE EXEMPTIONS LISTED UNDER 11 U.S.C. 522(D)(11) IS THAT THE EXEMPTIONS EXTEND TO PROPERTY THAT IS TRACEABLE TO THE LISTED EXEMPTIONS. FOR EXAMPLE, THE VICTIM OF A CRIME WHO HAD RECEIVED AN AWARD UNDER A STATE REPARATION LAW AND WHO HAD USED THE AWARD TO PURCHASE AN ANNUITY COULD CLAIM THAT THE PAYMENTS WERE EXEMPT FROM THE BANKRUPTCY ESTATE. OTHER EXAMPLES CAN BE IMAGINED, HOWEVER, WHERE THE RESULT MAY NOT BE AS DEFENSIBLE. FOR EXAMPLE, SUPPOSE THE CRIME VICTIM HAD USED THE AWARD TO PURCHASE SOME LUXURY ITEM. BECAUSE THE LUXURY ITEM COULD BE TRACED TO THE AWARD, THE DEBTOR COULD PROBABLY CLAIM THAT IT IS EXEMPT.

OTHER ISSUES THAT MAY BE APPROPRIATE TO EXAMINE CONCERN THE TYPES OF PROPERTY HELD BY DEBTORS THAT HAVE BEEN EXEMPTED UNDER SECTION 522(D)(11), AND THE CRITERIA, IF ANY, USED TO DETERMINE WHAT CONSTITUTES "NECESSARY FOR THE SUPPORT OF THE DEBTOR OR ANY DEPENDENT OF THE DEBTOR" IN 11 U.S.C. 522(D)(11)(B)(C), AND (E). THERE MAY BE A POLICY REASON WHY SOME PROPERTY PURCHASED BY THE PAYMENTS IDENTIFIED IN SECTION 522(D)(11) SHOULD NOT BE EXEMPT. DEBTORS MAY BE LESS WILLING TO DECLARE BANKRUPTCY IF SUCH PROPERTY WERE NOT EXEMPTED FROM THE ESTATE.

OTHER PARTS OF THE EXEMPTION SECTION ARE ALSO QUITE FAVORABLE TO THE DEBTOR. FOR EXAMPLE, THE TERM "DEPENDENT" INCLUDES THE DEBTOR'S SPOUSE WHETHER OR NOT THE SPOUSE IS ACTUALLY DEPENDENT ON THE DEBTOR. IT MAY BE FRUITFUL TO EXAMINE THE IMPACT OF THIS PROVISION BY RECORDING THE INCIDENCE OF EXEMPTIONS CLAIMED FOR PROPERTY OWNED BY THE DEBTOR BUT ACTUALLY HELD FOR THE BENEFIT OF A SPOUSE.

THE PURPOSE OF ALLOWING THE DEBTOR TO EXEMPT CERTAIN PROPERTY FROM THE BANKRUPTCY ESTATE IS TO ENSURE THAT THE DEBTOR WILL HAVE SUFFICIENT ASSETS AT THE CONCLUSION OF THE PROCEEDING WITH WHICH TO BEGIN HIS FRESH START. HOUSE REPORT NO. 95-595, 95TH CONG., 2D SESS. 126, REPRINTED IN 1978 U.S.C. CONG. & AD. NEWS 5963, 6087. TESTIMONY BEFORE CONGRESS, HOWEVER, INDICATED THAT PRIOR TO THE BANKRUPTCY REFORM ACT IT WAS COMMON PRACTICE FOR LENDERS TO OBTAIN FROM THE DEBTOR A WAIVER OF MANY OF HIS RIGHTS, INCLUDING HIS RIGHT TO CLAIM THE STATUTORY EXEMPTIONS IN THE EVENT OF BANKRUPTCY. H.R.REP. AT 169. IN ORDER TO PROTECT THE DEBTOR'S EXEMPTIONS, AND THUS HIS FRESH START, SECTION 522(E) OF THE NEW ACT PROVIDES THAT A WAIVER OF EXEMPTIONS IN FAVOR OF AN UNSECURED CREDITOR IS UNENFORCEABLE. WAIVERS OF THE DEBTOR'S STATUTORY POWERS TO AVOID LIENS OR PRIOR TRANSFERS OR TO RECOVER PROPERTY ARE ALSO UNENFORCEABLE.

THE LEGISLATIVE HISTORY OF THE BANKRUPTCY REFORM ACT REVEALS THE CLEAR INTENT OF CONGRESS TO RELIEVE OVERBURDENED CONSUMER DEBTOR'S OF THE SUBSTANTIAL ECONOMIC HARDSHIPS RESULTING FROM ILLNESS, LOSS OF EMPLOYMENT, UNEXPECTED EMERGENCIES OR OVERREACHING CREDITORS. H.R.REP. AT 116. THIS END, MANY OF THE CHANGES WERE DESIGNED TO BE MORE FAVORABLE TO THE DEBTOR THAN PRIOR LAW HAD BEEN. AN INTERESTING QUESTION WITH RESPECT TO ALL OF THE CHANGES EFFECTED BY THE ACT IS THE EXTENT TO WHICH THE CHANGES ACTUALLY HAVE BEEN LESS THAN FAVORABLE TO THE DEBTOR BY MAKING CONSUMER CREDIT LESS READILY AVAILABLE.

CHAPTER 13

ONE OF THE PRIMARY OBJECTIVES OF THE BANKRUPTCY REFORM ACT OF 1978 WAS TO MAKE IT EASIER FOR A DEBTOR TO REPAY FROM FUTURE INCOME AT LEAST PART OF THE DEBT OWED TO HIS CREDITORS. CONGRESS WANTED TO INCREASE THE NUMBER OF DEBTORS WHO CHOOSE TO ATTEMPT REPAYMENT RATHER THAN OPTING FOR A CHAPTER 7 LIQUIDATION. H.R.REP. 95-595 AT 118. IT WAS THOUGHT THAT THIS WOULD INURE TO THE BENEFIT OF CREDITORS AS WELL, IN THAT THEY WOULD RECEIVE AT LEAST SOME PAYMENTS UNDER CHAPTER 13 WHEREAS THEY MIGHT RECEIVE NOTHING IF THE DEBTOR ELECTED TO PROCEED UNDER CHAPTER 7. THEREFORE, CONGRESS SOUGHT TO MAKE CHAPTER 13 MORE APPEALING TO THE DEBTOR. MANY COMMENTATORS BELIEVE CONGRESS WAS SUCCESSFUL IN MAKING CHAPTER 13 MORE ATTRACTIVE TO DEBTORS; SOME WOULD ARGUE THE EFFORT WAS TOO SUCCESSFUL. SEE E.G., HUGHES, "CHAPTER 13'S POTENTIAL FOR ABUSE," 58 N.C.L. REV. 831 (1980).

CHAPTER 13 IS ENTITLED "ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME." THE CHAPTER IS ONE OF THE TWO FORMS OF RELIEF AVAILABLE TO CONSUMER DEBTORS. AS AN ALTERNATIVE TO A STRAIGHT BANKRUPTCY UNDER CHAPTER 7, A DEBTOR WITH A REGULAR SOURCE OF FUTURE INCOME MAY PROPOSE A REPAYMENT PLAN THAT PROVIDES FOR CREDITORS TO RECEIVE A PERCENTAGE OF THEIR CLAIMS. THE PROPOSED PERCENTAGE MAY NOT BE LESS THAN WHAT THE CREDITORS WOULD HAVE RECEIVED HAD THE DEBTOR PROCEEDED UNDER CHAPTER 7. THE MOST DISTINCTIVE FEATURE OF A CHAPTER 13 PROCEEDING IS THE DEDICATION OF FUTURE EARNINGS TO SATISFY THE CLAIMS OF CREDITORS. THIS IS A SIGNIFICANT DEPARTURE FROM THE REST OF BANKRUPTCY LAW UNDER WHICH FUTURE INCOME FORMS NO PART OF THE BANKRUPTCY ESTATE.

RELIEF UNDER CHAPTER 13 HAS SEVERAL JUSTIFICATIONS. FIRST, THE CREDITORS WILL RECEIVE AT LEAST AS MUCH, AND PERHAPS MORE, UNDER CHAPTER 13 AS UNDER CHAPTER 7. SECOND, BECAUSE THE DEBTOR IS ALLOWED TO KEEP HIS ASSETS, THE VALUE OF HIS "FRESH START" IS ENHANCED. THIRD, IN PROPOSING AND COMPLYING WITH A CHAPTER 13 PAYMENT PLAN, THE DEBTOR'S SELF-ESTEEM IS INCREASED.

REPAYMENT PLANS WERE PROVIDED FOR IN CHAPTER XIII OF THE BANKRUPTCY ACT. CONGRESS WAS CONCERNED THAT THE USE OF CHAPTER XIII WAS LIMITED AND VARIED WIDLEY THROUGHOUT THE UNITED STATES. THE REASON FOR ITS LIMITED USE WAS TRACED TO SEVERAL SOURCES. FIRST, PRIOR LAW PROVIDED NO PROTECTION TO CO- DEBTORS. ALTHOUGH CREDITORS WERE PROHIBITED FROM HARASSING A DEBTOR ONCE HE HAD FILED FOR BANKRUPTCY, THERE WAS NOTHING TO PREVENT CREDITORS FROM PERSISTING IN THEIR COLLECTION EFFORTS AGAINST A PARTY WHO MAY HAVE CO- SIGNED FOR THE DEBT. SECOND, DEALING WITH SECURED CREDITORS WAS DIFFICULT UNDER THE ACT. THIRD, A DEBTOR WHO CHOSE A PARTIAL REPAYMENT COMPOSITION PLAN WOULD BE BARRED FOR 6 YEARS FROM OBTAINING A SUBSEQUENT DISCHARGE IN BANKRUPTCY. BECAUSE THE BAR TO A SUBSEQUENT DISCHARGE WAS THE SAME IN A CHAPTER XIII PROCEEDING AS IN STRAIGHT BANKRUPTCY, DEBTORS SAW LITTLE ADVANTAGE TO ELECTING A COMPOSITION OF DEBTS OVER A STRAIGHT BANKRUPTCY. A CHAPTER 13 PROCEEDING PROVIDES THE CONSUMER DEBTOR WITH SEVERAL DISTINCT ADVANTAGES OVER A STRAIGHT BANKRUPTCY UNDER CHAPTER 7. FIRST, LIQUIDATION OF THE DEBTOR'S ASSETS IS AVOIDED. SECOND, A DISCHARGE IS AVAILABLE TO A CHAPTER 13 DEBTOR WHO COMPLETES A CONFIRMED PLAN EVEN THOUGH HE MIGHT BE INELIGIBLE FOR DISCHARGE UNDER CHAPTER 7. THERE ARE NINE SPECIFIC SITUATIONS IN WHICH A DEBTOR WILL NOT BE GRANTED A CHAPTER 7 DISCHARGE, 11 U.S.C. 727(A). THEY ARE NOT APPLICABLE TO A CHAPTER 13 DISCHARGE. MIGHT BE WORTHWHILE TO EXAMINE CHAPTER 13 CASES TO DETERMINE THE EXTENT TO WHICH DISCHARGES ARE BEING GRANTED TO CHAPTER 13 DEBTORS WHO WOULD NOT BE ELIGIBLE FOR DISCHARGE UNDER CHAPTER 7. THIRD, MANY OF THE DEBTS THAT ARE NOT DISCHARGEABLE UNDER CHAPTER 7 ARE SUBJECT TO DISCHARGE UNDER CHAPTER 13. SECTION 523(A) LISTS NINE SPECIFIC TYPES OF DEBTS THAT ARE NOT DISCHARGED IN A CHAPTER 7 PROCEEDING. IN A CHAPTER 13 PROCEEDING, HOWEVER, IF THE DEBTOR COMPLETES ALL OF THE PAYMENTS UNDER THE PLAN HE IS ENTITLED TO A DISCHARGE OF ALL OF THE DEBTS PROVIDED FOR BY THE PLAN, WITH ONLY TWO EXCEPTIONS. THE AUDIT STAFF MAY WANT TO DETERMINE THE EXTENT TO WHICH DEBTS ARE BEING DISCHARGED UNDER CHAPTER 13 THAT WOULD NOT BE ELIGIBLE FOR DISCHARGE UNDER CHAPTER 7. FINALLY, A DEBTOR WHO PROCEEDS UNDER CHAPTER 13 MAY AVOID THE SOCIAL STIGMA OFTEN ASSOCIATED WITH BANKRUPTCY AND USUALLY EMERGES FROM THE PROCEEDING WITH A FAR BETTER CREDIT STANDING THAN WOULD BE THE CASE IN CHAPTER 7.

UNDER PRIOR BANKRUPTCY LAW, A REPAYMENT PLAN COULD BE CONFIRMED ONLY IF A MAJORITY OF THE UNSECURED CREDITORS ASSENTED. THE ACT HAS ELIMINATED THE NEED FOR CREDITOR APPROVAL AND PROVIDES ONLY THAT THE CHAPTER 13 PLAN MUST PROVIDE FOR UNSECURED CREDITORS TO RECEIVE NO LESS THAN WHAT WOULD BE RECEIVED IF THE ESTATE OF THE DEBTOR WERE LIQUIDATED UNDER CHAPTER 7. CASES CAN BE IMAGINED WHERE UNSECURED CREDITORS WOULD RECEIVE NOTHING UNDER A CHAPTER 7 LIQUIDATION. DOES THIS MEAN THAT A CHAPTER 13 PLAN THAT PROVIDED FOR UNSECURED CREDITORS TO RECEIVE NOTHING SHOULD BE APPROVED? THIS IS STILL AN OPEN QUESTION. THE ISSUE IS NOT ADDRESSED IN THE LEGISLATIVE HISTORY. SOME BANKRUPTCY COURTS HAVE APPROVED REPAYMENT PLANS THAT CALL FOR UNSECURED CREDITORS TO RECEIVE ONLY NOMINAL SUMS OR EVEN NOTHING. THE MAJORITY OF COURTS, HOWEVER, HAVE IMPOSED A GOOD FAITH REQUIREMENT, APPROVING ONLY THOSE PLANS IN WHICH IT APPEARS THE DEBTOR HAS MADE A GOOD FAITH EFFORT TO SATISFY UNSECURED CREDITORS. IT MAY BE USEFUL TO DETERMINE THE PERCENTAGE OF UNSECURED DEBT THAT IS OFFERED FOR REPAYMENT IN EACH CHAPTER 13 CASE.

THE MOST LIKELY CLASS OF DEBTORS TO PROCEED UNDER CHAPTER 13 RATHER THAN CHAPTER 7 ARE THOSE WITH SUBSTANTIAL NON-EXEMPT ASSETS. THIS PROBABLY WILL OCCUR IN THOSE STATES THAT HAVE OPTED TO DENY ITS DOMICILLIARIES THE BENEFIT OF THE MORE GENEROUS FEDERAL EXEMPTIONS, THUS MAKING MORE OF THE DEBTOR'S ASSETS AVAILABLE FOR DISTRIBUTION TO CREDITORS.

RULES

IN ORDER TO COMPREHEND FULLY THE OPERATION OF THE BANKRUPTCY COURT SYSTEM, IT IS NECESSARY TO REFER NOT ONLY TO THE RELEVANT STATUTORY PROVISIONS BUT ALSO TO THE RULES OF PROCEDURE. THE RULES OF BANKRUPTCY PROCEDURE, FIRST PROMULGATED IN 1973, PRESCRIBE THE FORMS OF PROCESS AND PLEADINGS, SET THE TIME FRAMES WITHIN WHICH CERTAIN ACTIONS MUST BE TAKEN, AND PROVIDE GENERALLY FOR THOSE PROCEDURAL MATTERS ON WHICH THE ACT IS SILENT. THE NEW ACT DID NOT MAKE ANY CHANGES IN THE BANKRUPTCY RULES NOR DID IT PRESCRIBE A NEW SET OF RULES. RATHER, THE ACT PROVIDES THAT THE EXISTING BANKRUPTCY RULES SHALL APPLY TO CASES BROUGHT UNDER THE ACT TO THE EXTENT THAT SUCH RULES ARE NOT INCONSISTENT WITH THE ACT. THEREFORE, EXCEPT WHEN INCONSISTENT WITH THE ACT, THE EXISTING RULES WILL CONTINUE TO APPLY UNTIL SUCH TIME AS NEW RULES ARE PROMULGATED.

THE RATHER EXTENSIVE CHANGES MADE BY THE BANKRUPTCY REFORM ACT NECESSARILY WILL REQUIRE CONFORMING CHANGES TO THE RULES OF BANKRUPTCY PROCEDURE. THIS PROCESS WILL TAKE CONSIDERABLE TIME; AS OF NOVEMBER, 1981, A NEW SET OF RULES HAD NOT YET BEEN PROMULGATED. THE ADVISORY COMMITTEE ON BANKRUPTCY RULES OF THE JUDICIAL CONFERENCE OF THE UNITED STATES HAS PUBLISHED INTERIM BANKRUPTCY RULES. THESE RULES HAVE NOT BEEN APPROVED BY EITHER CONGRESS OR THE SUPREME COURT AND, THEREFORE, ARE NOT BINDING UPON BANKRUPTCY COURTS UNLESS THEY HAVE BEEN ADOPTED AS LOCAL RULES IN THE INDIVIDUAL DISTRICTS. THE RULES ARE INTENDED TO SERVE AS GUIDELINES TO THE BENCH AND BAR IN TWO AREAS: (1) IN APPLYING EXISTING BANKRUPTCY RULES WHERE APPROPRIATE, AND (2) IN FILLING IN THE GAPS IN THE EXISTING RULES CREATED BY THE NEW ACT.

TRUSTEES

ONE OF THE MAJOR PROBLEMS THAT EXISTED UNDER THE OLD BANKRUPTCY LAW WAS THAT THE BANKRUPTCY JUDGE WAS FORCED TO TAKE AN ACTIVE ROLE IN THE SUPERVISION AND ADMINISTRATION OF THE CASE. NOT ONLY DID THIS CREATE SIGNIFICANT TIME PRESSURES FOR THE JUDGE BUT, MOREOVER, HIS JUDICIAL OBJECTIVITY WAS INEVITABLY COMPROMISED WHEN FACTS WERE PRESENTED TO HIM IN HIS SUPERVISORY CAPACITY THAT WOULD BE INADMISSIBLE IN COURT. THE NEW ACT ATTEMPS TO SOLVE THIS PROBLEM BY SEPARATING THE SUPERVISORY AND ADMINISTRATIVE FUNCTIONS FROM THE JUDICIAL. THE NONJUDICIAL FUNCTIONS HAVE BEEN TRANSFERRED TO THE TRUSTEE OR, IN CERTAIN PILOT DISTRICTS, TO THE U. S. TRUSTEE.

THE NEW ACT ESTABLISHES A TRIAL PILOT PROGRAM OF UNITED STATES TRUSTEES. THE 5-YEAR PILOT PROGRAM WILL BE CONDUCTED BY THE DEPARTMENT OF JUSTICE UNDER THE SUPERVISION OF A SPECIAL ASSISTANT ATTORNEY GENERAL. AT THE END OF THE PROGRAM, CONGRESS WILL DECIDE WHETHER TO IMPLEMENT FULLY OR TERMINATE THE PILOT PROGRAM. TEN PILOT PROGRAMS HAVE BEEN ESTABLISHED COVERING 14 JUDICIAL DISTRICTS.

THE ATTORNEY GENERAL IS REQUIRED BY THE ACT TO APPOINT A U. S. TRUSTEE FOR EACH PILOT PROGRAM. THE TERM OF APPOINTMENT IS FOR 7 YEARS AND THE U. S. TRUSTEE MAY BE REMOVED ONLY FOR CAUSE. THE TERM OF OFFICE AND RESTRICTION ON REMOVAL ARE INTENDED TO INSULATE THE U. S. TRUSTEE FROM POLITICAL INFLUENCE.

THE U. S. TRUSTEE WILL BE RESPONSIBLE FOR ESTABLISHING AND SUPERVISING A PANEL OF PRIVATE TRUSTEES WHO WILL SERVE IN CHAPTER 7 LIQUIDATION CASES. IN ADDITION, THE U. S. TRUSTEE WILL PERFORM THE DUTIES OF A TRUSTEE IN THOSE CASES FOR WHICH A PRIVATE TRUSTEE CANNOT BE OBTAINED.

FN1 FIRST, THE DEBTOR MUST BE AN "INDIVIDUAL WITH REGULAR INCOME." ALTHOUGH THE CODE DEFINES "INDIVIDUAL WITH A REGULAR INCOME," 11 U.S.C. 101(24), THE DEFINITION IS NOT PARTICULARLY HELPFUL. IT MERELY STATES THAT AN INDIVIDUAL WITH REGULAR INCOME IS ONE WHOSE INCOME IS SUFFICIENTLY STABLE AND REGULAR TO ENABLE HIM TO MAKE PAYMENTS UNDER A CHAPTER 13 PLAN. STOCK BROKERS AND COMMODITY BROKERS ARE SPECIFICALLY EXCLUDED FROM THIS DEFINITION. SECOND, THE INDIVIDUAL MUST HAVE UNSECURED DEBTS TOTALLING LESS THAN $100,000 AND SECURED DEBTS TOTALLING LESS THAN $350,000. THE SAME DOLLAR LIMITS APPLY TO INDIVIDUAL DEBTORS AND TO MARRIED DEBTORS WHO ELECT TO FILE A JOINT PETITION 11 U.S.C. 109(E).

FN2 THE CREATION OF AN ESTATE UPON THE COMMENCEMENT OF A BANKRUPTCY CASE APPLIES BOTH TO CHAPTER 7 AND TO CHAPTER 13. SEE 11 U.S.C. 103(A). IN A CHAPTER 13 CASE, HOWEVER, PROPERTY OF ESTATE INCLUDES NOT ONLY THE PROPERTY SPECIFIED IN SECTION 541 BUT ALSO PROPERTY THAT THE DEBTOR ACQUIRES AFTER THE COMMENCEMENT OF THE CASE AS WELL AS EARNINGS FROM SERVICES PERFORMED BY THE DEBTOR AFTER THE COMMENCEMENT OF THE CASE. U.S.C. 1306(A). ALTHOUGH THE PRINCIPAL FEATURE OF A CHAPTER 13 CASE IS THAT PAYMENTS TO CREDITORS ARE MADE FROM FUTURE EARNINGS RATHER THAN NON- EXEMPT ASSETS, SECTION 1322(B)(8) PROVIDES THAT A CHAPTER 13 PLAN ALSO MAY PROVIDE FOR THE PAYMENT OF CLAIMS FROM PROPERTY OF THE ESTATE.

FN3 BOTH TENANCY BY THE ENTIRETY AND JOINT TENANCY ARE FORMS OF CONCURRENT OWNERSHIP OF PROPERTY. THE ESSENTIAL DIFFERENCE BETWEEN THEM IS THAT A TENANCY BY THE ENTIRETY MAY EXIST ONLY BETWEEN SPOUSES. IN BOTH FORMS OF CONCURRENT OWNERSHIP EACH OWNS AN INDIVIDUAL FRACTIONAL INTEREST IN THE ENTIRE PROPERTY. THE LEGAL CONSEQUENCES OF THE FORM UNDER WHICH ANY PROPERTY IS HELD IS CONTROLLED BY STATE LAW.