Consumer Bankruptcy Bootcamp

CLE Credit: 1.00 CLE Sponsor: KBA Bankruptcy Law Section

Compiled and Edited by: The Kentucky Bar Association

Office of Continuing Legal Education for

Kentucky Bar Association 2021 Kentucky Law Update On Demand

© 2021 All Rights Reserved Published and Printed by:

The Kentucky Bar Association, July 2021 Editor’s Note: The materials included in the following Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered as of the original publication date. No representation or warranty is made concerning the application of legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how a particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefor. Attorneys using these materials, or information otherwise conveyed during these programs, in dealing with a specific legal matter have a duty to research the original and current sources of authority. In addition, opinions expressed by the authors and program presenters in these materials do not reflect the opinions of the Kentucky Bar Association, its Board of Governors, Sections, or Committees.

i

FOR YOUR INFORMATION … The Kentucky Law Update: Continuing Legal Education for All Kentucky Lawyers The Supreme Court of Kentucky established the Kentucky Law Update (“KLU”) Program as an element of the minimum continuing legal education system adopted by Kentucky attorneys in 1984. Per Supreme Court Order 2021-26, the 2021 Kentucky Law Update program will be presented as an on demand program, available for free remotely to all Kentucky Bar Association members from September 1 through December 31, 2021. This program offers every Kentucky attorney the opportunity to meet the 12.0 CLE credit requirement, including the 2.0

ethics credit requirement – at your home/office and at no cost Judges can also earn continuing judicial education credits at the Kentucky Law Update. About the Handbooks and Presentations Handbook materials are the result of the combined efforts of numerous dedicated professionals from around Kentucky and elsewhere. The KBA gratefully acknowledges the following individuals who graciously contributed to this publication: Stephen Barnes Michael S. Fore James W. Lyons Nolia G. Batey Sheldon G. Gilman Libby Mills Ruth H. Baxter EmaLeigh C. Haines Susan Montalvo-Gesser Sonja M. Blackburn Jane H. Herrick Claire E. Parsons Thomas L. Canary, Jr. P. Yvette Hourigan Mary Ellis Patton Caroline J. Carter Andrea R. Hunt Lori J. Reed Mary-Michelle Coleman-Walsh Judge Paul Isaacs B. Scott West Mary E. Cutter Guion L. Johnstone C. Laurance Woods III David Ehsan Shelly Ann Kamei

Special Acknowledgments

Special thanks to the following KBA Sections, Committees and other organizations whose participation and assistance with the 2021 Kentucky Law Update programs have been invaluable:

KBA Animal Law Section Kentucky Bar Foundation KBA Bankruptcy Law Section Kentucky Court of Appeals KBA Criminal Law Section Kentucky Lawyer Assistance Program KBA Elder Law Section Lawyers Mutual of Kentucky KBA Ethics Committee Legislative Research Commission KBA Immigration & Nationality Law Section Supreme Court of Kentucky KBA Office of Bar Counsel Volunteers of America Mid-States Kentucky Administrative Office of the Courts

Presentations are also made on a voluntary basis. To the individuals who volunteer in this capacity, special gratitude is owed. Individuals contributing to this program

ii

are contributing to the professional development of all members of the Kentucky Bar Association. We wish to express our gratitude in advance to these individuals. A special thank you to all of the organizations, authors, presenters, moderators and other 2021 Kentucky Law Update program volunteers will appear in the January 2022 issue of the Bench & Bar. CLE and Ethics Credit

Completing all sessions qualifies attorneys for 18.00 CLE credits, including up to 6.00 ethics credits. One credit is awarded for each 60 minutes of actual instruction as noted on the agenda provided on the KLU webpage. The Kentucky Bar Association 2021 Kentucky Law Update is an accredited CLE activity in numerous other jurisdictions. Credit categories and credit calculations vary from state-to-state. All out of state information is available on the KLU webpage. Please direct all inquiries regarding accreditation in other states to Terri Marksbury at tmarksbury@kybar.org.

Kentucky Judges, don't forget you can claim CJE credit for attending this program.

REMEMBER Reporting attendance credits is now online. Visit the Kentucky Bar Association website. The activity number is listed on the KLU webpage and must be used to report credits using the Member CLE Portal. CLE credits should be totaled and reported only one time after you complete all desired on demand programming.

Evaluations

The 2021 Kentucky Law Update is your program and your input is valued and needed. PLEASE take a few minutes to complete the evaluation questionnaire upon completion of all on demand programming. The evaluation is available online here. We appreciate your assistance in improving this service.

iii

Kentucky Bar Association 2021-2022 Board of Governors

J. D. Meyer Amy D. Cubbage W. Fletcher Schrock Thomas N. Kerrick President President-Elect Vice President Immediate Past President

Owensboro Frankfort Paducah Bowling Green

Amelia M. Adams Lexington

Douglas C. Benge London

Rhonda Jennings Blackburn Pikeville

Allison I. Connelly Lexington

Matthew P. Cook Bowling Green

Jennifer M. Gatherwright Crescent Springs

William M. “Mitch” Hall, Jr. Ashland

Todd V. McMurtry Ft. Mitchell

Susan Montalvo-Gesser Owensboro

Susan D. Phillips Louisville

James M. Ridings London

James A. Sigler Paducah

Van F. Sims Paducah

J. Tanner Watkins Louisville

Megan P. Keane Chair, Young Lawyers Division

2021-2022 Continuing Legal Education Commission

Carrie Leigh Ovey-Wiggins Frank Hampton Moore III Graham C. Trimble First Supreme Court District Second Supreme Court District Third Supreme Court District

Eric M. Weihe LaToi D. Mayo, Chair Ryan M. Beck

Fourth Supreme Court District Fifth Supreme Court District Sixth Supreme Court District

Leigh Gross Latherow Justice Robert B. Conley Mary E. Cutter Seventh Supreme Court District Supreme Court Liaison Director for CLE

Kentucky Bar Association CLE Staff

John D. Meyers Mary E. Cutter Lori J. Reed Executive Director Director for CLE CLE Attorney Editor & Section/Division

Program Coordinator Section/Division Liaison

Caroline J. Carter EmaLeigh C. Haines Sonja M. Blackburn

Lead Program Coordinator & Manager

Marketing and Communications Specialist KBA Communications Department

Program & Publications Coordinator New Lawyer Program

Coleen Kilgore Terri Marksbury Clifford D. Timberlake

Attorney Compliance Coordinator CLE Regulatory Coordinator Accreditation Coordinator

1

CONSUMER BANKRUPTCY BOOTCAMP Stephen Barnes, Thomas L. Canary, Jr., and James W. Lyon

I. COVID-19 RELATED ACCOMMODATIONS1

In summary, because of all the free money from the government and restrictions on creditors, bankruptcy filings are actually way down (so far)!

A. FHFA, HUD, USDA and VA Extend Foreclosure and Eviction Moratoriums

through June 30, 2021

On February 25, 2021, the Federal Housing Finance Agency (FHFA) announced the extension of the Fannie Mae and Freddie Mac moratoriums on single-family foreclosures and real estate owned (REO) evictions from March 31, 2021 to June 30, 2021. Fannie Mae’s Lender Letter 2021-02, updated on February 25, 2021, contains its COVID-19 related servicing policies including the extension of the single-family foreclosure moratorium and notes that the moratorium does not apply to vacant or abandoned homes. FHFA also extended the COVID-19 forbearance period for borrowers with a mortgage backed by Fannie Mae or Freddie Mac by three months. This additional three-month extension allows borrowers who were in a COVID-19 forbearance plan as of February 28, 2021 to be in forbearance for up to 18 months.

On February 16, 2021, the U.S. Department of Housing and Urban Development (HUD) also extended the Federal Housing Administration’s (FHA) foreclosure and eviction moratoriums and the initial start date for COVID-19 Forbearance to June 30, 2021. As set forth in Mortgagee Letter 2021-05, the extension of the foreclosure and eviction moratoriums applies to all FHA-insured single-family mortgages, excluding legally vacant or abandoned properties. Deadlines for the first legal action and reasonable diligence timelines are extended by 180 days from the date of expiration of the moratoriums. Additionally, the timeframes for borrowers to request the start of a COVID-19 forbearance and Home Equity Conversion Mortgage (“HECM” or reverse mortgage) extension period have been extended through June 30, 2021, and borrowers who entered into a COVID-19 forbearance or HECM extension period on or before June 30, 2020 may receive up to two additional three-month COVID-19 forbearance periods or HECM extension periods. On February 16, 2021, the U.S. Department of Agriculture (USDA) similarly announced an extension of eviction and foreclosure moratoriums on USDA Single Family Housing Direct and Guaranteed loans through June 30, 2021 in Release No. 0026.21. In Circular 26-21-5 dated February 16, 2021, the U.S. Department of Veterans Affairs (VA) extended the eviction and foreclosure moratoriums for properties secured by VA-guaranteed loans through June 30, 2021.

1 This section of the materials was prepared by Stephen Barnes.

2

Like HUD and USDA, the VA also extended loan forbearance opportunities in Circular 26-21-04 dated February 16, 2021.

B. CDC Extends Public Health Order to Temporarily Halt Evictions for

Qualifying Renters

In an Order signed on March 28, 2021, the Centers for Disease Control and Prevention (CDC) modified and further extended its public health order temporarily halting residential evictions through June 30, 2021 to mitigate the further spread of SARS-Cov-2, the virus that causes COVID-19. The CDC order, which was initially issued on September 4, 2020, protects residential tenants from eviction for nonpayment of rent if they provide a Declaration, under penalty of perjury, to their landlord. The Declaration requires the tenant to swear to certain facts about their income and ability to pay, including the following:

1. The individual either (i) received a stimulus check (Economic

Impact Payment) in 2020 or 2021; (ii) was not required to report any income to the IRS in 2020; or (iii) earned (or expects to earn) less than $99,000 as an individual or less than $198,000 as a joint tax return filer in 2020 or 2021;

2. The individual cannot pay their full rent or make a full housing

payment because their household income has gone down substantially, they have been laid off from work, their work hours or wages have been cut, or they have extraordinary out-of-pocket medical expenses, defined as 7.5 percent of their adjusted gross income for the year;

3. The individual has done their best to make timely partial payments

that are as close as possible to the full payment and to get government assistance in making their rent or housing payments;

4. If evicted, the individual would have no other available housing

options, so they would probably become homeless, have to move to a homeless shelter, or have to move in with others who live in close quarters; and

5. The individual understands that after signing the Declaration, (i)

unless they reach an agreement with their landlord, they are still responsible for rent, back rent, and any fees, penalties or interest under their lease; (ii) they must still follow the conditions of their lease; (iii) unless they come to an agreement with their landlord, if they fail to make their required payments they could be evicted when this temporary halt of evictions ends; and (iv) they can still be evicted for reasons other than not paying rent or not making a housing payment.

3

C. The CARES Act Amendment to the Fair Credit Reporting Act

On March 13, 2020, a national state of emergency was declared under the National Emergencies Act regarding the public health crisis created by COVID-19. As part of the federal government’s response, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. Among other provisions, the CARES Act amended the Fair Credit Reporting Act (“FCRA”) to require that when a furnisher of credit information makes an “accommodation” to a consumer affected by COVID-19, and the consumer satisfies the accommodation, the furnisher must report the consumer’s account as “current.” Specifically, the CARES Act added a new provision to the FCRA entitled “Reporting information during COVID-19 pandemic.” This new provision, located at 15 U.S.C. §1681-s(2)(a)(1)(F), states as follows:

(F) Reporting information during COVID-19 pandemic (i) Definitions In this subsection: (I) Accommodation The term “accommodation” includes an agreement to defer 1 or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or any other assistance or relief granted to a consumer who is affected by the coronavirus disease 2019 (COVID-19) pandemic during the covered period. (II) Covered period The term “covered period” means the period beginning on January 31, 2020 and ending on the later of— (aa) 120 days after March 27, 2020; or (bb) 120 days after the date on which the national emergency concerning the novel coronavirus disease (COVID-19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. §1601 et seq.) terminates. (ii) Reporting Except as provided in clause (iii), if a furnisher makes an accommodation with respect to 1 or more payments on a credit obligation or account of a consumer, and the consumer makes the payments or is not required to make 1 or more payments pursuant to the accommodation, the furnisher shall—

4

(I) report the credit obligation or account as current; or (II) if the credit obligation or account was delinquent before the accommodation— (aa) maintain the delinquent status during the period in which the accommodation is in effect; and (bb) if the consumer brings the credit obligation or account current during the period described in item (aa), report the credit obligation or account as current. (iii) Exception Clause (ii) shall not apply with respect to a credit obligation or account of a consumer that has been charged-off. 15 U.S.C. §1681-s(2)(a)(1)(F).

D. Economic Impact Payments (Stimulus Checks)

So far, the federal government has provided three rounds of direct relief payments to Americans during the various phases of the COVID-19 crisis. First, the CARES Act, which was signed into law on March 27, 2020, provided for direct payments of up to $1,200 per eligible individual ($2,400 for married couples filing jointly), plus an additional $500 per dependent child aged 16 and under. Congress approved another economic relief bill on December 27, 2020, which authorized a second round of stimulus check payments of up to $600 per person ($1,200 for married couples filing jointly), plus an additional $600 per qualifying child dependent (aged 16 and under). On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law which authorized a third round of payments of up to $1,400 per eligible individual ($2,800 for married couples filing jointly), plus an additional $1,400 per qualifying dependent (any age). For all three payments, the maximum payment amount was available for people with adjusted gross incomes of up to $75,000 for individuals and $150,000 for married couples and payments were phased out, or reduced, for taxpayers with adjusted gross income above those amounts.

E. Student Loans On March 20, 2020, the U.S. Department of Education (ED) office of Federal Student Aid began providing temporary relief on ED-owned federal student loans, including suspension of loan payments, stopped collections on defaulted loans, and a 0 percent interest rate. The CARES Act provided for these COVID-19 emergency relief measures to continue through September 30, 2020. These relief measures have been subsequently extended, most recently on January 20, 2021, through at least September 30, 2021. On March 30, 2021, the COVID-19 emergency relief measures were expanded to federal student loans made through the Federal Family Education Loan (FFEL) Program that are in default.

5

In April 2021, President Biden asked the U.S. Department of Education to provide a recommendation on whether he has the legal authority to enact student loan cancellation unilaterally by executive order.

F. Unemployment Insurance

The CARES Act provided states additional flexibility and funding to provide unemployment insurance to many workers affected by the COVID-19 pandemic, including those who would not ordinarily be eligible for benefits. However, due to the mass number of claims and other issues with the online application system, the Kentucky unemployment office has experienced backlogs and other issues. Delays in receiving unemployment payments could contribute to an increase in bankruptcy filings in the future.

G. Paycheck Protection Program

The CARES Act established the Paycheck Protection Program, which is a loan backed by the Small Business Administration that helps small businesses to keep their workers on payroll and hire back laid off employees during the COVID-19 pandemic. In addition to paying payroll costs, the funds can be used to pay mortgages, rent, and utilities.

H. CARES Act Bankruptcy Provisions

1. For cases under Subchapter V of Chapter 11, the CARES Act

temporarily raised the debt limit from $2,725,625.00 to $7,500,000.00 for one year – until March 27, 2021.

2. It also excluded certain COVID-19 aid payments from being

considered as income for bankruptcy purposes. 3. Finally, the CARES Act allowed for the modification of confirmed

Chapter 13 plans at the request of the debtor. Specifically, Chapter 13 debtors, whose plans were confirmed on or before March 27, 2020 and who are experiencing or have experienced a material financial hardship due to COVID-19, can extend their plans for up to seven years (84 months) from the date of the initial plan payment.

4. President Biden signed the COVID-19 Bankruptcy Relief Extension

Act of 2021 on March 27, 2021 which extended these provisions an additional year, i.e., until March 27, 2022.

I. Additional Relief

The Biden Administration, Congress, Governor Beshear, the Kentucky Legislature, or other federal/state agencies may extend these accommodations or take further action to give additional relief for those affected by COVID-19 going forward.

6

II. CREDITOR’S PERSPECTIVE2

A. The Automatic Stay, Generally

The Bankruptcy Code, 11 U.S.C. §362, clearly articulates the vital protections afforded a debtor in bankruptcy, specifically the automatic stay, which stops all collection efforts against the debtor during the pendency of the bankruptcy proceeding. This provision describes not only what the automatic stay covers, but also when it begins: “…a petition filed…operates as a stay applicable to all entities, of – …” Importantly, there is no stay until the Bankruptcy Petition is filed. The following are tools to use to determine if the bankruptcy has been filed:

1. Pacer – www.pacer.gov. 2. McVCIS – Multiple Court Voice Case Information System EDKY &

WDKY – (866) 222-8029: Say “Kentucky Eastern Bankruptcy” or “Kentucky Western Bankruptcy.”

3. Call the attorney. 4. Bankruptcy scrub – you should be doing already. 5. Call the Court – the clerk will ask you if you accessed Pacer or

called the VCIS.

The automatic stay covers basically everything that could affect the debtor or property of the estate/debtor. Certain actions, if taken against a debtor in a bankruptcy proceeding, may constitute a willful violation of the automatic stay and subject a creditor to sanctions under the Bankruptcy Code, 11 U.S.C. §362(k). A stay violation can be brought against the creditor or debt collector as an Adversary Proceeding. A violation of the discharge injunction is brought as a contempt proceeding since the creditor or debt collector is in violation of the court’s order of discharge.

B. Stay/Discharge Violations (or Avoiding the Seven Deadly Sins)

11 U.S.C. §362(a) lists Seven Deadly Sins3 (we don't proceed before the Tax Court so I am omitting §362(a)(8) and take literary liberties with the Good Book [Proverbs 6:16-19 and a longer list at Galatians 5:19-21]) that must be avoided at all costs after a petition is filed:

2 This section of the materials was prepared by Thomas L. Canary, Jr. 3 I would note these also are called “cardinal sins” but I do not want to offend my Louisville Cardinal brothers and sisters of the bench and bar.

7

(1) The commencement or continuation, including theissuance or employment of process, of a judicial,administrative, or other action or proceeding against thedebtor that was or could have been commenced before thecommencement of the case under this title, or to recover aclaim against the debtor that arose before thecommencement of the case under this title;

(2) The enforcement, against the debtor or against propertyof the estate, of a judgment obtained before thecommencement of the case under this title;

(3) Any act to obtain possession of property of the estate orof property from the estate or to exercise control overproperty of the estate;

(4) Any act to create, perfect, or enforce any lien againstproperty of the estate;

(5) Any act to create, perfect, or enforce against property ofthe debtor any lien to the extent that such lien secures aclaim that arose before the commencement of the caseunder this title;

(6) Any act to collect, assess, or recover a claim against thedebtor that arose before the commencement of the caseunder this title;

(7) The setoff of any debt owing to the debtor that arosebefore the commencement of the case under this titleagainst any claim against the debtor;

So how can a creditor commit one of the Seven Deadly Sins?

1. Allow a summons to remain open, active and be served once theylearn of the filing of a petition – [Sloth].

2. Issue a garnishment against real property owned by the debtorpost-petition [Greed].

3. Repossess a vehicle post-petition [Lust].

4. Perfect a lien on collateral post-petition [Envy].

5. Pursuing a personal judgment after a debt is discharged [Gluttony].

6. Issue a notice for post-judgment debtor exam (Civil Rule 69) post-petition [Anger/Wrath].

7. Setoff of money in an account against a debt owed to that financialinstitution, post-petition [Pride].

8

For a party to commit the sin (for it to be actionable) it must be “willful.” See, 11 U.S.C. §362(k):

(1) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.

(2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.

The standard for an action to be willful is pretty low. The stay is "willfully" violated "when the creditor knew of the stay and violated the stay by an intentional act." In re Sharon, 234 B.R. 676, 687 (6th Cir. B.A.P. 1999). Three elements must be proven:

(1) that a violation of the automatic stay occurred; (2) that the violation was committed willfully; and (3) that the violation injured the individual seeking damages....The allegation that the appellees were notified of the debtor's bankruptcy filing and nevertheless proceeded with foreclosure supports a finding of willfulness. See In re Skeen,4 248 B.R. at 317 ("The willfulness requirement refers to the deliberateness of the conduct and the knowledge of the bankruptcy filing, not to a specific intent to violate a court order."). Barclay v. Reimer & Lorber Co. LPA (In re Barclay), 337 B.R. 728, 2006 Bankr. LEXIS 110, 12-13 (B.A.P. 6th Cir. Feb. 1, 2006) [emphasis added]

Said differently, the creditor knew of the imposition of the automatic stay or discharge and took an act – period.

1. Absolution of a deadly sin.

Try as we might, we all err from time to time – it is human. Let’s next talk about the divine, that is, forgiveness. a. Encourage your consumer clients not to ignore demand

letters. b. As you are aware, debt collectors must send the consumer

a Validation Letter containing certain disclosures regarding their right to ask for validation of a debt [15 U.S.C. §1692g]. That validation period is 30 days, and most debt collectors will wait 33 days to account for mailing.

4 248 B.R. 312, 316 (Bankr. E.D. Tenn. 2000).

9

c. If your debtor client gets one of those, that is a pretty good indication that the debt collector is not aware of your client's bankruptcy. PLEASE tell them not to toss those in the trash. Either they should call the number on the letter, provide to the debt collector all the bankruptcy information including how to communicate with their counsel, or have you do it. The LAST thing a debt collector wants to do is violate the stay/discharge injunction and waste time on an account they cannot collect. Affording this opportunity for the consumer to advise the debt collector of the bankruptcy/dispute is one of the root purposes of sending the letter.

2. Conclusion.

In the immortal words of Rodney King: “Can't we all just get along?” If everyone is proactive in addressing a seeming violation of the stay or discharge injunction, the matter should be wrapped up quickly with little fuss or muss. On the creditor side, this includes the following:

a. Run a bankruptcy scrub before every critical juncture such

as the demand letter, complaint, motion for judgment, garnishments and other executions on the judgment.

b. If you find that a consumer has filed bankruptcy after you

have taken one of these critical steps, do what you can to undo that step as soon as possible.

c. Recall any outstanding service of process. d. Dismiss, without prejudice, any complaint filed post-petition. e. If the judgment was issued post-petition, make motion to set

it aside, pending discharge. f. If execution was issued post-petition, return any wages

earned post-petition and release garnishment lien(s). g. REMEMBER pre-petition judgment liens survive discharge

if not set aside.

h. Play nice and work with the other side – you never know when you may need a favor.

C. Notable Recent Cases for Creditors

1. Hunstein v. Preferred Collection and Management Services, Inc.,

994 F.3d 1341 (11th Cir. 2021).

a. Eleventh Circuit Court of Appeals decision on 4/21/2021.

10

b. Facts: Debt collector transmitted data about consumer’s debt (including name, outstanding balance, the fact that debt was from son’s medical treatment, and son’s name) to third party vendor who used such info to generate and send collection letter (“dunning letter”) to consumer.

c. Held: Debt collector’s transmittal of debtor’s personal

information to third party vendor for dunning letter violated FDCPA restriction on third party communications.

2. City of Chicago, Illinois v. Fulton, 141 S.Ct. 585 (2021).

a. SCOTUS case decided January 14, 2021; Opinion by

Justice Alito (all joined except Barrett who did not participate; Sotomayor filed concurring opinion).

b. Facts: City impounded vehicles for unpaid parking tickets.

Debtors then filed Chapter 13 bankruptcy petitions and requested City return vehicles. Lower courts held violated automatic stay.

c. Held: Merely retaining possession of estate property does

not violate the automatic stay.

The Court explained, “The language used in §362(a)(3) suggests that merely retaining possession of estate property does not violate the automatic stay. Under that provision, the filing of a bankruptcy petition operates as a “stay” of “any act” to “exercise control” over the property of the estate. Taken together, the most natural reading of these terms – “stay,” “act,” and “exercise control” – is that §362(a)(3) prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” City of Chicago, Illinois v. Fulton, 141 S. Ct. 585, 590 (2021).

d. This case stands for the proposition that retaining a car

repossessed pre-bankruptcy is not a stay violation. However, selling it or repossessing it after the bankruptcy petition is filed would be a violation.

D. Subchapter V Chapter 11 – Small Business Reorganization

The Small Business Reorganization Act of 2019 (the “SBRA”) was signed into law on August 23, 2019 and became effective on February 19, 2020. The SBRA created a new subchapter of Chapter 11 of the bankruptcy code, Subchapter V, to streamline Chapter 11 reorganization for small business debtors. Debtors must affirmatively elect to proceed under Subchapter V in their bankruptcy petitions.

11

Per 11 U.S.C. §1182, to be eligible an individual or business debtor must have debts less than $2,725,625.00; at least 50 percent of the debt must be from commercial/business activities of the debtor. The CARES Act raised the debt limit to $7,500,000.00 for one year, ending March 27, 2021. President Biden signed the COVID-19 Bankruptcy Relief Extension Act of 2021 on March 27, 2021 which extended the increased debt limit by one year, i.e., until March 27, 2022.

Subchapter V cases require the appointment of a Subchapter V trustee to supervise and monitor the case and the debtor and to “facilitate the development of a consensual plan of reorganization.” 11 U.S.C. §1183. Normally, the debtor remains in control of the operations and management of its business. Other key provisions of Subchapter V include:

1. Only the debtor may file a plan of reorganization and the debtor

must do so within 90 days. See 11 U.S.C. §1189. 2. The absolute priority rule does not apply. 3. NO creditors’ committee unless ordered by the court for cause –

See 11 U.S.C. §1102(a)(3). 4. NO quarterly U.S. Trustee fees. 5. NO disclosure statement required unless ordered by the court –

See 11 U.S.C. §1181(b). 6. The debtor can pay administrative expenses over the life of the

plan, (if the plan was approved pursuant to the cramdown provisions of §1191(b)) – See 11 U.S.C. §1191(e).

7. Allows attorneys or other professionals who are familiar with the

debtor in possession to continue representing the debtor so long as unpaid prepetition fees owed by the debtor are less than $10,000 – See 11 U.S.C. §1195.

8. Mortgage loans on the debtor’s principal residence CAN be

crammed down, but only if the new value received in connection with the loan was (1) NOT used primarily to acquire the real property, AND (2) used primarily in connection with the small business of the debtor – See 11 U.S.C. §1190(3).

12

III. DEBTOR’S PERSPECTIVE5

A. Bankruptcy Generally 1. Bankruptcy is provided for in the U.S. Constitution: “The Congress

shall have Power To...establish...uniform Laws on the subject of Bankruptcies throughout the United States....” Article I, Section 8, Clause 4.

2. Gives debtors a financial “fresh start.”

a. Automatic stay.

i. The Bankruptcy Code, 11 U.S.C. §362, clearly articulates the vital protections afforded a debtor in bankruptcy, specifically the automatic stay, which stops all collection efforts against the debtor during the pendency of the bankruptcy proceeding.

ii. Certain actions, if taken against a debtor in a

bankruptcy proceeding, may constitute a willful violation of the automatic stay and subject a creditor to sanctions under the Bankruptcy Code, 11 U.S.C. §362(k).

b. Bankruptcy discharge.

i. Effect of discharge (11 U.S.C. §524):

(a) Injunction against personal collection action

against the debtor – discharge of all prepetition debts against the debtor personally (unless reaffirmed).

(b) Security interests in debtor’s property remain

intact. (Some creditors wait until after bankruptcy case is closed to foreclose rather than filing for relief from stay.)

(c) No effect on post-petition debt.

ii. Non-dischargeable debt:

(a) Recent taxes. (b) Child support. (c) Student loans.

5 This section of the materials was prepared by Jim Lyon.

13

B. Two Types of Consumer Bankruptcy

1. Chapter 7 – Liquidation.

a. Bankruptcy is modeled after the probate estate system; just as “The Estate” is the owner of the decedent’s assets, “The Estate” is the owner of the bankrupt person’s assets in bankruptcy. Moreover, like in probate, a fiduciary is appointed to manage the estate; in bankruptcy the fiduciary of the estate is the trustee. Basically, the trustee takes control of the assets in the debtor’s estate, sells them, and makes distributions to creditors.

b. Assets are separated:

i. Secured property (items subject to liens). ii. Exempt property.

(a) Can’t take the shirt off people’s backs. (b) This is not a new idea: Deuteronomy 24:6

“Do not take a pair of millstones – not even the upper one – as security for a debt, because that would be taking a person’s livelihood as security.”

iii. Unencumbered, non-exempt property.

c. Trustee sells assets and distributes to creditors:

i. Priority claims (taxes, child support). ii. Unsecured non-priority claims (credit card, guaranty

of business debt, medical bills).

2. Chapter 7 eligibility.

a. Median income test.

Calculate debtor’s current monthly income and compare with state median.

i. §101(10A) defines “Current Monthly Income.” ii. Add up all sources of income within six months of

filing petition and divide by six.

Include any amount someone else paid on a regular basis for the household expenses of the debtor or debtor’s dependents.

14

iii. Multiply the current monthly income by 12 and

compare that number with the median income of the state where the debtor resides to determine whether the debtor is below-median-income or above-median-income.

Determine “Household Size” and adjust income according to the state median income tables.

iv. If the debtor’s current monthly income is below the

state median, the debtor can file Chapter 7.

b. Means test.

i. The United States Courts’ website includes a helpful explanation of the means test:

If the debtor's "current monthly income" is more than the state median, the Bankruptcy Code requires application of a "means test" to determine whether the Chapter 7 filing is presumptively abusive…. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 (with the debtor's consent) or will be dismissed. 11 U.S.C. §707(b)(1).

See United States Courts’ Website, Chapter 7 Bankruptcy Basics.6

ii. Pursuant to 11 U.S.C. §707(b)(2)(A)(i), “the court

shall presume abuse exists if the debtor's current monthly income [after deduction of certain allowed expenses], and multiplied by 60 is not less than the lesser of— (I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $8,175, whichever is greater; or (II) $13,650.” These dollar amounts were adjusted effective April 1, 2019 and are adjusted every three years. See 11 U.S.C. §104.

6 http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics.

15

Expenses (§707(b)(2)(A)(ii-iv)):

Section 707(b)(2)(A)(ii) uses the IRS’s National Standards (a sliding-scale approach) when determining what are permissible expenses.7

3. Chapter 13 – Reorganization.

a. Generally:

i. “Wage earner” bankruptcy.

ii. Debtor proposes a plan to repay creditors over time,

usually three to five years. iii. Debtor keeps unencumbered assets. iv. Debtor makes monthly payments of their

“disposable income” to the Chapter 13 Trustee, who distributes to creditors pursuant to repayment plan.

b. Chapter 13 Cramdown:

i. The debtor can include in the Plan a provision which

allows them to pay only the value of certain assets in full.

ii. This is most commonly used for old cars for which

significantly more money is owed than the vehicle is worth.

iii. So if a car is worth $10,000 but the debt is $20,000,

the debtor would only pay $10,000. The lien is “crammed down.”

iv. The debtor cannot do this for newly purchased cars

or for first mortgages on their home. C. Helpful Websites

1. United States Courts: www.uscourts.gov. 2. U.S. Bankruptcy Court for the Eastern District of KY:

www.kyeb.uscourts.gov. 3. American Bankruptcy Institute: www.abiworld.org.

7 www.justice.gov/ust/eo/bapcpa/meanstesting.htm.

16

4. National Association of Consumer Bankruptcy Attorneys:www.nacba.org.

IV. ADDITIONAL CASE

In re Ragone, No. 20-8013, 2021 WL 1923658 (B.A.P. 6th Cir. May 13, 2021).

Facts: Debtor (Frank Ragone, Jr.) obtained a Chapter 7 bankruptcy discharge in June 2015; however the creditor (law firm of Stefanik & Christie, LLC) continued garnishing Debtor’s wages. In March 2016, Debtor’s counsel called attorney Christie (member of creditor law firm acting as counsel in garnishment proceeding) to discuss the garnishment but creditor did not stop the garnishment. About a month later, Debtor filed an Emergency Motion in the state court garnishment proceeding to stop the garnishment. Creditor filed an Objection to the Emergency Motion and also moved to reopen the bankruptcy case and revoke the discharge. The state court dismissed the garnishment proceeding and the bankruptcy court re-closed the bankruptcy case upon creditor’s failure to file an adversary proceeding or take any steps to revoke the discharge. However, the creditor still failed to return the improperly garnished funds to the debtor. A year after the bankruptcy case was re-closed, Debtor filed a motion to re-open the bankruptcy case again to file an adversary proceeding alleging that Christie and the law firm violated the discharge injunction. After a trial, the bankruptcy court found that Christie and the law firm were in contempt of the §524 discharge injunction and awarded damages to the Debtor of the amount of wages garnished post-discharge ($4,275.39) and attorneys’ fees incurred in attempting to stop the garnishment and recover the improperly garnished funds ($10,580.00), for which Christie and the law firm were jointly and severally liable.

Holding: The Sixth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court’s judgment and award of damages. The BAP held that the bankruptcy court correctly applied the standard set forth in Taggart v. Lorenzen, 139 S.Ct. 1795 (2019), for imposing sanctions for violations of the §524 discharge injunction and concluded that Christie and the law firm had no “objectively reasonable basis” for refusing to terminate the garnishment proceeding and return the improperly garnished wages. The BAP majority further held that the bankruptcy correctly imposed joint and several liability on Christie and the law firm for the discharge violation and determined that Christie could be held personally liable for the actions he took as creditor’s counsel.

BAP Judge Dales wrote a separate opinion concurring in part and dissenting in part, disagreeing that Christie should be held personally liable for the amount of the improperly garnished funds.

*Note the BAP has limited the precedential effect of this Opinion to this case andthese parties pursuant to Sixth Cir. BAP LBR 8024-1(b). The Opinion contains thefollowing note at the top of the first page: “By order of the Bankruptcy AppellatePanel, the precedential effect of this decision is limited to the case and partiespursuant to 6th Cir. BAP LBR 8024-1(b). See also 6th Cir. BAP LBR 8014-1(c).”