PLANS AND CONFIRMATION

PLANS AND CONFIRMATION JEFFREY P. NORMAN Standing Chapter 13 Trustee Southern District of Ohio Eastern Division One Columbus 10 West Broad Street Columbus, Ohio 43215 jeff.norman@13trcolumbus.com 614 436 6700 Telephone 614 436 6205 Fax DEMETRA L. LIGGINS Thompson & Knight LLP Three Allen Center 333 Clay Street, Suite 3300 Houston, Texas 77002 demetra.liggins@tklaw.com 713.654.8111- telephone 713.654.1871 facsimile State Bar of Texas BANKRUPTCY 101 September 7, 2011 Houston CHAPTER 1

JEFFREY P. NORMAN Mr. Norman was appointed as a Standing Chapter 13 Trustee in the Southern District of Ohio, Eastern Division on May 19, 2011. He had for the twenty six years prior been a practicing bankruptcy attorney in the Southern District of Texas. He has bankruptcy experience representing a variety of debtors and occasionally, creditors in all aspects of bankruptcy matters. He is Board Certified in Consumer Bankruptcy by the Texas Board of Legal Specialization and the American Board of Certification. He is AV rated by Martindale Hubble and is a chapter author of Bankruptcy Road Map, published by State Bar Books in 2010. Prior to moving to Ohio he was named a Texas Monthly Super Lawyer in bankruptcy for 5 consecutive years. He is licensed in the Southern District of Texas, Fifth Circuit Court of Appeals and the Southern District of Ohio. He obtained his Bachelor of Science in accounting and finance from Houston Baptist University in 1982 and his Doctor of Jurisprudence from South Texas College of Law in 1985. i

D E M E T R A L. L I G G I N S Associate, Thompson & Knight LLP Demetra.Liggins@tklaw.com HOUSTON OFFICE 333 Clay Street, Suite 3300, Houston, TX 77002 713.951.5884, Fax 832.397.8052 NEW YORK OFFICE 919 Third Avenue, 39th Floor, New York, NY 10022-3915 212.751.3539, Fax 832.397.8052 Demetra L. Liggins is a Partner in Thompson & Knight s Corporate Reorganization and Creditors Right Practice Group. She focuses her practice on insolvency and reorganization, including representation of banks, indenture trustees, secured and unsecured creditors, and acquirers of assets from bankruptcy estates. She has litigated contested matters, adversary proceedings, and plan confirmations. Ms. Liggins has also represented clients at the appellate level before the District and Circuit Courts of Appeal. She helps analyze the potential effects of a bankruptcy on corporate and financial transactions and litigation and engages in bankruptcy-related litigation. Ms. Liggins has been selected for inclusion in Texas Rising Stars and H Texas Magazine s Houston s Top Lawyers and Lawyers on the Fast Track. She is also a recipient of the Houston Bar Association s President s Award. She is a member of the Houston Bar Association, State Bar of Texas, American Bar Association, Texas Young Lawyers Association, Turnaround Management Association, Houston Lawyers Association, International Women's Insolvency and Restructuring Confederation, Houston Young Lawyers Association, and American Inns of Court. In addition, she is secretary of the Board of Directors of Spaulding for Children and a preceptor in Transformations. Ms. Liggins received her J.D., cum laude, from Samford University s Cumberland School of Law and a B.S., cum laude, from Christian Brothers University. She is licensed to practice in New York and Texas. ii

Plans and Confirmation Chapter 1 TABLE OF CONTENTS I. CHAPTER 13 PLANS AND CONFIRMATION... 1 A. WHAT IS THE BASIC CONCEPT OF CHAPTER 13 PLAN?... 1 B. WHY IS CONFIRMATION OF THE PLAN SO IMPORTANT?... 1 C. WHERE DOES THIS PLAN COME FROM?... 1 D. WHAT IS THE LIQUIDATION TEST AND HOW DOES IT AFFECT A CHAPTER 13 PLAN?... 1 E. WILL THE CLIENT SUFFER A LOSS OF ANY PROPERTY BY PROPOSING A PLAN?... 2 F. WHAT IS MEANS TESTING AND HOW DOES IT EFFECT A CHAPTER 13 PLAN? (11 USC 1322)... 2 G. WHAT OPTIONS EXIST AS TO SECURED DEBT IN A CHAPTER 13 PLAN?... 3 H. WHAT OPTIONS EXIST AS TO PRIORITY DEBT IN A CHAPTER 13 PLAN? (11 USC 1322(a)(2))... 4 I. WILL THE COURT REQUIRE A WAGE ORDER OR AUTOMATIC BANK DRAFT OF THE CLIENT S PLAN PAYMENT AND MORTGAGE PAYMENT?... 4 J. WHAT ARE THE ADVANTAGES OF CHAPTER 13 PLAN?... 4 K. WHO IS THE CHAPTER 13 TRUSTEE AND WHAT DOES HE DO WITH THE PLAN? (11 USC 1302)... 4 L. WHAT DEBTS ARE NOT DISCHARGEABLE IN A CHAPTER 13 PLAN? (11 USC 1328)... 5 M. WHAT DOES IT TAKE TO CONFIRM A CHAPTER 13 PLAN?... 6 N. IS THERE A HEARING ON PLAN CONFIRMATION?... 8 O. CAN YOU MODIFY A CONFIRMED CHAPTER 13 PLAN?... 8 P. WHO OBJECTS TO A CHAPTER 13 PLAN AND WHAT CAN I DO ABOUT IT?... 8 Q. WHAT DOES GOOD FAITH MEAN?... 9 R. CAN A CONFIRMED CHAPTER 13 PLAN BE REVOKED?... 9 S. CAN A CHAPTER 13 DEBTOR BE DENIED A DISCHARGE?... 9 T. WHEN WILL THE CLIENT RECEIVE DISCHARGE WHEN HE COMPLETES ALL OF HIS PLAN PAYMENTS AND DOES THE DEBTOR NEED TO TAKE FURTHER ACTION? (11 USC 1328(a))... 9 U. WHAT IS THE EFFECT OF THE CLIENT S CHAPTER 13 DISCHARGE? (11 USC 1328)... 10 II. CHAPTER 11 PLANS AND CONFIRMATION... 10 A. WHAT IS A CHAPTER 11 PLAN... 10 B. WHAT ARE THE DIFFERENT TYPES OF PLANS?... 10 C. WHO CAN PROPOSE A PLAN?... 10 D. WHAT IS THE DEADLINE FOR FILING A CHAPTER 11 PLAN... 10 E. Can exclusivity be extended or increased?... 11 F. WHAT ARE REQUIREMENTS OF A PLAN?... 11 G. HOW ARE CLAIMS AND INTERESTS CLASSIFIED?... 11 H. WHAT IS THE PURPOSE OF A DISCLOSURE STATEMENT?... 12 I. What is adequate information?... 12 J. WHAT ARE THE REQUIREMENTS FOR A DISCLOSURE STATEMENT?... 12 K. WHO CAN OBJECT TO THE DISCLOSURE STATEMENT?... 12 L. DOES the Court conduct a disclosure statement hearing?... 12 M. WHO CAN VOTE ON THE PLAN?... 13 N. WHAT ARE THE CONFIRMATION REQUIREMENTS?... 13 O. IS A HEARING REQUIRED FOR CONFIRMATION?... 13 P. WHO HAS THE BURDEN OF PROOF AT THE CONFIRMATION HEARING?... 13 Q. WHO CAN OBJECT TO CONFIRMATION?... 13 R. HOW MANY VOTES ARE NEEDED TO CONFIRM A CHAPTER 11 PLAN?... 14 S. WHAT IF THE PLAN IS CONSENSUAL?... 14 i

Plans and Confirmation Chapter 1 T. WHAT IS GOOD FAITH?... 14 U. WHAT IS THE BEST INTEREST OF CREDITORS TEST?... 14 V. HOW IS FEASIBILITY DETERMINED?... 14 W. WHEN ARE ADMINISTRATIVE CLAIMS PAID?... 14 X. WHAT IF THE PLAN IS CONTESTED? WHAT IS CRAM DOWN?... 14 Y. WHAT IS THE ABSOLUTE PRIORITY RULE?... 15 Z. UPON CONFIRMATION, IS THE DEBTOR DISCHARGED?... 15 APPENDIX & USEFUL BANKRUPTCY WEBSITES... 17 ii

Plans and Confirmation Chapter 1 TABLE OF AUTHORITIES Cases Acequia Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir. 1986)... 13 Carrieri v. Jobs.com, Inc., 393 F.3d 508 (5th Cir. 2004)... 14, 15 Hamilton v. Lanning, 130 S. Ct. 2464 (2010)... 2 Home Savings Ass n v. Woodstock Assocs. I, Inc. (In re Woodstock Assocs.,I, Inc.), 120 B.R. 436 (Bankr. N.D. Ill. 1990)... 13 In re Adelphia Communs. Corp., 352 B.R. 578 (Bankr. S.D.N.Y. 2006)... 11 In re Berryman Prod., Inc., 183 B.R. 463 (Bankr. N.D. Tex. 1995)... 10 In re Brass Corp., 194 B.R. 420 (Bankr. E.D. Tex 1996)... 12 In re Cajun Electric Power Cooperative Inc., 155 F.3d 503 (5th Cir. 1998)... 12, 14 In re Chaffin, 816 F.2d 1070 (5th Cir.1987)... 9 In re Chandler Airpark Joint Venture I, 163 B.R. 566 (Bankr. D. Ariz. 1992)... 13 In re City of Colorado Springs, Springs Creek General Improvement District, 187 B.R. 683 (Bankr. D. Colo. 1995)... 10 In re Combustion Engineering, Inc., 391 F.3d 190 (3d Cir. 2004)... 13 In re Cypresswood Land Partners, I, 409 B.R. 396 (Bankr. S. D. Tex. 2009)... 14 In re DeSardi, 340 B. R. 790 (Bankr. S.D. Tex. 2006)... 7 In re Easley, 72 B.R. 948 (Bankr. M.D. Tenn. 1987)... 9 In re Ferretti, 128 B.R. 16 (Bankr. D.N.H. 1991)... 12 In re Fleming, 339 B. R. 716... 6 In re Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991)... 11, 13 In re Hawes, 73 B.R. 584 (Bankr.E.D.Wis.1987)... 9 In re Kitchens, 702 F.2d 885 (11th Cir.1983)... 9 In re Kull, 12 B.R. 654 (S.D.Ga.1981), aff'd sub nom... 9 In re Lakeside Global II, Ltd., 116 B.R. 499 (Bankr. S.D. Tex. 1989)... 14 In re Landing Assocs.Ltd., 157 B.R. 791 (Bankr. W.D. Tex. 1993)... 14 In re Madison Hotel Assocs., 749 F.2d 410 (7th Cir. 1984)... 14 In re McClean Indus., 87 B.R. 830 (Bankr. S.D.N.Y. 1987)... 11 In re Microwave Prod. of America Inc., 100 B.R. 376 (Bankr. W.D. Ten. 1989)... 12 In re Montoya, 341 BR 41 (Bankr. Utah 2006)... 6 In re Neff, 60 B.R. 448 (Bankr. N.D. Tex. 1985)... 13 In re Perkins, 71 B.R. 294 (W.D. Tenn. 1987)... 11 In re R.G. Pharmacy Inc., 374 B.R. 484 (Bankr. D.C. 2007)... 11 In re Rusty Jones, Inc. 110 B.R. 362 (Bankr. N.D. Ill. 1990)... 13 In re Save Our Springs (S.O.S.) Alliance, Inc. 632 F.3d 168 (5th Cir. 2011)... 14 In re Southwest Oil Co. of Jourdanton, Inc., 84 B.R. 448 (Bankr. W.D. 1987)... 11 In re Storey, 392 B. R. 266 (B.A.P. 6th Cir. 2008)... 8 In re TH New Orleans Ltd P ship, 188 B.R. 799 (E.D. La. 1995)... 14, 15 In re Timbers of Inwood Forest Assocs. Ltd., 808 F.2d 363 (5th Cir. 1987) (en banc), aff d sub nom.... 11 In re Vita Corp., 380 B.R. 525 (C.D. Ill. 2008)... 14 In re: Rimgale, 669 F.2d at 431 n. 14... 9 In re: Tennyson, 611 F.3d 873 (11 th Cir. 2010)... 8 John Hancock Mut. Life Ins. Co. v. Route, 987 F.2d 154 (3d Cir. 1993)... 11 Kane v. Johns-Mansville, 843 F.2d 636 (2d Cir. 1988)... 13, 14 Lisanti v. Lubetkin (In re Lisanti Foods, Inc.), 329 B.R. 491 (D. N.J. 2005)... 10 Matter of Briscoe Enter., Ltd. II, 994 F.2d 1160 (5th Cir. 1993)... 14 Menard Sanford v. Mebey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir. 1989)... 12 United Sav. Assoc. of Texas vs. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365 (1988)... 11 United Student Aid Funds, Inc. vs. Francisco J. Espinosa, 130 S. Ct. 1367 (2010)... 1 Westland Oil Dev. Corp. v. M Corp. Mgmt. Solutions, Inc. v. Federal Deposit Ins. Corp., 157 B.R. 100 (S.D. Tex. 1993)... 12 Williams v. Hibernia Nat l Bank 850 F.2d 250 (5th Cir. 1988)... 13 iii

Plans and Confirmation Chapter 1 Statutes 11 U.S.C. 1121(b)... 12 11 U.S.C. 1121(d)... 12 11 U.S.C. 1126(f)... 15 11 U.S.C. 1128... 15 11 U.S.C. 1128(b)... 16 11 U.S.C. 1129... 15 11 U.S.C. 1129(a)(8)(A)... 15 11 U.S.C. 1109... 12 11 U.S.C. 1121(a)... 12 11 U.S.C. 1121(c)... 12 11 U.S.C. 1122... 13 11 U.S.C. 1126... 16 11 U.S.C. 1141(a)... 17 11 U.S.C. 1141(d)(3)... 17 11 U.S.C. 1124... 15 11 U.S.C. 1129(a)(11)... 16 11 U.S.C. 1129(a)(3)... 16 11 U.S.C. 1129(a)(7)... 16 11 U.S.C. 1129(a)(8)... 16 11 U.S.C. 1129(a)(9)... 16, 17 11 U.S.C. 1129(b)(1)... 17 11 USC 1325... 10 11 USC 1328(a)... 10 11 USC 362(b) (19)... 3 11 USC 541(b)(7)... 3 11 USC 1325... 4 11 USC 1327(a)... 1 11 USC 1328(h)... 11 11 USC 522(d)(5)... 2 Other Authorities Bankruptcy Act Revision, Serial No. 27, Part 3, Hearings on H.R. 31 and H.R. 32, 94th Cong. 2d Sess. (March 29, 1976)... 12 Rules FED. R. BANKR. P 3020(b)... 16 FED.R BANKR. P. 3017... 14 Fed.R Bankr. P. 3017(a)... 14 iv

Plans and Confirmation Chapter 7 PLANS AND CONFIRMATION I. CHAPTER 13 PLANS AND CONFIRMATION A. WHAT IS THE BASIC CONCEPT OF CHAPTER 13 PLAN? The Bankruptcy Code calls Chapter 13 an adjustment of debt of an individual with regular income. This requires that the debtor file a Chapter 13 plan to pay his secured and/or priority debts, typically by a wage order thru a court-appointed Trustee who distributes the funds to his creditors in small installments until the debts are paid. The Judge will approve, that is confirm, a repayment plan that his creditors must accept. There is no voting by creditors on a Chapter 13 plan. A Chapter 13 plan typically lasts from 3-5 years, depending on the required commitment period. Secured creditors are typically paid either partially or in full, or their collateral is surrendered to them. Priority creditors are always fully paid, and unsecured creditors receive a distribution based on either the liquidation test or disposable income test, whichever test requires a higher payment to unsecured creditors. As a practice pointer, many Chapter 13 debtors are not required to make any payment to unsecured creditors given either test, but some Court s will require a nominal distribution to unsecured creditors. This, typically, requires a minimum distribution of between one and three percent of unsecured claims. B. WHY IS CONFIRMATION OF THE PLAN SO IMPORTANT? Confirmation of the plan binds creditors to its terms. This is true even if the plan contains terms that should have prevented confirmation. United Student Aid Funds, Inc. vs. Francisco J. Espinosa, 130 S. Ct. 1367 (2010). Bankruptcy Code section 1327(a) declares the finality of a plan confirmation order on the debtor and every creditor, including any creditor who did not object to confirmation. The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan. 11 USC 1327(a). C. WHERE DOES THIS PLAN COME FROM? The Debtor is required under 11 USC 1321 to file a plan. Most judicial districts have a form plan that is available on the web site of each judicial district and incorporated into bankruptcy software. See the appendix for a complete listing. 1 D. WHAT IS THE LIQUIDATION TEST AND HOW DOES IT AFFECT A CHAPTER 13 PLAN? The liquidation test requires that unsecured creditors in a Chapter 13 receive more than what they would have received had the debtor filed a Chapter 7. As exempt assets are not subject to liquidation in a Chapter 7, the client s claim of and allowance of exemptions determines the liquidation test and a calculation of payments to unsecured creditors. If a debtor has $12,000.00 in non-exempt assets in a Chapter 7 and proposes a 60 month plan in a Chapter 13, then a monthly payment to unsecured creditors of $200.00 per month will pay these creditors $12,000.00 over time. However, to meet the liquidation test, the debtor would need to pay more than $12,000.00, so a payment of $200.01 per month or $12,000.60 over 60 months technically passes the liquidation test. A short recapitulation of exemptions is below. In summary form, the Texas state exemptions involve the ability of the debtor to own and maintain a home, regardless of value (but only if he has owned the property for 1215 days or rolled over equity from a prior home and combined ownership totals 1215 days), that is located on ten acres or less of land in a city, town, or village, or urban area (an area which is not necessarily a part of the city but which receives city services and effectively operates as if it were in a city), or in a rural area (generally in an area where agriculture, mining, timber operations, farming, ranching, etc., are carried out). The debtor is entitled to a homestead exemption of 100 acres if not married, and 200 acres if married. In addition, an exemption is allowed for burial lots for the client and his family. There is a limit of $125,000.00 per debtor; $250,000.00 in a case with a husband and wife, if they have owned the property for less than 1,215 days. Note, this is equity interest, which is the difference between value and what is owed and not the value of the property. By example, a property worth $400,000.00 that has a $350,000.00 mortgage has equity of $50,000.00. In addition to the real property exemption, a debtor who is single is entitled to a personal property exemption for things used by the debtor and or members of the debtor s family, as long as the aggregate fair market value at disposal (i.e., price the items could be sold for) is no more than $30,000.00. If the debtor is a married person, the limit is $60,000.00. These assets include home furnishings, provisions for consumption, farming or ranching vehicles and implements, tools, equipment, books, apparatus used in a profession or trade, wearing apparel, jewelry not to exceed 25% of the allowed exemption, two firearms, athletic and sporting equipment, a motor vehicle for each person who holds

Plans and Confirmation Chapter 7 a license, two horses, 12 head of cattle, 60 head of other livestock, 120 fowl, and household pets. In addition, retirement plans including most every type of plan which includes but are not limited to 401k, IRA, Roth IRA, 403b are also exempt. In addition annuities are also exempt. The primary benefit of the federal exemption package to a debtor is that it allows the debtor to partially exempt some cash or liquid assets. While the state exemptions do not permit a cash asset exemption, it is possible to exempt cash or other liquid assets under federal exemptions up to a maximum of $10,125.00, if the individual is not married, or up to a maximum of $20,250.00, if married and filing jointly. 11 USC 522(d)(5) The exemptions, however, are limited in other regards. The exemption under federal exemption is limited to the following (these exemptions can be doubled for a couple filing a joint petition): 1. The debtor s equity interest in real property used as a residence not to exceed $20,200.00. 2. The federal exemptions consist of items kept primarily for personal or family use: Motor vehicles (limited to $3,225.00 per debtor) Real property (house and/or land limited to $20,200.00 per debtor) Household goods and furnishings (*limited to $10,775.00 per debtor for all assets so marked) Clothing (*limited to $10,775.00 per debtor for all assets so marked) Books and musical instruments (*limited to $10,775.00 per debtor for all assets so marked) Pets and animals producing family use products (*limited to $10,775.00 per debtor for all assets so marked) Crops such as garden produce (*limited to $10,775.00 per debtor for all assets so marked) Burial plots (included in the $20,200.00 per debtor limit for real estate) Tools or books necessary to make a living (limited to $2025.00 per debtor) Cash value on life insurance policies Social security, unemployment, public assistance, veterans or disability benefits Pension, profit sharing, 401(K), IRA, or other similar plan Alimony or child support necessary for support Certain personal injury settlements (limited to $20,200.00 per debtor) Remember that most of the Federal limits in the Bankruptcy Code are adjusted at every three-year interval to reflect changes in the Consumer Price 2 Index. E. WILL THE CLIENT SUFFER A LOSS OF ANY PROPERTY BY PROPOSING A PLAN? Practically speaking, it is rare that a Chapter 13 debtor loses any property or possessions owned on the date of filing. The Chapter 13 Trustee is not in the business of taking a debtor s assets to satisfy creditor claims unlike a Chapter 7 Trustee. When the client promised to pay liquidation value through the Chapter 13 plan, he generally alleviated the need to surrender assets. F. WHAT IS MEANS TESTING AND HOW DOES IT EFFECT A CHAPTER 13 PLAN? (11 USC 1322) In a Chapter 13 Bankruptcy, the debtor must pay his unsecured creditors the higher of his net disposable income or the amount determined by the liquidation test. The Bankruptcy Code has incorporated the means test into the definition of disposable income, so the results of the means test determine the minimum payout to unsecured creditors in a Chapter 13. Remember, that payout is a minimum, and the client could be forced to pay a higher amount, if the liquidation test calls for a higher payment. The Supreme Court has ruled on one aspect of how to compute a Chapter 13 debtor s projected disposable income under 1325(b). In Hamilton v. Lanning, 130 S. Ct. 2464 (2010) the court held that the word projected gave the bankruptcy court the flexibility to adjust the debtor s income that are known or virtually certain at the time of confirmation. The court found that the ordinary meaning of the term projected encompassed more than simply multiplying the debtor s current monthly income by the number of months in the applicable commitment period and had a meaning that could take into account known or certain changes in income. The court in Lanning made clear that such adjustments to the statutory formula for computing disposable income should be made only in unusual cases where there is known or virtually certain information about changes in the components in the formula that are based on actual income. There is no suggestion in the decision that a bankruptcy court can rely on the term projected to otherwise deviate from the formula by, for example, including income that the definition of currently monthly income excludes, such as social security benefits, or altering expense allowances permitted by statute. Courts after Lanning will no doubt adopt a variety of approaches to the issue of how much discretion they may have with the means test. It is clear however that when a debtor has projected

Plans and Confirmation Chapter 7 income which is lower than current monthly income as defined by Code section 101 then one would expect a reduced plan payment from the plan payment required under a strict means test calculation. Conversely one would expect Trustees to argue that the plan payment should be higher if the reverse is true that is that projected monthly income is higher than current monthly income under Code section 101. There is one major positive difference for debtors between the Chapter 7 means test and the Chapter 13 means test, and that is the ability to deduct in the Chapter 13 means test, qualified retirement deductions including both voluntary retirement deductions as well as retirement loan repayments. 11 USC 541(b)(7) and 11 USC 362(b) (19) The ability of this deduction in a Chapter 13 means test can mean that a debtor fails the Chapter 7 means test but has a negative means test number in a Chapter 13. Means testing is determined by a historical look at a debtor s gross income over the last full six months. Attorneys can follow the Form B22C, which is intuitively called Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. Be advised that the means test forms for Chapter 7 (Form B22A) and Chapter 13 (Form B22C) are different. First, determine if the client s current monthly income, (called CMI) is above or below median income as defined by the federal government. Median income determines the commitment period (plan length) in a Chapter 13. Debtor(s) with below median income must have a 36 month plan but can propose a plan up to 60 months. Any debtor(s) with income above median income must propose a 60 month plan. CMI is a six month average ending at the month before filing a bankruptcy case of most (but not all) funds derived from all sources received in the last six months, most commonly, gross pay from the client s employment and net income (after business expenses) for selfemployed clients. It, however, does not include social security or payments under the social security act. Deduction of allowed expenses include expenses allowed by the Internal Revenue Code, as well as actual expenses for secured debt service and other expenses enumerated by the Bankruptcy Code, such as health care, child care, life and health insurance, support of elderly parents, charitable giving, specialized phone services, qualified retirement deductions and the like. If after these deductions on a step by step basis are funds available on the Bankruptcy Form B22C and they don t have special circumstances such as a serious medical condition or a call or order to active duty in the Army, then he must contribute this amount monthly to payment of his unsecured debts. Remember, this is a minimum and may be higher given the results of the liquidation test. If there are special circumstances and the 3 Chapter 13 Trustee and Judge agrees, the client may make a lower payment to unsecured creditors than the amount specified in the means test. One may never make a lower payment to unsecured creditors than what is required by the liquidation test. G. WHAT OPTIONS EXIST AS TO SECURED DEBT IN A CHAPTER 13 PLAN? In most consumer Chapter 13 cases, there exist three common types of secured debts: the homestead claim and claims that attach to the homestead; such as, property taxes and homeowners associations, automobile claims; and a secured consumer credit card, typically for appliances, electronics, and furniture. As to all three classifications, there are three possibilities with some variations. The debtor may: 1. Agree to surrender the property and thus seek a discharge of this debt. This is the same as surrender in a Chapter 7. The surrender of, or loss, of the property should usually be contemplated within 60 to 90 days after filing the bankruptcy action and involves a giving back of the property by the debtor. A creditor may ask that the period of time to give it back be shortened, but the filing of the Chapter 13 gives to the debtor a minimum period of time in order to make arrangements to substitute some other property for that being surrendered. Even if the motion to modify stay is filed immediately after the debtor s petition, the minimum period of post-petition use of the property should still be 30 to 60 days. 2. Pay the debt direct. On most secured debts, simply make the payments as they come due and payable and retain the property. This option exists only if the debt is current and not in default. 3. Restructure the debt (typically non-mortgage claims). The process of restructuring the entire debt (community property taxes, homeowners association claims, cars with equity or 910 car claims so called because the car was financed in the 910 days prior to the bankruptcy filing) or the value of the collateral securing the debt of a creditor whichever is less, called a cram down (typically on secured debt like a car, furniture, jewelry or electronics), provides a debtor the right to pay to the creditor the debt at the date the bankruptcy action was filed with interest. The debt is paid in monthly time payments over a period not to exceed sixty months plus interest,

Plans and Confirmation Chapter 7 typically, at two points over the prime rate as of the day of the bankruptcy filing. Congress has limited the right to cram down, that is pay value rather than the outstanding debt on automobile debts less than 910 days old. (11 USC 1325) On 910 car claims, so called because the debt is less than 910 days old, the creditor must receive payment of the outstanding debt irrespective of the value of the collateral. This limit to cram down also exists for debts incurred within one year of the filing date. 4. To restructure the debt (typically mortgage claims). Your client may also restructure an arrearage on a home or car over the same plan length. This typically occurs with a house or other real property or any other debt where the restructuring of the debt (as above) would lead to a higher monthly payment than the normal contractual payment amount. These are typically debts payable over a period of greater than 60 months, like a home or mobile home. In addition to curing the arrearage, one must also make the regular monthly contractual payments to the creditor. In some districts, these direct home payments become part of the Chapter 13 plan and are paid to the Chapter 13 Trustee. 5. Lien Avoidance for certain secured claims is available in a Chapter 13 Plan There is a special provision relating to nonpurchase money security interest in personal property and is found under Section 522(f) of the Bankruptcy Code. It provides that the debtor may avoid a lien that impairs an exemption, if the lien is a lien growing out of a note and security agreement and if it is nonpossessory, non-purchase money security interest in any household furnishing, wearing apparel, books, animals, crops, musical instruments, or jewelry primarily used by the family for personal or household use as well as any implements, professional books, or tools of the trade of the debtor, or professionally prescribed health aids for the debtor or a dependent of the debtor. In order to avoid such a lien, it must be nonpurchase money (i.e., proceeds of loan not being used to buy the property) and must necessarily relate to a lien which was granted to secure the payment of a debt, such as an individual borrowing money on household goods and furnishings and/or jewelry. A separate motion with accompanying notice to the creditor and court order must be sought in order to avoid such lien. In many cases, a finance company taking a lien upon household goods and furnishings does so with little intention to secure the return of this property, and a formal lien and validation process may 4 not be necessary. However, care should be taken to determine whether or not the lien is truly nonpossessory, non-purchase money. Lien avoidance is also available to avoid a judicial lien that impairs a homestead exemption under 522. H. WHAT OPTIONS EXIST AS TO PRIORITY DEBT IN A CHAPTER 13 PLAN? (11 USC 1322(a)(2)) Priority debts in a Chapter 13, typically, income taxes and/or child support, must be paid in full. This payment is, typically, without post-petition interest or penalty. Because priority debts must be paid in full, clients with large priority claims often do not have sufficient income to fund a Chapter 13 plan, if large claims exist. Small or moderate priority claims often can be favorable, paid over 60 months with no interest or penalty. I. WILL THE COURT REQUIRE A WAGE ORDER OR AUTOMATIC BANK DRAFT OF THE CLIENT S PLAN PAYMENT AND MORTGAGE PAYMENT? The answer is yes, in some divisions by local rule, and often plan payments which include mortgage payment (if applicable) are required to be deducted from the client s wages, by wage order or deducted directly from his checking account by a preauthorized draft. Preauthorized drafts are required for the selfemployed or those not paid by an employer. J. WHAT ARE THE ADVANTAGES OF CHAPTER 13 PLAN? There are advantages of a Chapter 13 filing for clients. First unlike a Chapter 11 plan there is no voting by creditors. Second the plan is typically a form and requires little or no drafting. Third is the ability to restructure debts in a simple and expedited process (as opposed to a Chapter 11). Lastly the debtor has the ability to retain nonexempt assets. K. WHO IS THE CHAPTER 13 TRUSTEE AND WHAT DOES HE DO WITH THE PLAN? (11 USC 1302) The Trustee is an individual, generally an attorney, who is charged by the Court to do basically three things: 1. Examine the statements, schedules, and documents filed by the debtor to determine if the rules have been followed.

Plans and Confirmation Chapter 7 The Chapter 13 Trustee determines, primarily from the debtor s testimony and information received from any interested creditors, that the statements and schedules have been properly prepared and that the debtor s duty has been discharged. If there are any additions, corrections, or deletions that are deemed necessary, the Trustee can request such amendments be made. 2. Review the Chapter 13 plan to determine that it complies with all applicable code sections and can be recommended for confirmation or conversely dismissed or converted to a Chapter 7, if it does not. Such action usually falls into three categories: a. Review and recalculate the Chapter 13 means test. In a Chapter 13, the Chapter 13 Trustee is the main gatekeeper of the bankruptcy means test. He can only recommend to the Court confirmation of the Chapter 13, if among other requirements, if it meets the means test. That is, it pays to unsecured creditors the monthly amount specified in the means test over the commitment period of the Chapter 13 plan. b. Determining that the Chapter 13 plan meets the liquidation test. The liquidation test requires that unsecured creditors in a Chapter 13 receive more than what they would have received had the debtor filed a Chapter 7. As exempt assets are not subject to liquidation in a Chapter 7, the client s claim of and allowance of exemptions determines the liquidation test and a calculation of payments to unsecured creditors. For example, if a debtor has $12,000.00 in non-exempt assets in a Chapter 7 and proposes a 60 month plan in a Chapter 13, then a monthly payment to unsecured creditors of $200.00 per month will pay these creditors $12,000.00 over time. However, to meet the liquidation test, the debtor would need to pay more than $12,000.00, so a payment of $200.01 per month or $12,000.60 over 60 months technically passes the liquidation test. c. Determining that the Chapter 13 plan is proposed in good faith. Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief of the absence of malice and the absence of design to defraud or seek an unconscionable advantage. 5 d. Making a recommendation to the Court to confirm or not confirm a Chapter 13 plan. Assuming that the client with attorney s assistance has complied with the applicable provisions of 11 USC 1325, which includes the liquidation test and good faith requirements, the Trustee will recommend the case for confirmation. 1. Administration of the case post confirmation. After confirmation, the Trustee will continue to receive Chapter 13 plan payments as well as disburse funds. Should the client become delinquent, the Trustee will file a Motion to Dismiss. Should claims be filed post confirmation that renders the plan deficient, he will bring the same to the Court s attention. Should a post confirmation modification be required, he will review the modification and recommend or not recommend its approval to the Court. The Trustee will also certify that the payments under the Chapter 13 plan are complete and that the debtor (subject to his responsibilities) can be discharged. L. WHAT DEBTS ARE NOT DISCHARGEABLE IN A CHAPTER 13 PLAN? (11 USC 1328) A discharge under Chapter 13 generally discharges all debts except long term mortgages, student loans, criminal fines, criminal restitution, civil restitution for willful or malicious injury, as well as the rare instance where a creditor has timely complained (typically within 60 days of the date of the first meeting of creditors) and had a judicial determination that certain debts are nondischargeable debts pursuant to 11 USC 523(a) paragraph (2), (3), (4), or (9). These debts are: 1. For money, property, services or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud. False statements when credit was obtained, such as in the case of false pretenses, false representations, or fraud, and/or the use of a statement in writing that is materially false to obtain credit constitute an exception to discharge. 2. Purchases or incurring of debt in contemplation of bankruptcy. Generally, purchases or incurring of debt in contemplation of bankruptcy may not be discharged. For example, one runs up substantial debt with the

Plans and Confirmation Chapter 7 intent in mind of getting the creditor or getting a free ride with no intention of repaying the debt. Such debts are non-dischargeable. These are generally called charge ups. 3. Consumer debts owed to a single creditor and aggregating more than $550.00 for luxury goods or services including cash advances incurred by an individual debtor on or within 90 days before filing are presumed not to be dischargeable. Purchases of non-luxury or ordinary goods and services aggregating more than $825.00 on or within 70 days before filing are presumed not to be dischargeable. 4. Creditors whose names and addresses are not listed in the schedules or whose names and addresses are listed inaccurately. 5. Fraudulent acts by a person acting in a fiduciary capacity, such as through embezzlement or larceny 6. A debt that arises from a judgment or consent decree entered in a Court of record against the debtor wherein liability was incurred by such debtor s operation of a motor vehicle, vessel, or aircraft while legally intoxicated is not dischargeable. Be advised that certain debts such as child support and certain income taxes are also nondischargeable, but as these debts are paid in full as part of the Chapter 13 plan payment and they typically would not be due after the bankruptcy is complete and discharged. The debts above, however, could survive bankruptcy and be owing after a case is complete. It is impossible in these few pages to provide all of the legal intricacies of issues such as discharge of certain indebtedness. This is designed as a general guide to follow and must be treated as such. There is no substitute for detailed legal research. If you recognize in your particular situation with your client the existence of any debt that might be subject to the dischargeability rules, I urge you to do further research. The time deadline for filing a complaint typically under 11 USC 523 is 60 days from the date first set for the meeting of creditors. M. WHAT DOES IT TAKE TO CONFIRM A CHAPTER 13 PLAN? Confirmation of a Chapter 13 plan is governed by 11 USC 1325. Subject to limited exceptions, bankruptcy courts must confirm Chapter 13 plans that meet the nine criteria listed in 11 USC 1325. Comments of the author are (within parenthesis in italic, underlined and bold) and are not part of the Code section. A. 1325. Confirmation of Plan (a) Except as provided in subsection (b), the court shall confirm a plan if (1) The plan complies with the provisions of this chapter and with the other applicable provisions of this title; (the catch all provision) (2) any fee, charge, or amount required under chapter 123 of title 28, or by the plan, to be paid before confirmation, has been paid; (basically the filing fee) (3) the plan has been proposed in good faith and not by any means forbidden by law; (grounds for general objection by creditorsgood faith is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief of the absence of malice and the absence of design to defraud or seek an unconscionable advantage.) (4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date; (This section is the best interest of creditors/liquidation test) (5) with respect to each allowed secured claim provided for by the plan (This section is what you can do with secured debts as described above) (A) the holder of such claim has accepted the plan; (Not objecting to the plan is not acceptance. See In re Montoya, 341 BR 41 (Bankr. Utah 2006) (B) (i) the plan provides that (I) the holder of such claim retain the lien securing such claim until the earlier of (Creditors in cram down retain liens until the case is discharged or debt is fully paid under state law no right to receive title if all secured payments are paid under the plan and plan dismisses or converts to a Chapter 7. In re Fleming, 339 B. R. 716) 6

Plans and Confirmation Chapter 7 (aa) the payment of the underlying debt determined under nonbankruptcy law; or (bb) discharge under section 1328; and (II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; (ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and (iii) if (I) property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts; and (See in re DeSardi, 340 B. R. 790 (Bankr. S.D. Tex. 2006) for an opinion that equal doesn t always mean the same amount) (II) the holder of the claim is secured by personal property, the amount of such payments shall not be less than an amount sufficient to provide to the holder of such claim adequate protection during the period of the plan; or (C) the debtor surrenders the property securing such claim to such holder; (This allows collateral surrender to a secured creditor) (6) the debtor will be able to make all payments under the plan and to comply with the plan; (This requires that the plan be feasible, that is the debtor(s) can afford to make the plan payments) (7) the action of the debtor in filing the petition was in good faith; (Still more good faith) (8) the debtor has paid all amounts that are required to be paid under a domestic support obligation and that first become payable after the date of the filing of the petition if the debtor is required by a judicial or administrative order, or by statute, to pay such domestic support obligation; and (Debtors must pay all of their support obligations, in addition you do not get discharged if you don t pay over the life of the plan) (9) the debtor has filed all applicable Federal, State, and local tax returns as required by section 1308. (You don t confirm a plan if you have not filed all of your tax returns and you don t get discharged if you don t continue to file returns and pay the applicable liability during the duration of the plan) For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day period preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1- year period preceding that filing. (This is the famous hanging paragraph - but bottom line is that a 910 claim cannot be bifurcated into a secured and unsecured portion, nor can you bifurcate debts incurred within the 1 year period prior to filing) (b) (1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan (A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or (B) the plan provides that all of the debtor s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan. (The disposable income test) (2) For purposes of this subsection, the term disposable income means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended (This section 7

Plans and Confirmation Chapter 7 incorporates the means test into Chapter 13) (A) (i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and (ii) for charitable contributions (that meet the definition of charitable contribution under section 548(d)(3)) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business. (3) Amounts reasonably necessary to be expended under paragraph (2), other than subparagraph (A)(ii) of paragraph (2), shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2), if the debtor has current monthly income, when multiplied by 12, greater than (A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; (B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or (C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4. (4) For purposes of this subsection, the applicable commitment period (How long your plan must be - most Courts agree that this is a temporal requirement. See In re: Tennyson, 611 F.3d 873 (11 th Cir. 2010)) (A) subject to subparagraph (B), shall be (i) 3 years; or (36 month plan if you are less than median income but as long as 60 months) 8 (ii) not less than 5 years, if the current monthly income of the debtor and the debtor s spouse combined, when multiplied by 12, is not less than (60 month plan if you are above median income) (I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; (II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or (III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4; and (B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period. (c) After confirmation of a plan, the court may order any entity from whom the debtor receives income to pay all or any part of such income to the trustee. (This allows for wage orders and possibly other types of orders directing a third party to make plan payments to a Chapter 13 Trustee on behalf of the debtor) N. IS THERE A HEARING ON PLAN CONFIRMATION? Generally in the absence of an objection and with a recommendation of confirmation by the Trustee there is either no hearing or a very limited hearing to confirm a Chapter 13 plan. Local practice however may vary greatly from Judge to Judge or Chapter 13 Trustee to Chapter 13 Trustee. O. CAN YOU MODIFY A CONFIRMED CHAPTER 13 PLAN? 11 USC 1329 of the Code defines the circumstances under which a confirmed plan may be modified. Plans can be modified only during the period of plan performance and only changed circumstances occurring after the plan confirmation can support modification. In re Storey, 392 B. R. 266 (B.A.P. 6th Cir. 2008). P. WHO OBJECTS TO A CHAPTER 13 PLAN AND WHAT CAN I DO ABOUT IT?

Plans and Confirmation Chapter 7 The Trustee may object to your plan and/or file a Motion to Dismiss if you fail to file a confirmable plan or fail to abide by 11 USC 1325. While technically you can confirm a plan over the objection of the Trustee, in practice this rarely happens. Creditors may object for various reasons including good faith, valuation, treatment of a particular claim, lack of adequate protection and feasibility. The Court will hear any contested claim and either confirm the plan over the creditor objection or deny confirmation based on the objection. Q. WHAT DOES GOOD FAITH MEAN? The good faith requirement is one of the central, perhaps the most important confirmation finding to be made by the court in any Chapter 13 case. In re: Rimgale, 669 F.2d at 431 n. 14 (quoting In re Kull, 12 B.R. 654, 658 (S.D.Ga.1981), aff'd sub nom. In re Kitchens, 702 F.2d 885 (11th Cir.1983)). Yet the term, good faith, is not defined in the Code or in its legislative history, and courts have said that no precise or comprehensive definition is possible." In re Hawes, 73 B.R. 584, 587 (Bankr.E.D.Wis.1987). See In re Chaffin, 816 F.2d 1070, 1073 (5th Cir.1987), modified on reconsideration on other grounds, 836 F.2d 215 (5th Cir.1988). The Bankruptcy Code does not define "good faith." There is no illuminating legislative history. More than 300 reported "good faith" decisions form a maze of rules and exceptions swallowing rules. Nearly identical fact patterns have produced inconsistent results within judicial districts and across the circuits. The reported decisions demonstrate that "good faith" is an illusive statutory description of the limits of Chapter 13 relief. In re Easley, 72 B.R. 948, 950 (Bankr.M.D.Tenn.1987) (collecting cases). The majority of circuits in holding that good faith must be defined on a case-by-case basis because a comprehensive definition of good faith is not practical. Most Courts set forth a non-exhaustive list of relevant factors as follows: (1) Does the proposed plan state [debtor's] secured and unsecured debts accurately? (2) Does it state [debtor's] expenses accurately? (3) Is the percentage of repayment of unsecured claims correct? (4) If there are or have been deficiencies in the plan, do the inaccuracies amount to an attempt to mislead the bankruptcy court? (5) Do the proposed payments indicate "a fundamental fairness in dealing with one's creditors. In addition bankruptcy courts examine the timing of the bankruptcy filings, the total amount of unsecured debt, the types of debts incurred and the conduct that caused the debts to be incurred. Generally it has been my opinion that bankruptcy judges know good faith or the lack thereof when they 9 see it and that the applicable case law gives a Court wide discretion to find good faith or a lack thereof for almost any fact pattern. R. CAN A CONFIRMED CHAPTER 13 PLAN BE REVOKED? 11 USC 1330 defines when a creditor, trustee or party in interest may seek to revoke a plan confirmation order once it has become final. On request of a party in interest at a time within 180 days after the date of the entry of an order on confirmation under section 1325 of this title, and after notice and a hearing, the court may revoke such order if such order was procured by fraud. 11 USC 1325. S. CAN A CHAPTER 13 DEBTOR BE DENIED A DISCHARGE? Generally, a Chapter 13 debtor cannot be denied a discharge. If a Chapter 13 debtor confirms a plan and makes all of the required Chapter 13 plan payments, then he is going to be discharged. Typically, any grounds that would have denied a discharge in a Chapter 7 case would be raised by a creditor or party in interest at confirmation of the Chapter 13 plan and, if proven, should have prevented a debtor from confirming a plan. If a debtor is able to confirm a plan and he makes all of the required payments, then he will be discharged, unless the debtor has not paid a domestic support obligation that is due on or before the end of the case or if the debtor executes a waiver of discharge. (11 USC 1328(a)) However, in extremely limited instances, the debtor cannot be discharged in a Chapter 13, if the Court finds that the debtor owes a debt arising from (a) a violation of state or federal securities laws, regulations or orders; (b) fraud, deceit or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security; (c) a criminal act, intentional tort or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years and have claimed an exemption for any residence in an amount in excess of $136,875.00 (d) or is guilty of a felony or may be found guilty of a felony which under the circumstances demonstrates that the filing of the case was an abuse of the Chapter 13 process. (11 USC 1328(h)) T. WHEN WILL THE CLIENT RECEIVE DISCHARGE WHEN HE COMPLETES ALL OF HIS PLAN PAYMENTS AND DOES THE DEBTOR NEED TO TAKE FURTHER ACTION? (11 USC 1328(a)) At the completion of the Chapter 13 plan payments, the debtor must file the certification and motion for entry of Chapter 13 discharge and proposed discharge order. A form motion is available

Plans and Confirmation Chapter 7 at the Southern District of Texas website. A debtor must also take and file the personal financial management instructional course prior to discharge. Typically, this course is provided by the Chapter 13 Trustee to the Chapter 13 debtor as part of the Chapter 13 Trustee s debtor education program. If not or if a client has not taken this class, a list of approved debtor education courses is available at the United States Trustee website. This education course typically takes sixty 60 minutes and has a cost of between $17.50 and $50.00. The certificate obtained by the debtor is filed with the Court and/or attached to the certification and motion for entry of discharge. Discharges are then usually entered by the Court as soon as practical thereafter. Other than possible clerical or mechanical errors that could conceivably occur in the bankruptcy clerk s office, there are limited factors or circumstances that could delay a discharge. U. WHAT IS THE EFFECT OF THE CLIENT S CHAPTER 13 DISCHARGE? (11 USC 1328) As previously discussed, a discharge under Chapter 13 generally discharges all debts except long term mortgages, student loans, criminal fines, criminal restitution, civil restitution for willful or malicious injury, as well as the rare instance where a creditor has timely complained (typically within 60 days of the date of the first meeting of creditors) and had a judicial determination that certain debts are nondischargable debts pursuant to 11 USC 523(a) paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8) or (9). Given the length of time the client will be in a Chapter 13, discharge violations are rare after a Chapter 13, but, again, the discharge order acts as an injunction to insure protection against collection activity. A discharge under Chapter 13 voids any judgment, to the extent that such judgment is a determination of the personal liability of the discharged debt. It also operates as an injunction against the commencement or continuation of an action, the employment of process or an act, to collect, recover or offset discharged debts. It is the typical conclusion of a consumer Chapter 13 case. The discharge injunction is enforceable by civil contempt. II. CHAPTER 11 PLANS AND CONFIRMATION A. WHAT IS A CHAPTER 11 PLAN A confirmed plan is the goal of every chapter 11 case. Lisanti v. Lubetkin (In re Lisanti Foods, Inc.), 329 B.R. 491, 497 (D. N.J. 2005). Generally, a confirmed chapter 11 plan is a contract between the debtor and all of its creditors and equity holders. In re Berryman Prod., Inc., 183 B.R. 463, (Bankr. N.D. Tex. 1995). But unlike a typical contract where parties voluntarily bind themselves, a non-consenting 10 creditor can be bound by a plan that it did not support. In re City of Colorado Springs, Springs Creek General Improvement District, 187 B.R. 683, 690 (Bankr. D. Colo. 1995). A fundamental understanding of the confirmation process is critical for three reasons. First, the inner working of the process is necessary to confirm a plan. Second, this understanding is critical to block the confirmation of plan. Finally, knowing what can be achieved through the chapter 11 process facilitates settlements. B. WHAT ARE THE DIFFERENT TYPES OF PLANS? Gone are the days when each case had a similar plan of reorganization. Today, chapter 11 plans come in all shapes and sizes, but four types of plans are most common in chapter 11 cases: (1) traditional plan of reorganization; (2) prepackaged plan of reorganization; (3) prearranged plan of reorganization; and (4) plan of liquidation. A traditional plan of reorganization allows a debtor to emerge from the bankruptcy case as a viable, profitable enterprise. Prepackaged or prearranged plans of reorganization have the same goals, but the emergence path is different as plan acceptances are solicited in good faith before the case is petition is filed. Liquidating plans arrange for the sale of all or substantially all of the debtor s assets., most times as a going concern. C. WHO CAN PROPOSE A PLAN? Any party-in-interest can propose a plan; however, the timing of when the party can propose such a plan differs. 11 U.S.C. 1121(c). Section 1109 defines a party-in-interest as the debtor, the trustee, a creditors committee, an equity security holders committee, a creditor, an equity holder, or any indenture trustee. 11 U.S.C. 1109. D. WHAT IS THE DEADLINE FOR FILING A CHAPTER 11 PLAN Section 1121 of the Bankruptcy Code permits a chapter 11 debtor to file a plan of reorganization at any time. 11 U.S.C. 1121(a). During the first 120- day period after commencement of a chapter 11 case, however, the debtor has the exclusive right to file a plan. No other plan can filed a plan during this 120- day period. If the debtor files a plan during this 120-day period, then it also has the exclusive right to solicit acceptances of such plan within 180 days of case commencement. 11 U.S.C. 1121(b). If acceptance of the plan is not obtained, any party-in-interest may file a plan. Congress intended Section 1121 to strike a balance between (a) the presumption that a debtor

Plans and Confirmation Chapter 7 should be given control, initially, over the plan process, and (b) the rights of creditors to limit the delay that makes [them] the hostage of chapter 11 debtors. See In re Timbers of Inwood Forest Assocs. Ltd., 808 F.2d 363, 372 (5th Cir. 1987) (en banc), aff d sub nom., United Sav. Assoc. of Texas vs. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365 (1988). The legislative history of Section 1121 reveals that the section was designed to effect a change from practice under former Chapter XI of the Bankruptcy Act whereby a debtor s ability to hold creditors hostage through the plan process was virtually unlimited. Of course, the bargaining position of the debtor under present Chapter XI may be further enhanced by the debtor s control of the business The take-it-or-leave-it attitude on the part of the debtors as permitted by Chapter XI is fraught with potential abuse. The granting of authority to creditors to propose plans of reorganization and rehabilitation serves to eliminate the potential harm and disadvantages to creditors and democratizes the reorganization process. Bankruptcy Act Revision, Serial No. 27, Part 3, Hearings on H.R. 31 and H.R. 32, 94th Cong. 2d Sess. (March 29, 1976). Further, Congress intended that debtors would be given the initial 120-day window to propose a plan and that, in the vast majority of cases, creditors would be given an equal opportunity to participate in the plan process thereafter: Proposed Chapter 11 recognizes the need for the debtor to remain in control to some degree, or else debtors will avoid the reorganization provisions in the bill until it will be too late for them to be an effective remedy. At the same time, the bill recognizes the legitimate interests of creditors, whose money is in the enterprise as much as the debtor s to have a say in the future of the company. The bill gives the debtor an exclusive right to propose a plan for 120 days. H.R. Rep. No. 595, 95th Cong. 2d Sess. 231 232 (1978). E. Can exclusivity be extended or increased? Bankruptcy courts, however, are permitted to increase or decrease exclusivity periods upon request of a party-in-interest for cause. 11 U.S.C. 1121(d). A request to extend exclusivity is a serious, rather than routine, matter. In re McClean Indus., 87 B.R. 830, 834 (Bankr. S.D.N.Y. 1987). The party requesting to modify (either enlarge or decrease) the exclusivity periods under Section 1121(d) bears the burden of proving that cause exists. See In re 11 R.G. Pharmacy Inc., 374 B.R. 484, 487 (Bankr. D.C. 2007). The decision to extend exclusivity for cause is within the Bankruptcy Court s discretion, and is fact specific. In re Adelphia Communs. Corp., 352 B.R. 578, 586 (Bankr. S.D.N.Y. 2006). In determining whether to grant an extension of exclusivity, bankruptcy courts must both balance the potential harm to creditors, and limit the delay that makes creditors hostages of chapter 11 debtors. In re Southwest Oil Co. of Jourdanton, Inc., 84 B.R. 448, 453 (Bankr. W.D. 1987); Timbers, 808 F.2d at 372. As such, courts must closely scrutinize an exclusivity extension request because extensions are not to be granted neither [sic] routinely nor cavalierly. McLean Indus., 87 B.R. at 834. Although courts have applied a more lenient standard in determining whether to grant additional time to gain acceptance of a filed plan, the lenient standard is applied where creditors are [n]o longer in the dark with respect to the debtor s intention, the creditors have a basis for decision, and can either accept the plan or fight extensions to the exclusivity period, in order to file a competing plan. In re Perkins, 71 B.R. 294, 299 (W.D. Tenn. 1987). F. WHAT ARE REQUIREMENTS OF A PLAN? Section 1123 requires that plan must:** classify claims and interests; specify any classes of claims or interests that are not impaired under the plan; specify the treatment of impaired classes; provide the same treatment for each member of a class unless a holder of a particular claim or interest agrees to less favorable treatment; provide adequate means of implementing the plan; provide certain technical corporate provisions if the debtor is a corporation; and contain only provision consistent with the interests of creditors, equity security holders, and public policy concerning the selection of officers, directors, or trustees of their successors under the plan. 7 Collier on Bankruptcy, 1100.09[2]. G. HOW ARE CLAIMS AND INTERESTS CLASSIFIED? Chapter 11 plans must classify the creditors claims and the equity interest holders interests in the same class for purposes of voting and treatment. In re Greystone III Joint Venture, 995 F.2d 1274, 1278 (5th Cir. 1991); John Hancock Mut. Life Ins. Co. v. Route, 987 F.2d 154, 159 (3d Cir. 1993)(noting the dual

Plans and Confirmation Chapter 7 purpose of classification is voting to determine whether a plan can be confirmed and treatment of claims under the plan). Section 1122 requires that substantially similar claims must be classified together. 11 U.S.C. 1122. The Bankruptcy Code, however, does not define substantially similar. H. WHAT IS THE PURPOSE OF A DISCLOSURE STATEMENT? In addition to the plan, when a plan proponent files its plan, it must also file a disclosure statement. FED. R. BANKR. P. 3016(b). The Bankruptcy Code does not require that the plan and disclosure statement be separate documents, but they usually are. Disclosure is a pivotal concept in the reorganization practice under the Bankruptcy Code. Westland Oil Dev. Corp. v. M Corp. Mgmt. Solutions, Inc. v. Federal Deposit Ins. Corp., 157 B.R. 100, 102 (S.D. Tex. 1993). A disclosure statement must inform a creditor what it is going to get, when it is going to get it, and what contingencies exist to getting it. In re Ferretti, 128 B.R. 16, 19 (Bankr. D.N.H. 1991). Simply stated, the primary purpose of a disclosure statement is to give a creditor the information necessary for it to decide whether to accept or reject a proposed plan of reorganization. In re Cajun Electric Power Cooperative Inc., 155 F.3d 503, 518 (5th Cir. 1998). I. What is adequate information? Section 1125 of the Bankruptcy Code obligates a plan proponent to submit a disclosure statement with adequate information, which means: information of a kind, and in sufficient detail, as far as reasonably practicable in light of the nature and history of the debtor and the condition of the debtor s books and records,..., that will enable a hypothetical investor of the relevant class to make an informed judgment about the plan. 11 U.S.C. 1125(a)(1). J. WHAT ARE THE REQUIREMENTS FOR A DISCLOSURE STATEMENT? A disclosure statement should contain [a] all factors presently known to the plan proponent that bear upon the success or failure of the proposals contained in the Plan. In re Microwave Prod. of America Inc., 100 B.R. 376, 377 (Bankr. W.D. Ten. 1989) (internal quotations omitted). Among the types of information that generally must be included are the following: Events which led to the filing of petition; A description of the available assets and their value; The anticipated future of the company; The source of information stated in the disclosure statement; A disclaimer; The present condition of the Debtors while in chapter 11; The scheduled claims; The estimated return to creditors under chapter 7 liquidation; The accounting method utilized to produce financial information and the name of the persons responsible for such information; The future management of the Debtor; The chapter 11 plan or summary thereof; The estimated administrative expenses, including attorneys and accountants fees; The collectability of accounts receivable; Financial information data, valuations, or projections relevant to the creditors decision to accept or reject the chapter 11 plan; Information relevant to the risk posed to creditors under the plan; The actual or projected realizable value from recovery of preferential or otherwise voidable transfers; Litigation likely to arise in a non-bankruptcy context; Tax attributions to the Debtors; Any relationship with affiliates. See In re Brass Corp., 194 B.R. 420, 424-25 (Bankr. E.D. Tex 1996). Approval of a disclosure statement should be denied when it does not contain adequate information. See Menard Sanford v. Mebey (In re A.H. Robins Co.), 880 F.2d 694, 696 (4th Cir. 1989). K. WHO CAN OBJECT TO THE DISCLOSURE STATEMENT? Any party-in-interest can object to the disclosure statement. FED.R BANKR. P. 3017. The objections, however, must be filed within the time fixed by the Court. Likewise, the objection must be served on the debtor, any official committee, and any other party that designated by the bankruptcy court. L. DOES the Court conduct a disclosure statement hearing? A disclosure statement can only be approved after notice and hearing. The court will conduct a hearing to the adequacy of the disclosure statement. The plan proponent must provide parties with at least 28 days notice of the 12

Plans and Confirmation Chapter 7 disclosure statement hearing. FED.R BANKR. P. 3017(a). The following parties are generally entitled to notice of the disclosure statement hearing; however, the local rules may include additional parties: Debtor; Creditors; Equity security holders; Office of the United States Trustee; Parties-in-Interest: o Securities & Exchange Commission; o Internal Revenue Service; o United States Attorney; and o Secretary of Treasury. In addition to providing the disclosure statement and notifying parities of the hearing date, the plan proponent typically includes a copy of the plan. M. WHO CAN VOTE ON THE PLAN? With the exception of pre-packaged plans, the plan proponent solicits the votes after the court approves the disclosure statement. Only classes of creditors and interests holder with impaired claims or interests are entitled to vote on a plan. 11 U.S.C. 1129(a)(8)(A); In re Combustion Engineering, Inc., 391 F.3d 190, 216 (3d Cir. 2004). The Bankruptcy Code defines impairment as any claimant or equity holder whose claim or interest is unaltered:...a class of claims or interests is impaired under a plan, unless with respect to each claim or interest of such class, the plan (1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest. 11 U.S.C. 1124. Simply put, if the plan alters the claimant s or equity holder s rights, positively or negatively, then the holder is impaired. Unimpaired classes are not entitled to vote and are presumed to have accepted the plan. 11 U.S.C. 1126(f). As such, creditors whose claims are unaltered are presumed to approve the plan. In re Chandler Airpark Joint Venture I, 163 B.R. 566, 568 (Bankr. D. Ariz. 1992). N. WHAT ARE THE CONFIRMATION REQUIREMENTS? Section 1129(a) contains thirteen requirements, which the plan proponent must establish: The plan complies with title 11; The plan proponent complies with title 11; The plan has been proposed in good faith; 13 The bankruptcy court exercises substantive control over the fees and expenses; The reorganized debtor s insiders have been disclosed and their compensation has been approved; Any local regulatory agencies of rate changes have been approved; The plan is in the best interests of the creditors; The plan has been accepted; Administrative and gap claims will be paid on the Effective Date; Priority tax claims are properly treated; At least one impaired class has accepted the plan; The plan is feasible; The plan provides for the payment of the United States Trustee fees; and The plan provides for retiree benefits. O. IS A HEARING REQUIRED FOR CONFIRMATION? Section 1128 requires the court to conduct an evidentiary hearing to determine if the plan can be approved or confirmed. 11 U.S.C. 1128. A bankruptcy court must hold an evidentiary hearing in ruling on confirmation. Williams v. Hibernia Nat l Bank 850 F.2d 250, 253 (5th Cir. 1988); Acequia Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352, 1358 (9th Cir. 1986); In re Neff, 60 B.R. 448, 451 (Bankr. N.D. Tex. 1985) (acknowledging the evidentiary hearing [is] required ). A bankruptcy court must confirm a plan if all the requirements set forth in Section 1129 are met. 11 U.S.C. 1129. The purpose of the confirmation hearing is to determine whether the plan proponent can establish each of the requirements for confirmation. P. WHO HAS THE BURDEN OF PROOF AT THE CONFIRMATION HEARING? The plan proponent bears the burdens of both introduction of evidence and persuasion that each element of Section 1129(a) are met. Home Savings Ass n v. Woodstock Assocs. I, Inc. (In re Woodstock Assocs.,I, Inc.), 120 B.R. 436, 453 (Bankr. N.D. Ill. 1990). Under Section 1129(b) the cram down provisions the plan proponent s burden of proof calls for clear and convincing evidence. In re Rusty Jones, Inc. 110 B.R. 362, 373 (Bankr. N.D. Ill. 1990). Q. WHO CAN OBJECT TO CONFIRMATION? Any party-in-interest can object to confirmation of a plan. 11 U.S.C. 1128(b); FED. R. BANKR. P 3020(b). Although any party can object to the treatment of its claim under the plan; it cannot object to the treatment of another creditor. Kane v. Johns- Mansville, 843 F.2d 636, 6444 (2d Cir. 1988).

Plans and Confirmation Chapter 7 R. HOW MANY VOTES ARE NEEDED TO CONFIRM A CHAPTER 11 PLAN? A plan proponent needs a majority in number and two-thirds in amount of the voting creditors. 11 U.S.C. 1126; In re Greystone III Joint Venture, 995 F.2d 1274, 1277 (5th Cir. 1991). The calculation is based on voting creditors only; not all creditors. (a class of creditors accepts a plan if a majority of the creditors and those holding two-thirds of the total dollar amount of the claims within that class vote to approve the plan). S. WHAT IF THE PLAN IS CONSENSUAL? Consensual means that that each class of creditors or interest holders specified in the plan has accepted the plan. 11 U.S.C. 1129(a)(8). If the plan proponent seeks consensual confirmation of the plan, then Section 1129(a) governs. In re Vita Corp., 380 B.R. 525, 526 (C.D. Ill. 2008). The voting requirements of Section 1129(a)(8) is at the heart of consensual confirmation. To confirm, a consensual plan, the plan proponent must have unanimity. Each impaired class must have affirmatively accepted the plan. Likewise, the best interests of creditors test and the feasibility test are critical to consensual confirmation. Consensual confirmation is not unusual as the debtor and its creditors can reach a basic agreement on the debtor s economic situation. T. WHAT IS GOOD FAITH? Section 1129(a)(3) requires the plan has been proposed in good faith. 11 U.S.C. 1129(a)(3). This section also requires that the plan not have been proposed by any means forbidden by law. 11 U.S.C. 1129(a)(3). In re Cajun Elec. Power Co-Op, Inc., 150 F.3d 503, 519 (5th Cir. 1998). Good faith requires a review of the totality of circumstances, keeping in mind the purpose of the Bankruptcy Code is to give a debtor a fresh start. Id. The Bankruptcy Code does not define good faith. To determine good faith, courts inquire as to whether the plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code. See e.g., In re Madison Hotel Assocs., 749 F.2d 410, 424-27 (7th Cir. 1984). U. WHAT IS THE BEST INTEREST OF CREDITORS TEST? The best interest of the creditors test in Section 1129(a)(7) is an essential element to confirming a plan. Under this test, each creditor must be guaranteed to better treatment of its claim under the plan that the creditor would receive in a liquidation. 11 U.S.C. 1129(a)(7); Matter of Briscoe Enter., Ltd. II, 994 F.2d 1160, 1167-68 (5th Cir. 1993). 14 Based on this requirement, the plan proponent must demonstrate (1) the present value of the estate property and (2) a liquidation analysis. The liquidation analysis assumes conversion of the case to chapter 7 and a chapter 7 trustee. V. HOW IS FEASIBILITY DETERMINED? Feasibility is related to the best interest of the creditors test. 11 U.S.C. 1129(a)(11). Section 1129(a)(11) requires the plan proponent to demonstrate that the plan will not likely be followed by liquidation or the need for further reorganization. In re Save Our Springs (S.O.S.) Alliance, Inc. 632 F.3d 168, 174 (5th Cir. 2011). The feasibility test requires the bankruptcy court to scrutinize carefully the plan to determine if the plan actually offers a prospect of a successful reorganization. The plan proponent does not have to guarantee success, but the plan must offer a reasonable assurance of success. Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2d Cir. 1988). W. WHEN ARE ADMINISTRATIVE CLAIMS PAID? Section 1129(a)(9) requires that all administrative expense claims and gap claims are paid on the effective date. 11 U.S.C. 1129(a)(9). Administrative claims include not only claims for post-petition expenses (i.e. operations, salaries, supplies, etc.), but the claims of professionals, members of official committees, and indenture trustees must also be paid. All of these claims must be paid in cash on the effective date unless the holder has agreed to different treatment. In re Cypresswood Land Partners, I, 409 B.R. 396, 431 (Bankr. S. D. Tex. 2009). X. WHAT IF THE PLAN IS CONTESTED? WHAT IS CRAM DOWN? Cram down occurs when one or more class objects to the plan and other classes accept the plan. In re TH New Orleans Ltd P ship, 188 B.R. 799, 804 (E.D. La. 1995). If the plan is contested, then the plan proponent must seek confirmation under Section 1129(b). The plan proponent must specifically request to proceed under cram down. 11 U.S.C. 1129(b)(1). In re Landing Assocs.Ltd., 157 B.R. 791, 809(Bankr. W.D. Tex. 1993). To cram down a plan, the plan proponent must demonstrate all but one (omitted the requirements that all classes consent or be unimpaired) of the 13 consensual confirmation plan requirement. 11 U.S.C. 1129(b)(1). In re Lakeside Global II, Ltd., 116 B.R. 499, 510 (Bankr. S.D. Tex. 1989). Additionally, to succeed under the cram down provisions, the plan must not unfairly discriminate against dissenting classes; and the plan s treatment of

Plans and Confirmation Chapter 7 such dissenting classes be fair and equitable. 11 U.S.C. 1129(a)(9); Lakeside, 116 B.R. at 510. Y. WHAT IS THE ABSOLUTE PRIORITY RULE? The fair and equitable requirement provides for the absolute priority among creditors and stockholders in the in the plan. Carrieri v. Jobs.com, Inc., 393 F.3d 508, 521 (5th Cir. 2004). The absolute priority rule provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property. Carrieri, 393 F.3d at 510. Z. UPON CONFIRMATION, IS THE DEBTOR DISCHARGED? When a plan of reorganization is confirmed Plan, the debtor is discharged, the estate s property is revested in the debtor, and all of the debtor s property becomes free from prior claims. 11 U.S.C. 1141(a). If a liquidating plan is confirmed not engage in business after confirmation, a debtor does not receive a discharge. 11 U.S.C. 1141(d)(3). In re TH New Orleans Ltd P ship, 188 B.R. 799, 804 (E.D. La. 1995). 15

Plans and Confirmation Chapter 7 APPENDIX & USEFUL BANKRUPTCY WEBSITES 17. Western District of Texas Bankruptcy website www.txwb.uscourts.gov/ 1. Sample Chapter 11 Ballot 2. Sample Chapter 11 Ballot Tabulation 3. United States Trustee website www.usdoj.gov/ust 4. Searchable Bankruptcy Code www.4law.cornell.edu/uscode/11/ 5. United States Bankruptcy Courts website www.uscourts.gov/bankruptcycourts. html 6. National Bankruptcy Pacer https://pacer.login.uscourts.gov/cgibin/login.pl 7. American Bankruptcy Institute www.abiworld.org 8. National Association of Consumer Bankruptcy Attorneys www.nacba.org 9. Chapter 13 Trustee websites www.13network.com or www.bestcase.com/trustees13.htm 10. Vehicle Valuations www.nadaguides.com or www.edmunds.com or www.kbb.com 11. Paycheck calculator for budgets www.paycheckcity.com/netpaycalc/n etpaycalculator.asp 12. Caselaw/Legal Research www.texasbarcle.com/cle/home.a SP or www.findlaw.com or http://www.law.cornell.edu/supct/index.html 13. United States Court website http://www.uscourts.gov/ 14. Southern District of Texas Bankruptcy Website www.txs.uscourts.gov/bankruptcy/ 15. Northern District of Texas Bankruptcy Website www.txnb.uscourts.gov/ 16. Eastern District of Texas Bankruptcy website www.txeb.uscourts.gov/ 17

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