16.2 Bankruptcy Chapters & the Bankruptcy Estate

Bankruptcy is exclusively federal. Title 11 of the United States Code — the Bankruptcy Code — and the Federal Rules of Bankruptcy Procedure govern cases filed in United States Bankruptcy Courts. For Domain 10 of the NALA CP Knowledge Exam, master the chapter purposes, how the estate is formed, how exemptions and the means test operate at a conceptual level, and who the major players are. State-specific local rules are not the focus; nationwide Code concepts are.

The Major Chapters

Chapter 7 is the classic "fresh start" liquidation. A trustee is appointed to collect and sell nonexempt property and distribute proceeds according to the Code's priority scheme (secured claims against collateral, then priority unsecured claims such as certain taxes and domestic support, then general unsecured claims). Many consumer Chapter 7 cases are no-asset cases — the trustee files a report of no distribution because everything is exempt or encumbered.

Chapter 11 is designed for reorganization. The debtor in possession (DIP) typically continues operating the business with most trustee powers, subject to court oversight. A creditors' committee (usually unsecured creditors) may be appointed to investigate and negotiate the plan. Confirmation requires meeting Code tests (feasibility, best interests of creditors, absolute priority in certain contexts, and voting thresholds).

Chapter 13 lets individuals with regular income propose a plan to cure defaults (often on a home mortgage) and pay unsecured creditors over time while retaining property. Debt ceilings and eligibility rules limit who may file. Plan payments usually last three years, or up to five years when the court finds cause or when required by the means-test framework.

Chapter 12 is a specialized reorganization for family farmers and family fishermen. Mention it on the exam if a fact pattern involves a farm or fishing operation seeking a plan; do not confuse it with Chapter 13.

The Petition and Creation of the Estate

A case begins with a voluntary petition (debtor files) or an involuntary petition (creditors force the debtor into bankruptcy under strict Code conditions — rarely tested in depth, but know the concept). Upon commencement, the bankruptcy estate arises automatically. Under 11 U.S.C. §541, the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case," wherever located and by whomever held. That expansive definition reaches real estate, bank accounts, lawsuit claims, tax refunds attributable to pre-petition years, and even certain interests the debtor might not think of as "property."

Important nuances for exam traps:

• Property the debtor acquires after filing is generally not estate property in Chapter 7 (with exceptions such as inheritances, life insurance proceeds, and divorce property settlements within 180 days under §541(a)(5)).
• In Chapter 13, post-petition earnings from the debtor's services are property of the estate while the case is pending (§1306) — a major difference from Chapter 7.
• Exempt property remains part of the estate until exemption is allowed, but the debtor may keep it free of creditors' claims once properly claimed and unopposed.

Exemptions: Federal Versus State

Exemptions allow individual debtors to protect designated property from liquidation. The Code provides a federal exemption scheme in §522(d) (homestead capped amount, motor vehicle, household goods, tools of the trade, wildcard, retirement accounts in various provisions, etc.). States may opt out of the federal list, requiring debtors domiciled there to use state exemptions (sometimes plus specific federal nonbankruptcy exemptions). Where the state has not opted out, debtors may choose between the federal Bankruptcy Code exemptions and the state scheme.

Domicile rules look to where the debtor lived for the requisite look-back period; gaming exemptions by moving shortly before filing is constrained by Code timing rules. On the exam, remember the policy: exemptions protect a modest fresh start — they do not let debtors shield unlimited luxury assets unless a state's homestead is unusually generous (and even then, federal caps can limit recently acquired homestead value in some situations).

The Means Test (Chapter 7 Abuse Screen)

The means test, added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), screens consumer Chapter 7 filings for abuse. Conceptually:

1. Compare the debtor's current monthly income (a six-month look-back average) annualized to the state median income for a household of the same size.
2. If income is below median, the presumption of abuse generally does not arise from the means test alone.
3. If income is above median, a formula subtracts allowed expense deductions (IRS standards and certain actual expenses) to compute disposable income. If projected disposable income over five years exceeds statutory thresholds, a presumption of abuse arises, pushing the debtor toward Chapter 13 or dismissal unless special circumstances rebut the presumption.

You need not memorize every IRS expense line for the CP exam, but you must know why the means test exists and that high-income debtors may be steered out of Chapter 7.

Roles: Debtor, Trustee, Creditors' Committee, U.S. Trustee

• Debtor — the person or entity seeking relief; must file complete, truthful schedules and attend the meeting of creditors (§341 meeting).
• Case trustee — in Chapter 7, liquidates and distributes; in Chapter 13, collects plan payments and monitors compliance; in Chapter 11, a trustee is appointed only for cause (otherwise the DIP serves).
• U.S. Trustee (or Bankruptcy Administrator in Alabama and North Carolina) — Department of Justice officer who supervises case administration, appoints panel trustees, reviews means-test compliance, and polices abuse — distinct from the private case trustee.
• Creditors' committee (Chapter 11) — typically the largest unsecured creditors; consults with the DIP, investigates, and participates in plan negotiation.

Schedules and Statements Paralegals Prepare

Bankruptcy practice is document-intensive. Under attorney supervision, paralegals commonly prepare:

• Voluntary petition and creditor matrix (mailing list)
• Schedules A/B (property), C (exemptions), D (secured creditors), E/F (unsecured priority and nonpriority), G (executory contracts/leases), H (codebtors), I/J (income and expenses)
• Statement of Financial Affairs
• Means-test forms (Form 122A series for Chapter 7; 122C for Chapter 13)
• Statement of intention (Chapter 7 — retain, redeem, or surrender collateral)
• Credit-counseling and personal-financial-management course certificates

Accuracy is ethical as well as practical: false schedules can lead to denial of discharge, referral for perjury, or attorney sanctions. The paralegal gathers bank statements, tax returns, pay stubs, titles, and loan documents; the attorney reviews and signs the petition package as counsel of record.

Paralegal Scenario

A married couple with above-median income wants Chapter 7 to wipe out credit cards while keeping two cars and a modest home. You assemble six months of pay stubs for the means test, draft Schedules A/B listing the home, cars, and household goods, and prepare Schedule C using the state's opted-out exemption scheme your attorney selects. The means-test Form 122A-2 shows disposable income that triggers a presumption of abuse. You flag the result for counsel, who advises converting the strategy to Chapter 13. You then draft a five-year plan curing the mortgage arrears and paying a dividend to unsecured creditors — illustrating why chapter choice and estate/exemption analysis belong together.

Common exam traps: (1) saying Chapter 13 is for corporations — it is for individuals with regular income; (2) confusing the U.S. Trustee with the case trustee; (3) claiming post-petition wages are always outside the estate — true in Chapter 7 generally, false in Chapter 13; (4) treating exemptions as removing property from the estate immediately without the claiming process; (5) assuming every business must file Chapter 7 — Chapter 11 reorganization remains available.