Chapter 9 How the Debtor Gets to Keep "His Own" Property

• Jurisdiction: United States

Chapter 9 How the Debtor Gets to Keep "His Own" Property

§ 9.1 ~ Introduction

The benchmark in bankruptcy is that the debtor turns over his property to the trustee, who liquidates it and distributes the proceeds to creditors. If there is a creditor with secured debt in an amount that exceeds the value of its collateral, then the trustee may abandon the property and let the secured creditor foreclose.

This may lead to the question: Does the debtor ever get to keep his own property? Surprisingly often, he does. For purposes of this book, the most important devices for retaining property are in chapter 11, which we deal with in detail later. But even under chapters 7, 12 and 13, there are ways a debtor can retain his property. The following is a catalog of a variety of devices that will work to leave property in the hands of the debtor, notwithstanding the claims of the trustee and creditors. Later, we call attention to a couple of devices that will not work.

§ 9.2 ~ Confirm a Plan

Confirm a chapter 11 plan, including a cramdown plan. A classic purpose of chapter 11 is to provide a device whereby the debtor gets to retain property while creditors' claims are disposed of. Cramdown, in which the debtor may "rewrite the contract" and impose it on the secured creditor, is only the most dramatic of plan devices.¹

Confirm a chapter 13 plan. Chapter 13 provides a "payment plan" process for debtors with a regular income — usually (but not always) wage-earners. Compare also chapter 12 for family farmers (or fishermen). Both chapters include a kind of cramdown.

§ 9.3 ~ Claim It as Exempt

Claim the property as exempt. Section 522 provides that an individual debtor may claim property as exempt, either under the bankruptcy statute or under non-bankruptcy law. But, as noted above, most states have exercised their statutory right to "opt out" of the federal system, leaving only state exemptions available.² Exemptions are available only to individual debtors; entities other than individuals, such as partnerships, corporations and limited liability companies, do not get any exemptions.

§ 9.4 ~ REDEEM It

Redeem the property under chapter 7. Sometimes overlooked, § 722 gives the debtor the right to "buy back" collateral from the secured creditor. The important part is that the debtor gets to redeem the property at a court-imposed valuation rather than having to bargain on his own. The right applies only to consumer goods securing a dischargeable consumer debt. It also applies only when the property is exempt or when the trustee is abandoning the property. Debtors must use non-estate property (e.g., a post-petition gift from a rich uncle) to redeem collateral.

Consider Daniel Debtor, who owes $5,000 on his household goods. Although it might cost as much as $6,000 to replace them, the court finds that they are worth only $2,000. Daniel may redeem by paying $2,000. Unfortunately for consumer debtors, they must pay the entire buyback price at the time the right is exercised; no installment payments are permitted.

The redemption right does not seem to be used very much — which is hardly surprising. After all, if the debtor has enough money to pay the lien in full, what is he doing in bankruptcy?

§ 9.5 ~ Buy It Back

Buy back from the estate "in...