MGMT 254 Chapter 34: Bankruptcy

The federal law

in 2005, Congress passed the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA) and is still in effect

bankruptcy courts

court of special jurisdiction to determine bankruptcy issues

- operate under the umbrella of the federal district court

Chapter 7 Bankruptcy (Liquidation)

liquidation form of bankruptcy under the federal law

liquidation

process of converting property into money whether of particular items of property or of all the assets of a business or an estate
-debtors must pass a means test

People who aren't entitled to Chapter 7 bankruptcy

farmers, insurance companies, savings and loans, municipalities, Small Business Administration companies, and railroads

Chapter 11 Bankruptcy (Reorganization)

reorganization form of bankruptcy under the federal law
- stockbrokers are not eligible

reorganization

allows debtor to reorganize and continue with protection from overwhelming debt and without the requirement of liquidation

Chapter 13 Bankruptcy (Payment Plans)

Payment Plans or Consumer Debt Adjustment Plans

payment plans

provides consumers a reorganization plan. Must have regular income and meet debt limitations. Debtors with means must file Chapter 13 rather than automatically declaring Chapter 7 bankruptcy

voluntary bankruptcy

proceeding in which the debtor files the petition for relief; once begun debtor must file a schedule of current income and current expenditures

means test

new standard under the Reform Act that requires the court to find that the debtor does not have the means to repay creditors; goes beyond the past requirement of petitions being granted on the simple assertion of the debtor saying "I have debts"
- if passed required to go into Chapter 13 bankruptcy

involuntary bankruptcy

proceeding in which a creditor or creditors file the petition for relief with the bankruptcy court
- nonprofits are exempt

eligibility

begins with creditors filing a petition with the bankruptcy court

number of claims of petitioning creditors

depends on creditors and amounts

bona fide

in good faith; without any fraud or deceit

ground for relied for involuntary case

if debtor does not contest, court will order relief if debtor is not paying debts or within 120 days of filing a custodian of debtor's estate was appointed

automatic stay

order to prevent creditors from taking action such as filing suits or seeking foreclosure against the debtor
- "Freezes" all creditors litigation, collections, and filing date positions
-Ends when case is closed or dismissed, or debtor is granted discharge

order of relied

the order from the bankruptcy judge that starts the protection for the debtor; when entered by the court, the debtor's creditors must stop all proceeding and work through the court to recover debts

list of creditors

debtor must furnish the court with a list; debts not disclosed will not be discharged

trustee in bankruptcy

impartial person elected to administer the debtor's estate

the bankrupt's estate

all of the debtor's property is included in the estate. Trustees have the power to set aside or void transfers to creditor, preferences, and statutory liens

preferences

transfers of property by a debtor to one or more specific creditors to enable these creditors to obtain payment for debts owed

voidable preferences

trustee may void transfers within 2 years of bankruptcy if intent to hinder creditors

fraudulent transder

transfer made or obligation incurred by the debtor within one year of bankruptcy when the debtor's actual intent was to hinder, delay, or defraud creditors

insolvent debtor

a debtor who cannot pay debts in a timely fashion; balance sheet test

insolvency

excess of debts and liabilities over assets, or inability to pay debts as they mature

balance sheet test

comparison of assets to liabilities made to determine solvency

preferential tranders

certain transfers of money or security interests in the time frame just prior to bankruptcy that be set aside if voidable

insiders

full-time corporate employee or a director or their relatives; transfers made to these people within the 12 months prior to the filing may be set aside

self-settled trust

trustee can set aside the transfer of property made within the last 10 years if intent to hinder creditors

claim

creditor's right to payment

proof of claim

written statement, signed by the creditor or an authorized representative, setting forth any claim made against the debtor and the basis for it

priority of claims

secured creditors may enforce their security interest up to the value of the security
- unsecured claims are paid in a specific order starting with domestic claims and costs and expenses of the bankruptcy
- the remainder (if any) goes to the debtor

debtor's duties

the debtor must file with the court a list of creditors, a schedule of assets and liabilities, and a statement of her financial affairs; must also appear for examination under oath at first creditor meeting

debtor's exemptions

an interest in property used as a residence, IRAs, college savings accounts, payments from life insurance, alimony, and child support

debtor's protection against discrimination

laws may not discriminate against anyone on the basis of a discharge in bankruptcy

example: state cannot refuse to issue new license if the fees on last one have been discharged as debt

discharge in bankruptcy

order of the bankruptcy court relieving the debtor from obligation to pay the unpaid balance of most claims

denial of discharge

debt's may not be discharged due to: fraud or concealment, failure to keep proper financial records, false oath, unexplained loss of assets, and many more

reorganizational plans under chapter 11

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contents of the plan

divides ownership interests and debts into those that will be affected and those that will not

confirmation of the plan

court must approve plan, approved if reasonable and submitted in good faith; after submitted cannot go back to old contract

Payment plans under Chapter 13

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contents of the plan (ch 13)

In effect a budget of the debtor's future income that provides for eventual full payment of outstanding debts

confirmation of the plan (13)

court must approve plan, approved if reasonable and submitted in good faith; debts are payable in the manner specified in the plan

discharge of the debtor (13)

after all payments called for by the plan have been made, the debtor is given a discharge