Bankruptcy

Types of Bankruptcy

1. voluntary — debtor files for bankruptcy

2. involuntary — creditors file for debtor to be bankrupt

   1. notice including copy of petition must be given to all creditors listed

   2. cannot be involuntary filed against farmer, insurer, bank, or non-profit corporation

automatic stay:

suspension of all actions of creditors against the debtor or debtor’s property after petition is filed

EXCEPTIONS:

1. domestic support obligations (debt owed to spouse, former spouse, child of debtor, child’s parent or guardian)

2. proceedings against the debtor related to divorce, child custody, visitation, domestic violence, and support enforcement

3. investigations by a securities regulatory agency

4. certain statutory liens for property taxxes

5. paternity or criminal proceedings

6. efforts to collect alimony or child support

bankruptcy does not look at insolvency to file, instead look for

the inability to pay debts as they become due

Voluntary petition must include:

1. all creditors (secured and unsecured) names, address, and amount of debt

2. all property / assets owned by the debtor (includng exempt property claimed)

3. statement of debtor’s financial affairs

   1. sch. of current income and expenses

Order for Relief:

1. automatically filed if VOLUNTARY petition filed

2. Court may enter order for relief for INVOLUNTARY petitions

If creditor wants to be part of bankruptcy claim, they must file

proof of claim in a timely manner (70 days after Order for Relief is granted)

When bankrtupcy petition if filed, it creates an estate. an estate includes:

1. all of the debtor’s nonexempt property

2. proceeds, rents, and profits arising from estate

3. property the trustee can recover

4. property the ebtor acquirse within 180 days after filing petition

DOES NOT INCLUDE:

1. amounts withheld by employer or contributed by employee to health insurance plan or retirement plan or for income taxes

2. does not include spendthrift trust enforceable under state law

Trustee for Bankruptcy

For chapter 7 and Chapter 13 — trustee is appointed but not needed for chapter 11

Trustee powers:

1. can sue and be sued

2. collect’s debtor’s estate and distributes money

3. entitled to compensation and reimbursement for expenses

4. debtor has duty to cooperate with trustee

5. has priority over unperfected secured creditor (like a lien creditor)

6. has the ability to recover preference payments

Liquidation Bankruptcy

1. debtor gives non exempt assets to trustee

2. trustee sells assets and distirbutes proceeds to creditors

3. many debts discharged

Any person (partnership, cooperation, individual) can be part of ch. 7 debtor

Railroads, banks, insurers, savings and loans cannot be ch. 7 debtor

Means Test

any creditor or trustee can bring motion to dismiss petition for bankruptcy, if debtor’s net income > state median income.

If debtors income > state median income, must go through mean’s test

How often can a debtor receive bankruptcy?

every 8 years. If they received a discharge within 8 years, they cannot file new bankruptcy petition

Credit Counseling

Must within 180 days prior to filing for bankruptcy receive credit counseling / financial management from an ‘ approved nonprofit budget and credit counseling agency’

Lien Stripping

a lien can be used to secure a debt by allowing the creditor ot take a security interest in a debtor’s property

some liens that a worth more than the security interest property may be stripped in bankruptcy.

e.g. security interest is 20,000 but car is worth only 12,000 and so lien stripping takes debt of 20,000 down to 12,000.

LIMITATION:

cannot strip down liens on personal vehicles bought within 910 days of bankruptcy filing

Ch. 13, repayment plan

can be filed by individuals who owe certain dollar amounts in secured debts and unsecured debts (including sole proprietors)

Can only be started by a voluntary petition

Preference Payments

debtor not allowed to prefer one creditor over another (transfer property to one creditor to defeat another’s interest) because we treat similarly situation creditors the same

What is NOT a preference payment:

1. when an insolvent debtor transfers property for preexisting debt during 90 days prior to filing for peittion (1 year for insiders like brother, sister, etc.)

   1. this creditor gets more than creditor would get in bankruptcy

2. alimony and child support payments

Trustee can cancel or void transfers including a Perfected Security interest if the transfer was:

1. to the benefit of a creditor

2. was made on an account of an old debt

3. was made at the time the debtor was insolvent

4. enabled the transferee to receive more than he would have received under chapter 7

Fraudulent Transfers by Debtor

trustee can look back two years before the period of bankruptcy petition and void fraudulent transfers made by the debtor and bring that asset back into the estate

Exempt property:

1. property used as resident or burial plot

2. one motor vehicle

3. jewelry

4. tools of the debtor’s trade

5. wildcard exemption of unused portion of homestead for other property

6. unmatured life insurance contracts

7. professionally prescribed health aids

8. social security, veteran’s and disability benefits

9. unemployment compensation

10. good faith alimony and support payments

11. payments from certain pension, profit sharing, and annuity plans

12. payments from an award under a crime victim’s reparation law, a wrongful death awar

13. retirement accounts

Reaffirm debt

creditor must make an agreement with debtor before debtor is discharged

consumer debt: court must confirm that reaffirmation not undue hardship and in debtor’s best interest

debtor has right ot rescind agreement within 60 days of it becoming enforceable

court must inform debtor of legal effect and that reaffirmation is not required

debts that are not dischargeable:

1. legal liability for Tort claims including punitative damages

2. judgements due to driving while intoxicated

3. taxes, fines, penalties owed to government

4. alimony and child support

5. student loans unless debtor can prove would impose undue hardships on debtor and dependents

6. consumer debts for luxury goods and services > $650 per creditor if incurred on or within 90 days before order for relief

how are assets distirbuted?

1. secured claims satisfied first

2. then sets of priority claimants

   1. domestic support obligations

   2. administration expenses (filing fees, attorney’s fees, trustee’s expenses)

   3. ordinary course of business expenses in involuntary bankruptcy

   4. wage claims earned within 180 days before filing of petition or before date business ceases

3. general creditors

4. debtor

creditor’s rights outside of bankruptcy

1. attachment

   1. seize property through court order — only for nonexempt property

2. garnishment

   1. take wages or property to satisfy debt — commonly used to secure child support

   2. served on employer who takes money out of debtor’s wages

3. composition:

   1. contractual agreement between debtor and creditor about new debt owed

4. debtor can voluntarily assign property to creditors

5. court can appoint a receiver to collect and perserve the debtor’s assets and dispose of them at the court’s discretion