Corporations and Bankruptcy Guide

Corporation

an artificial being created by operation of law (in accordance with statutes) with an
existence distinct from the individuals wwn and operate it

Characteristics of a Corporation

legal person, created by a statute, limited liability of shareholders, perpetual existence, powers, centralized management and control, free transferability of interests

creation by statute

a corporation is created under the provisions of applicable state statutes

Limited liability of shareholders

generally, shareholders are only at risk up to the amount of stock they have purchased.

powers

what a corporation can do: sue/be sued, alienate/own property, commit torts & crimes, incur debts, issue stock, enter into contracts

centralized management and control

a corporation’s management is centralized in a board of directors and officers

free transferability of interests

shares, representing ownership interests, are freely transferable

Articles of incorporation

name, purpose, capital stock authorization, place of business, directors and officer names, registered agent for service of process

By-laws

ground rules for management of the corporation: duties and authority of corporate officers, shareholder and director meetings, shareholder voting, and issuance and transfer of shares

Corporation claffications

public, quasi-public, private, close corporation, sub-chapter S, professional

public corporation

corporation formed by a state or the federal government to administer goverment affairs

quasi-public corporation

public service corps like utilities (gas co.,electric co.), heavily regulated due to public involvement

private corporation

created by private parties to serve a profit or non-profit purpose; McDonalds, Disney

close corporation

stock owned by one person or a family, not sold to public

Sub-Chapter S corporation

small corporation taxed as a partnership for IRS purposes only, less than 35 shareholders, one class of stock

Professional corporation

mainly for tax purposes, doesn’t protect as to tort liability for professional negligence

domestic corporations

domestic in the State of its “birth” In all other states it is a foreign corp

regulating of foreign corporations

if a corporation wishes to “do business” in another state, it must register or qualify in that other state as a foreign corporation

alienation corporation

corporation formed in a foreign country

piercing the corporate veil

disregard of the corporate entity, under certain circumstances creditors may seek to reach the shareholders by persuading the court to disregard the corporate entity and make shareholders liable

grounds for piercing the corporation veil

commingling of assets, lack of corporate formalities, undercapitalization, fraud/wrong/dishonesty/injustice

commingling of assets

mixing separate and community property, in this case being corporation and personal assets of shareholders

lack of corporate formalities

regular meetings, records maintained, issuance of stock

undercapitalization

organized without sufficient capital or liability insurance to meet obligations reasonably expected to arise

consolidation

transfer of assets of two corporations to a newly formed 3rd entity

bankruptcy options

ch 7 (liquidation), ch 9 (municipal debt adjustment), ch 11 (reorganization), ch 12 (family farmers), ch 13 (adjustment of debts of individuals), and ch 15 (cross-border cases)

non-dischargeable debts

creditors may object to the discharge of certain debts

taxes (state and federal) due within 3 years of petitions filing

non-dischargeable debt

debts resulting from fraud/embezzlement/larceny

non-dischargeable debt

alimony or child support payments/arising from property settlement in divorce

non-dischargeable debt

liabilities arising from willful and malicious injury

non-dischargeable debt

damages based upon intoxicated operation of a vehicle or vessel

non-dischargeable debt

student loans

non-dischargeable debt

debts not disclosed in the petition

non-dischargeable debt

railroads

cannot file a Ch 7 case

savings institutions

cannot file a Ch 7 case

insurance companies

cannot file a Ch 7 case

banks

cannot file a Ch 7 case

Individuals and entity debtors

can file a Ch 7 case if not apart of the exceptions

Means test test application

if a debtors income exceeds the state median income

median test Ch 7 approval

if an individual debtor’s average monthly income (w/ a 6 month average before filing) is > the state median income for a family of the same size

a creditor may dismiss an individuals ch 7 case if

an individual debtors average monthly income exceeds the state median income fro a family of the same size

what can a debtor do for Ch 7 if the median test doesnt work

attempt to qualify by passing the means test

mean test design

identify consumer debtors only who can pay a significant portion of their bills from their disposable income

When should a Ch 7 case be tried for a Ch 13

if the debtor fails the means test along

Means test formula

60 times the debtors average monthly income - allowable expenses

What if the sum of 60 times the debtors average monthly income - allowable expenses is < $9,075

the debtor may continue with Ch 7

What if the sum of 60 times the debtors average monthly income - allowable expenses is > $15,150

the debtors filing is presumed abusive and the debtor will likely have to convert to a ch 13 case in order to receive bankruptcy

What if the sum of 60 times the debtors average monthly income - allowable expenses is < $15,150 but > $9,015

the filing is presumed abusive if the sum is greater than 25% of the debtors unsecured claims

general abuse test

debtor acted in bad faith or under the totality of circumstance abuse exists

completion of a financial management course before discharge

Ch 7 liquidation characteristics

automatic stay

Ch 7 liquidation characteristics

credit counseling within 180 days of filing

Ch 7 liquidation characteristics

case is dismissed by the court 45 days after it is filed

if the debtor fails to file required schedules and documents, Ch 7 liquidation characteristics

Section 341 of the Bankruptcy Code

Ch 7 liquidation characteristics, requires that a meeting of the creditors of each bankruptcy estate be noticed and held within a reasonable time after the case is commenced, each debtor must appear at the meeting and submit to questioning under oath by the Trustee and by any creditors

property in the bankruptcy estate

Ch 7 liquidation characteristics, All of the debtor’s nonexempt personal and real property, All income from the bankruptcy estate property received within 180 days of the petition’s filing are included in the bankruptcy estate, and All property the debtor receives from divorce, inheritance, or insurance (e.g. life insurance proceeds) within 180 days of the petition’s filing.

exempt property

Ch 7 liquidation characteristics, property needed by the debtor to live and is therefore not included in the bankruptcy estate

examples of exempt property

homestead, interest in a motor vehicle, household goods and furnishings, apparel, appliances, books, animals, musical instruments, jewelry, tools of debtors trade

fraudulent transfers

Ch 7 liquidation characteristics, trustee may set aside these made within two years of the filing, made with the intent to hinder, delay, or defraud creditors, or where debtor received less than equivalent while debtor was insolvent

preferential payment to a creditor

Ch 7 liquidation characteristics, trustee may set aside a preferential payment to a creditor; trustee takes payment back from creditor

preferential payment is a payment to a creditor on an antecedent debt when

Ch 7 liquidation characteristics, made within 90 days of the petitions filing, made while the creditors was insolvent, the creditor received more than the creditor would have received under the bankruptcy code

reaffirmation of debts by the debtor

debtor may reaffirm a debt before discharge, court approval of the reaffirmation is required, Ch 7 liquidation characteristics

objections to discarge

Ch 7 liquidation characteristic only, can discharge within an eight year period

disappearance of assets

Ch 7 liquidation characteristics, debtors failure to adequately explain the disappearance or loss of assets may mean the debtor is not entitled to a discharge

conviction of a crime

Ch 7 liquidation characteristics, debtor criminally convicted of a crime involving violence or drug trafficking may have their case dismissed

unjustifiable failure to keep books and records

a debtor who unjustifiably conceals, falsifies, or fails to keep adequate records may not be entitled to a discharge, Ch 7 liquidation characteristics

revocation of discharge basis

Ch 7 liquidation characteristics

payments and priorities of claimants

Ch 7 liquidation characteristics

debtor obtained discharge fraudulently and the fraud wasn’t discovered until after the discharge

revocation of discharge basis

debtor obtained property that would have been property of the estate yet it was knowingly and fraudulently not disclosed

revocation of discharge basis

failure to obey a court order or answer questions

revocation of discharge basis

secured claimants paid first

payments and priorities of claimants

domestic support (alimony, child support)

priority claimant

administrative expenses (trust fees, attorney fees, CPA fees)

priority claimant

claims arising in the ordinary course of business during the 20 days following in involuntary filing when no automatic stay was in effect

priority claimant

wage claims up to a listed dollar amount

priority claimant

tax claims

priority claimant

personal injury claims arising from a party’s intoxicated operation of a vehicle or vessel

priority claimant

Chapter 13, adjustment of debts of individuals

Ch 7 liquidation and ch 11 reorganization may be converted into this bankruptcy type

repayment of plan over 3-5 year period (adjustment of debts of individuals)

turn over to the trustee any future earnings or income needed to fulfill the plan, provide for full payment of all priority claims within plan period, and provide equal treatment of all claims with a certain class

confirmation of the plan (adjustment of debts of individuals)

After the Plan is filed a court hearing is held. If secured creditors are protected the plan will likely be approved if all of the debtor’s disposable income will be applied to pay creditors. After completion of all payments all debts included in the plan will be discharged

Ch 11 reorganization characteristic

debtor remains in possession (DIP) of debtors assets

no trustee appointed, trustee continues to operate their business

Ch 11 reorganization characteristic

DIP consultors

committee of unsecured creditors (<=7) concerning reorganization

reorganization plan (reorganization)

A Debtor may file a Reorganization Plan at any time during the case and has the exclusive right to file a plan during the first 120 days after the petition’s filing. Thereafter, any creditor may file a plan. Creditors or equity security holders must have a chance to accept or reject the plan.

confirmation of the plan (reorganization)

The various creditor classes must agree on the plan and the court must confirm it. The court must confirm the plan for it to take effect, but the court may do so even if only one class accepts the plan if the plan doesn’t “discriminate unfairly” against any creditors. Called a Cram-down. An approved plan is binding on the debtor, all creditors, and security holders even if they don’t accept the plan.

involuntary bankruptcy

A debtor’s creditors may file an involuntary bankruptcy petition (Chapter 7 or 11) against the debtor if the debtor is generally not paying debts as they become due (farmers and nonprofit charitable organizations can’t be petitioned into an involuntary bankruptcy). Only creditors owed individually or in aggregate at least $18,600 in unsecured debt may petition a debtor into involuntary bankruptcy. How many creditors must file is determined by the debtor’s total number of creditors.

>=12 creditors w/ involuntary bankruptcy

the petition must be filed by three or more creditors having unsecured claims totaling at least $18,600

<12 creditors w/ involuntary bankruptcy

the petition must be filed by one ore more creditors having unsecured claims totaling at least $18,600 in unsecured, undisputed debt. If the debtor challenges the involuntary bankruptcy, the court will hold a hearing to determine the debtor’s solvency. The test for solvency is whether the debtor is generally not paying debts as they become due.

solvency

a party's ability to meet their financial obligations as they become due

commingling of assets

using corporate money for personal expenses