Acc 621 - Bankruptcy

Goals of Bankruptcy

1. To protect the debtor by giving them a fresh start, free from creditors’ claims

2. To ensure equitable treatment of creditors who are competing for a debtor’s assets.8

What laws govern Bankruptcy Proceedings?

• Covered by Article 1, section 8 of the U.S. Constitution

• Federal Jurisdiction

• Bankruptcy Reform Act of 1978, amended by Reform act of 1994.

• Bankruptcy Reform Act of 2005

Which courts have authority over Bankruptcy Proceedings?

• Federal Bankruptcy courts under the authority of U.S. District courts

• Federally appointed judges

  • 14 year terms

Types of Bankruptcy Relief

Chapters 1,3,5: General definitional provisions and provisions covering administration, creditors, debtor and estate.

Chapter 7: (MAJOR FOCUS OF REG EXAM) Liquidation proceedings

Chapter 9: Adjustments of debts of a municipality

Chapter 11: Reorganizations

Chapter 12: Adjustments of debts of family farmers with regular income

Chapter 13: adjustments of debts of individuals with regular incomes

Chapter 15: added in 2005, applies to international insolvency cases.

Chapter 7 Bankruptcy

• All assets are turned over to a trustee (appointed by the U.S. Trustee office)

• Trustee sells nonexempt property (exempt property = certain amount of specified property such as clothes, tools, household goods, etc) and distributes the proceeds to the creditors

• Remaining debts are discharged (with some exceptions)

• Available for any person, individual, corporation, or partnership

• Railroads, insurance companies, banks, municipalities, savings and loan investment companies licensed by the SBA, and credit unions cannot be debtors.

Filing the Chapter 7 Petition

• Will need to hire a bankruptcy attorney

• Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.

• - essentially the debtor is petitioning the court for relief.

Voluntary or Involuntary Bankruptcy

• Voluntary if debtor files petition

  • I need relief! Help me!

• involuntary if creditors file a petition to force the debtor into bankruptcy

  • Bruh pay us what you owe us

Conditions to file for Voluntary Bankruptcy

• Debtor must first receive credit counseling from an approved nonprofit agency within the 180-day period preceding the date of filing.

• Petitioner must understand there are other chapters of bankruptcy available

• Debtor does not have to be insolvent.

• Spouses can file jointly.

Chapter 7 Schedule aka needs to be in the petition

1. List of all assets (INCLUDING exempt property) and liabilities.

   1. List secured and unsecured creditors and addresses and amount of money owed.

2. Schedule of current income and expenses

3. Statement of financial affairs of the debtor

4. A certificate that the petitioner has received informational notice of rights and obligations and the implications of the filing

5. A certificate from an approved credit counseling agency

6. Proof of payments received from employers within 60 days prior to the filing

7. Statement of monthly income

   1. If exceeds median family income, then an additional form is needed (testing your means)

8. Debtor’s federal income tax return.

Legal Implications of Filing Voluntary Bankruptcy

• Debtor must swear to these schedules and sign.

• it is a FEDERAL CRIME to misrepresent^

• 14 days to file schedule after the petition or else there will be an automatic dismissal.

Potential Court push-back of Chapter 7 - Substantial Abuse

Courts will deny if “substantial abuse” of Chapter 7.

• Abuse is presumed if the debtor’s family income is more than the median family income in the state in which the petition is filed.

  • Means testing

  • Can be rebutted

• Not presumed if the debtor’s income is below the state median for the prior 6 months

What is Means Testing?

If the debtor’s income exceeds the state median income, additional calculations must be done.

Calculate a debtor’s disposable income and the ability to pay a certain sum to creditors monthly over 5 years

You are testing the debtor’s means of paying their debt obligations

Other grounds for dismissal of voluntary Chapter 7 Bankruptcy

• Violent crime or drug trafficking conviction

• Debtor fails to pay post-petition domestic support obligations (child support/alimony)

Ideal scenario for voluntary chapter 7 bankruptcy filing

• if a voluntary petition is proper, court issues order of relief.

• Clerk of court gives Trustee and Creditors mailed notice of the order within 20 days.

Involuntary Chapter 7 Bankruptcy

• Creditors force debtor into bankruptcy proceedings

  • Available under chapter 7 and 11

  • Not against a farmer or not-for-profit organizations, or if not allowed under the chapter under which such a case is concerned.

• If there are 12 or more creditors, you need three or more with unsecured claims totaling at least $18,600 to join the petition.

• If there are less than 12 creditors, one or more having an unsecured claim of $18,600 may file.

Ideal Scenario for Involuntary Chapter 7 bankruptcy

Court will order relief if:

• Debtor is generally not paying debts as they come due, or

• a general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 before filing

However, there are penalties for frivolous petitions against debtors. including attorney fees and punitive damages.

What is Automatic Stay?

What is a Stay? Once the petition is filed and court grants relief order, (whether involuntary or voluntary bankruptcy) creditors must STOP. Stop trying to collect. STOP legal actions against debtor or debtor’s property.

There are damages for violations of stay 

Exceptions to Automatic Stay

Aka, legal proceedings against a debtor that don’t have to stop once a relief order is granted by the court

• Domestic support obligations

  • Proceedings related to divorce, child custody or visitation, paternity, domestic violence, and support enforcement

• Criminal Prosecutions

• Investigations by a securities regulatory agency

• The creation or perfection of statutory liens for property taxes

• Eviction actions on judgements obtained prior to filing the petition. (basically if you got evicted before the petition, you still gotta GO)

• Withholding from debtor’s wages for repayment of a retirement account loan

• Withholding, suspension, or restriction of a driver’s license, a professional or occupational license, or a recreational license.

• Interception of a tax refund

• Enforcement of a medical obligation, as specified under Title IV of the Social Security Act.

Creditor’s meetings

• trustee calls a meeting of creditors within a reasonable time after the order of relief has been granted

• The debtor is examined under oath regarding their debts and assets. Failing to appear is cause for dismissal

• Within 90 days, creditors must file a “proof of claim” with the court clerk, unless it is listed on the debtor’s schedule as liquidated. (liquidated: paid)

Creditor’s Claims

• Claims are allowed unless disputed.

• If claim is disputed or unliquidated, court will decide value

• it is a crime to file false claim.

Property of the Estate

Debtor’s Estate (what gets liquidated, or what the courts can work with) Includes:

• All debtor’s legal and equitable interests in property presently held, including community property

• Property transferred in a “voidable” transaction

• After-Acquired property which Debtor becomes entitled within 180 days after filing from divorce, inheritance or insurance

• Proceeds and profits from property of the estate.

Exemptions to the Estate

1. Up to $27,900 in equity in property used as a residence or burial plot (homestead exemption - spouses who co-own a home can double to $55,800)

2. Up to $4,450 in equity in one motor vehicle

3. Up to $700 for any particular item of household furnishings, household goods, clothing, appliances, books, animals, crops, or musical instruments that are primarily for persona, family or household use with an aggregate limitation of $14,875

4. Up to $1,875 in jewelry

5. Any property up to $1,475 plus up to $13,950 of any unused amount of the homestead (first) exception

6. Up to $2,800 in implements, professional books or tools of the trade

7. Unmatured life insurance contracts

8. Professionally prescribed health aides (you cant be taking peoples hearing aids!!!)

9. Social Security, Veterans, and disability benefits

10. Unemployment Compensation

11. Alimony and Support payments, including child support

12. Payments from pension, profit-sharing and annuity plans

13. Tax exempt retirement funds

14. Payments from an award under a crime victim’s reparation law, a wrongful death aware and up to $27,900 from a personal injury aware, not including compensation for pain and suffering.

15. Post-petition earnings of an individual (chapter 7 only)

States may pass law requiring Debtor to use state exemptions. In some states, debtor may CHOOSE between state or fed guidelines.

The Trustee

• Court-appointed until first meeting of creditors

• Creditors will then elect permanent trustee

• Administers the estate

• Collects proceeds, liquidates assets and pays creditors in order of priority

• ^ this is marshalling of assets.

Trustee’s Powers

• Trustee has rights to get Debtor’s property back from those creditors that they can defeat by asserting the rights of:

  • Debtor against the creditors

  • Lien creditors against the creditors

  • Bona fide purchaser against the creditors

Aka a claw-back provision.

• However, the trustee still loses to the PMSI creditor who perfects within the grace period. (within 20 days after debtor takes possession) The PMSI cannot be dismissed in bankruptcy court.

Avoidance Powers

What can a trustee do?

Powers of avoidance: Reverse a sale or transfer of property to a creditor and call the property back into the debtor’s estate.

The main types of avoidance powers include reversing preferential transfers, fraudulent transfers, unauthorized post-petition transfers, and transfers voidable under other applicable laws. 

Voidable Rights

The trustee can stand in the shoes of the debtor and assume the rights they had. They can assert any lack of the debtor’s capacity or assent.

Voidable Preferences (in relation to avoidance powers)

A Debtor is NOT PERMITTED to transfer property or make a payment that favors or gives a preference to one creditor over another.

For a trustee to recover preferential payment, these 3 things must be present:

• Debtor must be insolvent

• Transferred property for pre-existing debt within previous 90 days (or, if the creditor is an insider (relative, partner, director of corporation), transfers within one year)

• Creditor gets more than usually they would in a chapter 7 bankruptcy proceeding

Voidable Transfer

• Creditor is a valid creditor

• Receives a preferential payment, more than their fair share of the debtor’s assets

Not Preferences

• Contemporaneous exchange for value

• Payments in the ordinary course of business

• Consumer can transfer up to $600 without constituting a preference (nonconsumers its $6,825)

• Payment of domestic support debts does not constitute a preference

• PMSI perfected within 20 days after the debtor receives possession of the property.

Liens on the debtor’s property

• The trustee is treated as having a lien on all the debtor’s property the instant the bankruptcy petition is filed

• Trustee has priority of all creditors except with prior perfected security interest or judicial liens

  • Reminder, PMSI in noninventory collateral grace period (20 days after debtor takes possession)

Fraudulent Transfers

Transfers made with an intent to hinder, delay, or defraud creditors or any transfer where the debtor received less than equivalent value while the debtor was insolvent.

• for example, a transfer of assets to a relative so debtor does not have to list on bankruptcy petition

• Trustee may avoid fraudulent transfers made within two years of filing of petition.

What debts cannot be discharged by bankruptcy?

• Taxes due within three years of filing

• Claims for amounts borrowed by the debtor to pay federal taxes or any nondischargeable taxes

• Claims against property or funds obtained by the debtor under false pretenses or by false representations

• Claims by creditors who were not notified and did not know about the bankruptcy (basically, if you forget to include a creditor on your petition, the debt you owe them doesn’t get discharged)

• Claims based on fraud or misuse of funds by the debtor while in a fiduciary capacity

• Judgement or consent decrees against a debtor as a result of the debtor’s operation of a motor vehicle or any vessel or aircraft while intoxicated.

  • basically if u drive drunk, hit someone and get sued, u still gotta pay that lawsuit after bankruptcy

• Fees or assessments arising from a lot in a homeowner’s association, as long as the debtor retained an interest in the lot

• Failure of the debtor to provide required or requested tax documents

• Restitution for federal crimes and prisoner court fees

• Debts incurred due to violations of securities laws

• Denial of discharge in a prior bankruptcy

• Fines for federal election law violations

Objections to Discharge of Debt

1. Debtor is not an individual

2. Fraudulent transfers or concealment of property

3. Unjustifiably failed to keep books and records

4. Commission of a bankruptcy crime

5. Failure to explain loss of assets

6. Refusal to obey orders or to answer questions

7. Improper Conduct in an insider’s case

8. Prior discharge within 8 years

9. Waiver

10. Failure to complete financial management course.

Chapter 13 Bankruptcy

• Adjustments of debts of an individual (typically a high-net worth individual)

• Only voluntary petitions, not involuntary, are allowed

• Trustee is appointed

• Composition or extension plan (3-5 years)