BLAW Ch 36: Bankruptcy

straight bankruptcy

this form of bankruptcy mandates that the bankrupt’s assets be distributed to creditors, but the debtor has no obligation to share future earnings.

Bankruptcy Code

set of laws that governs the process of bankruptcy. Allows individuals/businesses to resolve financial difficulties and either reorganize/discharge debts, depending on circumstance.

Chapter 7

Liquidation Bankruptcy

Bankrupt’s assets are sold to pay creditors. If the debtor owns a business, it terminates. The creditors have no rights to the debtor’s future earnings.

Available to individuals or businesses with limited income

Chapter 11

Reorganization Bankruptcy

Designed for businesses and wealthy individuals. Businesses continue in operation and creditors receive a portion of the debtor’s current assets and future earnings. Designed to resuscitate a business so they can stay alive

Chapter 13

Individual Debt Adjustment/Consumer Reorganization

This chapter offers reorganization for the typical individual. Creditors usually receive a portion of the individual’s current assets and future earnings.

1. To preserve as much of the debtor’s property as possible

2. To divide the debtor’s assets fairly between debtor and creditors

3. To divide the creditors’ share of assets fairly among each creditor

Goals of the Bankruptcy Code

bankrupt

someone who cannot pay his debts and files for protection under the Bankruptcy code

debtor

another term for a bankrupt

voluntary petition

filed by a debtor to initiate a bankruptcy case. Consists of majority of bankruptcy filings

involuntary petition

filed by creditors to initiate a bankruptcy case

trustee

oversees the bankruptcy case, collects assets and distributes them to creditors

Usually a CPA or lawyer

Selected by the creditors or by the US Trustee.

automatic stay

Legal protection that stops the creditors’ collection efforts(lawsuits, harassment, etc) after filing. Protects debtors from financial pressure during the process of bankruptcy. Without this, creditors could keep suing and repossessing property while you’re trying to resolve your situation.

proof of claim

a form stating the name of an unsecured creditor and the amount of claim against the debtor

1. Within 180 days before filing, individual debtor must get credit counseling.

2. Individuals may only file under Chapter 7 if they earn less than median income in their state or they can’t afford to pay back at least $8175 over 5 years.

2 requirements before filing a petition of bankruptcy

petition

begins the bankruptcy case, easy to fill out. It requires checking a few boxes and typing in name, address, and SSN

You also must include things like:

• list of creditors

• schedule of assets and liabilities

• claim of exceptions

• schedule of income and expenditures

• statement of financial affairs

list of creditors

names and addresses of all creditors

schedule of assets and liabilities

What the debtor owns and owes

claim of exceptions

a list of all assets that the debtor is entitled to keep

schedule of income and expenditures

the debtor’s job, income, and expenses

statement of financial affairs

a summary of the debtor’s financial history and current financial condition. In particular, the debtor must list any recent payments to creditors and any other property held by someone else for the debtor

8 years

How many years until you can file for bankruptcy again?

order of relief

Issued by the court after the petition is approved; an official acknowledgement that the debtor is under the jurisdiction of the court and is the start of the bankruptcy process.

US Trustee

oversees the administration of bankruptcy law in a region

meeting of the creditors

Called by the US Trustee after the order of relief is issued.

Here, the debtor must answer any questions the creditors have about his financial situation. If the creditors want to elect their own trustee, they do this here.

proof of claim

After the meeting of creditors, unsecured creditors submit this form that states the name of the unsecured creditor and the amount of claim against the debtor. If this is not filed, the unsecured creditor will lose any right to be paid.

No. Unless their claim exceeds the value of the collateral. In this case, they are unsecured creditors for the remaining balance and must file a proof of claim just like the other unsecured creditors.

Do secured creditors have to file a proof of claim?

Morton is a secured creditor for the $500k collateral of the house. However, for the remaining $250k, Morton is an unsecured creditor and must file a proof of claim.

Deborah borrows $750k from Morton in return for a mortgage on her house. If she does not repay the debt, he can foreclose. But, by the time Deborah files a voluntary petition in bankruptcy, the property value of the house is only $500k. How will Morton claim what he is owed?

The automatic stay will go into effect. This means the car lender must stop trying to repossess the car, the credit card company must halt its lawsuit, and the mortgage lender must pause foreclosure proceedings on her house.

Samantha is overwhelmed by debt. She owes $5k in credit card debt, $15k in car loan, and is 3 months behind on her mortgage. One day, Samantha receives a letter from her car lender stating her vehicle will be repossessed in 5 days unless she pays the overdue amount. At the same time, her credit card company sues her and her mortgage lender starts foreclosure proceedings on her house. Once Samantha files for bankruptcy, what will happen?

bankruptcy estate

the new legal entity created when a bankruptcy petition is filed; the debtor’s existing assets pass into the estate except exempt property and new property that the debtor acquires after the petition is filed.

exempt property

Allowed by the Code for individuals(but not organizations) to keep some property for themselves. Saves the debtor from destitution during the bankruptcy process and provides the foundation for a new life once the process is over.

Examples can include: car, house, disability benefits, health aids, etc

preferences

when a debtor unfairly pays creditors immediately before filing a bankruptcy petition. This gives unfair preferential treatment to some creditors.
Can also include when the debtor gives a creditor a security interest right before filing.

fraudulent transfer

a transfer that is made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditors.

No. A trustee cannot void pre-petition payments made in the ordinary course.

Can a trustee void payments from a grocery store to its regular fruit supplier?

1. Secured claims

2. Priority claims

3. Unsecured claims

How are a debtor’s assets distributed?

secured claims

creditors whose loans are secured by specific collateral. Paid out first in a bankruptcy case.

priority claims

Paid out 2nd in a bankruptcy case. Includes 7 categories

• alimony/child support

• administrative fees(to trustee, lawyers, etc)

• gap expenses(expenses that occur between involuntary petition and order for relief)

• employee payment

• employee benefits

• consumer accounts receivable

• taxes

• DUI injuries

unsecured claims

Last to be paid out in a bankruptcy case. If there are not enough funds to pay the entire class, everyone in this class shares the funds equally(pro rata)

Ex: If there is only enough money to pay 10% of the claims owing to unsecured creditor, than each creditor receives 10% of their claim.

Discharge/fresh start

after the termination of a bankruptcy case, creditors cannot make a claim against the debtor for discharged money owed before the initial bankruptcy petition was filed. Eliminates the debts

reaffirm

to promise to pay a debt even after it is discharged. Some debtors are willing to do this to a secured debt to avoid losing the collateral.

Ex: A debtor who has taken a loan secured by a car may ______ that debt so the finance company will not repossess the car.

Debts that cannot be discharged

• income taxes for last 3 years

• property tax for last year

• fraudulent debt(If someone is found liable for fraud, they will still owe that money)

• luxury goods bought within 90 days

• cash advances from last 70 days

• Debts not stated in petition(schedule of assets and liabilities)

• alimony/child support

• intentional injury cases

• government fines

• DUI fines

circumstances that prevent discharge

Under Chapter 7, organizations are not eligible for discharge, only individuals are.

If a debtor commits fraud during bankruptcy process, court can revoke any discharge.

If the debtor is dishonest or is in bad faith

If the debtor has repeated bankruptcy filings

unsecured debts like credit car bills, medical bills, and personal loans

What debts are usually discharged?

True. A creditors’ committee does the job of a trustee in Chapter 11.

True or false? Chapter 11 does not require a trustee.

debtor in possession

name for the bankrupt in Chapter 11. 2 responsibilities:

1. operate the business

2. develop plan of reorganization

plan of reorganization

provides payment of debts and the continuation of the business. Debtor has the right to propose this for 120 days. If they fail to do that, or the court rejects it, the creditors’ committee can develop their own plan

Typically, the debtor gives the creditors some of their current assets, but also promises to pay them a portion of future earnings.

disclosure statement

provides creditors and shareholders with enough information to make an informed judgement about a proposed plan of reorganization. This document describes the company’s business, explains the plan, calculates the company’s liquidation value, and assesses the likelihood that the debtor can be rehabilitated.

The debtor must file a voluntary petition in any Chapter 13 case. The creditors cannot use an involuntary petition. Then, the debtor must file a plan of payment within 15 days.

Who has to file a petition in a Chapter 13 case?

plan of payment

Must be filed by the debtor within 15 days of filing a voluntary petition under Chapter 13. Under the plan, the debtor must:

• commit some future earnings to pay off debts

• promise to pay all secured and priority claims in full AND

• treat all the remaining classes equally

• Debts are rarely discharged