REG - Bankruptcy Flashcards
What happens under a Chapter 11 reorganization? What is purpose? When will a trustee be appointed?
Applies to voluntary and involuntary proceedings. A debtor is allowed to remain in possession of its assets. The purpose is to keep the financially troubled firm in business.
The court is not required to appoint a trustee unless a party in interest requests so - only when there is evidence of fraud by debtor, gross mismgmt, or that the takeover by trustee would be in best interest of debtor’s estate.
What is the highest to lowest priority of debts?
Highest
Secured creditors have first priority concerning the property acting as their collateral
Admin costs - fees owed to appraisers, attorneys, trustee
Salary owed to employee if accrued within the previous 90 days before the filing of the petition and not more than $5400 (does not include salary claims by officers of corp)
State taxes
Claims arising in ordinary course of business
Consumers deposits for undelivered goods or services (limit/individual)
General, unsecured creditors - Legal fees for services not connected with bankruptcy
What are the rules of bankruptcy procedure?
It is necessary to file a proof of claims against the debtor’s estate. Must be timely (within 6 months) or claim will be barred. A claim that is filed on time is given prima facie validity and is approved unless there is an objection by one of the creditors. The filing would include a statement of compensation paid or agreed. Claims for services by an attorney of the debtor, to the extent a fee exceeds a reasonable value for services rendered, are disallowed.
When a valid petition in bankruptcy is filed, it acts as an automatic stay which..
stops the collection of most debts and the enforcement of most legal proceedings against the debtor’s estate. An automatic stay is valid against the garnishment of the debtor’s wages. Not effective to prevent the collection of alimony.
Under federal Bankruptcy Code, what rights does the trustee have?
May set aside security interests that are not perfected before the filing of the bankruptcy petition. (power to prevail against a creditor with an unperfected security interest)
Has the duty to obtain and liquidate the debtor’s property to pay the creditors. (power to require persons holding debtor’s property at the time the bankruptcy petition is filed to deliver the property to the trustee)
Right to the debtor to obtain the debtor’s property to pay off the creditors. (right to use any grounds available to the debtor to obtain the return of the debtor’s property)
May set aside statutory liens that become effective when the bankruptcy petition is filed but may not set aside those that were effective before the bankruptcy petition was filed.
What are the requirements for a voidable preferential transfer?
- enabled transferee/creditor to receive more than it otherwise would receive from the bankruptcy estate/liquidation proceeding
- made within 90 days of the bankruptcy filing - bankruptcy act presumes that debtor is insolvent during the 90 days prior to the date the petition was filed
Note preferential transfer can be made to a general creditor or inside creditor. If made to insider, may be voided by trustee if it occurred within 12 months prior to the filing of the petition.
What is an exception to the trustee’s power to avoid preferential transfers?
Contemporaneous exchange between the debtor and the creditor whereby the debtor receives new value.
What must be present to prove that a preferential transfer has been made?
Transfer involved an antecedent debt. If the transfer is a contemporaneous exchange for new value given, no antecedent debt was involved, and thus it is not a preference.
Trustee must prove that the transfer allowed the creditor to receive more than he would have under a ch7 liquidation proceeding.
When can debts be discharged and not be discharged when under the voluntary liquidation provisions of the Bankruptcy code?
Only debts which are incurred prior to the issuance of the order for relief will be discharged.
Debts incurred after the order for relief are excluded from the bankruptcy proceeding and will not be discharged.
What does the filing of an involuntary petition in bankruptcy do?
Stops the enforcement of most collections of debts and legal proceedings against the debtor’s estate. Thus the enforcement of judgment liens against property in the bankruptcy estate would be stopped by the filing of the involuntary petition.
Security interests in property are still enforceable and liens are still enforceable against exempt property.
Who is the trustee?
Is the representative of the bankrupt’s estate and as such has the capacity to sue and be sued on its behalf. It is permissible for the trustee to have dealings with the debtor within the prior year.
The amount the trustee receives cannot exceed certain % of the money disbursed by the trustee. % is specified in bankruptcy code.
Trustee is either elected by creditors or appointed by a judge to liquidate the estate. Does not need to be an attorney.
What must a bankrupt, who has voluntarily filed for and received a discharge in bankruptcy under the liquidation provisions, surrender and become part of the bankruptcy estate? What debts cannot be discharged?
Bankrupt’s estate consists of property owned at the time of the filing of the petition and property received by way of inheritance bequest, devise, property settlement with spouse, divorce decree, or life insurance within 6 months after filing of the petition. An inheritance or child support pmts received 180 days after the filing of the petition must be surrendered for distribution.
Debtor’s eages become a new separate estate, not part of the bankruptcy estate.
Educational loans, govt fines and taxes incurred 3 years prior to the filing, ad debts arising out of false pretenses are not discharged in bankruptcy.
The bankrupt cannot obtain another voluntary discharge in bankruptcy under ch7 until 6 years have elapsed from the date of the prior filing.
Who is considered an insider in connection with preferences and preferential transfers?
A secured creditor is not an insider
Partner is to partnership
Director is to corp
Close relative is to debtor
What happens to those under employment by the debtor if they fall under the reorganization chapter of the bankruptcy code when they remain in possession of its business/
A person is not disqualified for employment by the debtor before the commencement of the reorg proceedings. The debtor has the right to retain its own accountant to represent it. The debtor has many of the same rights as a trustee, but it does not have the right to be compensated in the same manner.
Under ch11 of the federal bankruptcy code, what actions are necessary before the court may confirm a reorg plan?
A business may be allowed to continue its operations and keep its business assets. The court supervised reorg plan provides for payment of all or part of the debts over an extended period. The claims are divided into classes of similar claims so that they can be treated equally. For the court to confirm the reorg plan, it must provide for full pmt of admin expenses.
