REG 21 - Bankruptcy Flashcards
Bankruptcy
Legal process whereby the debtor is relieved of his debts, & the debtor’s creditors are given satisfaction in the fairest way possible.
Insolvent
You answered correctly
Correct! An individual is insolvent when liabilities exceed the fair value of assets, including retirement assets. Since liabilities are $175,000 and assets have a total fair value of $155,000, the individual will be unable to pay $20,000 of the liabilities and is insolvent. The carrying value of the assets is not relevant since the excess of carrying value over fair value will not be available to repay debt.
Chapters of Federal Bankruptcy Code (3)
- Chapter 7 - Liquidation - The assets of the debtor are turned over to a trustee, who sells them & tries to satisfy creditor claims, with remaining claims discharged.
- Chapter 11 - Business Reorganization - The debtor continues to operate the business while the unsecured creditors committee meet to restructure the debts. No trustee is usally involved.
- Chapter 13 - Debt Adjustment Plan - The debtor & a trustee work out a plan to restructure debts without the involvement of the creditors. This is only available to individual debtors & small businesses.
What are the two types petitions to enter Bankruptcy?
-
Voluntary (7,11,13) - by Debtor
- Court enters immediate order of relief to stop individual collection efforts by creditors
- Need NOT be insolvent
- Certain entities may NOT file
- Insurance Companies
- Savings & Loans
- Banks & Credit Unions
- Railroads
-
Involuntary (7,11) - by Creditors
- Must satisfy conditions (1 or 3, $15,325)
- Court hearing is scheduled to determine if conditions has been satisfied
- May NEVER be filed against Farmers & Charity Orgs
- Creditors have 6 mo’s to file “proof of claim” form
Voluntary Petition
A debtor files the petition for bankruptcy under Chapter 7,11,13 & the courts enters immediate “order for relief” (date when courts approve) to stop individual collection efforts by creditors.
- Don’t need to be Insolvent (inability to pay debts)
- Spouses may file jointly to avoid duplicative fees.
- Certain entities may NOT file a voluntary petition such as,
- Insurance companies
- Savings & loans
- Banks & Credit Unions
- Railroads.
Involuntary Petition Requirements
(SAD)
A debtor being forced into bankruptcy under Chapter 7 or Chapter 11 by creditors who are not being paid on a timely basis.
- Signed by atleast 1 Creditor IF there are fewer than 12 creditors in total
- Signed by atleast 3 Creditors IF there are more than 12 creditors in total
- Amount owned by signing creditor(s) at least $15,325
- Debtor unable to pay debts (Insolvency)
NOTE: If Debtor contests the petition, just show the Debtor not paying debts as they become due & courts will approve petition.
Automatic Stay
In either a voluntary or involuntary petition, an “Automatic Stay” becomes effective against most creditors of the Debtor. This is to freeze the Debtor’s assets so the courts can take an accounting.
Involuntary Gap
The time period between the filing of the petition & the order of relief (court’s approval) in an involuntary bankruptcy.
Creditors who file a petition against Debitors will be liable to what three damages if it does not meet the Involuntary Bankruptcy requirements?
- Court Costs
- Compensatory Damages
- Punitive Damages
Trustee in a Chapter 7 Bankruptcy
Once a Chapter 7 bankruptcy petition is approved by the court, a trustee is appointed to take control of the Debtor’s property and has to following obligations:
- Obtain all of the non-exempt interest
- Will also maintain control over the earnings generated from -non-exempt property& proceeds from sale
- Has claim on property within 180 days from filing,
- inheritances
- life insurance proceeds
- divorce property settlements
Avoiding Powers of Trustee
(FLAP, I-WAIT)
The ability of the trustee in bankruptcy to retrieve property that has been transferred to creditors or other third parties to maximize the assets available to creditors if they result from (FLAP):
- Fraudulent transfers by debtor within 2 years of filing the petition for bankruptcy
- Liens by statue (liens made during “involuntary gap”)
- After filing transfers (Involuntary Gap Creditors)
-
Preferential transfers of property (I-WAIT)
- Debtor was Insolvent when transfer was made
- Within 90 days of filing the petition
- For an Antecedent debt (pre-existing debt); new debt is okay
-
Improves the creditor’s position
- creditor receives more $$ than in bankruptcy
- Time is increased from 90 days to 1 year for an insider such as an officer or close relative
Non-Preferential Transfers
(C-CONAC)
- Charity Donation
- Consumer Debt
- Ordinary Business Expenses (utility bills, lease)
- New Loans/Contracts (after filing,involuntary period)
- Alimony & Child Support Payments
- Continuation of Installment Payments
Priority of Distribution of Assets Among Creditors (3)
- Secured Creditors (Fully, Partially)
- Priority Claims (STOP-IT Drunk Driver)
- General/Unsecured Creditors
- Debtor is returned any reimaining asstes (unlikely)
Secured Creditors (2)
1.) Secured Creditors
-
Fully Secured - the collateral is worth the amout of debt or more.
- Any excess is returned to the Trustee.
-
Partially Secured - the collateral is worth less than the debt.
- Creditor gets the collateral, but is a General/Unsecured creditor for the remainder.
Priority Claims
(STOP-IT Drunk Driver)
Priority Claims (STOP-IT Drunk Driver)
- Support & Alimony payments
- Trustee, attorney fees, accountant/admin expenses
- Owed after petition date, “Involuntary Gap Creditors”
-
Payroll (90 Days) & Employee Benefit Plans (180 Days)
- Up to $12,475 per Employee
- Individual consumer deposits up to $2,775 each
- Tax claims arising within 3 years of the petition
- Drunk Driver Claims
