Bankruptcy

Question 1

What are the basic actions that occur in a bankruptcy?

Answer 1

Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt.

The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.

Question 2

For what debts the a debtor may still not be discharged from?

A credit card SLUT STD

Answer 2

• Alimony & Child Support
• Credit card purchases for luxury goods of $600 or more w/i 90 days of filing and Auto loan w/i 3 yr of filling
• Student Loans
• Loan obtain in Fraud or false representation
• Unlisted/Unscheduled debt in the bankruptcy filing
• Taxes claims w/i 3 years of filings
• Debts relating to SOX violations
• Debt incured to pay Tax
• Drunk driving injury or death judgements

Question 3

How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?

Answer 3

It does NOT, because the corporation is a separate legal entity.

Under bankruptcy,corporations are dissolved

Under bankruptcy, individuals are discharged

Question 4

What key action will cause a bankruptcy discharge to be denied (6)?

Answer 4

• Bankruptcy offense
• If a debtor fails to keep good records/ intentionally destroys records
• Refuse to explain loss of asset
• Being discharged w/i 8 year
• Fraudulent transfer of property w/i 1 yr of filing
• Corporation and partnership does not received discharge - entity is dissolved

Question 5

What are the basic characteristics of a Chapter 7 bankruptcy ?

Answer 5

• Liquidation - turning debtor’s asset into cash to pay debt
• Can only be filed every 8 years from previous
• Chapter 7 filing Voluntary or involuntary filing
• Certain businesses are disallowed from Chapter 7 bankruptcies - ** Banks; Railroads; Insurace companies; Savings & loans** (BRIkS)

Question 6

What are the requirements for a voluntary bankruptcy filing under Chapter 7?

Answer 6

• Must pass means test Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average)
• Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005

Question 7

What are the requirements for an involuntary bankruptcy filing under Chapter 7?

Answer 7

In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK

• Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property
• If ≥ 12 unsecured creditors - at least 3 must file; claims must be in excess of $15,325
• If < 12 unsecured creditors - only 1 must file; claims must be in excess of $15,325
• Upon filing, a judge will declare an order for relief unless the debtor protests
• if petition made in bad faith - indemnification: court cost, compensation and punitive damages

Question 8

What entities are disallowed from involuntary Chapter 7 bankruptcy filings?

Answer 8

Charities

Farms

Question 9

How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?

Answer 9

The debtor filed the court approved bond to keep a property in an involuntary BK; they can reclaim possession of their property from the interim BK trustee

Question 10

What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?

Answer 10

• Reorganize Debt
• Voluntary or involuntary filing
• NO trustee but creditor committee
• Must qualify under Chap 7
• Only debtor files a payment plan for the debt
• Business remains in operation
• At least 2/3 of each debt class of creditors must consent to reorganization Ch. 11 Involuntary petitions are allowed
• Not eligible: Banks; ; Insurace companies; Savings & loans

Question 11

What are the basic characteristics of a Chapter 13 bankruptcy?

Answer 11

• **Individuals Only **
• Reorganization of debt
• Trustee
• Creates a payment plan for the debt Ch. 13 confirmed by Court
• Voluntary ONLY

Question 12

What are the duties and abilities of a bankruptcy trustee?

Answer 12

• Represents the bankruptcy estate
• Can sue or be sued
• Oversees bankruptcy and watches for preferential creditor payments
• Oversees priority transfer of assets to creditors
• with court approval may employe professional/including himself

Question 13

How and when is a bankruptcy trustee appointed?

Answer 13

• Optional - Creditors decide
• Can be elected by creditors or can be appointed by the court
• Prior association is allowed

Question 14

What preferential transfers of property a bankruptcy (BK) trustee can void ?

I WAIT

Answer 14

Preferential transfer of property - I WAIT
♦ debtor was insolvent when the transfer was made
♦ within 90 days of a BK filing
♦ for antecedent debt (pre-existing debt), exception new value ok
♦ improves the creditors position
♦ time is increased from 90 days to 1 year for an insider (closer relative of debtor)

Question 15

What transfers can be voided by a bankruptcy (BK) trustee?

FLAP

Answer 15

FLAP
♦ Fraudulent transfer by debtor w/I 2 year of filing of the petition
♦ Lien by status (not lien that were effective before BK petition was filed)
♦ After filing the petition, a transfer was made by debtor
♦ Preferential transfer of property - I WAIT

Question 16

What is the treatment of a secured creditor in a bankruptcy?

Answer 16

• Superior to claims of other types of creditors
• Can take either collateral or cash proceeds from the sale of an asset - **Fully secured **
• If collateral doesn’t satisfy amount owed,Secured Creditors become a general creditor for the difference - **Partially secured **

Question 17

What is the order of priority given to unsecured creditors in a bankruptcy?

STOP-IT – Drunk driver

Answer 17

Priority claims (STOP-IT – Drunk driver)

1. Support and Alimony payments
2. Trustee, attorney, accountant and administrative expenses
3. Owed after petition date in involuntary gap between filing and approval date (involuntary gap creditor)
4. Payroll (90 days) and Employee benefit plans (180 days) up to $12,475 per employee. Farmers and Fishermen up to $6,150
5. Individual Consumer deposits up to $2,775 each
6. Tax claims arising within 3 years of the petition.
7. Drunk Driver injury claims

Question 18

What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?

Answer 18

** The trustee** in bankruptcy is given the option, subject to court approval, to

(1) assume and perform the unexpired lease,
(2) assume and assign the unexpired lease to a third party, or
(3) reject the unexpired lease.

In a liquidation case, the trustee must act to assume within 60 days after the order for relief is entered. If not assumed within this time, the lease is deemed rejected.

Question 19

What is the bankruptcy estate?

Answer 19

The pool of assets available to creditors until liquidation

Question 20

What assets are exempt from creditors in a bankruptcy estate?

Answer 20

• Limited equity in a home ($22,975)
• Limited equity in a motor vehicle ($3,675)
• The right to reasonable alimony and child support payments
• Household goods, furnishings, clothing, appliances, books not to exceed $575 per item
• Jewelry up to $1,550
• Books and Tools of trade ($2,300)
• Social security, veteran’s, and disability benefits and unemployment compensation
• Payments from pension, profit-sharing and annuity plans, up to $1,245,475 in tax exempt retirement accounts (IRA).
• Educational IRA’s (529 plans) exempt, unless deposited between 120 and 365 days prior to filing, then exempt only up to $6,225

Question 21

How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?

Answer 21

Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate

Question 22

What is a garnishment with respect to a bankruptcy?

Answer 22

Court allows a creditor to garnish or take a portion of the debtor’s paycheck - NOT social security benefit

Question 23

What is a mechanics lien?

Answer 23

Lien on real property to secure payment for a repair/improvement done to the house

• Non consensual: A contractor builds an addition to your house and you won’t pay. They can’t repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
• Consensual: mortgage
• must give notice to the debtor before selling the property

Question 24

What is an artisan’s lien?

Answer 24

Applies to personal property like a car If the dealership does $500 in repairs to your car; you don’t get the car back until you pay

must give notice to the debtor before selling the property

Question 25

What is a **surety** ?

Answer 25

* A third party agrees to be liable for a loan of another * must be **in writting ** * **surety** and creditor **need capacity** - not debtor * consideration between debtor and creditor * offer acceptance between creditor and surety Example: A parent co-signs on their child's car loan

Question 26

How is **a surety liable** in a transaction?

Answer 26

* A surety is **primarily liable** * **Creditor can demande payment when debt due to surety without any proof** of default of debtor or taking colleteral * **payment required even if debtor** * lacks capacity to make a contracts * discharges in bankruptcy from all debts * used fraud to induce the surety to make their promise to the creditor

Question 27

What is a **cosurety**; and how are they **liable** in a transaction?

Answer 27

* Two sureties are guaranteeing the same debt * **Proportionately liable** - If one cosurety is released from their obligation; then the remaining cosureties have their proportionate share reduced by the released party's percentage * **Right of Contribution - **If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference

Question 28

What is a **guarantor **?

Answer 28

**Similar to surety** - agree to answer for debts of another **BUT** a guarantor is **secondarily liable - guarantor paid only after debtor default and creditor demand payment from debtor**

Question 29

What are the **basic rights of a debtor under the Fair Debt Collection Practices Act**?

Answer 29

Basically - your **creditors** have the right **to collect** from you; **but not abuse you or embarrass you** * The can't contact you once you're represented by an attorney * They can call other people to find out where you are; but they cannot identify themselves as collectors * They must stop calling you at work if you send them a certified letter that says my employer doesn't allow me to take calls at work. * They must call you only at reasonable hours of the day - according to your time zone; not theirs

Question 30

Not preferential transfers for BK Chapter 7 C CONAC

Answer 30

Not preferential transfers C CONAC ♦ **_C_**harity ♦ **_C_**onsumer debt \<$600 ♦ **_O_**rdinary course of Business ♦ **_N_**ew value - contemporaneous exchange between the debtor and creditor for new value ♦ **_A_**limony and child support ♦ **_C_**ontinuation of installment payment

Question 31

Voluntary BK

Answer 31

* chap 7,11 and 13 * No need to be insolvent * may be filed jointly by husband and wife

Question 32

Order of Distribution of asset in Bankruptcy

Answer 32

1) Secured creditors 2) Priority claims (STOP-IT – Drunk driver) 3) General/unsecured creditors: prorata of share

Question 33

Reaffirmation of Debt

Answer 33

* In general the reaffirmation **must take place before discharge is granted ** * the reaffirmation must be **approved by court** * the debtor has **60 days to rescind** the reaffirmation **after he agree to it **

Question 34

Conditional Surety or guarantor of collection liablity

Answer 34

**Last resort** - when Conditional Surety or guarantor of collection - t**he creditor may not demand** payment from them **until all available means of collection have been exausted** including seizing collateral, obtaining a court judgement, and filing a bankruptcy judgment

Question 35

Compensate/ non Compensate surety

Answer 35

* **Compensate** surety (bonding company) generally **liable** on the debt **unless the surety 's risk of loss is increased due to a MATERIAL** change in the contract * **Uncompensate** surety is **relieved ANYTIME the creditor make a change** to the agreement

Question 36

Surety's Rights

Answer 36

* **Exoneration:** right to compel the principal debtor to pay the obligation before surety paid * **Reimbursement**: right to recover from the principal debtor afrer surety paid * **Subrogation**: obtain the right of the creditor against the debtor and debtor's collateral * **Contribution**: right to receive proportionate payment from cosureties

Question 37

Surety's defenses

Answer 37

* **Defense of contract that would be available to the debtor** (not personal like bankruptcy or death)**:** breach of contract by creditor; impossibility or illegality; statut of limitation; duress; running statute of limitation * **Surety contractual defenses**: status of fraud, incapacity of surety; bankruptcy of surety; * **Acts of creditor:** new agreement with debtor that increas surety's risk; failure of creditor to notify surety of any material fact; released the collateral that had secured the debt; extend the due date of payment; release the principal debtor; refuse to take a payment