Ch 36 Bankruptcy Flashcards
Overview of the Bankruptcy Code
-The objective of Chapters 11 and 13 is to rehabilitate the debtor.
-Chapter 7 provides for liquidation (also known as a straight bankruptcy).
- straight bankruptcy: Also known as liquidation, this form of bankruptcy mandates that the bankrupt’s assets be distributed to creditors, but the debtor has no obligation to share future earnings
Chapter Description
Number
Topic
Description
Chapter 7
Liquidation
The bankrupt’s assets are sold to pay creditors. If the debtor owns a business, it terminates. The creditors have no right to the debtor’s future earnings.
Chapter 11
Reorganization
This chapter is designed for businesses and wealthy individuals. Businesses continue in operation, and creditors receive a portion of the debtor’s current assets and future earnings.
Chapter 12
Family farmers or family fishermen
This chapter provides an easier, less expensive process for family farmers or fishermen. The goal is to keep these businesses in operation by protecting them from foreclosure and liquidation.
Chapter 13
Consumer reorganization
Chapter 13 offers reorganization for the typical individual. Creditors usually receive a portion of the individual’s current assets and future earnings.
Goals
The Bankruptcy Code has three primary goals:
- To preserve as much of the debtor’s property as possible.
- To divide the debtor’s assets fairly between the debtor and creditors.
- To divide the creditors’ share of the assets fairly among them.
Chapter 7 Liquidation
All bankruptcy cases proceed in a roughly similar pattern, regardless of chapter. We use Chapter 7 as a template to illustrate common features of all bankruptcy cases. Later on, the discussions of the other chapters indicate how they differ from Chapter 7.
Filing a Petition
(Voluntary Petition, Involuntary Petition)
-Any individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the United States can file under the Code.
- bankrupt: Someone who cannot pay his debts and files for protection under the Bankruptcy Code
- debtor: Another term for bankrupt
-A case begins with the filing of a bankruptcy petition in federal district court.
* voluntary petition: Filed by a debtor to initiate a bankruptcy case.
* involuntary petition: Filed by creditors to initiate a bankruptcy case.
[Voluntary Petition]
-Any debtor (whether a business or an individual) has the right to file for bankruptcy. It is not necessary that the debtor’s liabilities exceed assets
-However, individuals must meet two requirements before filing:
-The voluntary petition must include the following documents:
[Involuntary Petition]
-Creditors may force a debtor into bankruptcy by filing an involuntary petition.
-An involuntary petition must meet all of the following requirements:
+The debtor must owe at least $16,750 in unsecured claims to the creditors who file.Footnote
+If the debtor has at least 12 creditors, three or more must sign the petition. If the debtor has fewer than 12 creditors, any one of them may file a petition.
+The creditors must allege either that a custodian for the debtor’s property has been appointed in the prior 120 days or that the debtor has generally not been paying debts that are due.
- order for relief: An official acknowledgment that a debtor is under the jurisdiction of the bankruptcy court.
Trustee
-The trustee is responsible for gathering the bankrupt’s assets and dividing them among creditors.
* U.S. Trustee: Oversees the administration of bankruptcy law in a region
Creditors
-After the court issues an order for relief, the U.S. Trustee calls a meeting of all of the creditors.
* proof of claim: A form stating the name of an unsecured creditor and the amount of the claim against the debtor.
-Secured creditors do not file proofs of claim unless the claim exceeds the value of their collateral.
Automatic Stay
- automatic stay: Prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed.
- Creditors may not sue a bankrupt to obtain payment, nor may they take other steps, outside of court, to pressure the debtor for payment
Bankruptcy Estate
(Exempt Property, Voidable Preferences, Fraudulent Transfers,
- bankruptcy estate: The new legal entity created when a bankruptcy petition is filed; the debtor’s existing assets pass into the estate.
[Exempt Property]
- The Code permits individual debtors (but not organizations) to keep some property for themselves.
[Voidable Preferences]
* preferences: When a debtor unfairly pays creditors immediately before filing a bankruptcy petition.
-The trustee can void any transfer (whether payment or lien) that meets all of the following requirements:
-The transfer was to a creditor of the bankrupt.
-It was to pay an existing debt.
-The creditor received more from the transfer than she would have received during the bankruptcy process.
-The debtor’s liabilities exceeded assets at the time of the transfer.
-The transfer took place in the 90-day period before the filing of the petition.
- Insiders: Family members of an individual debtor, officers and directors of a corporation, or partners of a partnership that has filed for bankruptcy.
[Fraudulent Transfers]
* fraudulent transfer: A transfer is fraudulent if it is made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditors.
-A transfer is fraudulent if it is made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditors.
-A trustee cannot void pre-petition payments made in the ordinary course.
Payment of Claims
(Secured Claims, Priority Claims, Unsecured Claims )
-All claims are placed in one of three classes:
1. secured claims,
2. priority claims, and
3. unsecured claims.
-The trustee pays the bankruptcy estate to the various classes of claims in order of rank.
[Secured Claims]
[Priority Claims]
–There are seven subcategories of priority claims. Each category is paid in order, with the first group receiving full payment before the next group receives anything
Alimony and child support.
-Alimony and child support
-Administrative expenses.
-Gap expenses.
* gap period: The period between the time that a creditor files an involuntary petition and the court issues the order for relief
-Payments to employees.
-Employee benefit plans
-Consumer deposits.
-Taxes.
-DUI injuries
[Unsecured Claims]
-Secured claims that exceed the value of the available collateral.
-Priority claims that exceed the priority limits.
-All other unsecured claims.
Discharge
(Debts That Cannot Be Discharged, Circumstances that Prevent Debts from Being Discharged, Reaffirmation, )
- fresh start: After the termination of a bankruptcy case, creditors cannot make a claim against the debtor for money owed before the initial bankruptcy petition was filed.
- discharged: The debtor no longer has an obligation to pay a debt.
[Debts That Cannot Be Discharged]
-The following debts are never discharged, and the debtor remains liable in full until they are paid:
(Student Loans)
- Public Service Loan Forgiveness Program (PSLFP)
+owes a federal “direct” loan,
+works for the government or a nonprofit for ten straight years,
+makes 120 payments on the debt in full and on time, while working full time, and
+has enrolled in particular IBR programs
-Under the Brunner Test, a student loan will be discharged if:
+The debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loans;
+This state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
+The debtor has made good-faith efforts to repay the loans.
[Circumstances that Prevent Debts from Being Discharged]
-the Code also prohibits the discharge of debts under the following circumstances:
-Business organizations.
-Revocation.
-Dishonesty or bad-faith behavior.
-Repeated filings for bankruptcy.
[Reaffirmation]
* reaffirm: To promise to pay a debt even after it is discharged
- To be valid, the reaffirmation must:
Chapter 11 Reorganization
For a business, the goal of a Chapter 7 bankruptcy is euthanasia—putting it out of its misery by shutting it down and distributing its assets to creditors. Chapter 11 has a much more complicated and ambitious goal—resuscitating a business so that it can ultimately emerge as a viable economic concern, as General Motors did
Debtor in Possession
- debtor in possession: The debtor acts as trustee in a Chapter 11 bankruptcy.
Creditors’ Committee
In a Chapter 11 case, the creditors’ committee is important because typically, there is no neutral trustee to watch over their interests. Besides protecting the interests of all creditors, the committee may play a role in developing the plan of reorganization.
Plan of Reorganization
Once the bankruptcy petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditors. The next stage is to develop a plan of reorganization that provides for the payment of debts and the continuation of the business. For the first 120 days (which the court can extend up to 18 months), the debtor has the exclusive right to propose a plan. If the debtor fails to file a plan, or if the court rejects it, then creditors and shareholders can develop their own plan.
