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Flashcards in Chapter 31 Deck (67)
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1
Q

Bankruptcy is an __________ process

A

Administrative

2
Q

What are the 2 goals of bankruptcy law?

A
  1. Protect a debtor by giving him a fresh start free from creditors’ claims, and
  2. Ensure equitable treatment to creditors who are competing for a debtor’s assets.
3
Q

Bankruptcy Proceedings

A

Federal Bankruptcy Courts have exclusive subject matter jurisdiction over bankruptcy matters. Decisions of the bankruptcy courts can be appealed to the U.S. District Courts

4
Q

Role of the Bankruptcy Courts

A

essentially an administrative court who conducts proceedings dealing with the procedures required to administer the estate of the debtor.

5
Q

A bankruptcy court can conduct a jury trial if…

A

the appropriate district court and the parties involved give consent.

6
Q

Types of Bankruptcy Relief

A

Chapter 7 – Liquidation credit card debt
Chapter 11 – Reorganizations
Chapter 12 – family farmers/fishermen
Chapter 13 – adjustment of debts for individuals with regular income

7
Q

Consumer-Debtor

A

Debtor whose debts result primarily from the purchase of goods for personal, family, or household use

8
Q

Special Treatment of Consumer Debtors

A

certain information must be given to the consumer-debtor. Clerk of the court must provide info on the purpose, benefits, and costs of each type of bankruptcy and info on credit counseling services.

9
Q

Liquidation Proceedings - Chapter 7

A

most common and familiar type of bankruptcy – debtor turns over all assets to a trustee, who sells the nonexempt assets and distributes the proceeds to the creditors. All remaining debts, subject to certain exceptions, are then discharged.

10
Q

Who can file Chapter 7 bankruptcy?

A

Anyone
(individuals, partnerships, or corporations) But, businesses are often more interested in Chapter 11 so they can stay in business.

11
Q

How is chapter 7 bankruptcy started?

A

With a petition in bankruptcy

12
Q

Voluntary Bankruptcy

A
  • Debtor files the petition
  • Debtor must certify that he has received info on credit counseling
  • Debtor must confirm the contents of the petition and state he understands the relief available to him and opts to proceed with liquidation
13
Q

Chapter 7 Schedules

A
  1. 8 schedules required with the voluntary petition
  2. To conceal assets or knowingly supply false info on these schedules is a crime
  3. All schedules must be filed within 45 days of the petition
14
Q

What are the 8 chapter 7 schedules?

A
  1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each.
  2. A statement of the financial affairs of the debtor.
  3. A list of all property owned by the debtor, including property that the debtor claims is exempt.
  4. A list of current income and expenses.
  5. A certificate of credit counseling.
  6. Proof of payments received from employers within sixty days prior to the filing of the petition.
  7. A statement of the amount of monthly income, itemized to show how the amount is calculated.
  8. A copy of the debtor’s federal income tax return for the most recent year ending immediately before the filing of the petition.
15
Q

Substantial Abuse

A

Debtor is subject to “means testing” – court looks at the debtor’s income to determine whether a debtor’s petition is a “substantial abuse” of the bankruptcy code.

16
Q

Means Test basic formula

A

debtor’s average monthly income in recent months is compared with the median income in the geographic area in which the person lives.

17
Q

If they fail means test, they cannot do chapter 7…

A

but they can still file bankruptcy, they just can’t do liquidation

18
Q

What are expenses that are not considered necessity?

A

cell phone, cable, and internet

19
Q

Bankruptcy court will consider extenuating circumstances like…

A

child has cancer - there are massive medical bills

20
Q

If below median…
If above median…

A

…move forward
…“abuse” and petition is dismissed

21
Q

John and Sarah Buoy filed for Chapter 7 bankruptcy. For the past three months, John’s gross monthly income had been $4,900, and Sarah’s had been $6,761. They had five children. They owed secured debts of $34,321 on a Subaru Impreza and a BMW 328i, on which they intended to continue making loan payments (this is called reaffirmation, as will be discussed later). They owed $123,000 on a mortgage and $19,000 in student loans, and their unsecured debts were $4,900.
An auditor for the U.S. Trustee Program reviewed the Buoys’ Chapter 7 schedule and concluded that the family’s gross income figures were understated. Because of a mistake in the math, the Buoys had miscalculated their income by approximately $800 a month (or nearly $650 after taxes). The debtors claimed that they had incurred additional expenses after filing the petition, including orthodontic braces and another car. Even with those expenses, however, the court found that they would have an additional $400 a month in future disposable income and would receive sizeable tax refunds.

A

The court concluded that the Buoys could afford to pay their debts and dismissed the Chapter 7 petition for substantial abuse.

22
Q

Disposable Income

A

Subtract living expenses and secured debt payments (mortgage) from monthly income

23
Q

Living expenses

A

Modest allocations for food, clothing, housing, utilities, transportation (car payment), health care, and other necessities

24
Q

Additional Grounds for Dismissal:

A
  1. Debtor conviced of a violent crime/drug-trafficking
  2. Debtor fails to pay postpetition domestic-support obligations
    If either of these 2 events occurred…the court may dismiss the debtor’s petition
25
Q

Order for Relief

A

A court’s grant of assistance to a complainant. In bankruptcy proceedings, the order relieves the debtor of the immediate obligation to pay the debts listed in the bankruptcy petition. Given if the petition is found to be proper.

26
Q

Involuntary Bankruptcy

A

The debtor’s creditors force them into bankruptcy

27
Q

What are the requirements of an involuntary bankruptcy?

A
  1. If the debtor has 12 or more creditors, 3 or more of the creditors having unsecured claims totaling at least $16,750 must join in the petition.
  2. If the debtor has less than 12 creditors, one or more of the creditors having a claim of $16,750 may file.
28
Q

Debtor challenges the involuntary petition…

A
  1. Court will hold a hearing
  2. Court will only order relief if debtor is generally not paying debts as they become due
29
Q

If the debtor challenges the involuntary petition, a hearing will be held, and the bankruptcy court will enter an order for relief if it finds either of the following:

A
  1. The debtor is not paying debts as they come due.
  2. A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of the debtor’s property within 120 days before the filing of the petition.
30
Q

If the court grants an order for relief, the debtor will be required to supply…

A

the same information in the bankruptcy schedules as in a voluntary bankruptcy.

31
Q

How many days do you have to file schedules?

A

45 days

32
Q

Should an involuntary petition be used as an everyday debt-collection device?

A

No. There are penalties for frivolous petitions agains debtors

33
Q

Automatic Stay

A

a suspension of virtually all actions by creditors against the debtor or debtor’s property. The automatic stay normally goes into effect the moment the petition is filed. STOP (holding pattern, not dismissal)

34
Q

Creditors who knowingly violate the stay can…

A

be sued by any injured party, including the debtor, who can recover from the creditor, actual damages, costs, and attorneys’ fees, and may even be awarded punitive damages.

35
Q

What are the 4 exceptions to automatic stay (4 proceedings that aren’t halted)?

A
  1. Domestic-Support Obligations
  2. Proceedigns against the debtor related to divorce, child custody or visitation or domestic violence and support enforcement
  3. Investigations by a securities regulatory agency
  4. Certain statutory liens for property taxes
36
Q

Bad Faith

A

debtor has 2 or more bankruptcy petitions dismissed during the prior year – automatic stay doesn’t happen until the court exams the debtor’s good faith in this proceeding

37
Q

Bankruptcy Estate

A

Basically everything the debtor owns subject to 9 exemptions, become a part of the estate

38
Q

The trustee

A

Collects the debtor’s available estate and reduce it to cash for distribution, preserving the interests of both the debtor and the unsecured creditors.

39
Q

Exemptions – The federal Bankruptcy Code exempt 9 types of property up to a specific dollar amount that changes every 3 years.

A
  1. A portion of equity in the debtor’s home (the homestead exemption).
  2. Motor vehicles, up to a certain value (usually just one vehicle).
  3. Reasonably necessary clothing, household goods and furnishings, and household appliances (the aggregate value not to exceed a certain amount).
  4. Jewelry, up to a certain value.
  5. Tools of the debtor’s trade or profession, up to a certain value.
  6. A portion of unpaid but earned wages.
  7. Pensions.
  8. Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account.
  9. Damages awarded for personal injury up to a certain amount.
40
Q

States have the power to pass laws precluding (preventing) debtors from using federal bankruptcy exemptions. A majority of states have done this. So, in these states…

A

the debtor uses state exemptions

41
Q

In states without laws precluding the use of federal exemptions, the debtors…

A

have a choice of federal or state exemptions

42
Q

Homestead Exemption

A

Each state permits the debtor to retain the family home either in its entirety or up to a specific amount, free from the claims of creditors and trustees in bankruptcy. Texas!!

43
Q

New Bankruptcy Reform Act rule

A

If the debtor acquired the homestead within 3½ years prior to the date of filing, the maximum equity exempted is $170,350, even if the state law would exempt a higher amount.

Stops people who are, in anticipation of bankruptcy, going and buying a multimillion-dollar house right before filing a petition for bankruptcy.

44
Q

Under the New Bankruptcy Reform Act a debtor must have lived in the state for ___ years prior to filing bankruptcy to be able to use the state homestead exemption.

A

2

45
Q

Creditors’ Meeting and Claims

A

within a reasonable time after the order of relief is granted (not less than 20 days or more than 40 days), the Trustee must call a meeting of the creditors listed in the schedules.

46
Q

How is property distributed in most voluntary bankruptcies?

A

Paid IN TOTAL to each
1. Secured Creditors
2. Unsecured Creditors
Domestic-Support Obligations
Administrative Expenses
Ordinary BUsiness Expenses
Wages and Salaries
Employee Benefit Plans
Certain Farmers and Fisherman
Consumer Deposits
Taxes and Fines
Claims Resulting from Driving while Intoxicated
General Creditors
3. Debtor

47
Q

Once debtor’s assets have been distributed to creditors as permitted by the Code, all remaining debts are…

A

discharged; judgments on debts are voided; creditors are enjoined from bringing any collection actions.

48
Q

Exceptions to Discharge

A

Student loans are not discharged unless payment of the loans imposes an undue hardship on us our our dependents
Federal taxes and domestic-support are not discharged

49
Q

In certain circumstances, the court may deny the discharge of the debtor and debtor remains liable to creditors for the unpaid portion of all claims, even after all assets have been liquidated and paid to creditors…

A
  1. debtor concealed or destroyed property with the intent to hinder, delay or defraud a creditor;
  2. debtor fraudulently concealed or destroyed financial records;
  3. debtor had been discharged in bankruptcy within 8 years of the filing of the petition;
  4. debtor fails to complete the required consumer education course; or
  5. if the debtor is involved in any proceeding where the debtor could be found guilty of a felony.
50
Q

Revocation of Discharge

A

If the debtor acted fraudulently or dishonestly during the bankruptcy proceedings, the court has the power to revoke the discharge decree. The revocation power of the court is for 1 year and any creditor or the trustee can petition the court for the revocation.

51
Q

Reaffirmation of Debt

A

Debtor may wish to pay a debt – like to a family member, doctor or bank, and thus may enter into a reaffirmation agreement with that creditor, even though the debt would ordinarily be discharged. If you reaffirm the debt, you get to keep the asset (cars make a lot of sense to reaffirm).

52
Q

Chapter 11 reorganizations are most commonly used by corporate debtors, but cannot be used by…

A

Stock and commodities brokers

53
Q

Chapter 11 Reorganization

A

The debtor and creditors formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder.
The same rules apply to the filing of the petition for reorganization proceedings, as apply with liquidation proceedings.

54
Q

“Fast-track procedures for small-business debtors (liabilities not exceeding $2.7mil and do not own or manage real estate)

A

Chapter 11 Reorganization
Avoid the appointment of creditors’ committee
Shortens filing periods, simpler and costs less

55
Q

Voluntary/Involuntary filing

A

automatic stay and exceptions such as substantial abuse and adequate protection doctrine still apply in Chapter 11 bankruptcies.

56
Q

Workouts

A

out of court, speedy settlement of debts; often called negotiated adjustment of debts – private, faster, more flexible and cost less

57
Q

Must Be in the Best Interests of the Creditors

A

the court decides after a hearing if Chapter 11 is in the best interests of the creditors.

58
Q

Court can dismiss Ch. 11 cases after notice and hearing if they don’t see…

A

rehabilitation is possible, or if there is an inability to design a plan or if debtors use unreasonable delay tactics harming best interests of creditors

59
Q

Is the debtor allows to continue doing business during the reorganization?

A

Yes

60
Q

Creditors’ Committees

A

Made up of unsecured creditors

61
Q

When are creditors’ committees not necessary?

A
  1. If a debtor in possession came up with a plan accepted by creditors no meeting is necessary
  2. Fast-track chapter 11 proceedings
62
Q

Reorganization Plan

A

generally created by the creditors committee and the debtor and the Receiver; the purpose is to conserve and administer the debtor’s assets in the hope the debtor will be able to return to successful operation and solvency.

63
Q

Debtor may file a reorganization plan within the first _____ days after the date of the order of relief (extension up to 18 months from date of the order of relief);

A

120

64
Q

If debtor does not meet the 120 day deadline or get an extension, and fails to get the required creditor consent with 180 days…

A

any party may propose a plan up to 20 months from the date of the order for relief

65
Q

What must a reorganization plan do?

A
  1. designate classes of claims and interests;
  2. specify the treatment to be afforded the classes – same treatment must be given to all claims within a class;
  3. provide an adequate means for execution;
  4. provide for payment of taxes over a 5-year period.
66
Q

Acceptance and Confirmation of the Plan

A
  1. the plan is submitted to each class of creditors for acceptance;
  2. acceptance is by majority vote of the creditors, representing 2/3rds of the amount of the total claim;
  3. court can refuse to confirm even if all classes of creditors accept the plan;
  4. former spouse or child of debtor can block the plan if it doesn’t provide for the payment his/her claim in cash;
  5. even if only 1 class of creditors accepts the plan, the court may still confirm by using the cram-down provisions of the Code. This means the court confirms the plan over the objections of the other classes of creditors.
67
Q

The individual debtor must complete the reorganization plan before…

A

being discharged from remaining debts.