lesson 21

Question 1

although bankruptcy laws are controversial,

Answer 1

they provide a way for an orderly dissolution of the remaining assets and debts of an individual/company

Question 2

goals of bankruptcy

Answer 2

1. to preserve as much of debtor’s property as possible
2. to divide the debtor’s assets fairly between debtors and creditors
3. to fairly divide remaining assets of debtor between creditors

Question 3

3 main types of bankruptcy (known for chapter in bankruptcy code where they are found)

Answer 3

chapter 7 (liquidation), chapter 11 (reorganization), chapter 13 (consumer reorganization)

Question 4

chapter 7 bankruptcy is available to

Answer 4

individuals, partnerships, LLCs, others

Question 5

before an individual may file for chapter 7 bankruptcy, they must:

Answer 5

1. within 180 days before filing they must undergo credit counseling with approved agency
2. individual debtors may only file under this chapter if they earn less than median income in their state OR if they cannot afford to pay back at least $8175 over 5 years

Question 6

step one of chapter 7

Answer 6

file petition with US district court

Question 7

two types of petition

Answer 7

voluntary petition - filed by debtor
involuntary petition - filed by creditors against debtors

Question 8

what must petition include

Answer 8

1. form petition that lists basic info about debtor
2. list of creditors and contract info
3. schedule of assets and liabilities (everything debtor owns and owes)
4. claim of exemptions - what debtor is entitled to under law
5. schedule of income and expenditures - listing of debtor’s job, income, and expenses
6. statement of financial affairs - summary of debtor’s financial history and current condition

Question 9

what is required for involuntary petition

Answer 9

1. debtor must owe at least $16,750 in unsecured claims to creditors that file
2. if debtor has 12 or more creditors, at least 3 of them must sign petition. less than 12, at least 1.
3. creditors must allege that debtor has not been paying debts that are due OR that under state law a custodian for debtor’s property has been appointed

Question 10

steps of a petition

Answer 10

1. filed
2. court issues order for relief - means that petition has been filed, debtor is under jurisdiction of court
3. trustee is appointed by court to supervise bankruptcy proceedings
4. creditors all meet with trustee and debtor

Question 11

trustee appointed by court

Answer 11

a. trustee will organize and gather debtor’s assets
b. trustee will divide assets between creditors according to law
c. usually an attorney or CPA that works with court
d. trustee may be chosen by creditors but not required

Question 12

creditors all meet with trustee and debtor

Answer 12

a. debtor will be required to attend and answer questions under oath
b. unsecured creditors must file proof of claim with trustee
c. if debtor objects to claim, court will hold hearing
d. if creditor does not file proof of claim, they lose rights to be paid
e. secured creditors do not have to file a claim, unless the collateral does not cover the amount due, then just for that portion

Question 13

Kelly loans $40,000 to Victor to purchase a boat. she secures her loan with the boat as collateral and notes her lien on the boat’s title. 2 years later Victor has made no payments and value of boat is now only 25k. victor files bankruptcy.

Answer 13

kelly does NOT have to file a proof of claim for the first 25k owed b/c it is secured. but she does have to file for 15k that isn’t secured.

Question 14

most important aspect of bankruptcy

Answer 14

automatic stay

Question 15

after debtor has filed for bankruptcy, the court enters

Answer 15

automatic stay

Question 16

once automatic stay is entered

Answer 16

1. creditors no longer may sue debtor
2. creditors no longer may contact debtor about debts
3. creditors no longer may take action to collect from debtor
4. exclusive remedy for creditors is now with bankruptcy court

Question 17

certain property of an individual debtor is exempt from bankruptcy proceedings. this is not the case when

Answer 17

organization files bankruptcy

Question 18

number and type of exemptions are determined by

Answer 18

state law

Question 19

most states exempt

Answer 19

debtor’s home and household goods, vehicle, work tools, disability and pension benefits, alimony, health care devices

Question 20

fraudulent transfers

Answer 20

bankruptcy court will not allow debtor to transfer property in one year period prior to filing if purpose is to hinder, delay, or defraud creditors. this can be hard to prove and somewhat impractical to claw back property.

Question 21

next step after creditors meet

Answer 21

payment of claims

Question 22

order of creditor claims, classified by payment:

Answer 22

1. secured claims
2. priority claims
3. unsecured claims

Question 23

priority claims exs

Answer 23

alimony and child support, administrative expenses, payments to employees, employee benefit plans, consumer deposits, taxes

Question 24

a creditor is paid _______ before the trustee ______

Answer 24

everything they are owed from debtor’s assets, considers the next in line creditor

Question 25

once all of debtor's assets are paid out

Answer 25

all of debtor's debts are discharged

Question 26

debts discharged means

Answer 26

every proof of claim that was filed no longer exists

Question 27

effects of discharge

Answer 27

1. debtor is now debt free 2. creditors no longer have debt owed to them 3. debtors now have significant negative mark against their credit 4. many lenders will not loan money to those who have filed for bankruptcy for 5-7 years, bankruptcy shows up on most credit reports for 10 years

Question 28

some debts that may not be discharged in bankruptcy

Answer 28

1. income taxes for 3 years prior to filing 2. money obtained fraudulently 3. stolen money 4. money owed for alimony 5. liability to a bank 6. damages owed for DUI 7. debts owed for intentional torts 8. debts from violating SEC

Question 29

chapter 11 - reorganization goals

Answer 29

1. to save entity from dissolution and liquidation 2. to allow debtors and creditors to complete a plan for repayment or reduction of debts to the satisfaction of all 3. to create a plan that allows the entity to continue to operate and work towards satisfying debts 4. to allow the entity to continue as a going concern

Question 30

as opposed to chapter 7, which ends in _______, Chapter 11 is very different

Answer 30

total liquidation and the end of the entity

Question 31

bankruptcy proceedings of 7 and 11 both participate in the actions of

Answer 31

filing a petition, voluntary or involuntary, order of relief, meeting of creditors, proofs of claim, automatic stay

Question 32

main differences between chapter 11 and 7

Answer 32

1. no trustee for chapter 11 bankruptcy. debtor serves as trustee and is known as "debtor in possession." purpose of chapter 11 is to allow the debtor to continue operating entity but have time to pay off 2. creditor's committee serves an important function of creating and implementing the plan for repayment. court will ordinarily appoint 7 largest unsecured creditors to committee 3. after petition is filed in 11, debtor has 120 days to submit plan of repayment. if debtor fails to submit or if court rejects, creditors may submit.

Question 33

chapter 13 bankruptcy

Answer 33

very similar to chapter 11 in that it involves reorganization, except that it is for individuals and not entities.