What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently
(Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt
Filing halts collection activity; grants “automatic stay” (with certain exceptions)
Stops creditors from suing debtor
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
It doesn’t, because the corporation is a separate legal entity.
Under bankruptcy, corporations are dissolved
Under bankruptcy, individuals are discharged
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents, a discharge will be denied
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt 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 - Railroads, Banks, Insurance companies, Savings & loans (think: 7th inning RBIs)
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
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
What are the requirements for an involuntary bankruptcy filing under Chapter 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 $14,425
If less than 12 unsecured creditors - only 1 must file, claim(s) must be in excess of $14,425
Upon filing, a judge will declare an order for relief unless the debtor protests
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK, they can
reclaim possession of their property from the interim BK trustee
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors
Creates 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
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11, but for individuals
Gives individuals a reprieve from creditors
Creates a payment plan for the debt
Ch. 13 Involuntary petitions are not allowed
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate
Can sue or be sued
Oversees bankruptcy and watches for preferential creditor payments
Oversees priority transfer of assets to creditors
How and when is a bankruptcy trustee appointed?
Optional – Creditors decide
Can be elected by creditors or can be appointed by the court
Prior association with the debtor is allowed
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing
A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value
A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to “insider” - Corporate officers/directors, Partners, Relatives
Made within 3 Months of BK “non-insider”
Creditor receives larger payment than BK liquidation would have granted
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors
Can take either collateral or cash proceeds from the sale of an asset
If collateral doesn’t satisfy amount owed, Secured Creditors become a general creditor for the difference.
What is the order of priority given to unsecured creditors in a bankruptcy?
- BK Trustee and Attorney fees get paid before all other unsecured credit cards
- Salaries required to continue business once BK proceedings begin
- Any claims filed resulting from business operations that occur after involuntary BK is filed
- Wages owed to employees
- Retirement contributions within last 6 months
- Consumer deposits for undelivered goods
- Child Support & Alimony
- Other general unsecured claims
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors
The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
What assets are exempt from creditors in a bankruptcy estate?
Unemployment, Child Support, Alimony, Wages, Pensions, Annuities to the extent that they provide reasonable support for debtor and dependents
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor’s paycheck
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house
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
What is an artisan’s lien?
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
What is a surety (co-signing)?
A third party agrees to be liable for a loan
Example: A parent co-signs on their child’s car loan
How is a surety liable in a transaction?
A surety is primarily liable
Surety can be released from liability if the creditor behaves in a way that increases the risk that they
initially agreed to
Surety can be released from liability if the debtor changes the loan agreement in a way that materially
increases the surety’s risk
What is a cosurety, and how are they liable in a transaction?
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
If one surety pays more than their proportionate share of the risk, then the other sureties must compensate them for the difference, which is called Right of Contribution
What is a guarantor?
Similar to surety, but a guarantor is secondarily liable
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
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