Chapter 27 Bankruptcy

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Chapter 27Bankruptcy
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Learning Objectives

• What is the debtors estate? What property is
  exempt under bankruptcy law?
• What is the difference between Chapter 7 and
  Chapter 13?
• What is the difference between an exception to
  discharge and objection to discharge?
• In Chapter 11, what is the role of the debtor in
  possession?

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Bankruptcy and Reorganization

• Article I, Section 8 of the U.S. Constitution.
  Federal jurisdiction.
• Bankruptcy Reform Act of 1978, amended by Reform
  Act of 1994.
• Federal court under U.S. district court, can
  appeal to district courts.
• Federally appointed judges.

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Bankruptcy and Reorganization

• Bankruptcy provides different relief
• Chapter 7 Liquidation (wipe out all debt)
• Chapter 11 Corporate Reorganizations
• Chapter 12 Family Farmers
• Chapter 13 Adjustment of Individuals Debts
  with a payment plan.

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Chapter 7-Liquidation

• Most familiar.
• Any person (including corporation)
• All debts are discharged.
• Begins with a voluntary or involuntary Filing of
  a Petition (Automatic Stay)
• Voluntary filed by debtor
• Involuntary creditors force debtor to file
• Order for Relief

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Chapter 7

• Debtor must understand there are other chapters
  available.
• Debtor does not have to be insolvent.
• List secured and unsecured creditors and
  addresses and amount of money owed. List of all
  property owned including property claimed
  current income and expenses.
• Debtor must swear and sign. Federal crime to
  misrepresent.

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Chapter 7

• Automatic Stay upon Filing of Petition Either
  voluntary or involuntary.
• Creditors cannot commence or continue most legal
  actions.
• Damages available for violation of stay.
• Creditors can get adequate protection.
• Periodic or one time cash payments or equivalent.

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Chapter 7 Creditors Meeting

• Ten-thirty days after filing, Court calls meeting
  of creditors. Debtor is examined under oath about
  his debts and assets.
• Within 90 days, Creditors must file proof of
  claim with court clerk.
• Leases cannot be for more than one year.

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Chapter 7 Creditors Meeting

• Allowed unless disputed.
• If claim is disputed or unliquidated, court will
  decide value.
• It is a crime to file false claim.
• Employment contracts and real estate.

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Chapter 7 Estate Property

• Debtors Estate includes
• All Debtors legal and equitable interests in
  property presently held, including community
  property
• Property transferred in a voidable transaction
  and
• Property which Debtor becomes entitled within 180
  days after filing.

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Chapter 7 Estate Property

• Estate includes (contd)
• Proceeds and profits from the property of the
  estate.
• After-acquired property such as inheritances,
  property settlements, and life insurance death
  proceeds.

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Chapter 7 Exempted Property

• Exempted Property (Federal)
• Up to 17,425 in home equity
• Up to 2,775 in car
• Up to 9,300 in personal possessions (up to 450
  per item)
• Up to 1,150 in jewelry
• Up to 1,750 in tools
• Social security, alimony and support payments.

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Chapter 7 Trustees Role

• Court-appointed until first meeting of creditors.
• Creditors elect permanent trustee
• Administers estate.
• Collects proceeds, liquidates assets and pay
  Creditors in order of priority.

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Chapter 7 Trustees Powers

• Trustee has rights to get Debtors property back
  from those Creditors that he can defeat by
  asserting the rights of
• Debtor against the creditors.
• Lien creditors against the creditors.
• Bona fide purchaser against the creditors.
• Trustee still loses to the PMSI creditor who
  perfects within his magic 10-day period.
• Trustee can stand in shoes of debtor and assert
  any lack of capacity or lack of assent.

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Trustee Preferences

• A Debtor is not permitted to transfer property or
  make a payment that favorsor gives a preference
  toone creditor over another.
• For a Trustee to recover preferential payment,
  Debtor must be insolvent and transferred property
  for pre-existing debt within previous 90 days.

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Trustee Preferences

• Trustee can use preferential payment to pay a
  real preexisting debt, not for current
  consideration.
• Creditor gets more than he would in a Chapter 7.
• Consumer can transfer up to 600 without
  constituting a preference.

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Trustee -- Liens

• Trustee can avoid statutory liens that became
  effective when bankruptcy petition filed, or when
  debtor became insolvent.
• Can avoid liens which were unperfected on date of
  bankruptcy.

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Fraudulent Transfers

• Trustee may avoid fraudulent transfers made
  within one year of filing of petition.
• Trustee may proceed under state law for fraud
  with a 3 year statute of limitations.

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Chapter 7 -- Property Distribution

• If Secured property
• Consumer debtors.
• Have 30 days from filing petition or before
  first meeting of creditors.
• Debtor must tell what she intends to do with
  collateral-- keep or surrender.
• Trustee must enforce within 45 days.
• If surrenders creditor can keep or sell.
• If creditor keeps full satisfaction of debt.
• If creditor sells can use extra for costs, or
  can become unsecured creditor for deficiency.

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Chapter 7 -- Property Distribution

• Unsecured property
• Paid according to bankruptcy law.
• All of one class must be paid before moving to
  next.
• Creditor within last class receive
  proportionately if not enough.
• See Priority List in text.
• All creditors paid, trustee gives extra back to
  debtor.

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Chapter 7 -- Discharge

• Exemptions.
• Objections to Discharge.
• Effect of Discharge.
• Revocation of Discharge.
• Reaffirmation of a Debt.

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Exceptions to Discharge

• Claims for back taxes.
• Claims for amounts borrowed by Debtor to pay
  federal taxes.
• Claims against property/money obtained by Debtor
  under false pretenses.
• Claims by Creditors who did not know about
  bankruptcy.

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Chapter 7 -- Reaffirmation

• Debtor may wish to pay a debt notwithstanding the
  debt could be discharged in bankruptcy.
• Agreement is filed with court.
• Debtor can rescind agreement at any time.

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Chapter 11 -- Reorganization

• Chapter 11Corporations. Debtor and Creditors
  formulate a plan under which the Debtor pays a
  portion of its debts and is discharged of the
  rest.
• Same debtors as are eligible under Chapter 7.

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Chapter 11

• Fast tract Chapter 11 for small business
  debtors whose liabilities do not exceed 2
  million and who do not own or manage real estate.
• Workouts (private negotiated settlements).

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Chapter 11

• Debtor in Possession (DIP).
• Trustee may be appointed.
• DIP has same powers as trustee in Chapter 7.
• Strong-arm clause.
• Collective Bargaining Agreements.
• Creditors Committees.

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Chapter 11

• Reorganization Plan
• Rehabilitates debtor and conserves estate
• Plan must be equitable and
• Designate classes of claims and interests.
• Specify treatment to be afforded the classes.
• Provide adequate means for execution.

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Chapter 13 Repayment

• Chapter 13 Individuals Repayment Plans. For
  individuals with regular income who owe fixed
  unsecured debts of lt290,525 or fixed secured
  debts of lt871,550.
• Not for partnerships, corporations.

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Chapter 13 Repayment

• Repayment Plan
• For all or a portion of debts to be paid during a
  period not to exceed 3 years.
• Confirmation of the Plan
• Hearing for interested parties to object to plan.
• Court will confirm (order) the plan after
  creditors approve.
• Objections to the Plan
• Discharge balance of debt (after completion of
  all payments in the plan)

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Chapter 12 Family Farmer

• Chapter 12 Family Farmer Plans
• Family Farmer 50 of gross income comes from
  farming and whose debts are 80 farm related.
• Procedure for filing.
• Content of plan.
• Court confirmation.