BANKRUPTCY

1
BANKRUPTCY

• Form of Relief or Strategic Option?

2
BANKRUPTCY

• Congress directed by Constitution to
  establishuniform laws on the subject of
  bankruptcies Art. I, 8, Cl. 4
• Bankruptcy gives to the honest, but unfortunate
  debtor a new opportunity in life and a clear
  field for future effort, unhampered by the
  pressure and discouragement of preexisting debt.
  Local Loan Co. v. Hunt, 292 US 234 (1934)

3
BANKRUPTCY

• USE OF BANKRUPTCY

BANKRUPTCY FILINGS (Years Ended December 31,
2001 through 2005)
Year Total Non-Business Business
2005 2,078,415 2,039,214 39,201
2004 1,597,462 1,563,145 34,317
2003 1,660,245 1,625,208 35,037
2002 1,577,651 1,539,111 38,540
2001 1,492,129 1,452,030 40,099
4
BANKRUPTCY

• HISTORICAL CONTEXT
• Articles of Confederation did not prevent
  Judgment-Jumping
• Motive Enhance Creditors Ability to
  Collect/Not Debtor Relief
• Debtors Prisons until mid-19th Century
• 1898 Commercial Interests of Nationalized
  Economy motivated surprisingly Debtor-friendly
  Law

5
BANKRUPTCY

• FRAMEWORK
• Federal Court Process for Individuals and
  Businesses to Reorganize or Discharge Debts
• NON-DISCHARGEABLE DEBTS
• Alimony and Child Support
• DUI Judgments
• Student Loans
• Fines and Income Taxes

6
BANKRUPTCY

• EXEMPTIONS
• Homestead 50,425
• Insurance Proceeds, Partnership Property and
  Liquor Licenses
• Retirement Plans, Welfare and Unemployment
  Benefits
• Personal Property including Tools used in Work

7
BANKRUPTCY

• PROCEEDINGS
• First Action File and Elect Form
• Chapter 7 Liquidation
• Chapter 13 Personal Reorganization
• Chapter 11 Business Reorganization
• Second Action Court appoints Trustee
• Assumes Constructive Management of Bankrupts
  Financial Matters

8
BANKRUPTCY
PROCEEDINGS CHAPTER 7
LIQUIDATION (1) Trustee/Court identify Exemptions
and Exclusions (2) Notify Debtor and Creditors
of Disposition of Dischargeable Debt CHAPTER 13
PERSONAL REORGANIZATION (1) Debtor proposes Plan
(2) Negotiations with Creditors (3) Reconcile
Ability to Pay with Obligations (4) Most Assets
retained by Debtor
9
BANKRUPTCY

• PROCEEDINGS
• CHAPTER 11 BUSINESS REORGANIZATION
• Creditors (Committee) Accept/Reject Company Plan
  subject to Trustee/Court Oversight
• Final Plans usually Reconfigure Capital
  Structure Creditors Swap Debt for Equity
• Cram-Down Rule
• Super-Majority (2/3) Agreement binds
  Minority/Dissenting Claimants Effect can be Loss
  of Claim Priority

10
BANKRUPTCY

• PROCEEDINGS
• PREFERENCE (Reach-back) RULE
• Creditors may Recover Payments made in
  Anticipation of Bankruptcy (Fraudulent
  Conveyances) under Certain Conditions
• 90 Days prior to Filing if Effect favors
  Recipient over Other Creditors
• One Year prior to Filing if Payments made to
  Insiders (Relatives or Controlled Persons or
  Entities)

11
BANKRUPTCY

• CHANGES AS OF OCTOBER 17, 2005
• Shifts to Debtor More of Burden to Prove
  Eligibility for Bankruptcy
• Requires Pre-Filing Credit Counseling
• Chapter 7 Means Test Above-median Income can
  convert Filing to Chapter 13 with regular
  payment requirement
• Businesses providing Customer Credit supported
  Changes as Essential for Mitigating Misuse of Law