Bankruptcy

1
CHAPTER 27
Bankruptcy
2

• As in many areas of law, bankruptcy law must
  balance between competing interests. When an
  individual or business files for bankruptcy
  protection, generally neither debtor or creditor
  comes out whole.

3
OVERVIEW I

• Congress has recently amended the Bankruptcy
  Code to address a recent rise in bankruptcy
  filings. The new laws were effective October
  17th, 2005

4
OVERVIEW II

• THE BANKRUPTCY CODE IS DIVIDED INTO EIGHT
  CHAPTERS.

5
OVERVIEW III

• Chapters 1, 3, and 5 are administrative rules.
• Chapters 7, 9, 11, 12, and 13 are substantive
  rules that apply to specific types of
  bankruptcies.

6
OVERVIEW IV
7
OVERVIEW V

• Chapters 9 and 12 are for specialized types of
  debtors and are not covered in this textbook.

8
OVERVIEW VI

• The objective of Chapters 11 and 13 of the
  Bankruptcy Code is rehabilitation of the debtor.

9
OVERVIEW VII

• When debtors are unable to develop a feasible
  plan for rehabilitation, Chapter 7 allows for
  liquidation (also known as straight bankruptcy).

10
GOALS

• To preserve as much of the debtors property as
  possible.
• To divide the debtors assets fairly between the
  debtor and the creditors.
• To divide the debtors assets fairly among the
  creditors.

11
CHAPTER 7 -- LIQUIDATION

• Credit counseling first
• Then Chapter 13
• If unsuccessful, file a Petition
• Petitions may be voluntary or involuntary.

12
CHAPTER 7 (CONTD)

• VOLUNTARY
• VS
• INVOLUNTARY

13
TRUSTEE

• The trustee is responsible for gathering the
  bankrupts assets and dividing them among
  creditors.

14
CREDITORS

• Unsecured creditors must submit a proof of claim
  within 90 days after the meeting of creditors.
• Secured creditors do not file proofs of claim
  unless the claim exceeds the value of their
  collateral.

15
AUTOMATIC STAY

• An automatic stay prohibits creditors from
  collecting debts that the bankrupt incurred
  before the petition was filed.

16
PURPOSE

• The purpose of the automatic stay is to give
  the debtor time and space to make a rational plan
  for paying debts without pressure from creditors.

17
ESTATE

• Assets
• Exempt Property
• Secured Property

18
VOIDABLE PREFERENCES

• A preference is a transfer of money or property
  just before filing bankruptcy.
• The trustee can void a transfer that meets all of
  the following requirements

19
FRAUDULENT TRANSFERS

• A transfer is fraudulent if it is made within a
  year before a petition is filed and its purpose
  is to hinder, delay, or defraud creditors.
• A trustee may void fraudulent transfers.
• A trustee cannot void pre-petition payments made
  in the ordinary course of business.

20
PAYMENT OF CLAIMS

• The trustee pays the bankruptcy estate to the
  various classes of claims in the following order
  of rank
• Secured Claims
• Priority Claims
• Unsecured Claims

21
DISCHARGE

• Once a bankruptcy estate is distributed, the
  creditors cannot make claims on the debtor for
  money owed before filing.

22
NON-DISCHARGEABLE DEBTS

• Debts that cannot be discharged include (among
  others)
• Income taxes and property taxes
• Money obtained fraudulently or illegally
• Some loans for luxury goods
• Recent cash advances on credit cards
• Alimony and child support debt
• Fines and penalties
• Some student loans

23
REAFFIRMATION

• To reaffirm a debt means the debtor promises
  to pay even after discharge.
• Court very strict about permitting
  reaffirmation.

24
REAFFIRMATION MUST

• Not violate laws for fraud, duress or
  unconscionability.
• Be filed in court.
• Clearly state that the debtor has the right to
  rescind within 60 days.
• Not impose undue hardship on the debtor.

25
CHAPTER 11-- REORGANIZATION

• Chapter 11 does not require a trustee the
  petitioner (called debtor in possession) serves
  as the trustee. He
• Operates the business, and
• Develops a plan of reorganization.
• A creditors committee watches over the interests
  of the creditors.

26
PLAN OF REORGANIZATION

• The debtor comes up with a plan that is
  acceptable to the creditors.
• The creditors may accept a reorganization plan
  that they believe will be better for them than
  liquidation.
• If they reject the debtors proposal, they may
  submit alternative plans.

27
PLAN

• A typical plan of reorganization gives some
  current assets to the creditors and promises to
  pay them a portion of future earnings.

28
CONFIRMATION OF THE PLAN

• A confirmation hearing is held to determine
  whether it should accept the plan.
• The court will approve a plan if a majority of
  each class votes in favor of it.

29
CONFIRMED PLAN

• A confirmed plan is binding on the debtor,
  creditors and shareholders if complied with.

30
DISCHARGE

• If the debtor complies with the terms of the
  plan, the debtor now owns the assets in the
  bankrupt estate, free of all obligations except
  those listed in the plan.

31
CHAPTER 13 -- CONSUMER REORGANIZATION

• The purpose of Chapter 13 is to rehabilitate an
  individual debtor.
• Creditors cannot use an involuntary petition to
  force a debtor into Chapter 13.
• A trustee is appointed to supervise the debtor,
  who remains in possession of all assets.

32
CH. 13 -- PLAN OF PAYMENT

• Plan of payment must be submitted by the debtor
  within 15 days after filing the petition.
• The plan must
• Commit some future earnings to pay off debts,
• Promise to pay all secured and priority claims in
  full, and
• Treat all remaining classes equally.

33
CONFIRMATION OF PLAN

• Once confirmed, the plan is binding on all
  creditors.

34
DISCHARGE

• Upon complying with the plan, the debtor is
  washed clean of all pre-petition debts except
  those provided for in the plan.