Bankruptcy

Reaffirmation

A debtor may voluntarily agree to pay off a debt even though the debt could be discharged in bankruptcy. An agreement to do so is called a reaffirmation agreement, and (1) must be made before the debt is discharged in bankruptcy, and (2) must be filed with the bankruptcy court.

Automatic Stay

Filing a bankruptcy petition suspends virtually all other litigation and other actions by creditors or potential creditors against the debtor or the debtor's property until the bankruptcy is resolved and the stay is lifted. If a creditor knowingly violates the automatic stay, any party injured thereby is entitled to recover actual damages, costs, and attorneys' fees from the violator. A secured creditor may, while the debtor is still in bankruptcy, move to lift the stay against its collateral if the creditor's interest in the collateral is not adequately protected or if the debtor has no equity in the collateral and it is not essential to the debtor's successful reorganization. The stay terminates 60 days after the motion, unless the court extends it or the parties agree to extend it.

Reorganization

A form of bankruptcy, under Chapter 11 of the Bankruptcy Code, whereby a debtor and its creditors formulate a plan under which the debtor repays a portion of its debts and is discharged from the remainder.

Family Farmer

A person (or entity that is at least 50 percent owned by a farm family) whose gross income is at least 50 percent farm dependent and whose debts, which may not total more than $3,792,650, are at least 50 percent farm related.

Discharge (Repayment Bankruptcy

After the completion of all payments, the bankruptcy court will discharge all debts included in the repayment plan. Even if the debtor does not complete the plan, the court may grant a hardship discharge, if the failure was due to circumstances beyond the debtor's control.

Discharge (Farmer/Fisherman Bankruptcy)

After the debtor has made all plan payments, the bankruptcy court will discharge all plan debts.

Means Testing

BAPCPA restricts the availability of Chapter 7 liquidation to debtors whose family income exceeds the median family income for their state. If the debtor's income exceeds the median income for her state and her disposable income exceeds $2,200 per year, the trustee, any creditor, or any other party in interest may petition the bankruptcy court to force the debtor into Chapter 11 or 13. Faced with such a petition, the debtor must convince the bankruptcy court that "special circumstances" warrant permitting the debtor to proceed under Chapter 7.

Voidable Rights

Because the trustee "stands in the debtor's shoes," any reason the debtor could use to reclaim her property is equally valid for the trustee.

Discharge (Reorganization Bankruptcy)

For non-individual debtors, discharge occurs upon confirmation. An individual debtor is not discharged until she completes her plan.

Court Approval

If the debtor is not represented by counsel, the bankruptcy court must approve the agreement. If the debtor is represented by counsel, court approval is not needed, provided the debtor's attorney declares or affirms that (1) the debtor has been fully informed of the consequences of the agreement (and of default under the agreement), (2) the debtor made the agreement voluntarily, and (3) the agreement imposes no undue hardship on the debtor or the debtor's family. Reaffirmation payments that exceed the difference between the debtor's income and her monthly expenses presumptively create undue hardship.

Penal Dismissal

In addition, BAPCPA authorizes the bankruptcy court to dismiss a debtor's Chapter 7 petition if (1) the debtor has been convicted of a violent crime or drug trafficking offense and her victim files a petition to dismiss; or (2) the debtor fails to pay post-petition domestic-support obligations.

Property Distribution

Secured creditors have priority over unsecured creditors to the proceeds from the disposition of secured collateral. To the extent that a secured creditor's claims are not satisfied by the secured collateral, he becomes an unsecured creditor for the balance due. After paying all administrative expenses associated with the bankruptcy - including court costs, trustee fees, and attorneys' fees - proceeds from the remainder of the estate are distributed among unsecured creditors according to a strict categorization of claims. (See p. 592)

Exempt Assets

The automatic stay does not affect domestic support obligations or proceedings related to divorce, child custody, visitation, or domestic violence.

Chapter 12 Plan

The content of and court confirmation procedure are essentially the same as in Chapter 13.

Liquidation

The sale of all nonexempt assets of a debtor and distribution of the proceeds to the debtor's creditors, pursuant to Chapter 7 of the Bankruptcy Code.

Confirmation

The various creditor classes must agree to the plan, and the bankruptcy court must confirm it.

Proof of Claim

To receive a portion of the debtor's estate, a creditor must typically file with the bankruptcy court clerk its name and address and the amount the creditor claims the debtor owes it. A creditor failing to timely file a proof of claim may lose its right to share in distributions from the bankruptcy estate.

Debtor-In-Possession

Upon order of the bankruptcy court, the Chapter 11 debtor continues to operate his business, with or without a trustee to oversee the DIP.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

took effect October 17, 2005, has sharply curtailed the availability of liquidation bankruptcy to consumer debtors.

Discharge

With certain exceptions, any debts not satisfied by the liquidation proceeds are discharged - meaning that the debtor is no longer obligated to repay them. A number of debts are non-dischargeable, including back taxes, alimony and child support, student loans, and consumer debts incurred to purchase "luxury" items or in exchange for a large cash advance. (See pp. 592-93)

Discharge Objections

(1) concealing or destroying property or financial records with the intent to hinder, delay, or defraud a creditor; (2) having been previously discharged within eight years of filing the present petition; (3) failing to complete mandatory credit counseling; and (4) pending felony charges against the debtor.

Repayment Bankruptcy Procedure

A Chapter 13 repayment bankruptcy begins when a debtor files a voluntary petition. Certain Chapter 7 and Chapter 11 cases may be converted to Chapter 13 with the debtor's consent.

Creditors' Committee

A committee of unsecured creditors appointed to consult with the trustee or DIP concerning the debtor's reorganization.

Preferences

A debtor may not transfer property or make a payment favoring one creditor over others. Unless a payment or transfer was in exchange for current consideration (e.g., lunch, monthly phone bill) or was made by a consumer debtor in an amount no more than $5,850 in value, the trustee may reclaim a payment or transfer giving any creditor, in the last 90 days before the debtor filed her petition, more than it would have received as a result of the bankruptcy proceedings or to or for the benefit of an insider made in the last 365 days before the debtor filed her petition.

Voluntary Bankruptcy

A debtor who finds himself unable to pay debts as they become due may voluntarily petition for bankruptcy relief. The petition must contain (1) a list of all secured and unsecured creditors, their addresses, and the amount owed to each; (2) a statement of the debtor's finances; (3) a list of all property (real and personal) owned by the debtor, including property the debtor claims as exempt; (4) a list of current income and expenses, including (5) an itemization of monthly income and (6) proof of payments received from employers within 60 days of filing; (7) proof of pre-petition credit counseling; and (8) a copy of the debtor's federal income tax return for the most recent pre-petition tax year.

Involuntary Bankruptcy

A debtor's creditors may file a bankruptcy petition against the debtor. If the debtor has twelve or more creditors, three or more creditors having unsecured claims totaling at least $14,425 must jointly file the petition. If the debtor has fewer than twelve creditors, one or more creditors having unsecured claims totaling at least $14,425 may file the petition. If the debtor challenges the bankruptcy, the court will hold a hearing and enter an order against the debtor if (1) the debtor is generally not paying debts as they become due, or (2) a receiver, custodian, or assignee took possession of, or was appointed to take charge of, substantially all of the debtor's property within 120 days before the involuntary petition was filed.

Repayment

A form of bankruptcy, under Chapter 13 of the Bankruptcy Code, whereby an individual debtor and his or her creditors formulate a new payment schedule under which the debtor pays all secured debts (and at least as much of his or her unsecured debts as would be paid under Chapter 7) and is discharged from the remainder upon completion of the repayment plan. Individuals with regular income who owe fixed unsecured debts of less than $360,475 or fixed secured debts of less than $1,081,400 may voluntarily petition the bankruptcy court for relief under Chapter 13.

Family Fisherman

A person (or entity that is at least 50 percent owned by a family engaged in commercial fishing) whose gross income is at least 50 percent dependent on commercial fishing operations and whose debts, which may not total more than $1,757,475, are at least 80 percent related to commercial fishing operations.

Reorganization Plan

A plan to conserve and administer the debtor's assets in the hope of an eventual return to successful operation, which must (1) designate classes of claims and interests, (2) specify the treatment to be afforded to each class, (3) provide an adequate means for execution, and (4) pay all tax claims over a five-year period.

Trustee's Duty Upon Filing: Domestic-Support Obligations

If the debtor owes a domestic-support obligation, the trustee must notify the person entitled to receive the support about the debtor's bankruptcy filing.

Bankruptcy Estate

Once a bankruptcy proceeding begins, the following legal and equitable interests in property, subject to certain exemptions, become property of the bankruptcy estate: (1) property currently held by the debtor, (2) jointly-held property, (3) certain property the debtor transferred to a third party shortly before the bankruptcy filing, (4) proceeds and profits from the use or sale of property of the estate, and (5) certain interests in property to which the debtor will become entitled within 180 days after the filing.

Cram-Down

Once at least one class of creditors has agreed to the plan, the court may confirm it over the objections of other creditors, as long as the plan does not "discriminate unfairly" against any creditors.

Confirmation (Repayment Bankruptcy

Once the individual debtor has filed his plan, the bankruptcy court holds a hearing and will confirm the plan with respect to each claim of a secured creditor if (1) the secured creditor has accepted the plan, or (2) the plan provides that the creditor retains its claim and the property to be distributed under the plan is sufficient to satisfy the secured claim, or (3) the debtor surrenders the collateral to his creditor.

Revocation of Discharge

The bankruptcy court may revoke a discharge within one year if it discovers that the debtor was fraudulent or dishonest during the bankruptcy proceedings.

Timely Payment

The debtor must begin making plan payments within thirty days after filing the plan. Failure to make timely payments is grounds for the court to convert the case to a liquidation bankruptcy or dismiss the petition. If the court has not yet approved the debtor's plan, the trustee must retain all plan payments until the court confirms the debtor's plan.

Repayment Plan

The debtor's plan must (1) turn over to the trustee any future earnings or income needed to fulfill the plan, (2) provide for full payment of all priority claims within the plan period, and (3) provide equal treatment for all claims within a particular class.

Procedure (Farmer/Fisherman Bankruptcy)

The procedure for a family farmer or fisherman bankruptcy, under Chapter 12 of the Bankruptcy Code, is essentially the same as for a Chapter 13 consumer repayment bankruptcy.

Bad Faith

The stay does not protect the assets of a debtor who has had two or more bankruptcy petitions dismissed in the prior 12 months until the bankruptcy court finds that the debtor has filed in good faith.

Fraudulent Transfers

The trustee may avoid transfers the debtor made or obligations she incurred within two years of filing her petition if she made or with the intent to hinder, delay, or defraud a creditor.

Power to Posess

The trustee may require persons holding the debtor's property when the debtor files her bankruptcy petition to deliver the debtor's property to the trustee.

Trustee's Duty Upon Filing: Mean's Testing

The trustee must promptly review the debtor's petition and accompanying materials and file a statement with the court, copied to all creditors, opining whether the debtor's Chapter 7 filing is presumptively abusive. If abuse is presumed, the trustee must either file a motion to dismiss the Chapter 7 case (or convert it to a Chapter 11 or 13) or a statement why the debtor overcomes the presumption and a motion is inappropriate.

Exempt Property

Unless superseded by an individual state's exemptions, an individual debtor is entitled to exempt from her bankruptcy estate limited dollar amounts of the following: (1) equity in the debtor's homestead, burial plot, and other real property; (2) an interest in a motor vehicle; (3) household goods and furnishings, apparel, appliances, books, animals, crops, and musical instruments; (4) jewelry; (5) tools of the debtor's trade; (6) certain life insurance contracts, and interests in accrued dividends or interests therein; (7) prescription health aids; (8) Social Security and certain welfare benefits, alimony and support payments, and certain pension benefits; and (9) rights in certain personal injury awards.