Chapter 31 - Bankruptcy Law

Means Test - Substantial Abuse

A bankruptcy court could dismiss a Ch. 7 petition for relieve if the use of Ch. 7 would constitute a "substantial abuse" of bankruptcy law. This is a way to determine a debtor's eligibility for Ch. 7 and it acts as a way to keep upper-income people from abusing the bankruptcy process by filing Ch. 7. This forced many to file under Ch. 13 instead

Distribution to unsecured creditors Order

Domestic-Support Obligations Administrative Expenses Ordinary Business Expenses Wages and Salaries Employee benefit plans Certain Farmers and Fishermen Consumer Deposits Taxes and Fines Claims resulting from Driving While Intoxicated General Creditors

Order for Relief

If a debtor challenges the petition, a hearing will be held and the bankruptcy court will enter an order for relief if it finds either: 1) The debtor is not paying debts as they come due. 2) A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of the debtor's property within 120 days before the filing of the petition.

Background: Ransom v. FIA Card Services, N.A.

Jason Ransom filed a petition in fed bankruptcy court to declare bankruptcy under Ch. 13. Amount his assets, he had a Toyota Camry that he owned free of any debt. In listing monthly expenses for the means test, he claimed a car-ownership deduction of $471 and a separate $388 deduction for car operation costs. Based on his means test he proposed a five-year plan that would repay about 25% of his unsecured debt. He listed FIA Card services, N.A. as an unsecured creditor. FIA objected to Ransom's plan, arguing that he should not have claimed the car-ownership allowance because he did not make payments on his car. The court agreed with FIA and issued decision in its favor. A Bankruptcy Appellate Panel and the U.S. Court of Appeals for the Ninth Circuit affirmed the decision. Ransom appealed to the US Supreme Court.

Bankruptcy

Provided under federal law. although state laws may play a role in bankruptcy proceedings, particularly state laws governing property, the governing law is based on federal legislation

Ch. 13

Provides for "adj of debts of an individual with regular income" Individuals (not partnerships or corporations) with reg income who owe fixed (liquidated) unsecured debts of less than $383,175 or fixed secured debts of less than $1,149,525 may take advantage of bankruptcy repayment plans

Chapter 7 Bankruptcy

Provides for liquidation proceedings (the selling of all nonexempt assets and the distribution of the proceeds to the debtor's creditors). A debtor turns over all assets of the corporation to a trustee The trustee will sell all of the assets and pay the creditors as much as possible **also applicable to "persons" Any "person" - defined as individuals, partnerships, and corporations - may be a debtor in a liquidation proceeding.

Decision and Remedy: Ransom v. FIA Card Services, N.A.

The US Sup Court affirmed the lower court's decision. A debtor who does not make loan or lease payments may not take a car-ownership deduction. In Ransom's Case, the ultimate result was that confirmation of his repayment plan was denied. (Confirmation of repayment plans discussed below.)

Distribution to secured creditors

The code requires that consumer debtors file a statement of intention with respect to the secured collateral. Thye can choose to pay off the debt and redeem the collateral, claim it is exempt, reaffirm the debt and continue making payments, or surrender the property to the secured party. **Secured Creditors must be completely paid before unsecured creditors

Automatic Stay

The moment a petition, voluntary or involuntary, is filed, an automatic stay, or suspension of all actions by creditors against the debtor or the debtor's property normally goes into effect. Meaning that once a petition goes into effect, creditors cannot contract the debtor by phone or mail or start any legal proceedings to recover debts or to repossess property. **If a creditor knowingly violates the automatic stay (a willful violation), any injured party, including the debtor, is entitled to recover actual damages, costs and attorney's fees, and may be awarded punitive damages as well.

Trustee

They are appointed by the court to manage the debtor's funds They can act in the place of the debtor -Debtor has no say

Trustee's Powers

They have the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee The trustee has any rights the debtor had

2005 reform legislation

This was enacted partly because of the growing concerns that the law allowed too many debtors to avoid paying their debts One of the major goals of the reforms was to require more consumers to pay as many of their debts as thy possibly could instead of having those debts fully extinguished in bankruptcy

Duties for means testing

Trustee is required to promptly review all materials filed by the debtor to determine if there is substantial abuse. They have 10 days after the first meeting to state if there has been abuse or not.

Tax returns during bankruptcy

The debtor may be required to file a tax return at the end of each tax year while the case is pending and to provide a copy to the court. This may be done at the request of the court or of the U.S. Trustee

Preferences

A debtor is not permitted to transfer property or make a payment that favors - or gives a preference to - one creditor over others. The trustee is allowed to recover payments made bother voluntarily and involuntarily to one creditor in preference over another ** to have made a recoverable preferential payments, an insolvent debtor must have transferred property, for a preexisting debt, within ninety days before the filing of the bankruptcy petition **Any transfer within 90 days of bankruptcy is voidable

Involuntary Bankruptcy

An involuntary bankruptcy occurs when the debtor's creditors force the debtor into bankruptcy proceedings. An involuntary case cannot be filed against a charitable institution or a farmer (an individual or business that receives more thank 50% of gross income from farming operations.)

Exceptions to the automatic stay

1) Collection efforts can continue for domestic support obligations, which include any debt owed to or recoverable by a spouse, a former spouse, a child of the debtor, that child's parent or guardian, or a governmental unit. 2) Proceedings against the debtor related to divorce, child custody or visitation, domestic violence., and support enforcement are not stayed. 3) Investigations by a securities regulatory agency can continue 4) Certian statutory liens for proerty taxes are not stayed.

Requirements for Involuntary Bankruptcy

1) If the debtor has twelve or more creditors, three or more of these creditors having unsecured claims totaling at least $15,325 must join in the petition 2) If a debtor has fewer than twelve creditors, one or more creditors having a claim totaling $15,325 or more may file.

Goals of Bankruptcy Law

1) To protect a debtor by giving him or her a fresh start without creditors' claims 2) To ensure equitable treatment of creditors who are competing for a debtor's assets

Exemptions

1) up to $22,975 in equity in the debtor's residence and burial plot (the homestead exemption) 2) Interest in a motor vehicle up to $3,675 3) Interest, up to $550 for a particular item, in household goods and furnishings, wearing apparel, appliances, books, animals, crops, and musical instruments (the aggregate total of all items is limited, however, to $12,250) 4) Interest in jewelry up to $1,550 5) Interest in any other property up to $1,225, plus any unused part of the $22,975 homestead exemption up to $11,500 6) Interest in any tools of the debtor's trade up to $2,300 7) A life insurance contract owned by the debtor (other thank a credit life insurance contract). 8) Certain interests in accrued dividends and interest under, or loan value of, life insurance contracts owned by the debtor, not to exceed $12,250 9) Professionally prescribed health aids 10) The right to receive Social Security and certain welfare benefits, alimony and support, certain retirement funds and pensions, and education savings accounts held for specific periods of time. 11) The right to receive certain personal injury and other awards up to $22,975

Bankruptcy Trustee

After the order for relief in the liquidation proceedings has been entered, a trustee is appointed. The basic duty of the trustee is to collect the debtor's available estate and reduce it to cash for distribution, preserving the interest of both the debtor and the unsecured creditors. The trustee is held accountable for administering the debtor's estate.

Voluntary Bankruptcy

The debtor files official forms designated for that purpose in the bankruptcy court. Before debtors can file a petition, they must receive credit counseling from an approved nonprofit agency within the 180-day period preceding the date of filing. They must have a certificate proving that they have received individual or group counseling from an approved agency within the last 180 days.

The Adequate Protection Dovtrine

Underlying the Code;s automatic-stay provision for a secured creditor is a concept known as adequate protection. Amount other things, protects secured creditors from losing their security as a result of the automatic stay.

Ch. 11 - Reorganizations

Used by corporate debtors to reorganize In this they will formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder. **The debtor is allowed to remain in business **If the Bus has a pref for Ch. 11 but creditors are not Co-operative then they can file for Ch. 7 if eligible