BLAW CH 15

Discharge

From the debtor's point of view, the primary purpose of liquidation is to obtain a fresh start through a discharge of debts.• A discharge voids, or sets aside, any judgment on a discharged debt and prevents any action to collect it.

Petition in bankruptcy

The document that is filed with a bankruptcy court to initiate bankruptcy proceedings.

Any debtor (except a stockbroker or a commodities broker) who is eligible for Chapter 7 relief is eligible for relief under Chapter 11. T/F

True

The law does not attempt to balance the rights of the debtor and of the creditors. T/F

False

a liquidation proceeding works as follows:

1. A debtor turns all assets over to a bankruptcy trustee. 2. The trustee sells the nonexempt assets and distributes the proceeds to creditors. 3. With certain exceptions, the debtor is granted a discharge of the remaining debts.

The voluntary petition must contain the following schedules:

1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each 2. A statement of the financial affairs of the debtor 3. A list of all property owned by the debtor, including property that the debtor claims is exempt 4. A list of current income and expenses 5. A certificate of credit counseling 6. Proof of payments received from employers within sixty days prior to the filing of the petition 7. A statement of the amount of monthly income, itemized to show how the amount is calculated 8. A copy of the debtor's federal income tax return for the most recent year ending immediately before the filing of the petition

Four chapters set forth the most important types of relief that debtors can seek:

1. Chapter 7 provides for liquidation proceedings 2. Chapter 11 governs reorganizations. 3. Chapters 12 (for family farmers and family fisherman) and 13 (for individuals) provide for the adjustment of debts by persons with regular incomes.

The Reorganization Plan requirements:

1. Designate classes of claims and interests 2. Specify the treatment to be afforded to the classes of creditors• The plan must provide the same treatment for all claims in a particular class. 3. Provide an adequate means for the plan's execution• Individual debtors are required to utilize post petition assets as necessary to execute the plan. 4. Provide for payment of tax claims over a five-year period

Exceptions to the Automatic Stay

1. Domestic-support obligations, including any debt owed to or recoverable by: • A spouse • A former spouse • A child of the debtor • That child's parent or guardian • A governmental unit 2. Proceedings against the debtor related to: • Divorce • Child custody or visitation • Domestic violence • Support enforcement 3. Investigations by a securities regulatory agency 4. Certain statutory liens for property taxes

Personal property that is most often exempt from satisfaction of judgment debts includes the following:

1. Household furniture up to a specified dollar amount 2. Clothing and certain personal possessions• Examples: Family pictures, a Bible 3. A vehicle (or vehicles) for transportation (up to a specified dollar amount) 4. Certain classified animals, usually livestock but including pets 5. Equipment that the debtor uses in a business or trade (up to a specified dollar amount)

For an involuntary action to be filed, the following requirements must be met:

1. If the debtor has twelve or more creditors, three or more of these creditors having unsecured claims totaling at least $16,750 must join in the petition. 2. If a debtor has fewer than twelve creditors, one or more creditors having a claim totaling $16,750 or more may file.

The typical procedure for attachment is as follows:

1. The creditor files with the court an affidavit (a written statement, made under oath) that states that the debtor has failed to pay and indicates the statutory grounds under which attachment is sought. 2. The creditor must post a bond to cover at least the court costs, the value of the property attached, and the value of the loss of use of that property suffered by the debtor. 3. When the court is satisfied that all the requirements have been met, it issues a writ of attachment.

If the debtor challenges the involuntary petition, a hearing will be held, and the bankruptcy court will enter an order for relief if it finds either of the following:

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.

Mortgages normally are lengthy and formal documents containing many provisions, including the following:

1. The terms of the underlying loan 2. A prepayment penalty clause 3. Provisions relating to the maintenance of the property 4. A statement obligating the borrower to maintain homeowner's insurance on the property 5. A list of the non-loan financial obligations to be borne by the borrower 6. Creditor protections

Requirements of Repayment Plan:

1. The turning over to the trustee of such future earnings or income of the debtor as is necessary for execution of the plan 2. Full payment through deferred cash payments of all claims entitled to priority, such as taxes 3. Identical treatment of all claims within a particular class

Bankruptcy law in the United States has two main goals:

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

Substantial Abuse—Means Test

A bankruptcy court can dismiss a Chapter 7 petition if the use of Chapter 7 constitutes a "substantial abuse" of bankruptcy law. • The revised Code provides a means test to determine a debtor's eligibility for Chapter 7. • The purpose of the test is to keep upper-income people from abusing the bankruptcy process by filing for Chapter 7. A debtor wishing to file for bankruptcy must complete the means test to determine whether she or he qualifies for Chapter 7.

Lien

A claim against specific property to satisfy a debt. may arise under the common law or under statutory law generally take priority over other claims against the same property.

Order for relief definition

A court's grant of assistance to a complainant.

Writ of execution

A court's order, after a judgment has been entered against the debtor, directing the sheriff to seize (levy) and sell any of the debtor's nonexempt real or personal property.

Writ of Attachment

A court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt. prejudgment remedy, it occurs either at the time a lawsuit is filed or immediately afterward.

Homeowner's insurance

A form of property insurance that protects the home of the insured person and its contents against losses.

Homestead exemption

A law permitting a debtor to retain the family home, either in its entirety or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in bankruptcy.

Garnishment

A legal process used by a creditor to collect a debt by seizing property of the debtor (such as wages) that is being held by a third party (such as the debtor's employer). can be a prejudgment remedy, requiring a hearing before a court, but it is most often a post judgment remedy. vary from state

Bankruptcy trustee

A person appointed by the court to manage the debtor's funds in a bankruptcy proceeding.

Guarantor

A person who agrees to satisfy the debt of another (the debtor) only after the principal debtor defaults.

Surety

A person, such as a cosigner on a note, who agrees to be primarily responsible for the debt of another.

Foreclosure

A proceeding in which a mortgagee either takes title to or forces the sale of the mortgagor's property in satisfaction of a debt.

Preference

A property transfer or payment made by a debtor that favors one creditor over others. A debtor is not permitted to transfer property or to make a payment that favors—or gives a preference to—one creditor over others. The trustee is allowed to recover payments made both voluntarily and involuntarily to one creditor in preference over another.

Prepayment penalty clause

A provision in a mortgage loan contract that requires the borrower to pay a penalty if the mortgage is repaid in full within a certain period.

Mechanic's lien

A statutory lien on the real property of another, created to ensure payment for work performed and materials furnished in the repair or improvement of real property, such as a building. creates a special type of debtor-creditor relationship in which the real estate itself becomes security for the debt.

Fraudulent Transfers

A trustee may avoid fraudulent transfers or obligations if they were made: 1. Within two years prior to the filing of the petition 2. With actual intent to hinder, delay, or defraud a creditor

Mortgage Definition

A written instrument that gives a creditor (the mortgagee) an interest in, or lien on, the debtor's (mortgagor's) real property as security for a debt. If the debt is not paid, the property can be sold by the creditor and the proceeds used to pay the debt.

Individuals' Repayment Plan Discharge

After the debtor has completed all payments, the court grants a discharge of all debts provided for by the repayment plan.

Suretyship

An express contract in which a third party to a debtor-creditor relationship (the surety) promises to be primarily responsible for the debtor's obligation.

Individuals' Repayment Plans—Chapter 13

An individual with regular income who owes debts not exceeding specified amounts may file for a Chapter 13 repayment plan.• The limit for fixed unsecured debts is around $420,000.

Default

Failure to pay a debt when it is due.

Order for Relief

If the voluntary petition for bankruptcy is found to be proper, the filing of the petition will itself constitute an order for relief.Once a consumer-debtor's voluntary petition has been filed, the trustee and creditors must be given notice of the order for relief by mail not more than twenty days after entry of the order.

Limitations of homestead exemption:

In a few states, statutes allow the homestead exemption only if the judgment debtor has a family. The homestead exemption interacts with other areas of law and can sometimes operate to cancel out a portion of a lien on a debtor's real property.

Mortgage insurance

Insurance that compensates a lender for losses due to a borrower's default on a mortgage loan.

Best Interests of the Creditors

Once a Chapter 11 petition has been filed, a bankruptcy court can dismiss or suspend proceedings at any time if dismissal or suspension would better serve the interests of the creditors. The Code also allows a court, after notice and a hearing, to dismiss a case under reorganization "for cause" when there is no reasonable likelihood of rehabilitation. Similarly, a court can dismiss when there is an inability to effect a plan or an unreasonable delay by the debtor that may harm the interests of creditors.

The following cannot be debtors in a liquidation bankruptcy:

Railroads • Insurance companies • Banks • Savings and loans associations • Investment companies licensed by the Small Business Administration • Credit unions

The Trustee's Powers

The trustee has the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee.• To enable the trustee to implement this power, the Code provides that the trustee has rights equivalent to those of certain other parties, such as a creditor who has a judicial lien.

Reorganizations

The type of bankruptcy proceeding most commonly used by corporate debtors is the Chapter 11 reorganization.

Good Faith Requirement

The Bankruptcy Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition and the time of the filing of the plan.• The Code does not define good faith, but if the circumstances on the whole indicate bad faith, a court can dismiss a debtor's Chapter 13 petition.

Discharge of reorganization plan:

The law provides that confirmation of a plan does not discharge an individual debtor. On discharge, the debtor is given a reorganization discharge from all claims not protected under the plan.

Down payment

The part of the purchase price of real property that is paid in cash up front, reducing the amount of the loan or mortgage.

Automatic stay

The suspension of almost all litigation and other action by creditors against the debtor or the debtor's property. effective the moment the debtor files a petition in bankruptcy. prohibits creditors from taking any act to collect, assess, or recover a claim against the debtor that arose before the filing of the petition.

Discharge

The termination of a bankruptcy debtor's obligation to pay debts.

A straight bankruptcy can be commenced by the filing of either a voluntary or an involuntary petition in bankruptcy. T/F

True

Suretyship/Guarantee must be written to be enforceable. T/F

True

The length of the payment plan can be three or five years, depending on the debtor's family income. T/F

True

Suretyship and guaranty provide creditors with the right to seek payment from the third party if the primary debtor, or principal, defaults on her or his obligations. T/F

True The third person's creditworthiness becomes the security for the debt owed.

If the homeowner defaults, or fails to make the mortgage payments, the lender has the right to foreclose on the mortgaged property. T/F

True Foreclosure is expensive and time consuming. It generally benefits neither the borrowers, who lose their homes, nor the lenders, which face the prospect of losses on their loans.

If the property owner fails to pay the debt, the lienholder is technically entitled to foreclose on the real estate and sell it. T/F

True The sale proceeds are then used to pay the debt and the costs of the legal proceedings The surplus, if any, is paid to the former owner.

Judicial Liens

When a debt is past due, a creditor can bring a legal action against the debtor to collect the debt. If the action is successful, the court awards the creditor a judgment against the debtor (usually for the amount of the debt plus any interest and legal costs incurred) the creditor may request that certain property of the debtor be seized to satisfy the debt.

Mortgages

When individuals purchase real property, they typically make a down payment in cash and borrow the remaining funds from a financial institution.

Guaranty

With a guaranty arrangement, a third person to a debtor-creditor relationship (the guarantor) promises to be secondarily responsible for the debtor's obligation.

Laws assisting creditors:

a. Mechanic's lien b. Judicial liens i. Attachment ii. Writ of Execution c. Garnishments d. Suretyship/Guarantee e. Mortgages

Bankruptcy law

a. Protections for debtors i. Homestead exemption ii. Personal property exempted b. Bankruptcy policy: two primary goals

Chapter 7 - liquidation proceedings(ordinary/straight)

i. Consumer debtors must go through debt counseling prior to filing petition ii. Petition for Bankruptcy iii. Voluntary vs involuntary iv. Substantial abuse-means test v. Order for relief vi. Automatic stay (including exceptions) vii. Preferences viii. Fraudulent transfers ix. Trustee's role x. Discharge

An involuntary case cannot be filed against:

• A charitable institution • A farmer (an individual or business that receives more than 50 percent of gross income from farming operations)

In addition to wages, many other types of property can be garnished as well, including:

• Funds in a bank account • Tax refunds • Pensions • Trust funds

The remedies are available regardless of whether a creditor is secured or unsecured:

• Secured creditors are those whose loans are backed by collateral, which is specific property (such as a car or a house) pledged by a borrower to ensure repayment. • The loans made by unsecured creditors, such as companies that provide credit cards, are not backed by collateral.