Business Law II - Chapter 28 Bankruptcy

Chapter 13 petitions are usually filed by individual debtors who do not qualify for Chapter 7

liquidation bankruptcy and by homeowners who want to protect nonexempt equity in their residence. Chapter 13 enables debtors to catch up on secured credit loans, such as home mortgages, and avoid repossession and foreclosure.

Filing a Chapter 13 Petition

A Chapter 13 proceeding can be initiated only through the voluntary filing of a petition by an individual debtor with regular income. A creditor cannot file an involuntary petition to institute a Chapter 13 case. The petition must state that the debtor desires to effect an extension or a composition of debts, or both.

Bankruptcy Trustee

A bankruptcy trustee must be appointed in Chapter 7, Chapter 12, and Chapter 13 bankruptcy cases. This is an attorney appointed by the Bankruptcy Court to supervise and review the individual cases. Part of the Trustees' responsibilities is to review filings for fraud and investigate claims of fraud. The Trustee will be paid additionally fees for any money or property brought into the bankruptcy estate for the benefit of creditors.

Proof of Claim and Proof of Interest

A creditor must file a proof of claim stating the amount of his or her claim against the debtor and generally it should be filed within six months of the first meeting of the creditors.

Executory Contracts and Unexpired Leases

A major benefit of Chapter 11 bankruptcy is that the debtor is given the opportunity to accept or reject certain executory contracts and unexpired leases. Executory contracts or unexpired leases are contracts or leases that have not been fully performed.

Creditors' Committees

After an order for relief is granted, the court appoints a creditors' committee composed of representatives of the class of unsecured claims. The court may also appoint a committee of secured creditors and a committee of equity holders.

Bankruptcy Estate

All personal, real, tangible, and intangible property owned by the debtor at the time of filing is included in the bankruptcy estate, as well as any gifts, inheritance, life insurance proceeds, and divorce settlements that the debtor is entitled to receive within 180 days after the petition is filed are part of the bankruptcy estate. Earnings from the property of the estate are also treated as part of the estate.

Attorney Certification

An attorney, who represents a client in bankruptcy, must certify the accuracy of the petition and schedules.

Pre-Petition and Post-Petition Counseling

Individuals, filing for bankruptcy, must receive counseling through accredited agencies before filing and after filing. This is a new provision under the 2005 Bankruptcy Act designed to prevent reoccurrences of filings by trying to educate individuals on being financially responsible. Of course, not everyone that ends up having to file a bankruptcy petition is there because they were financially irresponsible. Factors such as divorce and illnesses can create financial hardships. No doubt, the Covid-19 pandemic is going to cause a flood of businesses and individuals into bankruptcy.

Exempt Property

Exempt property is property of the debtor that he or she can keep and that does not become part of the bankruptcy estate. The creditors cannot claim this property.

Automatic Stay in Chapter 11

Filing a Chapter 11 petition automatically stays any actions by creditors.

Order for Relief

Filing a voluntary petition or an unchallenged involuntary petition or an order that is granted after a trial of a challenged involuntary petition constitutes an order for relief.

Statutory Distribution of Property

If a debtor qualifies for a Chapter 7 liquidation bankruptcy, the non-exempt property of the bankruptcy estate must be distributed to the debtor's secured and unsecured creditors pursuant to statutory priority established by the Bankruptcy Code. Under the 2005 act, if personal property of an individual debtor secures a claim or is subject to an unexpired lease and is not exempt property, the debtor must either (1) surrender the personal property, (2) redeem the property by paying the secured lien in full, or (3) assume the unexpired lease.

.Chapter 7- Liquidation

In Chapter 7, the debtor's nonexempt property is sold for cash, which is distributed to the creditors, and all unpaid debts are discharged. The 2005 act added the median income test and the means test that a debtor must pass before being permitted to obtain a discharge of debts under Chapter 7. The 2005 act established a new simple abuse rule and a means test to determine whether a debtor should be granted relief under Chapter 7. If a debtor fails this test, a presumption of an abusive filing arises, and the debtor does not qualify for Chapter 7 bankruptcy.

Schedules

Individual debtors must submit schedules upon filing a voluntary petition and these schedules should provide full disclosure of all creditors and information about assets and incomes of the debtor.

Limitations on Who Can File for Chapter 13

Only an individual with regular income alone or with his or her spouse who owes individually or with his or her spouse (1) noncontingent, liquidated, unsecured debts of not more than $360,475 and (2) secured debts of not more than $1,081,400 may file a petition for Chapter 13 bankruptcy.

Chapter 11

Reorganization of the Bankruptcy Code provides a method for reorganizing a debtor's financial affairs under the supervision of the bankruptcy court. Chapter 11 is available to individuals, partnerships, corporations, and other business entities.

Fraudulent Transfer of Property Prior to Bankruptcy

The 2005 act gives the bankruptcy court the power to void certain fraudulent transfers of a debtor's property made by the debtor within two years prior to filing a petition for bankruptcy. To void a transfer or an obligation, the court must find that (1) the transfer was made or the obligation was incurred by the debtor with the actual intent to hinder, delay, or defraud a creditor or (2) the debtor received less than a reasonable equivalent in value. This was one of the deficiencies in the prior law; debtors would hide assets by given them to relatives or friends with no consideration. Those assets really should be part of the bankruptcy estate and go to pay the debt run up by the debtor. Not enrich friends or family.

Small Business Bankruptcy

The Bankruptcy Code permits a "small business," defined as one with total debts of less than $2,343,300, to use a simplified, fast-track form of Chapter 11 reorganization bankruptcy. Small business bankruptcy provides an efficient and cost-saving method for small businesses to reorganize under Chapter 11.

State Exemptions

The Bankruptcy Code permits states to enact their own exemptions. Exemptions under state laws are often more liberal than under the federal guidelines.

Bankruptcy Courts

The bankruptcy courts are part of the federal court system, and one bankruptcy court is attached to each of the 94 U.S. District Courts in the country. There in a branch of the Bankruptcy Court here in Poughkeepsie on Main Street. It is part of the Bankruptcy Court for the Southern District of New York which are covers filings originating out of Dutchess, Orange and Westchester Counties.

Property of the Estate

The property of a Chapter 13 estate consists of all nonexempt property of the debtor at the commencement of the case and nonexempt property acquired after the commencement of the case but before the case is closed. In addition, the property of the estate includes earnings and future income earned by the debtor after the commencement of the case but before the case is closed.

Bankruptcy Statute

, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This act substantially amended the previous bankruptcy act effective in 1978 which was viewed as too liberal allowing individuals to discharge debt that wasn't warranted. The different types of bankruptcies are divided into different Chapters of the Bankruptcy Law and routinely described by the chapter under which they are authorized. The most common forms of bankruptcy filings are Chapter 7 Liquidation, Chapter 11 Reorganization, Chapter 13 Adjustment of Debt of an Individual with Regular Income, and Chapter 12 Adjustment of Debt of a Family Farmer or Fisherman with Regular Income. Chapters 13 and 7 are the most utilized chapters by individuals with the bankruptcy act directing individuals into chapter 13 filings as opposed to chapter 7 liquidations in an effort to have more creditors paid out at least partially.

Test 1: Median Income Test

, This test determines whether the debtor's income either exceeds or is below the state median income for a family the same size as the debtor's family. If a family has median family income equal to or below the state's median family income, there is no presumption of abuse, and the debtor qualifies for Chapter 7 bankruptcy. If a family has median family income that is higher than the state's median family income for his or her size of family, the debtor does not automatically qualify for a Chapter 7 bankruptcy.

Confirmation of a Chapter 13 Plan of Payment

The court can confirm a Chapter 13 plan of payment if the prior requirements are met and if (1) the plan was proposed in good faith, (2) the plan passes the feasibility test (3) the plan is in the best interests of the creditors, (4) the debtor has paid all domestic support obligations owed, and (5) the debtor has filed all applicable federal, state, and local tax returns.

Chapter 13 Discharge

The court grants an order discharging the debtor from all unpaid unsecured debts covered by the plan after all the payments required under the plan are completed. A debtor cannot be granted Chapter 13 discharge if the debtor has received discharge under Chapter 7, 11, or 12 within the prior four-year period or Chapter 13 relief within the prior two-year period of the order for relief in the current Chapter 13 case.

Meeting of the Creditors

The court will call for a meeting of the creditors, during which the debtor must answer questions regarding their financial affairs and assets.

Labor Union and Retiree Contracts

The debtor and the representatives of the union members and retirees can voluntarily agree to modification of the union collective bargaining agreement and retiree benefits.

Chapter 11 Plan of Reorganization

The debtor has the exclusive right to file a Chapter 11 plan of reorganization with the bankruptcy court within the first 120 days after the date of the order for relief. Under the 2005 act, this period may be extended up to 18 months. The debtor has the right to obtain creditor approval of the plan, but if the debtor fails to do so, any party of interest (e.g., a trustee, a creditor, an equity holder) may propose a plan.

Chapter 13 Plan of Payment

The debtor's Chapter 13 plan of payment must be filed not later than 90 days after the order for relief. The debtor must file information about his or her finances, including a budget of estimated income and expenses during the period of the plan. The Chapter 13 plan may be either up to three years or up to five years, depending on a complicated calculation specified in the 2005 act. The plan must be submitted to secured and unsecured creditors for acceptance.

Debtor-in-Possession

The debtor-in-possession is empowered to operate the debtor's business during the bankruptcy proceeding. This power includes authority to enter into contracts, purchase supplies, incur debts, and so on.

Homestead Exemptions

The federal Bankruptcy Code permits homeowners to claim a homestead exemption of $21,625 in their principal residence. Bankrupt individuals can choose between federal or state exemptions. New York State is much more generous in protecting homesteads and debtors can exempt $125,000.00 of equity in their homes for a single person and $250,000.00 for married filers. Some states such as Florida allowed individuals to completely exempt any equity in their homes. People would abuse this by moving to Florida buying the largest property they could for cash, often taking out home equity loans on their former homes waiting six months to become a resident and then file bankruptcy claiming the total value of the house as exempt.

Automatic Stay

The filing of a voluntary or an involuntary petition automatically stays—that is, suspends—certain legal actions by creditors against the debtor or the debtor's property. This is called an automatic stay. A creditor seeking to collect on a debt is precluded from doing most acts related to enforcement until the stay is lifted. In the case of a secured creditor, such as a mortgage holder, they can move for relief from the stay if their repayment is jeopardized by waiting. If granted relief from the stay and then the creditor forecloses on the collateral, any surplus is paid back to the Trustee and becomes part of the bankruptcy estate. If the sale results in a deficiency, the creditor may file an unsecured claim against the bankruptcy estate for the deficiency amount.

Chapter 7 Discharge

The major benefit of a Chapter 7 discharge is that it is granted quite soon after the petition is filed. The individual debtor is not responsible for paying prepetition debts out of postpetition income, as would be required in other forms of bankruptcy.

Test 2: Means Test

The means test is a calculation that establishes, by law, a bright-line test to determine whether the debtor has sufficient disposable income to pay prepetition debts out of postpetition income. Generally, if a debtor has less than $7,025 in disposable income per year, he passes the means test and can file for Chapter 7 bankruptcy. If a debtor has disposable income of more than $11,725 per year, he does not qualify for Chapter 7 bankruptcy.

Confirmation of Chapter 11 Plan of Reorganization

There must be confirmation of a Chapter 11 plan of reorganization by the bankruptcy court for the debtor to be reorganized under Chapter 11. The bankruptcy court confirms a plan of reorganization under the acceptance method if (1) the plan is in the best interests of the creditors because the creditors would receive at least what they would receive in a Chapter 7 liquidation bankruptcy, (2) the plan is feasible, and (3) each class of creditors accepts the plan.

Reaffirmation Agreement

This is an agreement where the debtor agrees to pay the creditor for the debt owed that is dischargeable in bankruptcy, and it must be made prior to the discharge being granted.

Certain Acts Will Preclude a Debtor from a Discharge

Unsatisfied debts will not be discharged if the debtor made false representations about his financial position in order to get a line of credit; transferred, concealed, or removed property with the intent of hindering or defrauding creditors; falsified, destroyed, or concealed records; failed to account for any assets; or failed to submit to questioning at the meeting of creditors.

Filing a Bankruptcy Petition

Voluntary petitions can be filed by a debtor in the case of a Chapter 7, 11, 12, or 13 bankruptcy case. Debtors may be forced into involuntary bankruptcy in the case of either a Chapter 7 or 11 bankruptcy case.

Discharge of Debts

When discharge is granted, the debtor is relieved of responsibility to pay the discharged debts. Certain debts are not dischargeable in bankruptcy. Creditors who have nondischargeable claims against the debtor may participate in the distribution of the bankruptcy estate.