Bankruptcy

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What are objections to discharge? What are exceptions to discharge? When does each apply?

"Objections" to discharge mean that none of the debtor's debts will be dischargeable. They apply only to Chapter 7 bankruptcy. "Exceptions" to discharge prevent the discharge of a specific debt. They apply to both Chapter 7 and Chapter 11 bankruptcy cases.

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When can a Chapter 7 case be dismissed?

A Chapter 7 case by an individual consumer may be dismissed or converted to Chapter 13 (with the individual's consent) if and only if it is found that Chapter 7 would constitute "abuse."

What is a creditors' committee?

A committee consisting of persons with seven largest unsecured claims against the debtor, which is created in Chapter 11 reorganization cases.

What is an equity security holders' committee?

A committee consisting of seven largest holders of debtor's equity securities, which is created in Chapter 11 reorganization cases.

How is abuse determined?

Abuse may be determined by one of two tests: either a "Specific Means Test," or a "General Abuse Test."

Who cannot be considered for Chapter 11 bankruptcy?

Brokers, insurance companies, banks, and small business investment companies.

What is Chapter 11 Bankruptcy? Who does it apply to? Is there a trustee?

Chapter 11 Bankruptcy is a reorganization. It applies to individuals, partnerships, or corporations. A trustee is not appointed. The debtor remains in possession of the assets and a plan of reorganization is adopted. Creditors are paid to the extent possible and the business continues.

What is Chapter 13 Bankruptcy? Who does it apply to? Is there a trustee?

Chapter 13 Bankruptcy deals with the adjustment of debts of individuals. It applies to individuals only. A trustee is appointed. The debtor repays all or a portion of their debt over a 3-5 year period.

What is Chapter 7 Bankruptcy? Who does it apply to? Is there a trustee?

Chapter 7 Bankruptcy is a liquidation. It applies to individuals, partnerships, or corporations. A trustee collects assets, liquidates them, and pays creditors with the proceeds to the extent possible. Individual debts are discharged (the individual is relieved from most debts), and corporations are dissolved (no discharge, but effects are the same).

What is the "General Abuse Test?"

Chapter 7 may be denied if the debtor acted in bad faith. They may only dismissed by motion of court, trustee, or bankruptcy agent.

Which types of bankruptcy are can be either voluntary or involuntary?

Chapters 7 and 11 can be voluntary or involuntary; Chapter 13 is voluntary only

What are the effects of confirmation?

Confirmation is binding on all creditors and the debtor; the debtor must pay according to plan. Confirmation discharges all pre-confirmation debts except exceptions (FAT WED).

What are claims against the estate, and who makes them?

Creditors want to make claims against the estate to prove their right to payment. Unsecured creditors must file a proof of claim; shareholders must file a proof of interest. Unsecured creditors failing to file timely claims to not take part in distribution of the estate.

In what circumstances would a discharge be subject to exception?

FAT WED • Debts incurred by fraud, embezzlement, or larceny • Alimony, child support, or divorce payments • Taxes due within three years of filing • Liabilities arising from Willful and malicious injury to others • Educational loans • Debts undisclosed in the bankruptcy petition

Who is ineligible for involuntary bankruptcy?

Farmers and charities.

What remedies does the debtor have for an improperly-filed involuntary bankruptcy petition?

If creditors improperly filed the petition and it's dismissed, the court may award damages to the debtor. Compensatory damages, court costs, attorney's fees, and even punitive damages may apply.

What happens if there is insufficient money to pay all creditors at a particular level? What happens to the creditors subordinate?

If there is insufficient money to pay all creditors at a particular level, the creditors share pro rata. Payment is made according to priority without regard to whether the debt is excepted to discharge. After distributing proceeds, remaining debts are discharged unless there is exception (FAT WED).

Are all debts of an individual discharged in a Chapter 7 bankruptcy case?

Most debts of an individual are discharged in Chapter 7 bankruptcy. Some debts, however, survive bankruptcy.

In what circumstances would a discharge be subject to objection?

Objections generally occur due to a dishonest debtor, such as in the following circumstances: • Debtor is not an individual (remember corporations are 'dissolved,' not discharged) • Recall, fraudulent transfers are no discharged • Debtor unjustifiably concealed/failed to keep books & records relating to his financial condition • Prior discharge occurred within past eight years • Debtor committed a bankruptcy crime (false oath/claim, bribe, withholding records, etc.) • Unable to explain the disappearance or loss of assets • Refusal to obey orders or answer questions

In what order will a trustee distribute the bankruptcy estate?

Once debtor's assets are collected and liquidated, trustee will distribute proceeds first to secured claimants (payments are made in full to the extent of the value of the collateral), then to priority claimants (which are separated into 9 specific subcategories). Any proceeds left over are distributed to the general (unsecured) creditors who filed claims on time.

When can creditors file a petition for involuntary bankruptcy?

Only creditors who are owed at least $15,775 in unsecured, undisputed debt may petition. If there are fewer than 12 creditors, then any one creditor who is owed at least $15,775 can petition. If there are 12 or more creditors, then at least three creditors who are owed at least $15,775 in aggregate must file together.

What are preferential payments?

Preferential payments are transfers made to a creditor (money, property, or security interests), on account of pre-existing debts, which are made within 90 days prior to filing (1 year if to an insider), and are made while the debtor was insolvent, that result in the creditor receiving more than he would have under the bankruptcy code (for this reason, payments to fully secured creditors are not preferences).

What payments are not considered preferential?

Preferential payments do not include transfers in the ordinary course of business (i.e. monthly utility bills) or spousal support or child support obligations.

Who cannot be considered for Chapter 7 bankruptcy?

Railroads, insurance companies, banks, and small business investment companies.

What are the nine subcategories of priority claimants?

SAG WEG CTI 1. Alimony and child support 2. Administrative expenses (trustee fees, filing fees, attorney and accountant fees, etc.) 3. Involuntary case gap claims (new creditors within the 20-day involuntary case gap) 4. Claims for wages earned within 180 days prior to filing limited to $12,850 per employee 5. Claims for contributions to employee benefit plans within 180 days limited to $12,850 per employee reduced by Priority 4 wage claims 6. Grain farmers and fishermen 7. Consumer deposits made prior to bankruptcy up to $2,850 per customer 8. Tax claims 9. Claims for death or personal injury arising from intoxicated driving

How is the "Specific Means Test" applied?

Step 1: If the individual's income is less than the state median, Chapter 7 bankruptcy is allowed. If, however, the income is greater than the state median, you proceed to the means test (Step 2). Step 2: Calculate (Average Monthly Income - Allowed Expenses) × 60. If this is less than $7,700, Chapter 7 is allowed. If it is greater than $13,000, then generally Chapter 13 is required. If it is between those two numbers, than a presumption of abuse arises if the amount is equal to at least 25% of unsecured claims.

What property is excluded in a bankruptcy estate?

The bankruptcy estate excludes post-petition earnings, spendthrift trusts, educational IRAs, and state tuition programs. It also excludes things that are necessary to live (food, clothes, wheelchair, social security, etc.).

What property is included in a bankruptcy estate?

The bankruptcy estate includes all real and personal property owned by the debtor as of the time of filing. It also includes income generated from estate property received within 180 days of filing, as well as property received from divorce, inheritance, and insurance within 180 days.

Who confirms the plan? What are the requisites for confirmation?

The court will confirm the plan only if is accepted by all impaired classes, provides for full payment of administrative expenses and gap claims, and represents a feasible plan (reasonable to succeed).

How are discharges revoked?

The creditor or trustee may request a discharge be revoked, generally for the same reasons as the "objections" to discharge.

Who has the right to file the reorganization plan? When must it be filed?

The debtor has the executive right to file the reorganization plan within 120 days of the order of relief. If they fail to do so, or if the creditors shoot it down, the creditors can file their own plan.

How are discharged debts reaffirmed?

The debtor may reaffirm debts (un-discharge the debt and be forced to pay it), only if they prove the agreement to reaffirm was made before the grant of the discharge.

How can a debtor rebut a presumption of abuse?

The debtor may rebut the presumption by proving special circumstances (illness, military duty, etc.).

What are the duties of the debtor in filing a petition for bankruptcy?

The debtor must file the following: • A list of creditors with addresses • Assets and liabilities at FMV • Current income and expenditures • A statement of financial affairs • Pay stubs of last 60 days • Federal tax returns from last year

What are the requisites of acceptance?

The plan must be accepted by creditors holding at least 2/3 amount of claims, and stockholders with 2/3 amount of claims.

What must the reorganization plan contain?

The reorganization plan must contain a description of the classification (prioritization) of all claims, as well as a description of the treatment to be accorded to each priority class.

What are the trustee's powers as a lien creditor?

The trustee becomes a creditor as of the filing date. As so, he generally has priority over all creditors except prior perfected security interests or judicial liens. The powers of the trustee as lien creditor include the power to set aside (recover) fraudulent conveyances made within two years of filing date, and the power to set aside (recover) preferential payments.

What is the difference between voluntary and involuntary bankruptcy?

Voluntary bankruptcy occurs when the debtor files the petition for relief. Upon filing, there is an automatic order for relief. Involuntary bankruptcy occurs when the creditors petition the debtor into bankruptcy. Upon filing, there is not an automatic order for relief; rather, there is a gap between filing and order of relief called the "involuntary case gap" (which lasts for about 20 days). New creditors within the gap are given priority in recovering from the debtor.

What is an automatic stay? What doesn't apply to it?

When a bankruptcy petition is filed, an automatic stay stops almost all collection efforts (it doesn't apply to criminal prosecutions, alimony, or child support).

What is a Section 341 Meeting?

Within 20-40 days after an order of relief, a Section 341 Meeting (a creditors' meeting) occurs. Creditors, debtor, bankruptcy trustee, and all other interest parties must be given notice.

What are considered allowed expenses?

• Costs of food clothing, and shelter • Health insurance and health savings plans • Health care costs for family members • Elementary/high school expenses


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