bus115 business law, chapter 22 bankruptcy

Chapter 7 LIQUIDATION

1. Filing a Petition A. Any individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the United States can file under the Code -B. Bankrupt, someone who could not pay his debt and files for protection under the bankruptcy code -C. Debtor, Another term for bankrupt -D. A case begins with the filing of a bankruptcy petition in federal district court -Debtors may go willingly into the bankruptcy process by filing a voluntary petition, or they may be dragged into court by creditors who file an involuntary petition 2. Voluntary Petition A. Any debtor (whether a business or individual) has the the right to file for bankruptcy B. It is not necessary that the debtor liabilities exceed assets C. Debtor sometimes file a bankruptcy petition because cash flow is so tight they cannot pay their debts, even though they are not technically insolvent - individual debtor must meet two requirements before filing - Within 180 days before the filing, and individual debtor must undergo credit counseling with an approved agency -Individual debtors may file under Chapter 7 only if they earn less than the median income in their state or they cannot afford to pay back at least 7,700 over five years. D. Involuntary Petition - creditors may force a debtor into bankruptcy by filing an involuntary petition A. The creditors goals are to preserve as much of the debtors assets as possible and to ensure that all creditors receive a fair share B. The code set strict limits C. Debtors cannot be force into bankruptcy every time they miss a payment 3. Trustee -The trustee is responsible for gathering the bankrupts assets and dividing them among creditors A. The creditors have the right to elect a trustee, but often they do not bother. -B. n this case, the U.S. Trustee makes the selection. C. The U.S. attorney General appoints a U.S. Trustee for each region of the country to administer bankruptcy law D. U.S. Trustee-Oversees the administration of bankruptcy law in a region 4. Creditors A. After the order of relief, the U.S. Trustee calls a meeting of all of the creditors B. At this meeting the bankrupt must answer (under oath) any question the creditors pose about his financial situation C. Elect a trustee D. After the meeting of creditors, unsecured creditors must submit a proof of claim E. Proof of claim- A form stating the name of an unsecured creditor and the amount of the claim against the debtor 5. Automatic Stay -Prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed A. creditors may not sue a bankrupt to obtain payment, nor may they take other steps, outside of court, to pressure the debtor for payment 6. Bankruptcy Estate A. The filing of the bankruptcy petition creates a new legal entity separate from the debtor-the bankruptcy estate. -All of the bankrupts assets pass to the estate, except exempt property and new property that the debtor acquires after the petition is filed B. The new legal entity created when a bankruptcy petition is filed. The debtors existing assets pass into the estate. 7. Exempt Property -The code permits individual debtors (but not organizations) to keep some property for themselves A. This exempt property saves the debtor from destitution during the bankruptcy process and provides the foundation for a new life once the process is over B. In this one area of bankruptcy law, the Code defers to state law. C. Although the Code lists various types of exempt property, it permits states to opt out of the federal system and define a different set of exemption, it permits states to opt out of he federal system and define a different set of exemptions D. debtors can take advantage of state exemptions only if they have lived in that state for two years prior to the bankruptcy E. under the federal code, a debtor is allowed to exempt only 23,675 of the value of her home F. Many states exempt items such as the debtor home, household goods, cars, work tools, disability and pension benefits, alimony, and health aids G. Both Florida and Texas permit debtors to keep home of unlimited value and a certain amount of land E. The federal statute limits this state exemption to 160,375 for any house that was acquired during the 40 months before the bankruptcy 8. Voidable Preferences A. A major goal of the bankruptcy system is to divide the debtors assets fairly among creditors B. It would not be fair if debtors were permitted to pay off some of their creditors immediately before filing a bankruptcy petition C. Preference, when a debtor unfairly pays creditors immediately before filing a bankruptcy petition D. The trustee can void any transfer to a creditor that took place in the 90 day period before the filing of a petition 9. Fraudulent transfer A. Suppose that debtor sees bankruptcy approaching across the horizon like a tornado B. He knows that, once the storm hits and he files a petition, everything he owns except a few items of exempt property will become part of the bankruptcy estate. Before that happens, he may be tempted to give some of his property to friends or family to shelter it from the tornado. - A transfer is fraudulent if it is made within the year before a petition is filed and its purpose is hinder, delay, or defraud creditors A. The trustee can void any fraudulent transfer. The debtor has committed a crime and may be prosecuted

Voluntary petition must include the following documents

1. Petition begins the case. Easy to fill out, it requires checking a few boxes and typing in name, address, and social security number 2. List of Creditors, The names and addresses of all creditors 3. schedule of income and expenditures, A list of the debtors assets and debts 4. statement of financial affairs, A summary of the debtors financial history and current financial condition. In particular, the debtor must list any recent payments to creditors and any other property held by someone else for the debtor

Payment of claims

1. the code has, in essence, adopted a number system to prevent a fee for all fight over the bankrupts assets. 2. One of three classes, secured claims, priority claims, and unsecured claims 3. The trustee pays the bankruptcy estate to the various classes of claims in order of rank. A. A higher class is paid in full before the next class receives any payment at all. The debtor is entitled to any funds remaining after all claims have been paid. 4. Secured Claims -Creditors whose loans are secured by specific collateral are paid first. -Secured claims are fundamentally different from all other claims because they are paid not out of the general funds of the estate but by selling a specific asset. 5. Priority Claims -Each category of priority claims is paid in order, with the first group receiving full payment before the next group receive. Priority claims include -Alimony and child support -Administrative expenses (such as fees to the trustee, lawyers, and accountants) Includes -Back wages to the debtors employees for work performed during the 180 days prior to the date of the petition -Income and property taxes 6. Unsecured Claims -unsecured creditors have now reached the delicatessen counter. They can only hope that some goods remain 7. Discharge -Filing a bankruptcy petition id embarrassing and time consuming -To encourage debtors to file for bankruptcy despite the pain involved, the code offers a powerful incentive -Fresh start-After the termination of a bankruptcy case, creditors cannot the debtor for money owed before the initial bankruptcy petition was filed -Discharge- is an essential part of bankruptcy law -without it , debtors would have little incentive to take part -To avoid abuses, however, the code limits both the type of debts that can be discharged and the circumstances under which discharge can take place -A debtor must complete a course on financial management before receiving a discharge 8. Debts That Cannot Be discharge -The following debts are never discharged, and the debtor remains liable in full until they are paid A. Recent income and property taxes; B. Money obtained by fraud; C. Cash advances on a credit card totaling more than 950 that an individual debtor takes out within 70 days before the order of relief; D. Debts steming from intentional and malicious injury; E. Debts that result from a violation of securities law; F. Student loans. This topic requires more explanation beginning in 2009, congress introduced a so called income-base repayment plan (IBR) for student loans that are not in default

Chapter 11 Reorganization

1. the goal of a chapter 7 bankruptcy is euthanasia -putting it out of its misery by shutting it down and distributing its assets to creditors 2. Chapter 11 -resuscitating a business so that it can ultimately emerge as viable economic concern, as GM did -Both individuals and businesses can use Chapter 11. -Businesses usually prefer Chapter 11 over Chapter 7 because Chapter 11 does not require them to dissolve at the end, as Chapter 7 does -The threat of death creates a powerful incentive to try rehabilitation -Individuals usually file undr Chapter 7 if they can meet the income requirements because then they emerge from bankruptcy debt free ( except for debts that are not dischargeable). - Chapter 13 is specifically designed for individuals, but is only available to those whose debt does not exceed certain limits.. -for consumers with even modest income and high debt, Chapter 11 is the only option -A Chapter 11 proceeding follows many of the same steps as Chapter 7: a petition (either voluntary or involuntary), an order for relief, a meeting of creditors, proof of claim, and an automatic stay. 3. Debtor in Possession - Chapter 11 does not require a trustee -debtor in possession-the bankrupt, serves as trustee -The debtor in possession has two jobs: to operate the business and to develop a plan of reorganization -A trustee is chosen only if the debtor is incompetent or uncooperative -creditors can elect the trustee, but if they do not choose to do so, the U.S. Trustee appoints one 4. Creditors Committee - In Chapter 11 case, the creditors committee is important because typically there is no neutral trustee to watch over the committees interests -the committee may play a role in developing the plan of reorganization -The U.S. Trustee typically appoints the seven largest unsecured creditors to the committee -The courts have the right to require the appointment of some small-business creditors as well 5. Plan of Reorganization -Once the bankruptcy petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditors -The next stage is to develop a plan of reorganization that provides for the payment of debts and the continuation of the business -The first 120 days after the order for relief, the debtor has the exclusive right to propose a plan -If the shareholders and creditors accept it, then the bankruptcy case terminates -if the creditors or shareholders reject the debtors plan, they may file their own version 6. Confirmation of the plan -All the creditors and shareholders have the right to vote on the plan of reorganization A. In preparation for the vote, each creditors and shareholder is assigned to a class B. Chapter 11 classifies claims in the same way as Chapter 7: Secured claims, priority claims, and unsecured claims -The bankruptcy court will approve a plan of a majority of the debtors in each class votes in favor of it and if the yes votes hold at least two thirds of the total debt in that class A. As long as at least one class votes in favor of the plan, the court can still confirm it over the opposition of other classes in what is called a cramdown B. Crandown, when a court approves a plan of reorganization over the objection of some of the creditors C. The courts impose a crandown if , in its view, the plan is feasible, fair, and in the best interests of the creditors D. If the courts rejects the plan of reorganization, the creditors must develop a new one 7. Discharge -A confirmed plan of reorganization binding on the debtor and creditors -The debtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the plan A. Under a typical plan of reorganization, the debtor gives some current assets to creditors and also promises to pay them a portion of future earnings B. The chapter 7 debtor typically relinquishes all assets (except for non dischargeable debt 8. Small Business Bankruptcy A. To aid the creditors of business, , Congress added provisions that speed up the bankruptcy process for entities with less than 2,566,050 in debt B. After the order of relief, the bankrupt has the exclusive rights to file a plan for 180 days C. The court must confirm or reject the plan within 45 days after its filing d. If these deadlines are not met, the case can be converted to Chapter 7 or dismissed

Federal District Court

The district court hears a range of cases, including civil claims, and criminal cases. It also has a residual jurisdiction over some matters involving compensation for work injuries; and hears cases about offences committed under the Work Health and Safety Act 2011.Jun 6, 2016

Payments claim Circumstances that prevent debts from being discharged The Code also prohibits the discharge of debts under the following circumstances

1. Business organization -Under Chapter 7 (not other chapters), only the debts of individuals can be discharged, to those of business organizations. -Once its assets have been distributed, an organization must cease operation -If the company resumes business again, it becomes responsible for all its pre-filling debts 2. Revocation -A court can revoke a discharge within one year if it discovers the debtor engaged in fraud or concealment 3. Dishonesty or bad faith behavior -The court may deny discharge altogether if the debtor has made fraudulent transfers, hidden assets, lied under oath, or otherwise acted in bad faith 4. Repeated filings for bankruptcy - A debtor who has received a discharge under Chapter 7 or 11 cannot receive another discharge under Chapter 7 for at least eight years after the prior filing. -And a debtor who has received a prior discharge under Chapter 13 cannot, in most cases, receive one under Chapter 7 for at least six years 5. Reaffirmation -Sometimes debtors are willing to reaffirm a debt, meaning they promise to pay even after discharge. -They may want to reaffirm as secured debt to avoid losing the collateral. -a debtor who has taken out a loan secured by a car may reaffirm that so that the finance company will not repossess it. -Sometimes debtors reaffirm because they feel guilty or want to maintain a good relationship with the creditor. They may have borrowed from a family member or an important supplier -discharge is a fundamental pillar of the bankruptcy process, creditor are not permitted to unfairly pressure the bankrupt -reaffirmation must be approved by the court if the debtor is not represented by an attorney or if, as a result of the reaffirmed debt, the bankrupts expenses exceed his income

involuntary petition must meet all of the following requirements

1. The debtor must owe at least 15,775 in unsecured claims to the creditors who files 2. If the debtor has at least 12 creditors, 3 or more must sign the petition. If debtor has fewer than 12 creditors, any of them may file a petition 3. The creditors must allege either that a custodian for the debtors property has been appointed in the prior 120 days or that the debtor has generally not been paying debts that are due -custodian for the debtors property mean? State Laws sometimes permit the appointment of a custodian to protect a debtors assets -The code allows creditors to pull a case out from under state law and into federal bankruptcy court by filing an involuntary petition -Once a voluntary petition is filed or an involuntary petition approved, the bankruptcy court issues an order of relief -Order of Relief- An official acknowledgement that a debtor is under the jurisdiction of the bankruptcy court -An involuntary debtor must now make all the filings that accompany a voluntary petition

OVERVIEW OF THE BANKRUPTCY CODE, The U.S. bankruptcy Code (the code) has three primary goals

1. To preserve as much of the debtors property as possible 2.To divide the debtors assets fairly between the debtor and creditors 3. To divide the creditors share of the assets fairly among them A. Chapter 7 Liquidation -The bankrupts assets are sold to pay creditors. If the debtor owns a business, terminates. The creditors have no right to the debtors future earnings -Chapter 11 Reorganization, This chapter is designed for businesses and wealthy individuals. Business continue to operate, and creditors receive a portion of both current assets and future earnings -Chapter 13 Consumer Reorganization, Offers reorganization for the typical individual. Creditors usually receive a portion of the individuals current assets and future earnings -Chapter 11 and 13, the rehabilitate the debtor -holds debtor at bay while the debtor develops a payment plan -for retaining some of their future assets, debtors typically promise to pay creditors a portion of their future earnings -when debtors are unable to develop a feasible plan for rehabilitation under chapter 11 and 13, chapter 7 provides for liquidation (also known as a straight bankruptcy) -Straight bankruptcy- also know as liquidation, this form of bankruptcy mandates that the bankruptcy assets be sold to pay creditors, but the bankruptcy has no obligation to share future earnings -Debtors are sometimes eligible to file under more than one chapter -both debtors and creditors have the right to ask the court to convert a case from one chapter to another at any time during the proceedings

Chapter 13 consumer reorganizations

1. the purpose of Chapter 13 is to rehabilitate an individual debtor A. It is only available to individual with less than 394,725 in unsecured debts and 1,184,200 in secured debts B. Under Chapter 13, the bankrupt consumer typically keeps most of her assets in exchange for a promise to repay some of her debts using future income C. Therefore, to be eligible, the debtor must have a regular source of income D. Individuals who do not quality for Chapter 7 usually choose this chapter because it is easier and cheaper than Chapter 11 E. A bankruptcy under Chapter 13 generally follows the same course as Chapter 11 F. The debtor files a petition, creditors submit proofs of claim, the court imposes an automatic stay, the debtor files a plan, and the court confirms the plan 2. Beginning a Chapter 13 case - To initiate a Chapter 13 case, the debtor must file a voluntary petition A. creditors cannot use an involuntary petition to force a debtor into Chapter 13 B. In all Chapter 13 cases, the U.S. Trustee appoints a trustee to supervise the debtor C. The trustee also serves as a central clearinghouse for the debtors payment to creditors. The debtor pays the trustee who in turn, transmits these funds to creditors. For this service, the trustee is allowed to keep up to 10 percent of the payments 3. Plan of Payment -The debtor must file a plan of payment within 15 days after filing the voluntary petition A. Only the bankruptcy court has the authority to confirm plan, the court must ensure that -The plan is feasible and the bankrupt will be able to make the promised payment; -The plan does not extend beyond three years without good reason and in no event lasts longer than five years; -If the plan does not provide for the debtor to pay off creditor; -The debtor is acting in good faith, making a reasonable effort to pay obligations 4. Discharge -Once confirmed, a plan is binding on all creditors whether they like it or not -The debtor is washed clean of all prepetition debts except those provided for in the plan A. if the debtor violates the plan, all of the debts are revived, and the creditors have a right to recover them under Chapter 7 B. The debts become permanently discharged only when the bankrupt fully complies with the plan C. Any debtor who has received a discharge under Chapter 7 or 11 within the prior four years or under Chapter 13 within the prior two years is not eligible for discharge under Chapter 13 D. If the debtors circumstances change, the debtor, the trustee, or unsecured creditors can ask the court to modify the paln E. Most such requests come from debtors whose income has declined F. If the debtors income rises, the creditors or the trustee can ask that payments increase