Basically, we will talk about
the goals of bankruptcy law, the different bankruptcy
courts generally, the different types of relief,
and the different chapters, and a little bit about
the special treatment of consumer debt. Chapter 7– and I don’t mean
the chapter in the textbook– I mean, chapter 7 under the US
Bankruptcy Code is liquidation. This is sometimes
referred to as “ordinary” or “straight bankruptcy.” The debtor turns over
all of their assets to the bankruptcy trustee, and the trustee’s job is to
sell nonexempt property and distribute the
proceeds to the creditors. The remaining debts under
Chapter 7 are discharged. You’ll see that that’s
going to be different under other chapters. Chapter 7 is available for
any person, individual, corporation,
or partnership, and “person” is in quotes
because corporations or partnerships are
treated as a person for Chapter 7
liquidation purposes. Notice the different
types of organizations that cannot file
under Chapter 7. Chapter 7,
or straight bankruptcies, are started by
filing a voluntary or involuntary
petition in bankruptcy with the bankruptcy court. The bankruptcy court is the US District Court,
bankruptcy division. If the debtor files
the petition, then it’s called
“voluntary,” and if the appropriate
number and size creditor files a petition rather than
the debtor, that’s involuntary. Prior to filing, the
debtors or debtor must receive credit counseling
within 180 days of filing and submit a certificate of
that for credit counseling. And has to confirm the accuracy
of the contents of the filing, and an attorney must file an
affidavit informing the debtor about other chapters
of bankruptcy. There are some schedules
under Chapter 7. The debtor needs to list both
secured and unsecured creditors, their addresses and the
amount of debt they owe, and a statement of the
financial affairs of the debtor. They also need to list all
properties owned by the debtor, including the property claimed
by the debtor to be exempt, and current income
and expenses, that certificate that we
mentioned of credit counseling, and proof of payments
received from employers within 60 days prior to
the filing of the petition. They also need state
the amount of monthly income, itemize to show how
the amount was calculated, as well as a copy
of the debtor’s federal income tax return for the most recent year
ending immediately before the filing
of the petition. There is the Substantial
Abuse and Means Test– the basic formula is
they take the debtor’s average monthly income and compare it to
the median income in the areas
where he lives. If it’s below
the median income, there is no
presumption of abuse. Also, there is the
Applying the Means Test to Future
Disposable Income. If the debtor’s income is
above the median income, then further calculations
are necessary. This would include a calculation
of disposable income. Additional grounds for dismissal
would include a conviction of a violent crime
or drug trafficking, or the debtor
fails to pay a post-petition
domestic-support obligation. And then, the order for relief–
if the filing is proper, the filing itself is
the order for relief. The order for relief is granted
by the bankruptcy court. The involuntary bankruptcy
is, again, by the creditor forcing the debtor
into bankruptcy. If 12 or more
creditors– three or more which
have unsecured claims totaling at least $14,425,
they join in the petition. If it’s less than
three total creditors, one creditor has to have
that amount of debt. The debtor can challenge
this involuntary bankruptcy, but the bank will enter
an order for relief if the debtor is not paying
debts as they come due, or the debtor was in
receivership for the 120 days before the filing
of the petition. There are penalties for
frivolous petitions against debtors. If a court dismisses
an involuntary petition, a creditor may be required
to pay fees and costs… in some cases, even
punitive damages. The vehicle for
staying off the creditor is called an
“automatic stay.” It’s granted upon
filing of the petition and it protects the debtor
from all creditors, which basically
means a creditor can’t commence their own action
or continue legal action to collect
individually. There are damages for knowing
violations of an automatic stay. There are some exceptions
primarily around what kind of debt
is protected, domestic support obligation
related to divorce, support, custody,
maintenance, investigations by a security
regulatory agency. Secured parties, which
we talked about earlier, can petition
a bankruptcy court for relief from
the automatic stay. And with each
of these chapters, we look all of the
debtor’s assets. It’s called an estate
and it includes all legal and equitable interest
and property. It includes property transferred
in a “voidable” transaction, and property in which the
debtor becomes entitled to within 180 days
after filing. The proceeds of profits
from this date– after required property– basically, the idea is to not
just take a snapshot in time, but to look at
proceeds, profits, things that were
required afterwards, sales that were made
immediately before– those type of things. Things like inheritance,
property, settlements, life insurance
proceeds. The bankruptcy trustee is
appointed by the court. Their duties include collecting
assets and paying creditors in order of priority. And in terms of
the means testing, they determine whether there
is a substantial abuse, they file a statement
within 10 days after the first meeting
with the creditors. They have powers. The trustee has the right
to strong-arm creditors to return the
debtor’s property. They have avoidance powers to
set aside certain transfers– an example would
be if someone were fraudulently
transferring property to try to avoid it becoming
part of the bankruptcy estate. Basically, the trustee stands
in the shoes of the debtor and can assert any lack of
capacity or lack of assent. The debtor isn’t permitted
to transfer property or make a payment that
favors or gives preference to one creditor
over another. For a trustee to
recover payment, the debtor must
be insolvent, and transferred property
for pre-existing debt within the
previous 90 days. You could also give
preferences to insiders. This avoidance power
of the trustee extends to transfers made within
one year before filing. Transfers that don’t
constitute preferences– for example, payment for
services within 15 days, a payment must be made in the
ordinary course of business, and generally it applies to
debts that are not pre-existing. And they have the power to
avoid a fraudulent transfers. There are some exemptions
for things that go in the bankruptcy estate. Here are some
of them. Equity and the debtor’s
residence, burial plot. I’ve heard this as a
“homestead exemption.” An interest in a motor
vehicle, personal goods. You don’t have to memorize
these dollar amounts. It just gives
you an idea. Jewelry, other property
listed in the statute, tools, life insurance
contract, and you just see some of the
other exempted-type property or rights in terms of
the homestead exemption. The idea is to provide
protection for home equity. There’s some requirements in
terms of residence and amount. The creditors do meet. The trustee calls
that meeting and examines
the debtor under oath. Creditors are claiming a
portion of the debtor’s estate, and each creditor must file
proof of that claim. You know, basically, if they
don’t file proof of the claim, then there is a problem later
when they attempt to go after the assets of the debtor
and they fail to respond. The debtor needs to file
a statement of intention regarding the
secured collateral. Distribute– you know,
we talked about this last time, in terms of who the secured
versus unsecured creditors are. And the fact that
unsecured creditors are probably not going to
receive much or anything. They get what’s left over after
secured creditors are paid off. And this is just an exhibit
showing how that would work. And the image really
just describes the different types of
property that we mentioned– non-exempt property, properties that were
transferred to avoid the estate, after-acquired property
under the statute, proceeds and profit
from any of those things. And then, you know, it goes
first to secured creditors and then unsecured
creditors. And then, finally, if
there’s anything left over after all the debts
are paid, the debtor. So at the end of that,
they are discharged. And under all the
chapters of bankruptcy, “discharge” means an avoidance
or setting aside of debts. There are some exemptions
to this discharge. For example, back taxes,
borrowing to pay taxes. You know, it’s all
defined by statute, fraud, support generally,
retirement loans. And then, Chapter 11
is reorganization. This is usually for corporations
and other legal entities. The debtor and creditor
formulate a plan under which the debtor
pays a portion of his debt and it’s discharged. The same debtors are eligible
as under Chapter 7. There is “fast track”
Chapter 11. That’s for
small-business debtors. They have to have a certain
dollar amount in their estate. There are workouts, which
are private negotiations between a creditor
and debtors. The court can dismiss
or suspend the proceedings if it’s deemed prejudicial
to his creditors. Debtor in possession, where is the debtor
operates the business under court
supervision. They have the same
power as a trustee. The court also appoint
a trustee or receiver with strong-arm powers. And there’s what’s called
a “creditors committee.” And then, this kinda
outlines some of the things that would be in a
reorganization plan. Generally, it needs to
be fair and equitable, identify classes, and be able
to be carried out reasonably, adequate means
for execution, payment of tax claims
for five years. So this reorganization plan is filed within
120 days after the date. The relief order–
it’s accepted, it’s confirmed. The discharge is
binding on confirmation. You know, generally,
just know the difference between the different
chapters of bankruptcy in terms of who they
apply to, generally. For example, we talk about
Chapter 7 being liquidation, Chapter 11 being
reorganization, whereas Chapter 12 is
sometimes is referred to as for family farms,
fishermen. It defines what a
family farmer is. This is not just
small farm operations. And also, an individual
repayment plan under Chapter 13– this isn’t for partnerships
or corporations, and the statute gives
specific income amounts. There is a “good faith
requirement. Chapter 13– filing
the plans within 120 days after the order
for relief. You know, some of this is the
same across different chapters. Case 15.3 gives you a good
example of Chapter 13, and discharge.