1. Introduction to Bankruptcy Law Unit 3 Debtor-Creditor Relations and Bankruptcy

2. Common Reasons for Individual Bankruptcy Filings Death in the family Divorce Catastrophic illness Unanticipated unemployment Excessive credit card debt

3. Common Reasons for Business Bankruptcy Filings Obsolete products Failure to compete in the industry Mismanagement Sudden catastrophe Insider disputes Fraud A poor general economy

4. Debtor Relief The primary focus has vacillated throughout history from the extremes of punishment to forgiveness. Debtor prisons. Debt as sinful. Surrender assets to avoid prison. Composition agreement - between a debtor and multiple creditors for the repayment of debt.

5. Statutes Of Anne & George Debtor would receive a full discharge and be able to retain exempt property provided that certain conditions were complied with. Consent by four-fifths of the creditor body as a requirement of the debtor receiving a discharge. Formal roots of American Bankruptcy Law.

6. Constitution Article 1, Section 8 grants powers to Congress to enact federal laws. Federal Bankruptcy Law not required. Three prior Bankruptcy Acts dating back to 1800. Current Bankruptcy Code adopted in 1898. Modernized in 1979 and amended in 1984, 1986, 1994, and 2005.

7. Debt Collection Primary focus of bankruptcy systems has always been to formulated a body of rules to provide for the collection of assets of a debtor and the equitable distribution of the proceeds of those assets among multiple creditors. Bankruptcy systems are methods developed by societies to resolve the effects of financial crisis. Discharge is legal relief for the debtor from debt.

8. Exemption Statutorily defined property that an individual debtor may protect from administration by a bankruptcy estate. Exempt property is not available for liquidation to pay a dividend to creditors. Exemptions are a primary element of debtor relief. Liquidation is the sale of an estates assets to repay creditors.

9. Parties in Bankruptcy Proceeding Creditor: An entity with a claim arising before the filing of a bankruptcy petition. Debtor: An entity that owes a debt (a liability upon a claim). The entity filing a voluntary bankruptcy proceeding or against whom an order for relief is entered in an involuntary bankruptcy is known as the debtor. Trustee: An independent third party who liquidates the estate’s assets and distributes dividends to the creditors.

10. Who May be a Debtor? Only persons may be debtors -An individual is a person -A corporation can be a person -A partnership can also be a person A person has to reside or be domiciled in the United States or have a place of business or property in the United States.

11. Bankruptcy Proceedings Liquidation - all the non-exempt assets of a debtor are sold. The proceeds are distributed to creditors according to their ranking. Reorganization - a debtor seeks to avoid liquidation by proposing a viable plan of reorganization to the creditors that is successfully confirmed and performed.

12. Bankruptcy Code Flow Chart

13. Debtors in Bankruptcy Chapter 7 debtors can be individuals, corporations, and partnerships, but not railroads, banks or insurance companies. Chapter 9 debtors are municipalities. Chapter 11 debtors include anyone who could have filed under Chapter 7 plus railroads and certain banks. Chapter 12 debtors are family farmers or family fishermen. Chapter 13 debtors can only be individuals with regular income with less than certain specified debt.

14. Bankruptcy Alternatives Debtor seeks a marshaling of assets for equitable distribution to the creditors and a full or partial release from remaining debts. Sometimes, the effective use of these alternatives can accomplish the same results as a bankruptcy without ever having to file one. Composition Agreements. Assignment for the Benefit of Creditors.

15. Composition Agreement Any transaction in which a debtor and creditor agree to a revision of their legal obligations to one another. Informal: -Picking up the telephone and getting an extra month to pay a bill -Debt consolidation Formal: debtor and multiple creditors agree to a revision of existing obligations.

16. Assignment for the Benefit of Creditors Takes place when a debtor, which may or may not be in financial distress, assigns its assets to a third party in trust to sell the assets and apply the proceeds to the payment of the creditors’ claims. The third party is known as the assignee.

17. Gatekeeper Provisions - Prepetition Credit Counseling Prerequisite to an individual debtor seeking bankruptcy relief. An individual seeking bankruptcy relief may not be a debtor and must participate in an individual or group credit counseling session from an approved credit counseling agency within 180 days prior to the filing of a petition. Exceptions when district cannot provide service, exigent circumstances established by debtor or inability to comply.

18. Debt Relief Agency A debt relief agency is any person, including a bankruptcy attorney or bankruptcy petition preparer, providing bankruptcy assistance to assisted persons for money or other valuable consideration pursuant to 11 U.S.C. §101(12A). Debt relief agencies are subject to written retainer and disclosure requirements of 11 U.S.C. §§527 and 528

19. Voluntary vs. Involuntary Petitions Voluntary - proceeding initiated by a debtor filing a petition for relief. Involuntary - proceeding initiated by one or more creditors by filing a petition seeking the entry of an order of relief. Order of Relief - a judgment that the debtor is bankrupt.

20. Venue for Bankruptcy Petition A proceeding may be commenced in any district meeting one of the following qualifications: -(1) the district in which the petitioner is domiciled, resides, or has its principal place of business -(2) the district in which the debtor’s principal United States assets are located -(3) the district in which the debtor has complied with either of the above for the greatest portion of the 180 days preceding the petition’s filing

21. Due Process - Notice and Hearing Due process must be given to various parties involved in the proceeding before a court order authorizing the action is sought to be performed can be obtained. In the context of a bankruptcy proceeding, due process often means that the affected parties must merely be given notice and an opportunity to be heard.

22. Ex Parte An application made to the court without notice or with limited notice to limited parties. Ex parte applications are specifically permitted for various ministerial functions. In other circumstances, a legitimate extraordinary circumstance must exist for the court to consider ex parte relief.

23. Evidentiary Hearing A hearing held to take sworn testimony to permit a Bankruptcy Court to make a decision in a contested matter that is not a separate adversary proceeding. An evidentiary hearing is similar to a trial in a nonbankruptcy environment. A “trial” on a contested motion for relief from the automatic stay is properly called an evidentiary hearing.

24. Definitions - Section 101 of the Bankruptcy Code Used frequently throughout the Code. Saves substantial research time. Lien - a right to property to secure repayment of a debt or the performance of an obligation. Can be judicial, consensual or statutory. Security - commercial documents used to evidence an ownership interest in an entity. Insider - an entity in control of a debtor or a debtor’s relatives.

25. Other Terms Defined Affiliates Claim Community Claim Corporation Creditor Current Monthly Income Custodian Debt Debt Relief Agency Domestic Support Obligations Equity Security Holder Individual with Regular Income Insolvency Judicial Lien Median Family Income Person Security Agreement Single Asset Real Estate Statutory Lien Transfer

26. Tasks for this Unit Seminar Quiz Discussion Board Short Paper

27. Federal Bankruptcy Courts For the first Discussion Question consider that debtors under financial hardship can obtain relief from their creditors through federal bankruptcy courts. The guidelines for bankruptcy filings and challenges are set out in the Bankruptcy Code. Refer to the readings and Web Field Trips from this unit in order to answer the questions posed.

28. Questions for First DQ What are the Bankruptcy Act, the Bankruptcy Reform Act, and the Bankruptcy Code? What is a liquidation proceeding? What is a reorganization proceeding? Identify the major parties in a bankruptcy proceeding. What is a voluntary bankruptcy proceeding? Describe who may be a debtor in Chapter 7, Chapter 11, and Chapter 13.

29. Bankruptcy Terms For the second Discussion Question review the list of bankruptcy forms available at the sites provided. Pick out one or two terms whose definitions were a surprise to you and write a short paragraph about each.

30. Discussion Board Instructions Post your thoughts and responses to the Discussion Board as to each question. Read and comment on posts from your colleagues. Do not hesitate to pose questions to your colleagues. Discuss constructively with your colleagues their posts and positions. Post as early in the week as possible to foster interaction

31. Advantages and Disadvantages For your Short Paper write a memo that discusses the advantages and disadvantages of filing for bankruptcy. What is gained or lost by filing for bankruptcy? Create a fictional example to illustrate your comparison.

32. Next Week We introduced Bankruptcy Law this week. Next week we will continue our discussion about Bankruptcy and its Alternatives.