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1 BANKRUPTCY Form of Relief or Strategic Option?.

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Presentation on theme: "1 BANKRUPTCY Form of Relief or Strategic Option?."— Presentation transcript:

1 1 BANKRUPTCY Form of Relief or Strategic Option?

2 2 BANKRUPTCY Art. I, §8, Cl. 4 Congress directed by Constitution to “establish…uniform laws on the subject of bankruptcies…” Art. I, §8, Cl. 4 Local Loan Co. v. Hunt, 292 US 234 (1934) “Bankruptcy gives to the honest, but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 US 234 (1934)

3 3 BANKRUPTCY USE OF BANKRUPTCY BANKRUPTCY FILINGS (Years Ended December 31, 2001 through 2005) YearTotalNon-BusinessBusiness 2005 2,078,4152,039,21439,201 2004 1,597,4621,563,14534,317 2003 1,660,2451,625,20835,037 2002 1,577,6511,539,11138,540 2001 1,492,1291,452,03040,099

4 4 BANKRUPTCY HISTORICAL CONTEXT Articles of Confederation did not prevent “Judgment-Jumping” Motive: Enhance Creditors’ Ability to Collect/Not Debtor Relief Debtors’ Prisons until mid-19 th Century 1898: Commercial Interests of Nationalized Economy motivated surprisingly Debtor-friendly Law

5 5 BANKRUPTCY FRAMEWORK Federal Court Process for Individuals and Businesses to Reorganize or Discharge Debts NON-DISCHARGEABLE DEBTS Alimony and Child Support DUI Judgments Student Loans Fines and Income Taxes

6 6 BANKRUPTCY EXEMPTIONS Homestead: $50,425 Insurance Proceeds, Partnership Property and Liquor Licenses Retirement Plans, Welfare and Unemployment Benefits Personal Property including Tools used in Work

7 7 BANKRUPTCYPROCEEDINGS First Action : File and Elect Form Chapter 7: Liquidation Chapter 13: Personal Reorganization Chapter 11: Business Reorganization Second Action : Court appoints Trustee Assumes Constructive Management of Bankrupt’s Financial Matters

8 8 BANKRUPTCY PROCEEDINGS PROCEEDINGS CHAPTER 7 LIQUIDATION (1) Trustee/Court identify Exemptions and Exclusions; (2) Notify Debtor and Creditors of Disposition of Dischargeable Debt CHAPTER 13 PERSONAL REORGANIZATION (1) Debtor proposes Plan; (2) Negotiations with Creditors; (3) Reconcile Ability to Pay with Obligations; (4) Most Assets retained by Debtor

9 9 BANKRUPTCY PROCEEDINGS PROCEEDINGS CHAPTER 11 BUSINESS REORGANIZATION Creditors (Committee) Accept/Reject Company Plan subject to Trustee/Court Oversight Final Plans usually Reconfigure Capital Structure: Creditors Swap Debt for Equity “ Cram-Down Rule ” Super-Majority (2/3) Agreement binds Minority/Dissenting Claimants; Effect can be Loss of Claim Priority

10 10 BANKRUPTCY PROCEEDINGS PREFERENCE (“Reach-back”) RULE Creditors may Recover Payments made in Anticipation of Bankruptcy (Fraudulent Conveyances) under Certain Conditions  90 Days prior to Filing if Effect favors Recipient over Other Creditors  One Year prior to Filing if Payments made to “Insiders” (Relatives or “Controlled” Persons or Entities)

11 11 BANKRUPTCY CHANGES AS OF OCTOBER 17, 2005 Shifts to Debtor More of Burden to Prove Eligibility for Bankruptcy Requires Pre-Filing Credit Counseling Chapter 7 “Means Test”: Above-median Income can convert Filing to Chapter 13 with “regular” payment requirement Businesses providing Customer Credit supported Changes as Essential for Mitigating Misuse of Law

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