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2 “As in many areas of law, bankruptcy law must balance between competing interests. When an individual or business files for bankruptcy protection, generally neither debtor or creditor comes out whole.”

3 OVERVIEW I Congress has recently amended the Bankruptcy Code to address a recent rise in bankruptcy filings. The new laws were effective October 17 th, 2005

4 OVERVIEW II THE BANKRUPTCY CODE IS DIVIDED INTO EIGHT CHAPTERS.

5 OVERVIEW III Chapters 1, 3, and 5 are administrative rules. Chapters 7, 9, 11, 12, and 13 are substantive rules that apply to specific types of bankruptcies.

6 OVERVIEW IV

7 OVERVIEW V Chapters 9 and 12 are for specialized types of debtors and are not covered in this textbook.

8 OVERVIEW VI The objective of Chapters 11 and 13 of the Bankruptcy Code is rehabilitation of the debtor.

9 OVERVIEW VII When debtors are unable to develop a feasible plan for rehabilitation, Chapter 7 allows for liquidation (also known as straight bankruptcy).

10 GOALS To preserve as much of the debtor’s property as possible. To divide the debtor’s assets fairly between the debtor and the creditors. To divide the debtor’s assets fairly among the creditors.

11 CHAPTER 7 -- LIQUIDATION Credit counseling first Then Chapter 13 If unsuccessful, file a Petition Petitions may be voluntary or involuntary.

12 CHAPTER 7 (CONT’D) VOLUNTARY VS INVOLUNTARY

13 TRUSTEE The trustee is responsible for gathering the bankrupt’s assets and dividing them among creditors.

14 CREDITORS Unsecured creditors must submit a proof of claim within 90 days after the meeting of creditors. Secured creditors do not file proofs of claim unless the claim exceeds the value of their collateral.

15 AUTOMATIC STAY An automatic stay prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed.

16 PURPOSE The purpose of the automatic stay is to give the debtor time and space to make a rational plan for paying debts without pressure from creditors.

17 ESTATE Assets Exempt Property Secured Property

18 VOIDABLE PREFERENCES A preference is a transfer of money or property just before filing bankruptcy. The trustee can void a transfer that meets all of the following requirements:

19 FRAUDULENT TRANSFERS A transfer is fraudulent if it is made within a year before a petition is filed and its purpose is to hinder, delay, or defraud creditors. A trustee may void fraudulent transfers. A trustee cannot void pre-petition payments made in the ordinary course of business.

20 PAYMENT OF CLAIMS The trustee pays the bankruptcy estate to the various classes of claims in the following order of rank: Secured Claims Priority Claims Unsecured Claims

21 DISCHARGE Once a bankruptcy estate is distributed, the creditors cannot make claims on the debtor for money owed before filing.

22 NON-DISCHARGEABLE DEBTS Debts that cannot be discharged include (among others): Income taxes and property taxes Money obtained fraudulently or illegally Some loans for luxury goods Recent cash advances on credit cards Alimony and child support debt Fines and penalties Some student loans

23 REAFFIRMATION  To reaffirm a debt means the debtor promises to pay even after discharge.  Court very strict about permitting reaffirmation.

24 REAFFIRMATION MUST: Not violate laws for fraud, duress or unconscionability. Be filed in court. Clearly state that the debtor has the right to rescind within 60 days. Not impose undue hardship on the debtor.

25 CHAPTER 11-- REORGANIZATION Chapter 11 does not require a trustee; the petitioner (called debtor in possession) serves as the trustee. He: Operates the business, and Develops a plan of reorganization. A creditors’ committee watches over the interests of the creditors.

26 PLAN OF REORGANIZATION The debtor comes up with a plan that is acceptable to the creditors. The creditors may accept a reorganization plan that they believe will be better for them than liquidation. If they reject the debtor’s proposal, they may submit alternative plans.

27 PLAN A typical plan of reorganization gives some current assets to the creditors and promises to pay them a portion of future earnings.

28 CONFIRMATION OF THE PLAN A confirmation hearing is held to determine whether it should accept the plan. The court will approve a plan if a majority of each class votes in favor of it.

29 CONFIRMED PLAN A confirmed plan is binding on the debtor, creditors and shareholders if complied with.

30 DISCHARGE If the debtor complies with the terms of the plan, the debtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the plan.

31 CHAPTER CONSUMER REORGANIZATION The purpose of Chapter 13 is to rehabilitate an individual debtor. Creditors cannot use an involuntary petition to force a debtor into Chapter 13. A trustee is appointed to supervise the debtor, who remains in possession of all assets.

32 CH PLAN OF PAYMENT Plan of payment must be submitted by the debtor within 15 days after filing the petition. The plan must: Commit some future earnings to pay off debts, Promise to pay all secured and priority claims in full, and Treat all remaining classes equally.

33 CONFIRMATION OF PLAN Once confirmed, the plan is binding on all creditors.

34 DISCHARGE Upon complying with the plan, the debtor is washed clean of all pre- petition debts except those provided for in the plan.