Comprehensive Volume, 18 th Edition Chapter 37: Bankruptcy

Proceedings Jurisdiction over bankruptcy cases is in U.S. district courts, which may refer all cases and related proceedings to adjunct bankruptcy courts. Three bankruptcy proceedings are available: liquidation, reorganization, and extended-time payment.

After a Petition Is Filed An automatic stay prevents creditors from taking legal action against the debtor after a bankruptcy petition is filed. The trustee in bankruptcy is elected by the creditors and is the successor to, and acquires the rights of, the debtor. In certain cases, the trustee can avoid transfers of property to prevent creditors from satisfying their claims.

Declaration of Bankruptcy

Dismissal Order of Relief Appt. of Trustee Collection of Assets List of Creditors Creditors * meeting Property Rights (180 days) * Automatic with Involuntary Petition Anatomy of Bankruptcy Case Petition—either voluntary or involuntary Exemptions Voidable preference Evaluation of Claims Executory Contracts (60 days) Priority of creditors Discharge Sale and Payment

Liquidation Proceedings A liquidation proceeding under Chapter 7 may be either voluntary or involuntary. A voluntary case is commenced by the debtor’s filing a petition with the bankruptcy court. An involuntary case is commenced by the creditors’ filing a petition with the court. If there are 12 or more creditors, at least 3 whose unsecured claims total $10,775 or more must sign the involuntary petition. If there are fewer than 12 creditors, any creditor whose unsecured claim is at least $10,775 may sign the petition.

Distribution of Assets Bankruptcy law regulates the way creditors present their claims and the assets of the debtor are to be distributed in payment of the claims. Certain property of the debtor is exempt from the claims of creditors.

Paying Claims Secured claims are not affected by the bankruptcy of the debtor. Unsecured claims are paid in this order: (1) administrative expenses; (2) claims arising in the ordinary course of the debtor’s business; (3) wage claims, with limits; (4) contributions to employee benefit plans; (5) claims by consumer creditors; (6) certain taxes; and (7) general creditors.

Distribution Priorities 1.Secured creditors (to the extent of repossession) 2.Administration costs Attorneys, Accountants, Trustees, Appraisers 3.Claims arising in ordinary course of business after bankruptcy petition is filed but before of relief (involuntary) 4.Employee wages (not officers) $4,000 maximum 3 months preceding petition 5.Contributions to benefit plans $4,000 maximum (reduced by wages received) 180 days preceding bankruptcy 6.Consumer deposits $1,800 maximum 7.Alimony and child support 8.Taxes 9.Unsecured creditors

Discharge of Debts The decree terminating bankruptcy proceedings is generally a discharge that releases the debtor from most debts. Certain debts, such as income taxes, student loans, loans obtained by use of a false financial statement, alimony, and debts not duly scheduled, are not discharged.

NonDischargeable Debts 1.Taxes within Three Years of Filing Bankruptcy Petition 2.Liability for Obtaining Money or Property by False Pretenses 3.Willful and Malicious Injuries 4.Debts Incurred by Driving DWI 5.Alimony, Maintenance, or Child Support 6.Unscheduled Debts (unless actual notice) 7.Debts Resulting from Fraud as a Fiduciary (embezzlement) 8.Government Fines or Penalties Imposed within Three Years Prior 9.Educational Loans Due within Seven Prior Years 10.Prior Bankruptcy Debts in Which Debtor Waived Discharge 11.Presumption on Luxury Goods: $500 Goods; $1015 Cash. 12.Reaffirmation Agreements Writing Filed with Court Not rescinded prior to Discharge

Reorganization & Payment Plans Individuals, partnerships, and corporations in business may be reorganized so that the business may continue to operate. A plan for reorganization must be approved by the court. Individual debtors with a regular income may adopt extended-time payment plans for the payment of debts. A plan for extended-time payment must also be confirmed by the court.

Owners and creditors have only such rights as are specified in the plan Confirmation of plan — Approval by court Reorganization Under Ch. 11 Identifies ownership interests and debts not affected by adoption of the plan Identifies ownership interests and debts affected by adoption of the plan Specifies what will be done to interests and claims affected File plan for reorganization of the debtor or debtor or party in interest committee of creditors