© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. “One could always begin again in America, even again and again. Bankruptcy, which in the fixed society of Europe was the tragic end of a career, might be merely a step in personal education.” John A. Krout and Dixon Ryan Fox, The Completion of Independence

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The objective of Chapters 11 and 13 of the Bankruptcy Code is rehabilitation of the debtor.  When debtors are unable to develop a feasible plan for rehabilitation, Chapter 7 allows for liquidation (also known as straight bankruptcy).

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

 The Bankruptcy Code has three primary 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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Filing a Petition Any individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the United States can file under the Code.  Petitions may be voluntary or involuntary.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  May be filed by any debtor; not necessary to be insolvent or for liabilities to exceed assets.  Individuals must undergo credit counseling before filing and may only file under Ch. 7 if they meet income limits.  Filed by providing a petition, list of creditors, schedule of assets and liabilities, claim of exemptions, schedule of income and expenditures, and a statement of financial affairs.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  An involuntary petition must meet all the following requirements: The debtor must owe at least $14,425 in unsecured claims to the creditors who file. If the debtor has at least 12 creditors, three or more must sign the petition. If fewer than 12 creditors, any one can file. The creditors must allege either that a custodian for the debtor’s property has been appointed in the prior 120 days or that the debtor has generally not been paying debts.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  In order to help insure impartiality, the U.S. Attorney General appoints a U.S. Trustee to each region of the country.  The trustee is responsible for gathering the bankrupt’s assets and dividing them among creditors.  The U.S. Trustee calls a meeting where the creditors may ask the bankrupt questions about his finances.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Unsecured creditors must submit a proof of claim after the meeting of creditors.  Secured creditors do not file proofs of claim unless the claim exceeds the value of their collateral.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  An automatic stay prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed.  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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Code permits individual debtors (but not organizations) to keep some property for themselves.  States have the option of determining what property is exempt or adopting the federal Code. For example, federal Code allows only $21,625 of the value of a home; some states allow exemption of a home of any value. Most states exempt other items such as household goods, cars, work tools, disability and pension benefits, alimony, and health aids. Debtors may use the state exemptions only if they have lived in that state for at least two years.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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: The transfer was to a creditor of the bankrupt. It was to pay an existing debt. The creditor received more than she would have received during the bankruptcy process. The debtor’s liabilities exceeded assets at the time of the transfer. The transfer took place in the 90-day period before the filing of the petition.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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 cannot void pre-petition payments made in the ordinary course of business.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The trustee pays the bankruptcy estate to the various classes of claims in the following order of rank: Secured Claims Priority Claims (seven subcategories) Unsecured Claims (three subcategories)  All creditors with secured claims are paid before any in the priority claims category, etc.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Paid in this order; each category paid in full before payments are made to next category. Alimony and Child Support Administrative Expenses Gap Expenses (ordinary business expenses) Payments to Employees (back wages) Employee Benefit Plans Consumer Deposits (refunds) Taxes Payment for injuries caused by impaired driving

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Paid together, equally Secured claims that exceed the value of the available collateral Priority claims that exceed the priority limits All other unsecured claims

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Once a bankruptcy estate is distributed, the creditors cannot make claims on the debtor for money owed before filing.  There are some circumstances that prevent debts from being discharged, such as repeated bankruptcy filings, dishonesty, and conduct of some kinds of business.  Debtor must complete a course on financial management before discharge.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Debts that cannot be discharged include (among others): Income taxes (3 yrs) and property taxes (1 yr) Money obtained fraudulently or illegally Some recent loans for luxury goods Recent cash advances on credit cards Alimony and child support debt Fines and penalties Liability for injuries caused while driving under the influence of drugs or alcohol Liability for breach of duty to a bank Some student loans

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Under Ch. 7, debts of partnerships and corporations cannot be discharged.  Repeated filings for bankruptcy (within 8 years)  Revocation of previous discharge if evidence of fraud is discovered.  Debtor who has acted in bad faith – made fraudulent transfers, hidden assets, falsified records, etc.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  To reaffirm a debt means the debtor promises to pay even after discharge.  In order to be valid, the 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. Clearly state that reaffirmation is not required by law.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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.  A committee of equity security holders may be appointed to watch out for the interests of the shareholders.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The debtor has 120 days to come up with a plan that is acceptable to the creditors.  The creditors will usually only accept a reorganization plan that they believe will be better for them than liquidation.  If they reject the debtor’s proposal, the creditors or shareholders may submit alternative plans.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A confirmed plan is binding on the debtor, creditor and shareholders.  A typical plan of reorganization gives some current assets to the creditors and promises to pay them a portion of future earnings.  The debtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the plan.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  In 2005, Congress provided a quicker method of Chapter 11 bankruptcy for businesses with less than $2 million in debt, by placing deadlines on each step of the process.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The purpose of Chapter 13 is to rehabilitate an individual debtor.  Generally follows same process as Chapter 11, but with a few differences.  Creditors cannot use an involuntary petition to force a debtor into Ch. 13.  A trustee is appointed to supervise the debtor, who keeps possession of assets.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Once confirmed, the plan is binding on all creditors.  The debtor is washed clean of all pre- petition debts except those provided for in the plan, but (unlike under Chapter 7), the debts are not permanently discharged and may be revived if the debtor does not comply with the plan.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.