Chapter 35 BANKRUPTCY

2 Bankruptcy Law Jurisdiction over bankruptcy cases is in U.S. district courts, which may refer all cases and related proceedings to adjunct bankruptcy courts. 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: Three bankruptcy proceedings are available:  Chapter 7 (consumer liquidation),  Chapter 11 (business reorganization) and  Chapter 13 (consumer time payment plan). Automatic stay prevents creditors from taking legal action against the debtor. Automatic stay prevents creditors from taking legal action against the debtor.

3 Chapter 7Chapter 11Chapter 13 TrusteeYesNoYes Eligible persons: Individuals Partnerships Corporations Yes No VoluntaryYes InvoluntaryYes, except Farmers and Nonprofit Yes, except Farmers and Nonprofit No ExemptionsRailroads, insurance companies, S&L’s, small businesses (under SBA), municipalities, farmers Same as Chapter 7 except for railroads are eligible for Chapter 11 and stock brokers are ineligible for Chapter 11 Only individuals Requirements — Voluntary Debts unsecured <$290,250 secured <$871,550 < *special sections (chapter 9 - municipalities; chapter 12 -farmers) How Bankruptcy is Declared

4 Trustee in Bankruptcy The trustee is elected by the creditors. The trustee is elected by the creditors. Trustee acquires the rights of the debtor. Trustee acquires the rights of the debtor. Voidable Transfers: Trustee can avoid (cancel) transfers of property. Voidable Transfers: Trustee can avoid (cancel) transfers of property.  Preferential Transfers to creditors.  ‘Insider’ transfers. Proof of Claim. Proof of Claim. Priority of Claims. Priority of Claims.

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

6 Chapter 7 A liquidation proceeding under Chapter 7 may be either voluntary or involuntary. 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 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.If there are fewer than 12 creditors, any creditor whose unsecured claim is at least $10,775 may sign the petition.

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

8 Creditors and Claims Proof of Claim. Proof of Claim.  Creditors object to discharge of debt and demand payment.  Must be filed within 90 days of bankruptcy petition filing. Priority of Claims. Priority of Claims.  Creditors with security interests (such as a mortgage or lien) are not affected.

9 Creditors and Claims Unsecured claims are paid in this order: 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.

10 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

11 Discharge in Bankruptcy The decree terminating bankruptcy proceedings is generally a discharge that releases the debtor from most debts. The decree terminating bankruptcy proceedings is generally a discharge that releases the debtor from most debts. Exemptions from Discharge: Exemptions from Discharge:  Income taxes, student loans, loans obtained by fraud, alimony, judgments based on willful and malicious injury.

12 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: $1,100 Goods; $1150 Cash. 12.Reaffirmation Agreements Writing Filed with Court Not rescinded prior to Discharge Non-Dischargeable Debts

13 Reorganization & Payment Plans Individuals, partnerships, and corporations in business may be reorganized under Chapter 11 so that the business may continue to operate. Individuals, partnerships, and corporations in business may be reorganized under Chapter 11 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 under Chapter 13 for the payment of debts. Individual debtors with a regular income may adopt extended-time payment plans under Chapter 13 for the payment of debts.  A plan for extended-time payment must also be confirmed by the court.

14 Owners and creditors have only such rights as are specified in the plan Confirmation of plan — Approval by court 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 Reorganization under Chapter 11