30-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Introduction to Credit and Secured Transactions Security Interests in Personal Property Bankruptcy Credit P A R T

30-3 Bankruptcy PA E TR HC 30 Success is not built on success. It's built on failure. It's built on frustration. Sometimes its built on catastrophe. Sumner Redstone Executive Chairman and Founder of Viacom

30-4 Learning Objectives Explain purpose of bankruptcy code and types of bankruptcy proceedings (Chapters 7, 11, 12, 13) Describe process by which property in a debtor’s estate is distributed to creditors and the debtor is granted discharge in bankruptcy Identify dischargeable debts

30-5 The federal Bankruptcy Code provides an organized procedure for insolvent debtors and is supervised by a federal court Primary proceedings include: 1.Straight bankruptcy (liquidations) 2.Reorganizations 3.Family farms and commercial fishing operations 4.Consumer debt adjustments The Bankruptcy Code

30-6 All bankruptcy proceedings begin by filing a petition, either voluntary or involuntary –A voluntary petition may be filed by an individual, partnership, or corporate debtor –An involuntary petition may be filed by creditors of a debtor in an attempt to reach debtor’s assets in lieu of payment on debts The Bankruptcy Code

30-7 Filing a bankruptcy petition operates as an automatic stay, halting creditor action against a debtor or property, including: –Beginning or continuing judicial proceedings against the debtor –Actions to repossess the debtor’s property; –Actions to create, perfect, or enforce a lien against the debtor’s property; and –Setoff of indebtedness owed to debtor before commencement of the bankruptcy proceeding The Automatic Stay

30-8 Once a bankruptcy petition has been filed, the court must first determine whether relief should be ordered –This step automatic for a voluntary petition or no-contest of involuntary petition –If debtor contests involuntary petition, then a trial is held on question of whether court should grant relief. Order of Relief

30-9 To participate in the estate of a bankrupt debtor, unsecured creditors must file a proof of claim within a certain time, usually six months after the first meeting of creditors Bankruptcy Code declares ten types of claims to have priority over other claims –Priority claims are paid after secured creditors but before other unsecured creditors are paid Creditor Claims

30-10 In a liquidation proceeding (straight bankruptcy), the debtor must disclose all property s/he owns and surrender this bankruptcy estate to a bankruptcy trustee –Trustee segregates property that debtor may keep and then administers, liquidates, and distributes the remainder of the estate Relative rights of creditors established by law Liquidation (Chapter 7)

30-11 If debtor transfers property or incurs an obligation with intent to hinder, delay, or defraud creditors, transfer voidable by trustee Bankruptcy Code permits court to dismiss cases for abuse of process if debtor acted in bad faith or had present or future means to pay a significant portion of their current debts Fraud and Abuse

30-12 A bankrupt person not guilty of dishonest acts and who fulfilled duties as a bankrupt is entitled to a discharge in bankruptcy A discharge relieves the bankrupt person of further responsibility for dischargeable debts and gives him a fresh start. A corporation or partnership is not eligible for a discharge in bankruptcy Discharge

30-13 Chapter 11 offers a procedure in which the debtor’s financial affairs can be reorganized rather than liquidated because creditors would benefit more from the continuation of a bankrupt debtor’s business than from the liquidation of debtor’s property Chapter 11 is available to individuals and business enterprises Chapter 11 Reorganization

30-14 Rather than liquidating the debtor’s estate, a trustee for a Chapter 11 proceeding develops a plan for handling creditor claims and the various interests of persons such as shareholders Reorganization plan is essentially a contract between a debtor and its creditors and may involve recapitalization or giving creditors some equity Trustee Duties Under Chapter 11

30-15 Plan must: (1) divide creditors into classes; (2) set forth how each creditor will be satisfied; (3) state which claims, or classes of claims, are impaired or adversely affected by the plan; & (4) provide equal treatment to each creditor in a particular class, unless creditors in the class consent to other treatment In re Made In Detroit, Inc. : plan not feasible, therefore court unable to confirm planIn re Made In Detroit, Inc. The Bankruptcy Plan

30-16 A reorganization plan must be confirmed by the court before it becomes effective Plans may be confirmed by voluntary agreement of creditors or a cram down: –Court forces dissenting creditors whose claims would be impaired to accept the plan if the court finds it is fair and equitable to the creditors If confirmed, debtor must implement plan The Bankruptcy Plan

30-17 Chapter 12 is modeled after Chapter 13 and is available only for family farmers and fishermen with regular income Chapter 12 Bankruptcy

30-18 Chapter 13 gives individuals who do not want to be declared bankrupt the right to file a voluntary petition for bankruptcy protection, obtaining the opportunity to pay debts in installments and free of such problems as garnishments and attachments of property by creditors –Must be an individual with regular incomes owing less than a specific amount of debt Chapter 13 – Consumer Debt

30-19 After filing, the debtor submits a plan of payment to secured creditors for acceptance –3-5 year payment plan If acceptable to creditors and the court, the court will approve the plan and appoint a trustee to carry out the plan –In re Burt: unacceptable plan because it was a “cram-down” of creditor’s secured interest Chapter 13 – Consumer Debt

30-20 Thought Questions Why was the right to file for banruptcy protection incorporated into the U.S. Constitution? What is your opinion of the bankruptcy process?