Bankruptcy Flashcards
What is a composition agreement in terms of bankruptcy?
binding, debtor released from remaining debt,
Debtor invites creditor to a meeting before adjustment.
Creditors can’t sue for remaining balance.
What is the assignment of benefit in terms of a bankruptcy?
Not binding, debtor not released from debts.
Returns car, but still owes deficiency.
If your credit card is stolen and you report it right away, what is your max liability?
$50
Who enforces all the debtor/creditor rights?
Federal Trade Commission
Assuming the Federal Fair Debt Collection Practices Act, what would a collection services be subject to if they violate?
Civil lawsuit
Voluntary bankruptcy vs Involuntary
Sometimes creditors force the debtor into bankruptcy
Chapter 7 vs. Chapter 11 Bankruptcy
Chapter 7 - need a trustee to help the debtor gather his assets, MORE OF A STRAIGHT LIQUIDATION
Chapter 11 - trustee is OPTIONAL, more of a reorganization than a liquidation
Insolvent means
that your total liabilities > total assets
(owe more than you own)
-Doesn’t mean bankruptcy, debt could be long-term
Equitably insolvent means
Worse than “insolvent”
Means CURRENT liabilities are greater than your CURRENT assets
More immediate problem
Court looks to see if debtor is paying debts as they come due.
Secured creditor vs. UNsecured creditor
Most unsecured creditors on EXAM. No collateral.
Secured creditor doesn’t count during bankruptcy. Example: mortgage against warehouse, collateral, take warehouse if debtor defaults.
Secured creditor may have filed a financing statement. Has priority.
Dischargeable debt vs. NON-dischargeable debt
Non-dischargeable after bankruptcy:
alimony, child-support, taxes owed
Almost everything else is dischargeable.
Liquidation results in what?
Result after filing for Chapter ___.
DEBT RELIEF.
Chapter 7
Trustee takes cash from liquidation and pays as many debts as possible.
Reorganization results in what?
After filing for Chapter ___
REORGANIZATION of debt. Work with creditors after going to court. An extension of time. Goal is to keep struggling business in business.
Chapter 11.
In order for a creditor to file for a debtor to file INVOLUNTARY BANKRUPTCY, the creditor must prove what?
That the debtor is not paying debts that are coming due - “equitable insolvency” - current liabilities > current assets
Number of unsecured creditors required to join to force a debtor into “involuntary bankruptcy”?
- 3 unsecured creditors to file if 12 or more total unsecured creditors
- 1 unsecured creditor to file if fewer than 12 total
Unsecured creditors must be owed a total of $______ in order to file to force a debtor into involuntary bankruptcy?
$16,750
What happens if the creditor files in bad faith?
The debtor can collect damages from the creditor and punitive damages.
EXAM TRICK
Any question on the exam dealing with involuntary bankruptcy that says the debtor is unable to pay debts as they come due is probably the right answer
Means test in order to file bankruptcy
- Debtors may file bankruptcy if they earn less than the median income in their state
- They cannot afford to pay back at least $6,000 over a 5 year period
- Must undergo credit counseling 180 days before filing
EXAM TIP
Any answer choice to a bankruptcy question that says “the debtor must be insolvent to declare bankruptcy” is always WRONG.
Need to be EQUITABLY INSOLVENT.
Chaz has been involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy code. Should he succeed in having the petition dismissed, Chaz could recover:
- Court cost + attorney fees
- Compensatory damages
- Punitive damages
What does it mean to say “timely filing is key” in regards to bankruptcy and creditors?
All the creditors must report back to the trustee in a timely fashion with a confirmation what is owed.
If the creditors do not respond timely to the bankruptcy attorney, those creditors receive nothing.
Do you need 3 or more creditors in order to file a VOLUNTARY bankruptcy petition?
NO
What is an “automatic stay” in terms of a bankruptcy filing?
Almost immediately after the filing of the bankruptcy, there is an automatic stay. This stops almost all creditor actions (lawsuit, levies, garnishments, harassment, recordation of liens, even IRS).
Gives trustee time to gather assets.
Allows for orderly/fair payment of claims.
Can couples file a “joint petition” under Chapter 7?
YES
Are voluntary petitions subject to the $15,775 floor?
NO
What PROPERTY is included in the Debtor’s Bankruptcy estate?
3 categories:
- Property owned as of date of filing (present)
- Property debtor is entitled to 180-day rule after filing date (future) (life insurance, inheritance, divorce settlements)
How long must a debtor wait after a bankruptcy filing to receive another discharge?
8 years
Debtors, under the Bankruptcy code, are still entitled to receive what payments?
Income from wages Social security benefits Disability benefits Veteran benefits Unemployment benefits Alimony Child support Personal residence (as long as no mortgage or lien)
Chapter 11 Reorganization committee is made up of who? What do they do?
7 largest unsecured creditors willing to serve.
They make a new payment plan. Any creditor who is not mentioned by name gets nothing.
Must there be a trustee in a Chapter 11 filing?
optional.
When is the Section 341 Creditors meeting usually held?
Between 20 and 40 days after filing for bankruptcy.
All interested parties, creditors, debtor, must be given notice of the meeting.
Who has higher priority: bankruptcy trustee or creditors?
Bankruptcy trustee (unless creditor has a perfected security interest prior to filing)
What are the 5 elements of Preferential Transfers that a bankruptcy trustee must be on the lookout for?
- Favors one creditor over others
- For or on account of antecedent debt
- Debtor insolvent at time of transfer
- transfer was made within 90 days preceding bankruptcy (insiders, 1 year)
- Creditor’s position improved
What kind of transfer are considered NON-preferential and OK even within 90 days prior to filing for bankruptcy?
Charitable contributions
Transfer of money/goods received
Bankruptcy trustee is always on the lookout for FRAUDULENT CONVEYANCES. What does this mean?
Court is looking for what property the debtor owned two years ago and what happened to that property
Can void:
- hiding assets
- Assets sold for less than FMV to conceal the asset
- court wants a reasonable explanation as to what happened to those assets from 2 years ago to make sure no one is being defrauded.
What property is included in the bankruptcy estate?
- Property owned at time of filing
- 180-day rule (property acquired after) such as life insurance property, inheritance, divorce settlement
Are all debts discharged during bankruptcy?
No, child support, alimony, etc. survive.
Can a person start a new business after bankruptcy?
Yes, immediately.
Is bankruptcy allowed in cases of fraud?
No, then bankruptcy would not be granted, debts would NOT be discharged.
Do you lose income under bankruptcy?
No, you do not lose wages (including disability, veteran benefits, social security), etc. These do NOT get distributed to creditors.
Under Chapter 11, does someone have to shut down their own business?
NO, Chapter 11 is a reorganization of debts. Business will live on and continue to operate.
Who does a creditor’s committee consist of?
The debtor’s unsecured creditors.
What types of bankruptcy can be both voluntary and unvoluntary?
BOTH Chapter 7 and Chapter 11
Is a personal residence subject to bankruptcy?
YES - if paid off
NO - if subject to a mortgage
What is preferential transfer related to BANKRUPTCY?
Usually cash, old debt (antecedent), transferred to creditor that FAVORS ONE CREDITOR over another
How far does the trustee look back for preferential transfers for antecedent debt?
90 days
Prepaying an installment loan for a debtor that is insolvent is an example of what?
A preferential transfer
old debt, favors one creditor over another
Are charitable transfer considered a preferential transfer?
No, exempt
If a creditor is an insider, how far can the trustee look back for preferential transfers?
1 YEAR
What is a FRADULENT CONVEYANCE?
A fraudulent transfer and then the debtor reacquires the property later.
How far can the trustee lookback for fraudulent conveyances?
2 YEARS
Order of distribution / priority?
- Recorded mortgage (sell collateral)
- Perfected security interest (repossess)
- Unsecured
What happens when a SECURED creditor sells the collateral for less than the amount owed?
They get in line with the unsecured creditors. Go to back of line. No longer have priority.
Priority in UNsecured line of creditors?
- Child support & alimony
- Admin costs (CPA, trustee)
- Gap creditor (timing of filing)
- Employees and benefits
- Deposits from customers
- Taxes
- DWI claims
- General creditors (no priority)
NON-dischargeable debts
Writing false financials Alimony/Child Support Torts/DWI Taxes w/in 3 yrs Student loans Unlisted debts Prior bankruptcy Penalties/fines
Which of the following TORTS are dischargeable?
- Willful and malicious
- Ordinary torts / negligence
Only ordinary.
Willful and malicious torts such as a DWI are NOT dischargeable.
After __ years, a debtor may return to bankruptcy court seeking relief.
7 years
BAD behaviors during bankruptcy that result in NO discharges:
- Failure to preserve records (bad faith)
- Failure to explain whereabouts of assets
- Disrespect to the court
