Bankruptcy

Question 1

What are the basic actions that occur in a bankruptcy?

Answer 1

Bankruptcy gives creditors protection from their creditors and stops them from either permanently or temporarily collecting a debt.
The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.

Question 2

How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?

Answer 2

It doesn’t; because the corporation is a separate legal entity.

Under bankruptcy; corporations are dissolved

Under bankruptcy; individuals are discharged

Question 3

What key action will cause a bankruptcy discharge to be denied?

Answer 3

If a debtor fails to keep good records or falsifies documents; a discharge will be denied

Question 4

What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?

Answer 4

Discharges all non-exempt debt

Can only be filed every 8 years from previous Chapter 7 filing

Voluntary or involuntary filing

Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)

Question 5

What are the requirements for a voluntary bankruptcy filing under Chapter 7?

Answer 5

Must pass means test

Consumer debtor monthly income must be below certain specified amount in the bankruptcy code

Debtor must meet with an authorized credit counselor within 180 days prior to filing

Question 6

What are the requirements for an involuntary bankruptcy filing under Chapter 7?

Answer 6

Creditors not being paid, so they force the debtor into bankruptcy

Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property

If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15,325

If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15,325

Upon filing; a judge will declare an order for relief unless the debtor protests

Question 7

What entities are disallowed from involuntary Chapter 7 bankruptcy filings?

Answer 7

Charities

Farms

Question 8

How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?

Answer 8

If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can
reclaim possession of their property from the interim BK trustee

Question 9

What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?

Answer 9

Debtor and creditor formulate a plan under which the debtor repays a portion of the debt owed. Remainder is discharged.

File reorganization plan to each class of creditor
Must be approved by 2/3 of the $ amount and 1/2 # of claims
Court must confirm the Plan

Question 10

What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?

Answer 10

Similar to Chapter 11; but for individuals

Gives individuals a reprieve from creditors

Creates a payment plan for the debt

Ch. 13 Involuntary petitions are not allowed

Question 11

What are the duties and abilities of a bankruptcy trustee?

Answer 11

Represents the bankruptcy estate

Can sue or be sued

Oversees bankruptcy and watches for preferential creditor payments

Oversees priority transfer of assets to creditors

Question 12

How and when is a bankruptcy trustee appointed?

Answer 12

Optional - Creditors decide

Can be elected by creditors or can be appointed by the court

Question 13

What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?

Answer 13

Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing

A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value

A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)

Question 14

What is the treatment of a secured creditor in a bankruptcy?

Answer 14

Superior to claims of other types of creditors

Can take either collateral or cash proceeds from the sale of an asset

If collateral doesn’t satisfy amount owed; Secured Creditors become a general creditor for the difference.

Question 15

What is the order of priority given to unsecured creditors in a bankruptcy?

Answer 15

“STOP IT” Drunk Driver

• Support payments (alimony/child support)
• Trustee Fees & Admin expenses
• Obligations created after petition filing before settlement
• Payroll and benefits w/in 180 days (up to $12,475/empl)
• Individual consumer deposits on goods (up to $2,775/ea)
• Tax claims arising within 3 years of petition
• Drunk Driver injury claims

Question 16

What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?

Answer 16

The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors

The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected

Question 17

What is the bankruptcy estate?

Answer 17

The pool of assets available to creditors until liquidation

Question 18

What assets are exempt from creditors in a bankruptcy estate?

Answer 18

Social security

Disability payments

Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents

Question 19

How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?

Answer 19

Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate

Question 20

What is a garnishment with respect to a bankruptcy?

Answer 20

Court allows a creditor to garnish or take a portion of the debtor’s paycheck

Question 21

What is a mechanics lien?

Answer 21

Lien on real property to secure payment for a repair/improvement done to the house

A contractor builds an addition to your house and you won’t pay. They can’t repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid

Question 22

What is an artisan’s lien?

Answer 22

Applies to personal property like a car

If the dealership does $500 in repairs to your car; you don’t get the car back until you pay

Question 23

What is a surety (co-signing)?

Answer 23

A third party agrees to be liable for a loan

Example: A parent co-signs on their child’s car loan

Question 24

How is a surety liable in a transaction?

Answer 24

A surety is primarily liable

Surety can be released from liability if the creditor behaves in a way that increases the risk that they
initially agreed to

Surety can be released from liability if the debtor changes the loan agreement in a way that materially
increases the surety’s risk

Question 25

What is a cosurety; and how are they liable in a transaction?

Answer 25

Two sureties are guaranteeing the same debt

Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties
have their proportionate share reduced by the released party’s percentage

If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution

Question 26

What is a guarantor?

Answer 26

Similar to surety; but a guarantor is secondarily liable

Question 27

What are the basic rights of a debtor under the Fair Debt Collection Practices Act?

Answer 27

Basically - your creditors have the right to collect from you; but not abuse you or embarrass you

The can’t contact you once you’re represented by an attorney

They can call other people to find out where you are; but they cannot identify themselves as collectors

They must stop calling you at work if you send them a certified letter that says my employer doesn’t allow me to take calls at work.

They must call you only at reasonable hours of the day - according to your time zone; not theirs

Question 28

What transfers can the trustee avoid to maximize the corpus available to creditors?

Answer 28

“FLAP”

• Fraudulent transfers by debtor within 2 years of filing
• Liens by statute against debtor’s property
• After-filing the date transfers
• Preferential transfer of property “I-WAIT”

Question 29

What are preferential transfers that can be avoided?

Answer 29

“I-WAIT”

• Insolvent when transfer was made
• Within 90 days of filing petition
• Antecedent debt (pre-existing), new value is ok
• Improves creditors position (creditor would rec’v more than in bankruptcy)
• Time is increased from 90 days to 1 year for an insider

Question 30

What Exceptions are not discharged as a result of bankruptcy?

Answer 30

“STUPID”

• Student loans of debtor
• Taxes arising within 3 years of the filing of the petition
• Unscheduled/Unlisted debt
• Pension and profit sharing obligations
• Intentional force or fraud against another person
• Domestic support obligations (alimony/child support)

Question 31

When is a payment considered preferential?

Answer 31

When it provides the creditor with a larger amount than it would have received out of bankruptcy assets.

If a creditor is fully secured, it will have recourse to all collateral, so a payment to such a creditor would not be considered preferential.