Bankruptcy Flashcards
1
Q
An individual is ineligible to be a debtor under any of the chapters of the Bankruptcy Code unless…
A
Within 180 days of the bankruptcy filing the individual received an individual or group briefing from an approved nonprofit budget and credit counseling agency.
Details:
The briefing must outline opportunities for available credit counseling & assist the individual in performing a related budget analysis.
Can be by telephone or internet.
2
Q
Prerequisite to Individual Bankruptcy Filing
A
- Briefing from budget and credit counseling agency
- File a certificate of completion from the agency describing services provided to the debtor
- Must file debt repayment plan (if one was created)
3
Q
Definition: Debt Relief Agency
A
Any person who provides any bankruptcy assistance to an “assisted person” in return for the payment of money or other valuable consideration
Details:
- Must comply with certain restrictions and disclosure requirements
- An attorney providing bankruptcy assistance to an assisted person = debt relief agency
4
Q
Definition: Assisted Person
A
Person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $186,825
5
Q
Definition: Consumer Debt
A
Debt incurred by an individual primarily for personal, family, or household purposes
6
Q
By signing a Ch. 7 pleading, the attorney certifies that…
A
- She performed a reasonable investigation into circumstances giving rise to petition
- Petition well grounded in fact and law
- Petition not an abuse
- No knowledge information in accompanying schedules is incorrect
7
Q
Definition: Reorganization
A
Keep assets, keep business, pay back over time
8
Q
Definition: Liquidation
A
Sell assets, lose business, not paid back
9
Q
Definition: Chapter 13 Bankruptcy
A
Voluntary bankruptcy instituted by individual who wants to propose a plan to repay creditors over time
Details:
Reorganization ONLY for individuals who qualify (about $400k unsecured and $1.2 million secured maximum)
10
Q
Under Ch. 13, debts may be ____ and _______ __ ______.
A
Extended & reduced in amount
11
Q
Definition: Best Interest of the Creditors Test
A
Each creditor must receive in present value terms at least as much as that creditor would receive if the debtor were liquidated under Ch. 7
Must be fulfilled in both Ch. 13 and Ch. 11 bankruptcy
12
Q
Limitations on Ch. 13 Bankruptcy
A
- Only individuals with regular income
- Noncontingent, liquidated UNSECURED debts of LESS than $383,145 (about $400k)
- Noncontingent, liquidated SECURED debts of LESS than $1,149,525 (about $1.2 million)
13
Q
Definition: Guarantee
A
A promise to pay the debt of another if the primary obligor does not pay
14
Q
When does a guarantee become a debt for the guarantor?
A
When the primary obligor fails to pay.
Details:
There is no debt attached to a guarantor just by virtue of their guarantee unless and until the contingency occurs.
15
Q
Definition: Chapter 11 Bankruptcy
A
Reorganization process in bankruptcy for companies and high debt individuals
16
Q
Limitations of Ch. 11 Bankruptcy
A
- Businesses MUST file under this chapter (unless they elect liquidation)
- Individuals with small amounts of debt MAY file under this chapter
- Individuals with over $383,175 unsecured and $1,149,525 secured can file Ch. 11 if they want to pay back over time (or can elect liquidation)
17
Q
Ch. 11 Bankruptcy Procedure
A
- Filing – file BR petition
2. Debtor in Possession –management stays in business (can operate without a bankruptcy trustee)
18
Q
Definition: Bankruptcy Trustee
A
An entity/person in charge of administering a bankruptcy estate; essentially an officer of the court
Details:
- Always appointed in Ch. 13 and Ch. 7 bankruptcies
- MAY be appointed in Ch. 11 for cause (fraud, dishonesty, incompetence, gross mismanagement)
19
Q
When will a bankruptcy trustee be appointed?
A
Ch. 7: Always
Ch. 13: Always
Ch. 11: For cause –fraud, dishonesty, incompetence, gross mismanagement
20
Q
Definition: Chapter 7 Bankruptcy
A
Straight Bankruptcy; provides for “liquidation” – the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors
Details:
An individual’s debts are discharged, regardless of whether a creditor is paid in full.
21
Q
Dismissal of Ch. 7 Bankruptcy Petition for Abuse
A
- Showing debtor filed in bad faith or by establishing a lack of good faith under the “totality of the circumstances of the debtor’s financial situation”
- Means Test: if you make a certain amount of money, you’re barred from Ch. 7 bankruptcy
22
Q
Rationale: The Means Test
A
If debtors can pay their creditors at least a certain amount of money over 5 years (between about $7000 and $12,000), they should pay under Ch. 13 instead of using liquidation
23
Q
Voluntary Ch. 7 Bankruptcy Requirements
A
- Individuals and entities may both file for bankruptcy under Ch. 7 (except for certain specialized industries like RRs, insurance companies, banks, credit unions, and municipalities)
- Insolvency is NOT a prerequisite
24
Q
Who may be subject to involuntary bankruptcy?
A
Any debtor who is eligible to file a voluntary petition may be subject to an involuntary petition in Ch. 7 or Ch. 11 (But not Ch. 13)
EXCEPTION: non-profits and farmers
25
Rationale: Involuntary Bankruptcy
1. Creditor may not want money to run out before they get their claim in
2. Can invalidate preferential payments
26
TX State Law on Recovering Preferences
Preferences are not illegal or voidable under TX state law, and they cannot be recovered under state law by a bankruptcy trustee. ONLY the federal bankruptcy laws provide for recovery of preferences.
27
Definition: Undersecured
Debt > value of collateral.
NOTE: in bankruptcy, a creditor has a secured claim ONLY up to the value of the collateral
28
Involuntary Bankruptcy: Counting Creditors
1. If the debtor has 12+ creditors, 3 or more with aggregate unsecured/undersecured claims of at least $15,325 must file
Rationale: don't want 1 or 2 disgruntled creditors to be able to force a typical business into bankruptcy
2. If the debtor has fewer than 12 creditors, one more more creditors whose unsecured/undersecured claims aggregate $15,325 may file.
NOTE: employees, insiders, and creditors who have received transfers voidable by the trustee are NOT included in counting the 12 creditors
29
Adequate Grounds for Filing Involuntary Bankruptcy Petition
1. Debtor is generally not paying debts as they come due (must regularly miss a significant number of payments to creditors or regularly miss payments significant in amount in relation to the debtor's operation)
2. A custodian is appointed to take possession or control over substantially all of the debtor's property within 120 days of the involuntary petition
30
When a petition is filed, the debtor incurs a duty to file these documents:
1. List of creditors
2. Schedule of assets and liabilities
3. Schedule of current income and current expenditures
**Those are the only ones necessary to remember, but the list also includes:
4. Statement of debtor's financial affairs (e.g., tax returns)
5. Copies of pay stubs received from employer within 60 days of filing for bankruptcy
6. Itemized statement of monthly net income
7. Statement disclosing any reasonably anticipated increase in income or expenditures for the 12 months after filing
8. If the debtor is an individual, a certificate from the nonprofit budget and credit counseling agency that provided the debtor credit counseling services & any plan of repayment developed by the agency
9. If debtor is an individual w/debts secured by property, a statement of intention re: the property (retain or surrender, whether it's exempt, etc.)
31
If an individual debtor in a voluntary Chapter 7 case fails to file the required items...
Within 45 days after filing for bankruptcy, the case may be dismissed.
32
Definition: Automatic Stay
Halts collection activities from the time of the bankruptcy filing; applies to creditors whether they know of the filing or not.
33
Willful violations of the automatic stay can result in...
Damages, attorney's fees, and punitive damages
34
Exceptions to the Automatic Stay
1. Prosecution of crime
2. Alimony, maintenance, support
3. Government, police, or regulatory action (e.g., SEC investigation)
4. Civil action for establishing paternity, child custody, divorce, or domestic violence
5. Assessment of tax or demand for tax returns or tax audit (not collection)
6. Steps to maintain the perfection of an interest in property
7. Eviction proceeding of residential property (endangerment, illegal use of controlled substances, or continuance of an eviction proceeding in which L obtained judgment of possession before filing of bankruptcy petition)
8. Enforcement of security interest in real property if debtor is violating a previous bankruptcy ruling prohibiting him from filing for bankruptcy again
35
How long does the automatic stay last?
The automatic stay continues for the duration of the bankruptcy unless a creditor requests that the stay be lifted and relief is granted
36
Creditor Relief: Lack of Adequate Protection
A SECURED creditor is entitled to protection against a decline in the value of the collateral during the life of an automatic stay (e.g., depreciation of a vehicle)
May take the form of a lien, cash payments, or insurance
Does NOT violate the automatic stay if this form of relief has been granted
37
Creditor Relief: Lack of Equity
A SECURED creditor can request the court to lift the automatic stay re: some item of encumbered property if:
1. the debtor does not have any equity in the property AND
2. the encumbered property is not necessary to an effective reorganization
38
Definition: Equity
value of collateral exceeds the amount of debt
39
Creditor Relief: Scheme to Defraud Creditors
A creditor whose claim is secured by a REAL PROPERTY INTEREST is entitled to relief from the automatic stay if the bankruptcy petition was part of a scheme to delay, hinder, or defraud creditors.
Relief is binding in any case filed by the debtor for 2 years.
40
Creditor Relief: Serial Filings
Automatic stay terminates after 30 days if the bankruptcy is filed by or against an individual debtor within 1 year after the debtor had another bankruptcy case dismiss.
EXCEPTION: court continues the stay upon a finding of good faith
41
What is included in the Bankruptcy Estate?
1. All property of the debtor acquired prior to bankruptcy, including exempt property
2. In a Ch. 7 bankruptcy, all post-petition property remains the property of the DEBTOR
EXCEPTIONS: inherited property, life insurance, and property received in divorce if received within 180 days of filing the petition.
42
Choice of Exemption Law
Both the Bankruptcy Code and TX law allow the debtor to choose between the federal and TX state exemptions
43
Purpose of Exemptions
Provide a minimum amount of property that a debtor is allowed to keep, even though they are in bankruptcy.
44
TX State Exemptions
VERY favorable to the debtor.
1. If a family, maximum of $60,000 in various items of personal property
2. Single individual, $30,000
NOTE: a secured creditor with a perfected security interest will still be able to obtain the property, even though it may be covered by the exemption provisions. I.e., this only is protected against unsecured creditors.
3. Wages earned after bankruptcy is filed
4. Prescribed health aids
5. Alimony
6. Amounts paid under insurance contract
7. Pension benefits
8. Retirement funds
9. Homestead
45
TX Homestead Exemption
Very favorable to debtor
1. Allows a debtor to keep her home without any limitation to value
2. Urban Home: 10 acres
3. Rural Home: 200 acres
NOTE: a valid security interest will prevail over the homestead exemption
46
Creditors may still reach a TX debtor's homestead if...
1. The debts are for a secured home mortgage
2. Taxes are owed on the property
3. The IRS has a lien
4. There is a home equity loan (if all loans on the house, including the mortgage, do not exceed 80% of the home's FMV)
47
If a debtor wants to claim the exemptions of state X, the debtor must be a resident of state X for __ years before the bankruptcy filing.
2
NOTE: if this residency requirement is not met, the debtor may only use the exemptions of the state where the debtor lived for the majority of the time between 2-2.5 years before filing.
48
Definition: Bad Acts Exemption Limitation
The debtor's homestead exemption is limited to $155,675 if:
1. The debtor has been convicted of a felony which demonstrates the filing of the case was an abuse of the bankruptcy code; or
2. The debtor owes a debt arising from (a) violations of securities laws; (b) fraud, deceit, or manipulation in a fiduciary capacity or in connection with a securities transaction; (c) RICO violations; or (d) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the 5 year period before bankruptcy filing
49
The debtor's homestead is limited to $_______ for any homestead that was acquired within _____ years (or _____ days) of the bankruptcy filing.
$155,675; 3.3 years; 1215 days
NOTE: still exempt if transferred from a former homestead located within the same state, as long as the former homestead was acquired before the 3.3 year mark
50
The debtor's homestead shall be reduced by an amount equal to the value of any non-exempt assets that...
The debtor put into the home with the intent to hinder, delay, or defraud a creditor.
Applies to the 10 year period prior to the bankruptcy filing.
51
The bankruptcy trustee is a hypothetical lien creditor. What does this mean?
The trustee is treated as having a hypothetical judicial lien on the date of the bankruptcy filing.
The trustee may avoid any property interest or claim held by a creditor that could be trumped by a judicial lien creditor who established its lien on the date of the bankruptcy filing.
52
Secured creditor vs. judicial lien-- who wins?
Under Art. 9 of the UCC:
1. A secured creditor prevails over a lien creditor if the secured creditor is PERFECTED OR has obtained a security agreement and filed a financing statement by the time the lien creditor establishes its lien
2. A judicial lien trumps an UNPERFECTED secured creditor who has not filed a financing statement, even though the security interest is prior in time.
53
The trustee is given the rights of a ________________ of the debtor's real property as of the date of _______, whether or not such a purchaser exists.
Bona fide purchaser; filing
NOTE: a BFP's rights will trump unperfected/unrecorded security interests
54
Trustee's Power Over Fraudulent Transfers
1. Trustee may avoid transfers fraudulent under state law
NOTE: 4 year SOL for voidable transfers under TX law/Uniform Fraudulent Transfer Act
2. Trustee may avoid conveyances deemed fraudulent under the Bankruptcy Code if made within 2 years before the filing date
55
Uniform Fraudulent Transfer Act – Creditor Rights
Allows creditors to get property back that a debtor has given away in a fraudulent transfer, even if the debtor is not in bankruptcy.
56
Uniform Fraudulent Transfer Act – Trustee Rights
A trustee can use the law to void transfers of property made by the debtor and get the property back in the bankruptcy estate for distribution to all of the creditors.
57
Grounds for Fraudulent Transfer
1. Transfers made with fraudulent intent; i.e., transfers made with actual intent to hinder, delay, or defraud any entity to which the debtor was or became indebted; OR
2. Transfers for less than reasonably equivalent value IF:
(a) Debtor was insolvent or became insolvent as a result of the transfer;
(b) Unreasonably undercapitalized;
(c) Intended to incur debts that would be beyond the debtor's ability to pay as debts matured; OR
(d) Debtor made transfer to/for the benefit of an insider (family, partner, relative, etc.)
**Will usually be a transfer to family/friends
58
Statutory Liens
General, statutory liens (mechanic's, landlord's, and garagemen's liens) are valid against a trustee in bankruptcy
59
Elements of a Voidable Preference
The following 5 conditions must ALL be present to have a voidable preference:
1. A transfer to or for the benefit of a creditor
2. If the debtor is insolvent
3. On account of an antecedent debt (i.e., debt was in existence before transfer to creditor took place)
4. Within 90 days of filing a petition in bankruptcy (or 1 year if transfer is to an insider)
5. That enables the creditor to receive more than it would have received by way of its "dividend" in bankruptcy litigation
NOTE: fully secured creditors will never have a preference because they would have gotten 100% back in any event
60
Definition: Preferential Transfer
The debtor, before filing bankruptcy, made a transfer to some creditors, while not making a transfer to other creditors.
1. Payment of money
2. Grant of a security interest
Details:
The trustee may get back the transfers or payments made to the preferred creditors and distribute them among all creditors. This is a reason to force a debtor into involuntary bankruptcy.
61
Presumption of Insolvency
There is a presumption that the debtor is insolvent during the 90 day period prior to bankruptcy filing
62
Is the perfection of a security interest a preference?
1. Look at date of debt
2. Look at date of transfer
PAYMENT: date of transfer = day of payment
SECURITY INTEREST: if perfected within 30 days of attachment, date of transfer = date of attachment; if perfected after 30 days of attachment, date of transfer = date of perfection
Only a preference if date of transfer is AFTER the date of debt (i.e., if perfected within 30 days of attachment, it's not a preference)
63
Exceptions to Voidable Preference Rules
1. Transfer intended as a contemporaneous exchange for new value
2. Purchase Money Security Interest
3. Statutory Liens
4. Domestic Support Obligations
5. Transfers By Consumer Debtors (aggregate value of all property transferred to a single creditor is under $600)
6. Transfers made as part of an alternative repayment schedule between the debtor and a creditor created by an approved nonprofit budgeting and credit counseling agency
64
Definition: Executory Contract
A contract that has not yet been fully completed or performed
65
What are the trustee's powers as to executory contracts?
Trustee has the power to assume, reject, or assign executory contracts upon the approval of the bankruptcy court.
Clauses prohibiting such assignments are invalid.
NOTE: the debtor may opt to perform
66
Why would a trustee reject an executory contract?
The executory contract is burdensome.
Modern Trend: permit rejection where the contract is a hindrance to an effective plan of reorganization.
67
What relief is available when a trustee rejects an executory contract?
Damages for breach, but damages are treated as general UNSECURED debts and are paid off at a fraction of the dollar by the estate.
68
What is the order of claim payment?
1. Secured Claims & Secured Judicial Lien Creditors
2. Priority Claims
3. General Unsecured Claims
69
Secured claims are secured up to the value off the _______, and includes ______________.
Collateral; interest accrued
70
Priority Unsecured Claims Include:
1. Domestic support obligation claims
2. Administrative expenses
3. Involuntary gap claims
4. Wage claims (limited to 6 months before petition & $12,475)
5. Contributions to employee benefit plans
6. Claims against operators of grains or fish storage facilities
7. Consumer deposits
8. Tax claims
9. Insured federal depository institutions
10. Personal injuries or death caused by drug or alcohol impairment
71
Definition: "Gap"
Period of time between the filing of a bankruptcy a petition and the order for relief or appointment of trustee
72
Definition: Equitable Subordination
A court may subordinate one claim or interest to another claim or interest when distribution under the priority rules would be inequitable
73
Equitable subordination is proper if...
Claimant engaged in inequitable conduct (e.g., fraud), the misconduct injured creditors, and equitable subordination is consistent with the Bankruptcy Code
74
Definition: Recharacterization
A court may recharacterize "debt" as an equity interest if it determines a transaction did not genuinely create a debt.
Note: an equity interest has lower priority than a debt
75
Definition: Discharge
Under usual circumstances, the debtor will be discharged of its obligations and be given a fresh start.
76
Objections to discharge include...
1. The debtor is not an individual (e.g., corporation or partnership --> debt not discharged)
2. Fraudulent transfers or concealment of property
3. Failure to keep books or records
4. Commission of a bankruptcy crime
5. Failure to explain a loss of assets
6. Refusal to obey orders or answer questions
7. Improper conduct in an insider's case
8. Prior discharge in Ch. 7 or 11 within 8 years
9. Prior discharge in Ch. 13 within 6 years (unless it has a proposed plan to pay at least 70% of its claims in the prior case)
10. Waiver
11. Failure to complete a personal financial management course
12. Bad acts
77
A debtor is entitled to __ discharge in __ years.
1; 8
78
The follow debts are exceptions to discharge...
1. Tax claims entitled to priority
2. Debts incurred by fraud
3. Luxury goods ($650+ and within 90 days of filing)
4. Cash advances on open ended credit to consumers that exceeded $925 and ere obtained within 70 days of filing
5. Unscheduled debts
6. Debts for embezzlement, larceny, and fiduciary's fraud
7. Domestic support obligations
8. Liability for willful and malicious injury to property or person
9. Liability or death or personal injury caused by the debtor's operation of a motor vehicle, vessel, or aircraft while intoxicated or drug-impaired
10. Student loans
(The list goes on... just be able to recognize)
79
Reaffirmation of Discharged Debts
A debtor may agree to repay their debts, even though they would have been discharged
1. Reaffirmation must be made before the granting of discharge
2. Creditor must provide debtor with prescribed disclosures (e.g., notice of right to rescind prior to discharge or within 60 days; amount of debt; interest rate)
3. Agreement must be filed with the court
4. Reaffirmation hearing
