Bankruptcy Flashcards
What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
It doesn’t; because the corporation is a separate legal entity.
Under bankruptcy; corporations are dissolved
Under bankruptcy; individuals are discharged
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt
Can only be filed every 8 years from previous Chapter 7 filing
Trustee appointed - collects assets, liquidates them and use funds to pay off creditors.
If debtor are people, debts are discharged; if a corporation, corporation is dissolved.
Voluntary or involuntary filing
Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
Individual debtor may be dismissed if it was found that granting relief under Chp 7 will be abused.
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Step 2 - Must pass means test - used to determine if they can pay if they are reclassed to Chp 13.
Step 1 -Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average); if it exceeds state median income then means test is applied - step 2
Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK
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 $15325
If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325
Upon filing; a judge will declare an order for relief unless the debtor protests
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Charities
Farms
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
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
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors
Creates a payment plan for the debt
Business remains in operation
At least 2/3 of each debt class of creditors must consent to reorganization
Ch. 11 Involuntary petitions are allowed
Trustee is not required, but court may appoint one. No Liquidation.
File a reorg plan within 120days after the order for relief is effective.
A creditor must be given the chance to reject or accept the plan.
Once confirmed, the debtor pays debt according to plan.
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals - debtor repays all or a portion of debts over a 3 -5 yr period.
Trustee appointed; oversees the handling the proceeding.
Gives individuals a reprieve from creditors, at the end the remaining debts are discharged.
Creates a payment plan for the debt
Ch. 13 Involuntary petitions are not allowed
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate
Can sue or be sued
Oversees bankruptcy and watches for preferential creditor payments
Oversees priority transfer of assets to creditors
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide
Can be elected by creditors or can be appointed by the court
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
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)
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives
Made within 3 Months of BK non-insider
Creditor receives larger payment than BK liquidation would have granted
What is the treatment of a secured creditor in a bankruptcy?
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.
What is the order of priority given to unsecured creditors in a bankruptcy?
- Court Costs and Fees
- Child Support & Alimony
- Expenses from ordinary course of business during bankruptcy proceedings
- Wages owed to employees
- Retirement contributions within last 6 months
- Consumer deposits for undelivered goods
- Taxes
- Other general unsecured claims
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
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
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
What assets are exempt from creditors in a bankruptcy estate?
Social security
Disability payments
Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor’s paycheck
What is a mechanics lien?
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
What is an artisan’s lien?
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
What is a surety (co-signing)?
A third party agrees to be liable for a loan
Example: A parent co-signs on their child’s car loan
How is a surety liable in a transaction?
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
What is a cosurety; and how are they liable in a transaction?
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
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
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
Six types of Bankruptcy
Chapter 7 - liquidation; Chapter 9 - municipal debt adjustment; Chapter 11 - reorganization; Chapter 12 - family farmers with regular income; Chapter 13 - adjustment of debts of individuals with regular income; and Chapter 15 - ancillary and other cross border
Debtors
For Chp 7 - can’t be railroads, banks, insurance and small business investment co.
Railroads can be debtors under Chp 11
Credit counseling required if debtor is an individual - can occur no more than 180 days before filing for BK
If filing Chp 7 & 13 - must complete financial management course before debts is discharged.
Entitled to only one discharge within an 8 yr period.
Automatic Stay
When filed for BK, auto stay becomes effective against most creditors
The stay stops all collection efforts.
Involuntary Cases
Unsecured creditors may petition a debtor involuntarily into bankruptcy under Chp 7 & Chp 11.
Only creditors owed $15,325, individually or in aggregate, may petition a debtor involuntarily.
If debtor have less than 12 creditors , any one or more owed at least $15,325 may file
If more than 12, at least 3 creditors owed at least $15,325 in aggregate may file.
There is no auto order of relief, since its involuntary. The court will enter an order of relief if the debtor does not object to the petition within 20 days.
If creditor improperly filed an involuntary petition, a court may award the debtor compensatory damages, court costs, attorney’s fees, and even punitive damages if bad faith is shown.
Section 341 Meeting
Meeting of the creditors - held within 20 - 40 days after the order of relief. Debtor must attend meeting.
Exempt Property of BK estate - homestead, car, household goods, animals, life insurance, tools, health aids, government benefits, govt benefits, alimony, support.
Trustee
- powers as a lien creditor - has priority over all creditors except creditors with prior perfected security interests.
- has power to set aside fraudulent transfers made within two years of filing date
- has the power to set aside preferences
Preferential Payment
- transfer made to or for the benefit of a creditor
- on account of an antecedent (existing) debt of the debtor
- made within 90 days prior to the filing of the BK - 1 yr if an insider (family, friend)
- made while the debtor is insolvent
- results in the creditor receiving more than the creditor would have received.
The purpose is to prevent one creditor from being preferred over others.
Exceptions to BK Discharge - under Chp 7 & 11
Taxes, Debt incurred by Fraud, Luxury Goods, Open ended credit, Debt not disclosed, Alimony/Child Support, willful and malicious injury, DUI, fines/penalties, educational loans, denied discharge in prior bankruptcy, HOA dues, restitution for crimes, court fees, debt to pension.
Distribution of Estate
Claimants are paid in the following order:
1 - Secured Claimants - paid up to their collateral
2 - Priority Claimants
3 - Creditors who field claims on time.=
If there is not enough money to pay creditors at a particular level, the remainder is shared pro-rata
Priority Claimants
- First Priority - Support to Spouse and Dependents
- Second Priority - Administrative Expenses
- Third Priority - Claims that accrue between the window of after the involuntary filing and the court order of relief
- Fourth Priority - Employee wages claim up to $12,475 (within 180 days prior to filing)
- Fifth Priority - Employee Benefit Plain up to $12,475 (within 180 days prior to filing)
Sixth Priority - Grain Farmers/Producers - up to $6,150
Seventh Priority - Consumer Deposits of up to 2,775
Eighth Priority - Tax Clains
Ninth Priority - Personal Injury Claims from DUI
Mnemonic - SAG-WEG-CTI
Exceptions to Discharge vs Payment Priorities
Some items are both a priority and an exception; others are one but not the other.
Payment is made according to the priority rules (without regard to whether the debt is excepted to discharge) . After all possible payments are made, any remaining debts are discharged unless they are on the exception to discharge.
Committee for Reorg under Chap. 11
Committee of unsecured creditors - creditors holding 7 largest unsecured claims against the debtor.
The committee can engage with the debtor, check their finances, and participate in reorg plan.
