Bankruptcy Flashcards
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 or fraud
- Debts not listed in the bankruptcy filing
- Debts from causing Willful & malicious injury to other
- Debts from Theft or Embezzlement
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 or fruad
- Debts not listed in the bankruptcy filing
- Debts from causing Willful & malicious injury to other
- Debts from Theft or Embezzlement
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
Voluntary or involuntary filing
Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
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 $14,425
If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $14,425
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
Railroads
Banking & insurance companies
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
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test
Your income must be below the median income for your state (Note – median; i.e. middle; not mean; i.e. average)
Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
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
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
Prior association with the debtor is allowed
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 order of priority given to unsecured creditors in a bankruptcy?
- BK Trustee and Attorney fees get paid before all other unsecured credit cards
- Salaries required to continue business once BK proceedings begin
- Any claims filed resulting from business operations that occur after involuntary BK is filed
- Wages owed to employees
- Retirement contributions within last 6 months
- Consumer deposits for undelivered goods
- Child Support & Alimony
- Taxes
- Other general unsecured claims
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 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
What are ways for which Preferential Transfers can be avoided (preferring 1 creditor over others) by the Trustee of a bankruptcy estate?
In other words, what are situations in which a BK trustee can intercept a payment that a debtor made to creditor that was disallowed?
To disaffirm the prior payment to a creditor, 5 tests must be met:
- Must have a Transfer for property that benefits a creditor
- Transfer must have been for an Antecedent debt - an existing
BK trustee can’t intercept these types of debts:
a. New debts are NOT antecedent debts (a contemporaneous exchange for new value)
b. Secured debts are not antecedent debts - can’t prepay
c. Paying current bills in the ordinary course of business aren’t antecedent debts - can’t prepay
d. Consumer debts of $825 or less are NOT antecedent debts
3. Transfer must have been made within 90 DAYS of the filing day
a. May be up to 1 year prior to filing if creditor was an insider
4. Transfer must have been made while debtor was Insolvent
a. Insolvency is normally presumed if the transfer was made within 90 days
5. Creditor received MORE than what would have received in bankruptcy
What kinds of actions from the debtor would prevent them from filing bankruptcy (denial of discharge)?
Certain actions by debtor will preclude any discharge (denial of discharge):
- Received previous discharge within 8 years of filing
- Unjustifiably failed to keep adequate books & records
- Attempted to hide assets within 1 YEAR of filing
- Refusal to explain a loss of asset or refusal to obey a court order
- Making false oath or account
What are the defenses that a Surety can have to beat a Creditor?
Defenses of a Surety vs. a Creditor:
- Lack of writing of consideration
- Payment or tender of performance by Debtor
- Fraud by the Creditor
Note: Fraud by the Debtor is NOT a good defense unless the Creditor was aware of the fraud.
Fraud by Debtor does NOT relieve Surety of their obligation
Note: Surety may NOT use defenses that are personal to debtor (infancy, insanity, or bankruptcy)
- Any action by Creditor which increases the risk of a Surety releases it to the extent of the increased risk
a. Binding extension of time by Creditor - releases the Surety 100%
b. If Creditor delays on collection (doesn’t agree to extend time), Surety is NOT released
c. Release of one cosuretor by a Creditor without consent of the other cosureties, increases their risk by the amount of contribution they could have collected
d. If Creditor releases Debtor without reserving rights against Surety - Surety is released
Note: If Creditor reserved rights against the Surety, the Surety is NOT released
What are Creditor Pre-judgment remedies?
Creditor debt collection remedies
Creditor Pre-judgment remedies are actions by a creditor prior to receiving a judgment. There are 2 types:
- Attachment - puts a lien on debtor’s property so it’s available if a judgment is obtained (required a hearing before a judge & creditor may be required to post a bond)
- Pre-judgment garnishment - actions by a creditor after getting a judgment
What is Writ of Execution?
Creditor debt collection remedies
Writ of Execution is a type of creditor post-judgment remedy whereby a debtor is served by a sheriff demanding payment of a judgment if returned “unsatisfied” creditor can levy on debtor’s property and fore a public sale
What is a Garnishment?
Creditor debt collection remedies
Garnishment is when creditor collects money from debtor’s wages or bank accounts
What is a Fraudulent conveyance?
Creditor debt collection remedies
Fraudulent conveyance is a phony transfer of property by debtor to a 3rd party to stop creditors from attaching it (3rd party is expected to return property to debtor at a later time)
Indications of a fraudulent conveyance include:
- Debtor remains in possession of the property
- Debtor retains an equitable interest in the property
- Transfer was done secretly
What is a Composition of Creditors?
Debtor Debt Collection Relief
Composition of Creditors is an agreement between a debtor and creditors to discharge the debtor’s debts in return for a partial payment by the debtor
- Debts are only discharged when the debtor completes ALL partial payments
- A composition of creditors is ONLY binding on the creditors who agree to it
What is an Assignment for Benefit of Creditors?
Debtor Debt Collection Relief
Assignment for Benefit of Creditors is when a debtor transfers property to a trustee to pay creditors on a pro-rata basis
- Doesn’t require the agreement of other creditors
- Doesn’t discharge debtor’s debts
- Protects assigned property from attachment by other or new creditors
