Bankruptcy & Debt Flashcards
What are bankruptcy basics?
- Bankruptcy gives debtors protection from their creditors and stops them from either permanently
(Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt - Filing halts all collection; grants automatic stay
- Stops creditors from suing debtor
Bankruptcy does not stop collections on what?
o Student Loans o Income Taxes from previous 3 years o Alimony & Child Support o Debts/judgments resulting from drunk driving o Pension Obligations o Debts relating to SOX Violations o Debts arising from illegal activities o Debts not listed in the Bankruptcy Filing
Does owning a bankrupt corporation doesn’t affect the owner’s ability to file Bankruptcy?
No, Corporations are dissolved and individuals are discharged
What does bankruptcy stop related to property included in Bankruptcy Estates?
Stops judgment lien on property included in Bankruptcy Estate
What must Bankruptcy attorneys file?
A statement showing their payment for Bankruptcy services so that the court can review and make sure that the legal fees are reasonable
A Bankruptcy discharge will be denied if…?
A debtor fails to keep good records or falsifies documents,
What is CHAPTER 7 BANKRUPTCY (LIQUIDATION)?
Chapter 7 discharges all non-exempt debt
How often can Chapeter 7 be filed?
Can only be filed every 8 years
o Remember: 8 looks like the letter B
What are Businesses disallowed from Chapter 7 Bankruptcy?
o Railroads
o Banks
o Insurance Companies
o Savings & Loans
o Think – 7th Inning and your team needs RBIs
What must occur for Voluntary Filing of Chapter 7?
o Must pass Means Test
Your State income must be below the Median
Note – Median, not Mean
Credit Card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What is Involuntary Filing of Chapter 7?
o In some cases, your creditors can force you into Chapter 7 or Chapter 11 Bankruptcy
o 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
o If 12+ unsecured creditors
At least 3 must file
Claims must be in excess of $15,325
o If less than 12 unsecured creditors
* Only 1 must file
* Claim(s) must be in excess of $15,325
o Upon filing, a judge will declare an order for relief unless the debtor protests
o Businesses disallowed from involuntary filings
* Charities
* Farming
o If the debtor pays the court-assigned bond to keep a property in an involuntary Bankruptcy, they can reclaim possession of their property from the interim Bankruptcy trustee
What is an exam trick about bankruptcy?
Remember – If you see an answer on the CPA Exam that states that Bankruptcy can be commenced against any debtor, that option is WRONG.
What is CHAPTER 11 BANKRUPTCY (BUSINESS REPAYMENT)?
- 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 is CHAPTER 13 BANKRUPTCY (PERSONAL REPAYMENT)?
- 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 BANKRUPTCY TRUSTEES?
Optional – Creditors decide
o Can be elected by creditors
o Can be appointed by the court
What do Bankruptcy Trustees Represents?
They represent Bankruptcy Estate and
o Can sue
o Can be sued
What must a bankruptcy trustee do?
Paid a reasonable amount for services
o Fee cannot exceed certain amount of Estate
Can the bankruptcy trustee have prior associations with the debtor?
No
What do bankruptcy trustees do?
They oversees Bankruptcy and watches for
o Preferential creditor payments
Trustee can void payments on antecedent (past) debts that occur within 90 days of a Bankruptcy filing
A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value
Example: A company orders inventory and pays for it upon arrival. 2 Months later, they declare Bankruptcy. This is not voidable because it was an even exchange/new value and wasn’t payment for a prior debt.
A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (a.k.a. a voidable preference)
Preferential Transfers related to bankruptcy trustees can be voided if?
Made within One Year of Bankruptcy to insider
Corporate officers/directors
Partners
Relatives
Made within 3 Months of Bankruptcy noninsider
Creditor receives larger payment than
Bankruptcy liquidation would have granted
Bankruptcy trustees do what?
Oversees priority transfer of assets to creditors
What are Secured Creditors?
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 unsecured Creditors Order of Priority?
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
Other general unsecured claims
Remember – Taxes actually have a low priority and are only slightly more important in a Bankruptcy than other unsecured creditors (like a CPA firm that is owed money for services not related to the Bankruptcy)
If a Landlord files 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 Bankruptcy Estate?
It is the pool of assets available to creditors until liquidation
What are Bankruptcy Estate Exemptions?
o Creditors are not allowed to take
Social Security
Disability payments
Unemployment, Child Support, Alimony, Wages, Pensions, Annuities to the extent that they provide reasonable support for debtor and dependents Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 Bankruptcy become part of the Bankruptcy Estate – i.e. creditors can get their hands on it for repayment
