Bankruptcy Debt

Question 2

What are the basic actions that occur in a bankruptcy?

Answer 2

Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt Filing halts collection activity; grants “automatic stay” (with certain exceptions) Stops creditors from suing debtor

Question 3

For what debts does bankruptcy NOT stop collections?

Answer 3

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

Question 4

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

Answer 4

It doesn’t, because the corporation is a separate legal entity. Under bankruptcy, corporations are dissolved Under bankruptcy, individuals are discharged

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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 7

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

Answer 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

Question 8

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

Answer 8

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

Question 9

What entities are disallowed from involuntary Chapter 7 bankruptcy filings?

Answer 9

Charities Farms

Question 10

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

Answer 10

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 11

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

Answer 11

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

Question 12

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

Answer 12

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 13

What are the duties and abilities of a bankruptcy trustee?

Answer 13

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 14

How and when is a bankruptcy trustee appointed?

Answer 14

Optional – Creditors decide Can be elected by creditors or can be appointed by the court Prior association with the debtor is allowed

Question 15

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

Answer 15

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 16

When can preferential transfers be voided by a bankruptcy (BK) trustee?

Answer 16

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

Question 17

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

Answer 17

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 18

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

Answer 18

1. BK Trustee and Attorney fees get paid before all other unsecured credit cards 2. Salaries required to continue business once BK proceedings begin 3. Any claims filed resulting from business operations that occur after involuntary BK is filed 4. Wages owed to employees 5. Retirement contributions within last 6 months 6. Consumer deposits for undelivered goods 7. Child Support & Alimony 8. Taxes 9. Other general unsecured claims

Question 19

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

Answer 19

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 20

What is the bankruptcy estate?

Answer 20

The pool of assets available to creditors until liquidation

Question 21

What assets are exempt from creditors in a bankruptcy estate?

Answer 21

Social security Disability payments Unemployment, Child Support, Alimony, Wages, Pensions, Annuities to the extent that they provide reasonable support for debtor and dependents

Question 22

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

Answer 22

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

Question 23

What is a garnishment with respect to a bankruptcy?

Answer 23

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

Question 24

What is a mechanics lien?

Answer 24

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 25

What is an artisan’s lien?

Answer 25

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 26

What is a surety (co-signing)?

Answer 26

A third party agrees to be liable for a loan Example: A parent co-signs on their child’s car loan

Question 27

How is a surety liable in a transaction?

Answer 27

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 28

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

Answer 28

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 29

What is a guarantor?

Answer 29

Similar to surety, but a guarantor is secondarily liable

Question 30

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

Answer 30

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