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Legal & Regulatory Aspects of FP > Chapter 16 - Bankruptcy > Flashcards

Chapter 16 - Bankruptcy Flashcards

1
Q

What are the three primary goals of the U.S. Bankruptcy Code?

A
  • To preserve as much of the debtor’s property as possible
  • To divide the debtor’s assets fairly between the debtor and creditors
  • To divide the creditor’s share of the assets fairly among them.
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2
Q

How many types of Bankruptcy are there? What chapters are they?

A 
Five
Chapter 7
Chapter 9
Chapter 11
Chapter 12
Chapter 13
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3
Q

What are Bankruptcy Chapters 1, 3, & 5?

A

Administrative rules that apply to all types of Bankruptcy proceedings.

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4
Q

What are the two main types of goals for bankruptcy?

A

Rehabilitation
or
Liquidation

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5
Q

What bankruptcy chapters have the objective of rehabilitation for the debtor?

A

Chapters 11 & 13

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6
Q

Which bankruptcy is also known as Straight Bankruptcy?

A

Chapter 7 - Liquidation

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7
Q

Which bankruptcy chapter’s topic is Municipal Bankruptcies?

A

Chapter 9

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8
Q

Which bankruptcy chapter’s topic is Reorganization?

A

Chapter 11

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9
Q

Which bankruptcy chapter’s topic is Family Farmers?

A

Chapter 12

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10
Q

Which bankruptcy chapter’s topic is Consumer Reorganization?

A

Chapter 13

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11
Q

Which bankruptcy chapter’s topic is Liquidation?

A

Chapter 7

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12
Q

If Chapter 11 and 13 both deal with reorganization, what is the difference between the two?

A

Chapter 11 is for Wealthy Individuals and businesses. It allows for businesses to continue.
Chapter 13 is for the general debtor.

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13
Q

What is the description for a Chapter 7 - Liquidation bankruptcy?

A

The bankrupt’s assets are sold to pay creditors. If the debtor owns a business, it terminates. The creditors have no right to the debtor’s future earnings.

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14
Q

What is the description for a Chapter 11 - Reorganization bankruptcy?

A

This chapter is designed for businesses and wealthy individuals. Businesses continue to operate, and creditors receive a portion of both current assets and future earnings.

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15
Q

What is the description for a Chapter 13 - Consumer Reorganization bankruptcy?

A

Offers reorganization for the typical consumer. Creditors usually receive a portion of the individual’s current assets and future earnings.

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16
Q

In the last 15 years, what portions of bankruptcies have been by consumers?

A

95%. The remainder was mostly businesses.

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17
Q

What is Straight Bankruptcy?

A

Also known as liquidation, this form of bankruptcy mandates that the bankrupt’s assets be sold to pay the creditors, but the bankrupt has no obligation to share future earnings.

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18
Q

What is Bankrupt?

A

Someone who cannot pay his debts and files for protection under the Bankruptcy Code

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19
Q

What is a Debtor?

A

Another term for Bankrupt (person)

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20
Q

Who can file bankruptcy?

A

Any

  • individual, partnership, corporation, or other business that
  • lives, conducts business, OR owns a property in the US.
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21
Q

How does a Bankruptcy petition begin?

A

A case begins with the filing of a bankruptcy petition in federal district court.

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22
Q

How can debtors begin bankruptcy?

A

Willingly or Involuntarily

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23
Q

What are the two requirements INDIVIDUALS must meet before filing bankruptcy?

A
  • Within 180 days before the filing, an individual must undergo credit counseling with an approved agency
  • Individuals debtors may file under Chapter 7 only if they earn less than the median income in their state OR they cannot afford to pay back at least $7,025 over FIVE years.

Generally, all other debtors must file under Chapters 11 or 13 (Requiring bankrupt to repay some debt)

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24
Q

What is the test to allow people with income higher than $7,025 to see if they may still be eligible to file under Chapter 7 bankruptcy?

A

BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) Means Test

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25
Q

Is it necessary to be insolvent to file bankruptcy?

A

No

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26
Q

What documents must a voluntary petition include? 6

A

-Petition - Begins the Case. Easy Form
-List of Creditors - Names and Addresses
-Schedule of Assets and Liabilities - List of the debtor’s assets and debts
-Claim of Exemptions - List of all assets the debtor is entitles to keep
-Schedule of Income & Expenditures - The debtor’s job, income, and expenses.
Statement of Financial Affairs- A summary of the debtor’s financial history and current financial condition. In particular, the debtor must list any recent payments to creditors and any other property held by someone else for the debtor.

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27
Q

Who files an involuntary petition?

A

A debtor’s creditors.

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28
Q

What are the requirements that an involuntary petition must meet? 3

A
  • The debtor must owe at least $14,425 in unsecured claims to the creditors who file.
  • If the debtor has at least 12 creditors, 3 or more must sign the petition. If the debtor has fewer than 12, any of them may file a petition
  • The creditors must allege either that a custodian for the debtor’s property has been appointed in the prior 120 days or that the debtor has generally not been paying debts that are due.
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29
Q

What is an Order for Relief?

A

An official acknowledgement that a debtor is under the jurisdiction of the bankruptcy court. This is the second step for a creditor after they have filed an involuntary petition.

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30
Q

What must a debtor supply for a case of involuntary bankruptcy?

A

Everything they must under voluntary bankruptcy after the court receives the petition and order for relief.

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31
Q

What is a US Trustee?

A

The person that oversees the administration of bankruptcy law in a region.

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32
Q

Who appoints a U.S. Trustee?

A

The U.S. Attorney General.

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33
Q

Do creditors get a say in a debtor’s trustee?

A

Yes. The creditors have a right to elect a trustee, who is responsible for gathering the bankrupt’s assets and dividing them among the creditors, but often do not both, allowing the U.S. Trustee to make the selection.

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34
Q

What is Proof of Claim?

A

A form stating the name of a an UNSECURED creditor and the amount of the claim against a debtor.

Secured creditors don’t file this.

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35
Q

What is an Automatic Stay?

A

Prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed.

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36
Q

What is the third step of bankruptcy?

A

After the petition and order for relief, the
-U.S. Trustee calls a meeting of all the creditors. At this meeting, the bankrupt must answer (under oath) any question the creditors pose about his financial situation. If the creditors want to elect a trustee, they do so now.

37
Q

What it the purpose of an automatic stay?

A

To stop creditors from hounding the debtor to allow him breathing space to sort our his affairs sensibly.

38
Q

When does an automatic stay go into affect?

A

As soon as the petition was filed.

39
Q

What is a Bankruptcy Estate?

A

The new legal entity created when a debtor files a bankruptcy petition. All of the debtor’s existing assets pass into the estate.

40
Q

What property does not pass into a bankruptcy estate?

A

Protected property and new property that the debtor acquires after the petition is filed.

41
Q

Who is permitted to have exempt property?

A

Only individual debtors

42
Q

What is the purpose of exempt property?

A

It saves the debtor from destitution during the bankruptcy process and provides the foundation for a new life when the process is over.

43
Q

What is the only area of the Bankruptcy code that defers to state laws?

A

Exempt Property - Although the code lists various types of exempt property, it permits states to opt our of the federal system and define a different set of exemptions.

44
Q

When can a debtor take advantage of a state’s set of exempt items?

A

Only when they have lived in the state for two years prior to bankruptcy/

45
Q

What is Preference?

A

When a debtor unfairly pays creditors immediately before filing a bankruptcy petition.

46
Q

How much equity of a person’s home is exempt property federally?

A

$21,625

47
Q

What can a trustee do with preferences?

A

Void any transfer to a creditor that took place in the 90-day period before the filing of a petition.

48
Q

When is a transfer fraudulent?

A

If it is made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditors. The trustee can void any fraudulent transfer.

49
Q

What are the three classes in which all creditors claims fall under?

A
  1. Secured Claims
  2. Priority Claims
  3. Unsecured Claims
50
Q

How are a debtors’ estates funds distributed?

A

In order of class. Secured, priority, and then unsecured. A higher class is paid in full before the next class receives any payment at all. The debtor is entitles to any funds remaining after all the claims have been paid.

51
Q

How are Secured Claims fundamentally different than the other classes?

A

They are not paid out of the general funds of the estate but by selling a specific asset.

52
Q

What are four major categories of priority claims? How is the money divided?

A

Listed out of rank order:
-Alimony and child support
-Administrative expenses (such as fees to the trustee, lawyers, and accountants)
-Back wages to the debtor’s employees for work performed during the 180 days prior to the date of the petition.
-Income and property taxes
They are paid on category at a time, fully, before the next group receives anything.

53
Q

What is a Fresh Start?

A

After the termination of a bankruptcy case, creditors cannot make a claim against the debtor for money owned before the initial bankruptcy petition was filed. (Whether or not they received any payment)

54
Q

What is Discharge?

A

The bankrupt no longer has an obligation to pay a debt.

55
Q

What does the Code do to avoid abuses of discharge?

A

It limits both the types of debts that can be discharged and the circumstances under which discharge can take place. In addition, a debtor must complete a course on financial management before receiving a discharge.

56
Q

What are debts that among those that can never be discharged? 9 (The debtor remains liable in full until they are paid)

A
  • Recent income and property taxes
  • Money obtained by fraud
  • Cash advances on credit cards totaling more than $875 that an individual debtor takes out within 70 days before the order of relief.
  • Debts omitted from the Schedule of Assets and Liabilities.
  • Money owed for alimony, maintenance, or child support
  • Debts stemming from intentional and malicious injury
  • Debts that result from a violation of securities laws
  • Student loans (unless repayment would cause undue hardship to the debtor)
  • Income Taxes
57
Q

What are other circumstances under which debts cannot be discharged?

A
  • Business Organizations - Under Chapter 7 (but not the other Chapters), only the debts of individuals can be discharged, not those of business organizations. Once its assets have been distributed, an organization must cease operation. If the company resumes business again, it becomes responsible for all of its prefiling debts.
  • Revocation - A court can revoke a discharge within one year if it discovers the debtor engaged in fraud or concealment.
  • Dishonesty or Bad-Faith Behavior - The court may deny discharge altogether if the debtor has made fraudulent transfers, hidden assets, or otherwise acted in bad faith.
  • Repeated filings for bankruptcy - A debtor who has received a discharge under Chapter 7 or 11 cannot receive another discharge under Chapter 7 for at least EIGHT years after the prior filing. And a debtor who received a prior discharge under Chapter 13, cannot in most cases receive on under a Chapter 7 for at least SIX years.
58
Q

What is Reaffirm?

A

To promise to pay a debt even after it is discharged.

59
Q

When must a reaffirmation be approved by the court?

A

If the debtor is not represented by an attorney or if, as a result of the reaffirmed debt, the bankrupt’s expenses exceed his income.

60
Q

Why do businesses prefer Chapter 11 bankruptcy over Chapter 7?

A

Chapter 11 doesn’t require them to dissolve at the end as Chapter 7 does.

61
Q

In Chapter 11, is there a trustee, and if so who?

A

Chapter 11 does not require a trustee. The bankrupt can in essence serve as trustee.

62
Q

What is Debtor In Possession?

A

The bankrupt, who can in essence, serve as trustee.

63
Q

What are the two jobs for a Debtor in Possession?

A
  1. To operate the business

2. To develop a plan of reorganization.

64
Q

When is a trustee chosen for a business going through Chapter 11?

A

When the debtor is incompetent or uncooperative.

In this case, the creditors can elect the trustee, but if they do not choose to do so, the U.S. Trustee appoints one.

65
Q

Why is the Creditor’s Committee important during Chapter 11?

A

Because typically there is no neutral trustee to watch over the committee’s interest. The committee may play a role in developing the plan of reorganization.

66
Q

Who does the U.S. Trustee typically appoint to the Creditor’s committee?

A

The seven largest UNsecured creditors to the committee. Though the court has the right to require the appointment of some small-business creditors as well.

67
Q

What happens in Chapter 11 after the petition is filed and the automatic stay goes into effect?

A

Develop a Plan of Reorganization.

68
Q

Who proposes the Plan of Reorganization?

A

For the first 120 days after the order of relief, the debtor has the exclusive right to propose a plan. If the shareholders and creditors accept it, then the bankruptcy case terminates. If the creditors or shareholders reject the debtor’s plan, they may file their own version.

69
Q

Who has the right to vote on the plan of reorganization?

A

All of the creditors and shareholders. In preparation for the vote, each creditor and shareholder is assigned to a class (Secured, Priority, Unsecured)

70
Q

When will the bankruptcy court approve the plan of reorganization?

A

If a MAJORITY of EACH CLASS votes in favor of it
AND
if the ‘yes’ votes hold at LEAST TWO-THIRDS of the TOTAL DEBT in that class.

71
Q

What is Cramdown?

A

When a court confirms the plan without all the classes voting for it.

72
Q

What happens if the court rejects the plan of reorganization?

A

The creditors must develop a new one.

73
Q

Who owns the assets in a Chapter 11 Bankrupcty estate?

A

The debtor owns the assets free of all obligations except those listed in the plan.

74
Q

What is considered a small business to get special treatment under Chapter 11?

A

Business with less than 2 million in debt.

75
Q

What is different for small business in Chapter 11?

A

It is a speedier process. After the order of relief, the bankrupt has the exclusive right to file a plan within 180 days. The court must confirm or reject the plan within 45 days after filing.

76
Q

What happens if the deadlines aren’t met for Chapter 11 when dealing with small businesses?

A

The case can be converted to Chapter 7 or dismissed.

77
Q

What is the purpose of Chapter 13?

A

To rehabilitate an individual debtor.

78
Q

Who is Chapter 13 not available for?

A

For businesses or to individuals with more than $360,475 in unsecured debts or $1,081,400 in secured debts.

79
Q

What must an individual have to be eligible for Chapter 13?

A

A source of income.

80
Q

How does a Chapter 13 start?

A

The debtor must file a voluntary petition.

81
Q

What does a trustee do in Chapter 13?

A

Supervise the debtor
-Serves as a central clearinghouse for the debtor’s payments to creditors. (Trustee can keep up to 10% of payments for this service)

82
Q

When must a debtor file a plan of payment?

A

Within 15 days after filing the voluntary petition

83
Q

Do creditors get to vote on a Chapter 13 plan?

A

No

84
Q

What must the court ensure about a debtor’s Chapter 13 payment plan

A
  • The plan is feasible and the bankrupt will be able to make the promised payments
  • The plan does not extend beyond three years without good reason and in no event lasts longer than five years.
  • If the plan does not provide for the debtor to pay off creditors in full, then all of the debtor’s disposable income for the next five years must go to creditors; and
  • The debtor is acting in good faith, making a reasonable effort to pay obligations.
85
Q

What happens if the debtor violates the plan in Chapter 13?

A

All of the debts are revived and the creditors have a right to recover them under Chapter 7.

86
Q

When do debts become permanently discharged under Chapter 13?

A

Only when the bankrupt fully complies with the plan.

87
Q

When is the debtor not eligible for discharge under Chapter 13?

A

When the debtor has received a discharge under Chapter 7 or 11 within the prior four years or under Chapter 13 within the prior two years.

88
Q

What happens to a secured credit who’s debt is not fully satisfied with the collateral is sold?

A

The amount the creditor is still owed over what the collateral fetches, is unsecured, so gets paid with the rest of that class of debts.

Legal & Regulatory Aspects of FP (26 decks)

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