Chapter 22 Notes

Question 1

The bankruptcy code is contained in this Title of the United States Code (USC) and has eight “chapters.” Chapters 1, 3, and 5 include general definitions and the provisions governing case administraton and procedures, creditors, the debtor, and the estate. These three chapters of the Code normally apply to all types of bankruptcies. Four chapters of the Code set forth the most important types of relief that debtors can seek. (Chapters 7, 11, 12, and 13).

Answer 1

Title 11 of the United States Code

Question 2

1. Chapter 7
2. Chapter 11
3. Chatper 12 and Chapter 13

Answer 2

Types of Bankruptcy Relief

Question 3

Provides for liquidation proceedings- that is, the selling of all nonexempt asssets and the distribution of the proceeds to the debtor’s creditors.

Answer 3

Chapter 7

Question 4

Governs reorganization.

Answer 4

Chapter 11

Question 5

• Chapter 12- for family farmers and family fishermen
• Chapter 13- for individuals
• These provide for adjustment to the debts of parties with regular income.

Answer 5

Chapter 12 and Chapter 13.

Question 6

The sale of the nonexempt assets of a debtor and the distribution of the funds received to creditors.

• Chapter 7 relief
• A debtor in a in a liquidation bankruptcy turns all assets over to a bankruptcy trustee, who sells the nonexempt assets and distributes the proceeds to creditors. With certain exceptions, the remaining debts are then discharged and the debtor is relived of the obligation to pay the debts.
• Any person may be a debtor under Title 7
• Railroads, insurance companies, banks, savings and loan associations, investment companies licensed by the US Small Business Administration and credit unions cannot be Title 7 debtors.
• Petition in bankruptcy

Answer 6

Liquidation

Question 7

Includes individuals, partnerships, and corporations.

Answer 7

Person

Question 8

A person appointed by the court to manage the debtor’s funds.

Answer 8

Bankruptcy Trustee

Question 9

The termination of a bankruptcy debtor’s obligation to pay debts.

Answer 9

Discharge

Question 10

A document that is filed with a bankruptcy court to intiate bankruptcy proceedings.

• If debtor files this, it is voluntary bankruptcy
• If one or more creditors file this to force the debtor into bankruptcy, it is involuntary bankruptcy.

Answer 10

Petition in Bankruptcy

Question 11

In bankruptcy proceedings, the suspension of almost all litigation and other action by creditors against the debtor or the debtor’s property. The stay is effective the moment the debtor files a petition in bankruptcy.

• Whether the peitition is filed voluntarily or involuntarily.
• Prohibits a creditor from taking any act to collect, assess, or recover a claim against the debtor that arose before the filing of the petition.
• Willful violation- any injured party, including the debtor, is entitled to recover actual damages, costs, and attorney’s fees and may be entitled to punitive damages as well.

Answer 11

Automatic Stay

Question 12

1. Collection efforts can continue for domestic-support obligations, which include any debt owed to or recoverable by a spouse, a child of the debtor, that child’s parent or guardian, or governmental unit.
2. Proceedings against the debtor related to divorce, child custody or visitation, domestic violence, and support enforcement are not stayed.
3. Investigations by a securities regulatory agency can continue.
4. Certain statutory liens for property taxes are not stayed.

Answer 12

Exceptions to the Automatic Stay

Question 13

A secured creditor or other party in interest can petition to the bankruptcy court for this. If a creditor or other party requests relief from the stay, the stay will automatically terminate sixty days after the request, unless the court grants an extension or the parties agree otherwise.

Answer 13

Requests for Relief from the Automatic Stay

Question 14

Terminates 45 days after the creditors’ meeting unless the debtor redeems or reaffirms certain debts. This means that the debtor cannot keep secured property (such as a financed vehicle), even if he or she continues to make payments on it, without reinstating the rights o the secured party to collect on the debt.

Answer 14

Automatic Stay on Secured Property

Question 15

If the debtor had two or more bankruptcy petitions dismissed during the prior year, the Code presumes this. In such a situation, the automatic stay does not go into effect until the court determines that the petition was filed in good faith.

Answer 15

Automatic Stay- Bad Faith

Question 16

Promptly after the order for relief has been entered, a trutee is appointed. The basic duty of the trustee is to collect the debtor’s available estate and reduce it to cash for distribution, preserving the interests of both the debtor and the unsecured creditors. This requires that the trustee be accountable for administering the debtor’s estate.

• The Code gives the trustee certain powers, stated in both general and specific terms. These powers must be exercised within 2 years after the order for relief has been entered.

Answer 16

The Bankruptcy Trustee

Question 17

The trustee is required to review promptly all materials filed by the debtor to determine if there is substantial abuse.

• Within 10 days after the first meeting of the creditors, the trustee must file a statement as to whether the case is presumed to be an abuse under the means test.
• When there is presumption of abuse- trustee must either file a motion to dismiss the petition (or convert it to a chpater 13 case) or file a statement explaining why a motion would not be appropriate.
• If debtor owes a domestic support obligation- the trustee must provide written notice of the bankruptcy to the claim holder.

Answer 17

Review for Substantial Abuse- Bankruptcy Trustee

Question 18

The purpose of the test is to keep upper-income people from abusing the bankruptcy process by filing for Chapter 7. This test forces more people to file for Chapter 13 bankruptcy rathan than have their debts discharged under Chapter 7.

Answer 18

Means Test

Question 19

Has the power to require the persons holding the debtor’s property at the time the petition is filed to deliver the property to the trustee.

• Strong-arm-power
• Powers of avoidance
• These powers apply to voidable rights available to the debtor, preferences, and fraudulent transfers by the debtor.
• If the trustee does not take action to enforce one of these rights, the debtor in a liquidation bankruptcy can enforce it.

Answer 19

Trustee’s Powers

Question 20

Code provides that the trustee has powers equivalent to those of certain other parties, such as a creditor who has a judicial lien.

Answer 20

Strong-Arm-Power

Question 21

Enable the trustee to set aside (avoid) a sale or other transfer of the debtor’s property and take the property back for the debtor’s estate.

• The debtor shares most of this power.

Answer 21

Powers of Avoidance

Question 22

Any reason that a debtor can use to obtain the return of his or her property can be used the the trustee a well. The grounds for recovery include fraud, duress, incapacity, and mutual mistake.

Answer 22

Voidable Rights

Question 23

In bankruptcy proceedings, a property for transfer or payment made by the debtor that favors one creditor over others.

• An insolvent debtor generally must have tranferred property for a preexisting debt during the 90 days before the filing the petition in bankruptcy. The transfer must have given the creditor more than the creditor would have had received as a result of the bankruptcy proceedings.
• If the preferred creditor has sold the property to an innocent third party, the trustee cannot recover the property from the innocent party. The trustee can generally force the preferred creditor to pay the value of the property, however.

Answer 23

Preferences

Question 24

In the context of bankruptcy, a creditor who has received a preferential tranfer from a debtor.

Answer 24

Preferred Creditor

Question 25

Any individual, partner, partnership, or officer or director of a corporation (or relative of one of these) who has a close relationship with the debtor.

• The avoidance power of the trustee is extended to transfers made within one year before filing.
• If transfer was fraudulent- trustee can avoid transfers made within 2 years before filing.
• The trustee must prove that the debtor was insolvent at the time the tranfer occured.

Answer 25

Preferences to insiders

Question 26

To be a preference, the transfer must be made in exchange for something other than the current consideration.

• Many courts do not consider a debtor’s payment for services rendered within 15 days prior to the payment to be a preference.
• If creditor receives payment in the ordinary course of business, the trustee in bankruptcy cannot recover the payment.
• The Code permits a consumer-debtor to transfer any property to a creditor up to a total value of $6255 without the transfer constituting a preference.
• Payments of domestic-support debts do not constitute a preference.
• Payments required under a plan created by an approved credit-counseling agency do not constitute preference.

Answer 26

Transfers that do not Constitute Preferences

Question 27

One whose debts result primarily from the purchases of goods for personal, family, or household use.

Answer 27

Consumer-Debtor

Question 28

A trustee can avoid fraudulent transfers or obligations if:

1. They were made within 2 years of the filing of the peitition, or
2. They were made wtih actual intent to hinder, delay, or defraud a creditor.

Answer 28

Fraudulent Transfers

Question 29

The creditors and the debtor formulate a plan under which the debtor pays a portion of its debts and the rest of the debts are discharged. The debtor is allowed to continue in business.

• generally corporate
• Any debtor (except a stockbroker or commodities broker) who is eligible for Chapter 7 relief is normally eligible for relief under this chapter.
• Same principals that govern Chapter 7 also govern Chapter 11

Answer 29

Chapter 11- Reorganization

Question 30

A procedure for small business debtors whose liabilities do not exceed 2.49 million and who do not own or manage real estate. This enables a debtor to avoid appointment of a creditors’ committee and also shortens the filing periods and relaxes certain other requirements. It is also less costly.

Answer 30

Fast Track Chapter 11 Relief

Question 31

• Family farmer= one whose gross income is at least 50% farm dependent and whose debts are at least 50% farm related. Total debt must not exceed $4,031,575. A partnership or close corporation that is at least 50% owned by a farm family can also qualify as a family farmer.
• Family fisherman= one whose gross income is at least 50% dependent on commercial fishing operations and whose debts are at least 80% related to commercial fishing. Total debt must not exceed $1,868,200

Answer 31

Family Farmers and Fishermen- Chapter 12

Question 32

Provides for the adjustment of debts of an individual with regular income. Individuals with regular income who owe fixed unsecured debts of less than $383,175 or fixed secured debts of less than $1,149,525 may take advantage of bankruptcy repayment plans.

• Salaried employees and sole proprietors, as well as invididuals who live on welfare, Social Security, fixed pensions, or investment income.
• Many small business owners can file under either Chapter 11 or Chapter 13
• Typically less expensive and less complicated than reorganization or liquidation proceedings.

Answer 32

Individuals Repayment Plan- Chapter 13