Chapter 7 Section 3: Bankruptcy Flashcards
What are the most important types of bankruptcy?
7, 11, 13
What is chapter 7?
Liquidation - trustee appointed
Who can fall under chapter 7?
Individual, partnership, corporation
What does the trustee do for chapter 7?
Collects debtor’s assets, liquidate them, and use the proceeds to pay off creditors to the extent possible
If an individual, the rest of the debts are discharged (with a few exceptions)
If a corporation or partnership, it is dissolved
What is chapter 13?
Adjustments of debts, only for individuals.
What happens under chapter 13?
Debtor repays all or a portion of their debts over a 3-5 year period. There is no liquidation, but a trustee oversees the proceeding. Any remaining debts at the end are discharged
What is chapter 11?
No liquidation, no trustee
What happens under chapter 11?
Reorganization - there is hope, there is no liquidation, and a trustee is not required. Usually used by business, but available to individuals. They remain in possession of their assets. Creditors are paid as possible, and they remain in business.
What is chapter 15 used for?
Ancillary and cross-border cases
What is the means test?
Used for dismissal or conversion of a chapter 7 case. When a chapter 7 case by an individual consumer debtor is started, it can be dismissed or (with the debtor’s consent) converted to a case under chapter 13 if they find that granting relief under chapter 7 would constitute abuse.
What are the steps to the means test?
- Calculate income - average the income for six months preceding. If equal or less than state median income, 7 is permitted. If greater, apply the means test.
- Means test - average monthly income less allowed expenses times 60. If less than 7475, 7 is permitted. If greater than 12475, presumption of abuse
What if, in the means test, the income is between 12475 and 7475?
Abuse only if amount equals 25% of nonpriority claims
What are the two exceptions to the presumption of abuse?
If you can show special circumstances like serious illness or active military duty, or if you are a disabled veteran
Who may not file chapter 7?
RIBS
Railroads
Insurance
Bank
Savings and loans/stockbroker
What is the credit counselling requirement?
If the debtor is an individual, it can’t happen more than 6 months before the filing. You also have to complete a financial management course
What are the duties of debt relief agencies?
These agencies are paid to assist consumer debtors in filing bankruptcy petitions.
They enter into a written contract with a debtor, they may not advise them to enter into more debt prior to bankruptcy
What is automatic stay?
It becomes effective against most creditors in either a voluntary or involuntary case. It stops most collection efforts, but doesn’t apply to criminal prosecutions or family court obligations.
What does a debtor need to file after the petition?
List of creditors and their addresses
Schedule of assets and liabilities at FMV
Schedule of current income and expenditures
Copies of pay stubs
Statement of monthly net income
Copy of tax returns
Which cases can be voluntary or involuntary?
7: both
11: both
13: voluntary only
Does a debtor need to be insolvent to file?
No, but they do need to pass income tests
Can spouses file jointly?
Yes, to avoid duplicative fees
What are the grounds for a creditor to file an involuntary case?
Generally not paying debts when due (default)
Doesn’t apply to farmers or charities
What creditors need to join the petition for an involuntary case?
If fewer than 12 creditors, one or more must be owed 15,325 in the aggregate
If more than 12, three in the aggregate must be owed at lease 15,325
Does an involuntary petition constitute an order for relief?
No. There is a gap between the filing and the order for relief, called the involuntary case gap
What happens to creditors that arise during the involuntary case gap?
They are given high priority
What is the section 341 meeting?
The creditors’ meeting - held within 20-40 days of the order for relief and includes all the interested parties. Everyone must be given notice.
What assets are included in the bankruptcy estate?
Everything at the time of filing, and everything from divorce, inheritance, or insurance within 180 days after the filing.
What is excluded from the bankruptcy estate?
Post-petition earnings, spendthrift trusts, educational IRAs, and state tuition programs
Things necessary to live
What is the power over fraudulent transfers?
The trustee looks over all transfers within 2 years of the filing, to make sure it’s all legit.
What happens to preferences?
Trustee sets them aside, so one creditor isn’t preferred over others.
What transfers can’t be set aside by the trustee?
Transfers in the ordinary course of business
PMSI perfected within 30 days after the debtor receives possession of collateral
Domestic support obligations
Under chapter 7, what are the exceptions to discharge?
WAFTED
Willful and malicious injury Alimony Fraud Taxes Educational loans Debts undisclosed in the petition
Can you reaffirm discharged debts?
Yes, but they’ll make sure that you’re not doing so under duress.
Can there be a revocation of discharge?
Yes, if you do things in bad faith
What are the three basic categories of claimants?
Secured
Priority
General
What is the order of priority claimaints?
SAG WEG CTI
- Support obligations to spouse and children
- Administrative expenses
- Involuntary case Gap claims
- Wage claims up to 12,475
- Employee benefit plans up to 12,475 (less wage claims)
- Grain farmers and fishermen up to 6,150
- Consumer deposits up to 2,775
- Tax claims
- Personal injury claims arising from intoxicated driving
What if you’re in the middle of one level of priority and run out of money?
Distribute it on that level pro rata
What is the committee of unsecured creditors for chapter 11?
Willing people holding the seven largest unsecured claims against the creditor.
If a corporation, it can be an equity security holders’ committee with seven largest stockholders
They can consult, investigate, and participate in reorganization
When in chapter 11 is a trustee appointed?
If there is fraud, dishonesty, or gross mismanagement
Who files the plan under chapter 11?
The debtor within 120 days, or the creditor if:
Trustee has been appointed, they haven’t filed within 120 days, or the plan from the debtor isn’t good enough
Who needs to accept the chapter 11 plan?
2/3 of creditors/stockholders
When will the court confirm the plan?
If accepted by all impaired classes
What happens when the chapter 11 plan is confirmed?
It is binding on everyone, regardless of whether or not they accepted it.
