Chapter 7 Section 3: Bankruptcy

Question 1

What are the most important types of bankruptcy?

Answer 1

7, 11, 13

Question 2

What is chapter 7?

Answer 2

Liquidation - trustee appointed

Question 3

Who can fall under chapter 7?

Answer 3

Individual, partnership, corporation

Question 4

What does the trustee do for chapter 7?

Answer 4

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

Question 5

What is chapter 13?

Answer 5

Adjustments of debts, only for individuals.

Question 6

What happens under chapter 13?

Answer 6

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

Question 7

What is chapter 11?

Answer 7

No liquidation, no trustee

Question 8

What happens under chapter 11?

Answer 8

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.

Question 9

What is chapter 15 used for?

Answer 9

Ancillary and cross-border cases

Question 10

What is the means test?

Answer 10

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.

Question 11

What are the steps to the means test?

Answer 11

1. 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.
2. Means test - average monthly income less allowed expenses times 60. If less than 7475, 7 is permitted. If greater than 12475, presumption of abuse

Question 12

What if, in the means test, the income is between 12475 and 7475?

Answer 12

Abuse only if amount equals 25% of nonpriority claims

Question 13

What are the two exceptions to the presumption of abuse?

Answer 13

If you can show special circumstances like serious illness or active military duty, or if you are a disabled veteran

Question 14

Who may not file chapter 7?

RIBS

Answer 14

Railroads
Insurance
Bank
Savings and loans/stockbroker

Question 15

What is the credit counselling requirement?

Answer 15

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

Question 16

What are the duties of debt relief agencies?

Answer 16

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

Question 17

What is automatic stay?

Answer 17

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.

Question 18

What does a debtor need to file after the petition?

Answer 18

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

Question 19

Which cases can be voluntary or involuntary?

Answer 19

7: both
11: both
13: voluntary only

Question 20

Does a debtor need to be insolvent to file?

Answer 20

No, but they do need to pass income tests

Question 21

Can spouses file jointly?

Answer 21

Yes, to avoid duplicative fees

Question 22

What are the grounds for a creditor to file an involuntary case?

Answer 22

Generally not paying debts when due (default)

Doesn’t apply to farmers or charities

Question 23

What creditors need to join the petition for an involuntary case?

Answer 23

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

Question 24

Does an involuntary petition constitute an order for relief?

Answer 24

No. There is a gap between the filing and the order for relief, called the involuntary case gap

Question 25

What happens to creditors that arise during the involuntary case gap?

Answer 25

They are given high priority

Question 26

What is the section 341 meeting?

Answer 26

The creditors’ meeting - held within 20-40 days of the order for relief and includes all the interested parties. Everyone must be given notice.

Question 27

What assets are included in the bankruptcy estate?

Answer 27

Everything at the time of filing, and everything from divorce, inheritance, or insurance within 180 days after the filing.

Question 28

What is excluded from the bankruptcy estate?

Answer 28

Post-petition earnings, spendthrift trusts, educational IRAs, and state tuition programs
Things necessary to live

Question 29

What is the power over fraudulent transfers?

Answer 29

The trustee looks over all transfers within 2 years of the filing, to make sure it’s all legit.

Question 30

What happens to preferences?

Answer 30

Trustee sets them aside, so one creditor isn’t preferred over others.

Question 31

What transfers can’t be set aside by the trustee?

Answer 31

Transfers in the ordinary course of business
PMSI perfected within 30 days after the debtor receives possession of collateral
Domestic support obligations

Question 32

Under chapter 7, what are the exceptions to discharge?

WAFTED

Answer 32

Willful and malicious injury
Alimony
Fraud
Taxes
Educational loans
Debts undisclosed in the petition

Question 33

Can you reaffirm discharged debts?

Answer 33

Yes, but they’ll make sure that you’re not doing so under duress.

Question 34

Can there be a revocation of discharge?

Answer 34

Yes, if you do things in bad faith

Question 35

What are the three basic categories of claimants?

Answer 35

Secured
Priority
General

Question 36

What is the order of priority claimaints?

SAG WEG CTI

Answer 36

1. Support obligations to spouse and children
2. Administrative expenses
3. Involuntary case Gap claims
4. Wage claims up to 12,475
5. Employee benefit plans up to 12,475 (less wage claims)
6. Grain farmers and fishermen up to 6,150
7. Consumer deposits up to 2,775
8. Tax claims
9. Personal injury claims arising from intoxicated driving

Question 37

What if you’re in the middle of one level of priority and run out of money?

Answer 37

Distribute it on that level pro rata

Question 38

What is the committee of unsecured creditors for chapter 11?

Answer 38

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

Question 39

When in chapter 11 is a trustee appointed?

Answer 39

If there is fraud, dishonesty, or gross mismanagement

Question 40

Who files the plan under chapter 11?

Answer 40

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

Question 41

Who needs to accept the chapter 11 plan?

Answer 41

2/3 of creditors/stockholders

Question 42

When will the court confirm the plan?

Answer 42

If accepted by all impaired classes

Question 43

What happens when the chapter 11 plan is confirmed?

Answer 43

It is binding on everyone, regardless of whether or not they accepted it.