R7.3 – Bankruptcy Flashcards
Chapter 7 = Liquidation
Trustee is appointed
If debtor is individual, debtor’s debts generally discharged
If debtor is business, it is dissolves and ceases to operate thus wiping out its debts
Married couples may file jointly
Individual consumer debtor must pass means or general abuse test
– If fail case will be dismissed or converted to Chapter 13 case with individual’s consent
Types of Bankruptcy Cases
Six basic types of bankruptcy cases exist under federal law
- Chapter 7 Liquidation
- Chapter 9 Municipal Debt Adjustment*
- Chapter 11 Reorganization
- Chapter 12 Family Farmers with Regular Income*
- Chapter 13 Adjustments of Debts of Individuals with Regular Income
- Chapter 15 Ancillary and Other Cross-Border Cases
* Not focus of Exam
Chapter 11 = Reorganization
Trustee is not required, but court could appoint one
Debtor remains in possession of his assets and a plan of reorganization is adopted
Business continues; assets are not liquidated
Creditors are paid to the extent possible
Chapter 13 = Debt Adjustment
A trustee is appointed
Debtor or creditors come up with a 3 - 5 year repayment plan
Chapter 15 = Ancillary and Cross-Border Case
US Adoption of UN’s Model Law on Cross-Border Insolvency
Commenced by a “foreign representative” filing a petition for recognition
Who is Eligible to be a Debtor?
Only a person (individual, corporations, partnerships etc.) who resides, or has a place of business, in the US is eligible to be a debtor under the Bankruptcy Code
Railroads, savings institutions, insuance companies, banks, and small business investments companies may not file for bankruptcy under Ch 7
Anyone who can be a debtor (except stockbroker or commodity broker) under Chapter 7 may also be debtor under Chapter 11
Railroads can be debtors under Chapter 11
Credit Counseling
Credit counseling required if debtor is an individual
Counseling occurs no more than 180 days before filing
Counseling requirement waived for:
– Active combat duty
– Disability or incapacitation
– Credit counseling agencies not reasonably available within district
Pre-petition counseling waived if services could not be obtained within 5 days of requesting services
– Must receive counseling within 30 days after filing
Debtors filling under Chapter 7 or Chapter 13 must also complete financial management course before debts discharged.
Debt Relief Agencies
Debt relief agencies = agencies paid compensation to assist consumer debtors in filing bankruptcy petitions
Consumer debtor = debtor whose debts are primarily consumer in nature and has <$164,250 in non-exempt property
Debt relief agency must enter into written contract with debtor within 5 business days after it first provides bankruptcy assistance, and before filing petition
Debt relief agencies may not advise a person to incur more debt in anticipation of a bankruptcy filing
If debt relief agency breaks rules can be subject to action for actual damages, costs, loss of fees, and/or an injunction
Means and General Abuse Tests
Individual consumer debtor must pass means test or general abuse test to be allowed to file Ch 7 case
If fail, case will be dismissed or converted to ch 13 if debtor agrees
Means Test – When to Apply
- Calculate debtor’s current monthly income based on the debtor’s average income over the 6 month prior to filing
- Compare average current monthly income to median income for similarly sized family in debtor’s state
– If debtor’s income + his spouses income < median income = Chapter 7 permitted
– If debtor’s income > state median income = apply means test
Means Test – Application
If debtor’s current income x 60
< $7,475 = Chapter 7 permitted
$7,475 to $12,475 = abuse only if > 25% of non priority claims
> $12,475 = Presumption of abuse – NO Chapter 7, Chapter 13 ok
Don’t include SS payments in current income
Certain expenses are deductible from current income
Note: Ch 7 case can not be dismissed or converted based on means testing if the debtor is a disabled veteran whose indebtedness occurred primarily while he was on active duty or performing homeland defense activities
Means Test – Allowable Deductions from Monthly Income
– Living expenses set by IRS
– Health and disability insurance cost, and health savings account expenses
– Reasonable and necessary payments for the care of elederly, disabled and chronically ill household members or immediate family members
– Expenses to keep debtor and family safe from family violence
– Actual expenses of administering a Chapter 13 plan up to a maximum of 10% of project plan payments
– Expenses up to $1,875 for each dependent child under age 19 to attend elementary or high school
– 1/60th of payment due secured creditors
– 1/60th of amount of priority claim payments
General Abuse Test
Even if debtor qualifies for Chapter 7 he can be denied relief if the debtor acted in “bad faith” or if under the ‘totality of circumstances’ there is abuse
– This can only be raised by a court, trustee, or bankruptcy administrator not a creditor.
Court can also dismiss a Chapter 7 filing by a debtor convicted of a crime involving violence or drug trafficking.
Automatic Stay
When bankruptcy petition filed, automatic stay becomes effective against most creditors
Automatic stay stops all collection efforts
Automatic stay does not apply to criminal prosecutions, paternity suits, and cases brought to establish spousal support or child support obligations.
Duties of Debtor
After a petition is filed, debtor must file:
- List of creditors and their addresses
- Schedule of assets and liabilities
- Schedule of current income and expenses
- Statement of debtor’s financial affairs
- Copy of pay stubs received within 60 days before filing
- Itemized statements of monthly net income
- Disclosure of any reasonably anticipated increase in income or expenditures for 12 months after filing
- Last year’s tax return – Must pay any unpaid taxes before bankruptcy can proceeds
- Record of any interest in education IRA or qualified state tuition program
- For individuals certification showing counseling and any repayment plan developed by counseling agency
- If debtor is individual and has debts secured by property, statement of intent with respect to property
Voluntary Ch 7 & Ch 11 Cases
Debtor files for relief under Ch 7 or Ch 11
Debtor does not have to be insolvent to file but Chapter 7 case will be dismissed or converted if income too high
Spouses may file jointly
Voluntary petition = order for relief
- Case can proceed unless court otherwise
Involuntary Ch 7 & Ch 11 Cases
Debtor involuntary petitioned into bankruptcy proceedings under Chapter 7 and Chapter 11 by creditors
Grounds = debtor not paying debt when due
Farmers and nonprofit charitable organizations can’t be petitioned involuntarily into bankruptcy
Only creditors who are owned individually or in aggregate > $15,325 in unsecured undisputed debt may petition debtor involuntarily into bankruptcy
– Less that 12 creditors: only creditors owed > $15,325 in unsecured debt may file
– 12 or more creditors: At least 3 creditors who are together owed > $15,325 in unsecured debt must join to file
Involuntary petition is not order for relief
– Court will enter order for relief if debtor does not object to petition within 20 days
– If debtor objects, hearing held to determine debtor’s solvency
Note: creditors who become creditors of debtor during involuntary case gap period given high priority in recovering against debtor’s estate.
If creditors improperly filed involuntary petition, court can award debtor compensatory damages, court costs, attorney’s fees, and punitive damages if bad faith shown.
Section 341 Meeting
Section 341 meeting = meeting of creditors
– held within 20 - 40 days after order of relief
Notice must be given to all interested parties
– Creditors
– bankruptcy trustee
– Debtor
Notice must include
– Name, address, and SS# of debtor
– Notice of automatic stay
– Final dates for filing claims
Property of Bankruptcy Estate – Included Property
Debtor’s estate
Income generated from the estate
Property the debtor receives from divorce, inheritance or insurance within 180 days after filing the petition
Property of Bankruptcy Estate – Excluded property
Post-petition earnings
Spendthrift trusts
Contributions to Educational IRAs qualified stated tuition programs made 365+ days before petition filed
Contributions by employees to qualified employee benefit plans
Federal exemptions
Homestead, up to $22,975
Motor vehicle, up to $3,675
Household goods, $575 per item up to $12,250 in total
Unmatured life insurance
Tools of trade or professional books up to $2,300
Health aids
Government benefits
Alimony
Trustee – Trustee’s alien
Trustee is treated as having a lien on all debtor’s property the instant the bankruptcy petition is filed
Trustee’s lien is a judicial lien
Trustee is subordinate to all prior perfected security interest or prior statutory or judicial liens
Trustee has priority over all subsequently perfected security interest
– Exception subsequently perfected security interest that can have retroactive effect e.g. PMSI in non inventory collateral
Trustee has priority over unperfected security interest
Trustee can set aside fraudulent transfers made within 2 years of filing
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Trustees Can Set Aside Preferential Payments
Preferential payments =
- Transfer made to or for the benefit of a credit,
- On account of an antecedent dent of the debtor,
- Made within 90 days prior to filing (1 year if creditor is an insider)
- Made while debtor was insolvent, and
- Results in the creditor receiving more that he would received under Bankruptcy Code
Trustee can take back payment made to a given creditor, and return it to bankruptcy estate
Improper intent is not a requirement to classify a transfer as preferential
Trustee Can Not Set Aside
Transfer made to repay a debt that debtor incurred in the ordinary course of business
PMSI perfected within 30 days after debtor receives possession of collateral
Payments or transfers of property of < $600 by a debtor whose debts are primarily consumer debts
Spousal or child support
Trustee can serve as a professional (tax preparer, accountant, lawyer etc.) for the estate if court approves
Trustee serving as tax preparer may receive additional compensation
Claims Against The Estate
Unsecured creditors must file proof of claim
Shareholders must file proof of interest
Unsecured creditor who fails to file claim can not take part in distribution of debtor’s estates
Creditors with perfected security interest do not have to file
Filed claim or interest automatically allowed by court unless objection raised
Ch 7 – Liquidation
Goal is to give honest debtors a “fresh start”
Discharges most debts owed by debtor
Trustee appointed
Ch 7 Liquidation – Objections to Discharge: Debtor not individuals
Individuals can receive discharge under Ch 7
Entities are dissolved after case
Ch 7 Liquidation – Objections to Discharge: Fraudulent transfers or concealment of property
Transfer occurred in year before of after petition filed
Ch 7 Liquidation – Objections to Discharge: Missing Records Due to Debtor’s Actions
Debtor unjustifiably concealed, falsified, or failed to keep or preserve books and records needed to determine debtors financial condition
Bars debtor from discharge of debt
Ch 7 Liquidation – Objections to Discharge: Prior Discharge in Bankruotcy
Prior discharge was within 8 years
Ch 7 Liquidation – Objections to Discharge: Commission of bankruptcy crime
Debtor knowingly does the following in connection with bankruptcy case – making a false oath or account – presenting or using a false claim – giving or receiving a bribe – withholding records or documents
Ch 7 Liquidation – Objections to Discharge: Failure to explain disappearance or loss of assets
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Ch 7 Liquidation – Objections to Discharge: Refusing to obey lawful order of court
Includes refusing to answer questions
Ch 7 Liquidation – Objections to Discharge: Improper conduct in connection with another case concerning an insider
Improper conduct:
– Fraudulent transfers or concealment of property
– Unjustifiably concealment, falsification , or failure to keep or preserve books and records needed to determine debtors financial condition
– Commission of bankruptcy crime
– Failure to explain disappearance or loss of assets
– Refusing to obey lawful order of court, including refusing to answer questions
Ch 7 Liquidation – Objections to Discharge: Court approves written waiver of discharge
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Ch 7 Liquidation – Objections to Discharge: Failure to complete personal financial management course after filing petition.
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Ch 7 Liquidation – Debts That can Not Be Discharged (Most Commonly Tested)
Debts arising from willful and malicious injury to another or injury due to operating a vehicle while intoxicated
Alimony, child support, property settlement from divorce
Alimony
Debts arising from fraud
Taxes due within 3 years before bankruptcy petition file or debts incurred to pay taxes
Educational Loans
Debts Undisclosed at bankruptcy
– Debts not disclosed by debtor in timely manner, unless creditor had notice of knowledge of bankruptcy
Note: Debts from negligent torts can be discharged
Ch 7 Liquidation – Other Debts That can Not Be Discharged, Part I
Debts incurred for luxury goods
Debt > $600 to single creditor and incurred within 90 days or order for relief
Cash advances obtained under open-end credit plan
– $875+ and within 70 days of order for relief
Fines, penalties, forfeiture owed to a government unit, and claims for court costs
Debts predating a prior bankruptcy that were not discharged
– Exception – reason for denial of discharge in prior case was previous discharge within 8 years
Ch 7 Liquidation – Other Debts That can Not Be Discharged, Part II
Debts incurred due to violations of securities laws
Condo, co-op, and homeowner’s association fees that become due after order for relief
Orders to pay restitution for federal crimes
Fees imposed on a prisoner by a court for filing a legal pleading
Debt owed to a pension, profit-sharing, or stock bonus plan.
Ch 7 Liquidation – Reaffirmation of Discharged Debts
Reaffirmation = Debtor does not want certain debts discharged in bankruptcy
Debtor can reaffirm debt if:
- Agreement to reaffirm before discharged granted
- Agreement contains provision giving debtor right to rescind prior to discharge or within 60 days after agreement is filed by giving note to creditor
- Upon discharge debtor informed that reaffirmation not required by law and advises debtor of legal effect of reaffirmation
Ch 7 Liquidation – Revocation of discharge
Creditor or trustee can request discharge be revoke for the following:
– Debtor obtained the discharge fraudulently
– Debtor acquired property that would constitute property of the estate and fraudulently failed to disclose
– Debtor failed to obey a court order or answer material questions
– Debtor could not explain why he failed to make documents available to auditor.
Ch 7 Liquidation – Distribution of debtor’s estates
Order of distribution:
- Secured claimants
- Priority claimants
- General creditors who filed their claims on time
- Nonpriority claims
Pay each group in full before moving on to the next group if funds still available
If there is insufficient money to pay all creditors at a particular level, the creditors share pro-rata
Ch 7 Liquidation – Priority claimants (in order)
- Support obligations to spouse and children
- Administrative expenses
- Involuntary case gap claims
- Wage claims of each employee up to $12,475 earned within 180 days prior to bankruptcy
- Employee benefit plans contributions for each employee arising within 180 days prior to bankruptcy, up to $12,475 reduced by wage claims
- Grain farmers’ and fishermen’s claims against storage/processing facilities up to $6,150
- Consumer deposits up to $2,775
- Tax claims
- Personal injury claims airing from intoxicated drivers
Ch 11 Reorganization
Create a creditors’ committee or a stockholders’ committee
Creditors’ committee = some or all of 7 largest unsecured claims holder
– Small business debtor can request no creditors’ committee
Stockholders’ committee appointed when debtor is corporation
– Stockholders’ committee = 7 largest holders of equity securities
Trustee generally is not appointed but Court can choose to appoint trustee.
– Trustee selected usually when there is fraud, dishonesty, incompetence, or gross mismanagement by the debtor
No trustee – debtor remains in possession of his assets because debtor presumed to be in pest position to run business
Note: Ch7 – Trustee required; Ch 11 – Trustee not required
Ch 11 Reorganization – Reorganization Plan
Unless a trustee is appointed, the debtor has an exclusive right to file a plan during the first 120 days after the order for relief is effective
Creditors may file reorganization plan if:
– a trustee has been appointed, or
– the debtor has not filed a plan within 120 days, or
– the debtor has filed a plan but has not obtained acceptance of the plan by every impaired class with 180 days of the entry of the order of relief.
Ch 11 Reorganization – Reorganization Plan: Content of Plan
Classification of claims by priority, impairment etc.
Description of treatment to be accorded each impaired class
Equal treatment of each claimant within a class
Ways to implement plan
Ch 11 Reorganization – Reorganization Plan: Acceptance of plan
Each creditor or security holder must be given opportunity to accept or reject plans
Class of impaired claims accepts if majority of the number of their members, and members holding 2/3+ debt amount agree
Class of impaired interests accepts if members holding 2/3+ debt amount agree
Ch 11 Reorganization – Reorganization Plan: Confirmation
Court will confirm plan if
- Accepted by all impaired classes
- Provides payment for all 2nd priority administrative expenses, and 3rd priority involuntary case gap creditors in cash
- Provides payment in full in cash of 3rd - 7th priority claims unless class has accepted plan
- Regular cash installment payments of 8th priority tax claims that is equal to amount of claim
- Payment in full for domestic support obligations that become payable after petition filed
- If debtor is individual, and unsecured creditors object to confirmation, the property to be distributed = amount of claim of debtor’s projected disposable income for the greater of 5 years or period covered by plan
- Plan is feasible
Ch 11 Reorganization – Reorganization Plan: Cram Down
Cram down = court confirm plan even though not accepted by all impaired classes
At least one impaired class accepts
Court finds plan not unfairly discriminatory and is fair and equitable with respect to dissenting classes
Ch 11 Reorganization – Reorganization Plan: Effect of Confirmation
Binding on all creditors, holders, and debtor
Once confirmed, debtor pays according to plan
Discharges debtor form pre-confirmation debts (with some exceptions)
Terminates automatic stay
Chapter 15 Ancillary and Cross-Border Case – Commencement of Ancillary Proceeding
- Foreign representative files petition for recognition of a foreign proceeding
– Must show existence of foreign proceeding and appointment and authority of foreign representative - US courts issues order recognizing the foreign proceeding as “foreign main proceeding” or “foreign non-main proceeding”
– Foreign main proceeding = country were debtor’s main interests are located
– Foreign non-main proceeding = country other than one where debtor’s main interest are located - Automatic stay and other provisions of Bankruptcy Code kick in upon recognition of foreign main proceeding
- US court can issue preliminary relief as soon as petition of recognition filed
Chapter 15 Ancillary and Cross-Border Case – Foreign Representative’s Powers
Can operate debtor’s business
Once recognized, can seek additional relief from bankruptcy court including bringing full-blown bankruptcy case under Ch 7 and Ch 11
Can participate in pending US insolvency and other cases where debtor is a party
Chapter 15 Ancillary and Cross-Border Case – Prohibition Against Discrimination
Ch 15 prohibits discrimination against foreign creditors
Exception – certain foreign governments and tax claims which may be governed by treaty
Chapter 15 Ancillary and Cross-Border Case – Requirements of notice and cooperation
Ch 15 requires notice to foreign creditors concerning US bankruptcy case including notice of right to file claims
Under Ch 15, US courts and trustees must cooperate to the maximum level possible with foreign courts and representative.
