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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