Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 39: BankruptcyChapter 39: Bankruptcy

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 39: BankruptcyChapter 39: Bankruptcy

ByBy

Richard A. MannRichard A. Mann

&&

Barry S. RobertsBarry S. Roberts

Topics Covered in this ChapterTopics Covered in this Chapter

I. I. Federal Bankruptcy LawFederal Bankruptcy LawA. Case Administration-Chapter 3A. Case Administration-Chapter 3B. Creditors, the Debtor, and the B. Creditors, the Debtor, and the C. Liquidation–Chapter 7C. Liquidation–Chapter 7D. Reorganization–Chapter 11D. Reorganization–Chapter 11E. Adjustment of Debts of Family Farmer-Ch. 12E. Adjustment of Debts of Family Farmer-Ch. 12F. Adjustment of Debts of Individuals-Ch. 13F. Adjustment of Debts of Individuals-Ch. 13

II.II. Creditors' Rights & Debtors’ Relief Creditors' Rights & Debtors’ Relief Outside of BankruptcyOutside of BankruptcyA. Creditors' RightsA. Creditors' RightsB. Debtor's ReliefB. Debtor's Relief

Case Administration– Ch. 3Case Administration– Ch. 3 Commencement of the Case - the filing Commencement of the Case - the filing

of a voluntary or involuntary petition of a voluntary or involuntary petition begins jurisdiction of the bankruptcy begins jurisdiction of the bankruptcy court.court.– Voluntary Petitions - Voluntary Petitions - available to any available to any

debtor even if solvent.debtor even if solvent.– Involuntary Petitions - Involuntary Petitions - may be filed only may be filed only

under Chapter 7 or 11 if the debtor is under Chapter 7 or 11 if the debtor is generally not paying his debts as they generally not paying his debts as they become due.become due.

Case AdministrationCase Administration Dismissal - Dismissal - the court may dismiss a case for the court may dismiss a case for

cause after notice and a hearing; under cause after notice and a hearing; under Chapters 12 and 13 the debtor has an Chapters 12 and 13 the debtor has an absolute right to have his case dismissed.absolute right to have his case dismissed.

Automatic Stay - Automatic Stay - prevents attempts by prevents attempts by creditors to recover claims against the debtor.creditors to recover claims against the debtor.

Trustee - Trustee - responsible for collecting, responsible for collecting, liquidating, and distributing the debtor's liquidating, and distributing the debtor's estate.estate.

Meeting of Creditors - Meeting of Creditors - debtor must appear debtor must appear and submit to an examination of her financial and submit to an examination of her financial situation.situation.

Creditors, the Debtor, and the Creditors, the Debtor, and the Estate—Ch. 5Estate—Ch. 5

Creditor - any entity that has a claim against Creditor - any entity that has a claim against the debtor.the debtor.

Claim - Claim - a right to payment.a right to payment.– Secured Claim - Secured Claim - claim with a lien on property of claim with a lien on property of

the debtor.the debtor.– Unsecured Claim - Unsecured Claim - portion of a claim that portion of a claim that

exceeds the value of any property securing that exceeds the value of any property securing that claim.claim.

Priority of Claims - Priority of Claims - the right of certain claims the right of certain claims to be paid before claims of lesser rank.to be paid before claims of lesser rank.

DebtorsDebtors Debtor's Duties - Debtor's Duties - the debtor must file the debtor must file

specified information, cooperate with specified information, cooperate with the trustee, and surrender all property of the trustee, and surrender all property of the estate.the estate.

Debtor's Exemptions - Debtor's Exemptions - determined by determined by State or Federal law, depending upon State or Federal law, depending upon the State.the State.

Discharge - Discharge - relief from liability for all relief from liability for all debts except those the Bankruptcy debts except those the Bankruptcy Code specifies as not dischargeable.Code specifies as not dischargeable.

The EstateThe Estate

All legal and equitable interests of the All legal and equitable interests of the debtor in nonexempt propertydebtor in nonexempt property..

Trustee as Lien CreditorTrustee as Lien Creditor

Trustee gains the rights and powers of Trustee gains the rights and powers of creditor with judicial lien (an interest in creditor with judicial lien (an interest in property, obtained by court action, to property, obtained by court action, to secure payment of a debt).secure payment of a debt).

Voidable PreferencesVoidable Preferences

Bankruptcy Code invalidates certain Bankruptcy Code invalidates certain preferential transfers made before the preferential transfers made before the date of bankruptcy from the debtor to date of bankruptcy from the debtor to favored creditors.favored creditors.

Fraudulent TransfersFraudulent Transfers

Trustee may avoid fraudulent transfers Trustee may avoid fraudulent transfers made on or within one year before the made on or within one year before the date of bankruptcy.date of bankruptcy.

Statutory LiensStatutory Liens

Trustee may avoid statutory liens which Trustee may avoid statutory liens which first become effective on insolvency, are first become effective on insolvency, are not perfected at commencement of not perfected at commencement of case, or are for rent.case, or are for rent.

ProceedingsProceedings

Distribution of the Estate - Distribution of the Estate - in this in this order: (1) secured creditors, (2) creditors order: (1) secured creditors, (2) creditors entitled to a priority, (3) unsecured entitled to a priority, (3) unsecured creditors, and (4) the debtor.creditors, and (4) the debtor.

Discharge - Discharge - granted by the court unless granted by the court unless the debtor has committed an offense the debtor has committed an offense under the Bankruptcy Code or has under the Bankruptcy Code or has received a discharge within six years.received a discharge within six years.

Reorganization—Chapter 11 Reorganization—Chapter 11

Purpose - to preserve a distressed Purpose - to preserve a distressed entity and its value as a going concern.entity and its value as a going concern.

Proceedings - Proceedings - debtor usually remains debtor usually remains in possession of the property of the in possession of the property of the estate.estate.

PlanPlan Acceptance of Plan -Acceptance of Plan -requires a requires a

specified proportion of creditors to specified proportion of creditors to approve the plan.approve the plan.

Confirmation of Plan - Confirmation of Plan - requires (1) requires (1) good faith, (2) feasibility, (3) cash good faith, (2) feasibility, (3) cash payments to some creditors, and payments to some creditors, and usually (4) acceptance by creditors.usually (4) acceptance by creditors.

Effect of Confirmation - Effect of Confirmation - binds debtor binds debtor and creditors and discharges the and creditors and discharges the debtor.debtor.

Adjustment of Debts of a Family Adjustment of Debts of a Family Farmer—Ch. 12Farmer—Ch. 12

PurposePurpose - to permit a family farmer to file a - to permit a family farmer to file a repayment plan that will discharge him from repayment plan that will discharge him from most debts.most debts.

Proceedings - Proceedings - available to a farmer who available to a farmer who receives at least 50 percent of his income receives at least 50 percent of his income from farming and who meets certain debt from farming and who meets certain debt limitations.limitations.

Confirmation of Plan - Confirmation of Plan - same as a Chap. 13.same as a Chap. 13. Discharge - Discharge - after a debtor completes all after a debtor completes all

payments under the plan.payments under the plan.

Adjustment of Debts of IndividualsAdjustment of Debts of Individuals—Ch. 13—Ch. 13

PurposePurpose - to permit an individual debtor to - to permit an individual debtor to file a repayment plan to discharge most file a repayment plan to discharge most debts.debts.

Confirmation of Plan - Confirmation of Plan - requires (1) good requires (1) good faith, (2) that the value of property distributed faith, (2) that the value of property distributed to creditors be not less than the amount that to creditors be not less than the amount that would be paid them under Chapter 7, (3) that would be paid them under Chapter 7, (3) that secured creditors accept the plan, and (4) secured creditors accept the plan, and (4) that the debtor be able to make all payments that the debtor be able to make all payments and comply with the plan.and comply with the plan.

Discharge - Discharge - after a debtor completes all after a debtor completes all payments under the plan.payments under the plan.

Comparison of Bankruptcy Comparison of Bankruptcy ProceedingsProceedings

Chapter 7 Chapter 11 Chapter 12 Chapter 13

Objective Liquidation Reorganization Adjustment Adjustment

EligibleDebtors

Most debtors Most debtors,including railroads

Family farmerwho meets certaindebt limitations

Individual withregular incomewho meets certaindebt limitations

Type ofPetition

Voluntary orinvoluntary

Voluntary orinvoluntary

Voluntary Voluntary

Trustee Usually selectedby creditors;otherwiseappointed

Only if court ordersappointment forcause; creditors thenmay select trustee

Appointed Appointed

Collection and Distribution of the Collection and Distribution of the Debtor’s EstateDebtor’s Estate

All of debtor’s nonexempt property

Voidablepreferences

Fraudulenttransfers

Debtor’s EstateAdministered by

Trustee

Securedcreditors

Creditorswith priority

Unsecured creditorswho file claims

on time

Unsecured creditorswho file claims

tardily

Debtor receivesremaining assets

Statutoryliens

Property subject totrustee’s right as

a lien creditor

Creditors' Rights Outside of Creditors' Rights Outside of BankruptcyBankruptcy

Prejudgment RemediesPrejudgment Remedies - include - include attachment and garnishment.attachment and garnishment.

Postjudgment Remedies - Postjudgment Remedies - include writ include writ of execution and garnishment.of execution and garnishment.

Debtor's Relief Outside of Debtor's Relief Outside of BankruptcyBankruptcy

CompositionsCompositions - agreement between - agreement between debtor and two or more of her creditors debtor and two or more of her creditors that each will take a portion of his claim that each will take a portion of his claim as full payment.as full payment.

Assignment for Benefit of Creditors -Assignment for Benefit of Creditors -voluntary transfer by the debtor of some voluntary transfer by the debtor of some or all of his property to a trustee, who or all of his property to a trustee, who applies the property to the payment of applies the property to the payment of all the debtor's debts.all the debtor's debts.

Debtor's Relief Outside of Debtor's Relief Outside of BankruptcyBankruptcy

Statutory Assignment - Statutory Assignment - provides a provides a voluntary release of balance of claims voluntary release of balance of claims from creditors who accept partial from creditors who accept partial payments made by the trustee for the payments made by the trustee for the debtor.debtor.

Equity Receivership - Equity Receivership - receiver is a receiver is a disinterested person appointed by the disinterested person appointed by the court to collect and preserve the court to collect and preserve the debtor's assets and income and to debtor's assets and income and to dispose of them at the direction of the dispose of them at the direction of the court.court.

Bankruptcy Filings-1997Bankruptcy Filings-1997

70%

1% 0.1%29%

Chapter 7 Chapter 11 Chapter 12 Chapter 13

Source: Administrative Office of the U.S. Courts, 1997.