Chapter 30 – Bankruptcy

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1.Introduction to Credit andSecured TransactionsSecurity Interests in Personal Property Bankruptcy 2010 The McGraw-Hill Companies, Inc. All rights reserved.2. BankruptcySuccess is not built on success.Its built on failure. Its built onfrustration. Sometimes its builton catastrophe.Sumner RedstoneExecutive ChairmanandFounder of Viacom 2010 The McGraw-Hill Companies, Inc. All rights reserved. 3. Learning Objectives The Bankruptcy Act Chapter 7 liquidation Discharge in bankruptcy Chapter 11 -- reorganizations Chapter 12 family enterprises Chapter 13 consumer debt30 - 3 4. Overview Sometimes debtorsare faced withfinancial ruin andthe right to file forbankruptcy isguaranteed by theU.S. Constitution30 - 4 5. The Bankruptcy CodeThe federal Bankruptcy Code provides an organized procedure for insolvent debtors and is supervised by a federal courtPrimary proceedings include:3. Straight bankruptcy (liquidations)4. Reorganizations5. Family farms and commercial fishing operations6. Consumer debt adjustments30 - 5 6. The Bankruptcy CodeAll bankruptcy proceedings begin by filing a petition, either voluntary or involuntaryA voluntary petition may be filed by an individual, partnership, or corporate debtorAn involuntary petition may be filed by creditors of a debtor in an attempt to reach debtors assets in lieu of payment on debts30 - 6 7. The Automatic StayFiling a bankruptcy petition operates as an automatic stay, halting creditor action against a debtor or the property, including: Beginning or continuing judicial proceedings against the debtor Actions to repossess the debtors property; Actions to create, perfect, or enforce a lien against the debtors property; and Setoff of indebtedness owed to debtor before commencement of the bankruptcy proceeding30 - 7 8. Order of ReliefOnce a bankruptcy petition has been filed, the court must first determination that relief should be ordered This step automatic for a voluntary petition or no-contest of involuntary petition If debtor contests involuntary petition, then a trial is held on question of whether court should grant relief.30 - 8 9. Creditor ClaimsTo participate in the estate of a bankrupt debtor, unsecured creditors must file a proof of claim within a certain time, usually six months after the first meeting of creditorsThe Bankruptcy Code declares ten types of claims to have priority over other claims Priority claims are paid after secured creditors but before other unsecured creditors are paid30 - 9 10. Liquidation (Chapter 7) In a liquidation proceeding (straightbankruptcy), the debtor must disclose allproperty s/he owns and surrender thisbankruptcy estate to a bankruptcy trustee The trustee segregates property that debtormay keep and then administers, liquidates,and distributes the remainder of the estate Creditors relative rights determined by law30 - 10 11. The Bankrupts FilingsBankrupt person required to file a list of assets, liabilities, and creditors, plus a statement of bankrupts financial affairsFailure to file the information within 45 days of petition results in automatic dismissal Extension of time possible30 - 11 12. Trustee Duties in Chapter 7 Creditors meet and may elect a trustee Whether appointed or elected, the trustee: Sets aside property a debtor may keep Takes possession of debtors property and has itappraised Examines creditor claims, objecting if necessary Separates unsecured property from the securedand otherwise exempt property30 - 12 13. Trustee Duties The trustee also: Sells debtors nonexempt property as soon aspossible, consistent with best interests of creditors Operates debtors business for a time if necessary Keeps an accurate account of all property andmoney received and promptly deposits money intothe estates accounts30 - 13 14. The Bankruptcy Estate The estate includes all of debtors legal andequitable interests in property Exemptions permit the bankrupt person toretain a minimum amount of assetsconsidered necessary to life and an ability tocontinue to earn a living Exemptions vary from state to state See In Re Kyllogen30 - 14 15. Dismissal for AbuseBankruptcyCode permits court to dismisscases for abuse of process if debtor acted inbad faith or had present or future means topay a significant portion of their current debts Means test determines debtors ability to repaygeneral unsecured claims In re Siegenberg: court dismissed a Chapter 7case on the grounds it was filed in bad faith30 - 15 16. Liens and Business Transactions Debtor may void some liens against exemptproperties that impair the exemptions Debtors may redeem exempt personalproperty from secured creditors by payingthe full value of the collateral at the time theproperty is redeemed A debtor and creditors may engage inordinary business transactions30 - 16 17. Fraudulent Transfers If a debtor transfers property or incurs anobligation with intent to hinder, delay, ordefraud creditors, the transfer is voidable bythe trustee Includes transfers of property for less thanreasonable value See In re Manhattan Investment Fund Ltd.:margin payments to brokerage firm presumed tobe made with intent to hinder, delay, or defraud30 - 17 18. Chapter 11 Reorganization Chapter 11 offers a procedure in which thedebtors financial affairs can be reorganizedrather than liquidated because creditorswould benefit more from the continuation ofa bankrupt debtors business than from theliquidation of debtors property Chapter 11 is available to individuals andbusiness enterprises30 - 18 19. Trustee Duties Under Chapter 11 Rather than liquidating the debtors estate, atrustee for a Chapter 11 proceedingdevelops a plan for handling creditor claimsand the various interests of persons such asshareholders The reorganization plan is essentially acontract between a debtor and its creditorsand may involve recapitalization or givingcreditors some equity30 - 19 20. The Bankruptcy Plan Plan must: (1) divide creditors into classes;(2) set forth how each creditor will be satisfied;(3) state which claims, or classes of claims,are impaired or adversely affected by the plan;& (4) provide equal treatment to each creditorin a particular class, unless creditors in theclass consent to other treatment In re Made In Detroit, Inc.: plan notfeasible, therefore court unable to confirmplan30 - 20 21. The Bankruptcy Plan A reorganization plan must be confirmed bythe court before it becomes effective Plans may be confirmed by voluntaryagreement of creditors or a cram down: Court forces dissenting creditors whose claimswould be impaired to accept the plan if the courtfinds it is fair and equitable to the creditors If confirmed, debtor must implement plan30 - 21 22. Bankruptcy & Ethics Bankruptcy petitions have been filed toavoid obligations under divorce judgments,collective bargaining agreements, and masstort and product liability litigation (asbestos,breast implant, and birth control devicelitigation) These cases arent merely a matter ofeconomics, but are a matter of ethics30 - 22 23. Chapter 12 Chapter 12 is modeled after Chapter 13and is available only for family farmers andfishermen with regular income30 - 23 24. Chapter 13 Consumer Debt Chapter 13 gives individuals who do notwant to be declared bankrupt the right to filea voluntary petition for federal bankruptcyprotection, obtaining the opportunity to paydebts in installments and free of suchproblems as garnishments and attachmentsof property by creditors30 - 24 25. Chapter 13 Consumer Debt Only individuals with regularincomes (including businesssole proprietors) who oweindividually (or with aspouse) liquidated,unsecured debts of lessthan $336,900 and secureddebts of less than$1,010,650 may file forbankruptcy relief30 - 25 26. Chapter 13 Consumer Debt After filing, the debtor submits a plan ofpayment to secured creditors foracceptance 3-5 year payment plan If acceptable to creditors and the court, thecourt will approve the plan and appoint atrustee to carry out the plan In re Burt: unacceptable plan because it was acram-down of creditors secured interest30 - 26 27. Discharge A bankrupt person not guilty of dishonestacts and who fulfilled duties as a bankruptis entitled to a discharge in bankruptcy A discharge relieves the bankrupt person offurther responsibility for dischargeabledebts and gives him a fresh start. A corporation or partnership is not eligiblefor a discharge in bankruptcy30 - 27 28. Discharge Certain debts, including educational loans,are not dischargeable in bankruptcy In re Gerhardt: court denied the request of adebtor that his student loans be dischargedbecause their repayment would constitute anundue hardship to him30 - 28 29. Test Your Knowledge True=A, False = B All bankruptcy proceedings begin by filing avoluntary bankruptcy petition Once a voluntary bankruptcy petition hasbeen filed, the automatic stay prevents acreditor from filing suit against the debtor forrepossession of the property. Chapter 11 is available only to businessenterprises30 - 29 30. Test Your Knowledge True=A, False = B A reorganization plan under Chapter 11requires unanimous consent by all creditorsbefore it becomes effective To participate in the estate of a bankruptdebtor, unsecured creditors must file a proofof claim within a certain time, usually sixmonths after the first meeting of creditors.30 - 30 31. Test Your Knowledge Multiple Choice Days before filing for reorganization,Bernie gave six of his properties to friendsin return for an agreement that they wouldsell the property back to him in five years.Has Bernie done anything wrong? (a) Yes, he must have sold the properties for at least $1 minimum value (b) Yes, he engaged in fraudulent transfer (c) No, properties given to friends are exempt from inclusion in the bankruptcy estate (d) None of the above30 - 31 32. Test Your Knowledge Multiple Choice In JarlCos reorganization, the bankruptcycourt forced dissenting creditors whoseclaims would be impaired to accept thereorganization plan. The court:(a) Improperly abused its power and will be reversedon appeal(b) Prioritized execution of the plan(c) Engaged in a cram down(d) none of the above30 - 32 33. Thought Questions Why did the foundingfathers incorporatebankruptcy into the U.S.Constitution as aconstitutional guarantee? What is your opinion ofthe current bankruptcylaws?30 - 33