Chapter 35Chapter 35BANKRUPTCYBANKRUPTCY

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Bankruptcy LawBankruptcy Law

Jurisdiction over bankruptcy cases is in U.S. district Jurisdiction over bankruptcy cases is in U.S. district courts, which may refer all cases and related courts, which may refer all cases and related proceedings to adjunct bankruptcy courts.proceedings to adjunct bankruptcy courts.

Three bankruptcy proceedings are available: Three bankruptcy proceedings are available: Chapter 7 (consumer liquidation), Chapter 7 (consumer liquidation), Chapter 11 (business reorganization) and Chapter 11 (business reorganization) and Chapter 13 (consumer time payment plan).Chapter 13 (consumer time payment plan).

Automatic stayAutomatic stay prevents creditors from taking legal prevents creditors from taking legal action against the debtor.action against the debtor.

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Chapter 7 Chapter 11 Chapter 13

Trustee Yes No Yes

Eligible persons:IndividualsPartnershipsCorporations

YesYesYes

YesYesYes

YesNoNo

Voluntary Yes Yes Yes

Involuntary Yes, except Farmers andNonprofit

Yes, except Farmers andNonprofit

No

Exemptions Railroads, insurancecompanies, S&L’s, smallbusinesses (under SBA),municipalities, farmers

Same as Chapter 7 exceptfor railroads are eligiblefor Chapter 11 and stockbrokers are ineligible forChapter 11

Only individuals

Requirements —Voluntary

Debts Debts unsecured <$290,250secured <$871,550

<

*special sections (chapter 9 - municipalities; chapter 12 - farmers)

How Bankruptcy is DeclaredHow Bankruptcy is Declared

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Trustee in BankruptcyTrustee in Bankruptcy

The trustee is elected by the creditors.The trustee is elected by the creditors.Trustee acquires the rights of the debtor. Trustee acquires the rights of the debtor. Voidable Transfers: Trustee can avoid Voidable Transfers: Trustee can avoid

(cancel) transfers of property.(cancel) transfers of property. Preferential Transfers to creditors.Preferential Transfers to creditors. ‘‘Insider’ transfers. Insider’ transfers.

Proof of Claim.Proof of Claim.Priority of Claims. Priority of Claims.

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DismissalOrder

ofRelief

Appt. of

Trustee

Collection of Assets

List of

Creditors

Creditors* meeting

Property Rights (180 days)

*Automatic with Involuntary Petition

Petition—either voluntary or involuntary

Exemptions

Voidable preference

Evaluation of Claims

Executory Contracts (60 days)

Priority of creditors

Discharge Sale and Payment

Anatomy of a Bankruptcy CaseAnatomy of a Bankruptcy Case

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Chapter 7Chapter 7

A liquidation proceeding under Chapter 7 may A liquidation proceeding under Chapter 7 may be either be either voluntaryvoluntary or or involuntaryinvoluntary. . A voluntary case is commenced by the debtor’s A voluntary case is commenced by the debtor’s

filing a petition with the bankruptcy court. filing a petition with the bankruptcy court. An involuntary case is commenced by the creditors’ An involuntary case is commenced by the creditors’

filing a petition with the court. filing a petition with the court. • If there are 12 or more creditors, at least 3 whose If there are 12 or more creditors, at least 3 whose

unsecured claims total $10,775 or more must sign the unsecured claims total $10,775 or more must sign the involuntary petition. involuntary petition.

• If there are fewer than 12 creditors, any creditor whose If there are fewer than 12 creditors, any creditor whose unsecured claim is at least $10,775 may sign the petition.unsecured claim is at least $10,775 may sign the petition.

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Creditors and ClaimsCreditors and Claims

Bankruptcy law regulates the way creditors Bankruptcy law regulates the way creditors present their claims and the assets of the debtor present their claims and the assets of the debtor are to be distributed in payment of the claims. are to be distributed in payment of the claims.

Certain property of the debtor is exempt from Certain property of the debtor is exempt from the claims of creditors.the claims of creditors.

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Creditors and ClaimsCreditors and Claims

Proof of Claim.Proof of Claim. Creditors object to discharge of debt and demand Creditors object to discharge of debt and demand

payment.payment. Must be filed within 90 days of bankruptcy petition Must be filed within 90 days of bankruptcy petition

filing.filing.

Priority of Claims.Priority of Claims. Creditors with security interests (such as a mortgage Creditors with security interests (such as a mortgage

or lien) are not affected.or lien) are not affected.

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Creditors and ClaimsCreditors and Claims

UnsecuredUnsecured claims are paid in this order: claims are paid in this order: (1) administrative expenses; (1) administrative expenses; (2) claims arising in the ordinary course of the debtor’s (2) claims arising in the ordinary course of the debtor’s

business; business; (3) wage claims, with limits; (3) wage claims, with limits; (4) contributions to employee benefit plans; (4) contributions to employee benefit plans; (5) claims by consumer creditors; (5) claims by consumer creditors; (6) certain taxes; and (6) certain taxes; and (7) general creditors. (7) general creditors.

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Distribution PrioritiesDistribution Priorities

1. Secured creditors (to the extent of repossession)

2. Administration costsAttorneys, Accountants, Trustees, Appraisers

3. Claims arising in ordinary course of business after bankruptcy petition is filed but before of relief (involuntary)

4. Employee wages (not officers)$4,000 maximum3 months preceding petition

5. Contributions to benefit plans$4,000 maximum (reduced by wages received) 180 days preceding bankruptcy

6. Consumer deposits$1,800 maximum

7. Alimony and child support

8. Taxes

9. Unsecured creditors

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Discharge in BankruptcyDischarge in Bankruptcy

The decree terminating bankruptcy proceedings The decree terminating bankruptcy proceedings is generally a is generally a dischargedischarge that releases the debtor that releases the debtor from most debts. from most debts.

Exemptions from Discharge:Exemptions from Discharge: Income taxes, student loans, loans obtained by Income taxes, student loans, loans obtained by

fraud, alimony, judgments based on willful and fraud, alimony, judgments based on willful and malicious injury. malicious injury.

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1. Taxes within Three Years of Filing Bankruptcy Petition2. Liability for Obtaining Money or Property by False Pretenses3. Willful and Malicious Injuries4. Debts Incurred by Driving DWI5. Alimony, Maintenance, or Child Support6. Unscheduled Debts (unless actual notice)7. Debts Resulting from Fraud as a Fiduciary (embezzlement)8. Government Fines or Penalties Imposed within Three Years Prior9. Educational Loans Due within Seven Prior Years10. Prior Bankruptcy Debts in Which Debtor Waived Discharge11. Presumption on Luxury Goods: $1,100 Goods; $1150 Cash.12. Reaffirmation Agreements Writing

Filed with CourtNot rescinded prior to Discharge

Non-Dischargeable DebtsNon-Dischargeable Debts

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Reorganization & Payment PlansReorganization & Payment Plans

Individuals, partnerships, and corporations in Individuals, partnerships, and corporations in business may be reorganized under Chapter 11 business may be reorganized under Chapter 11 so that the business may continue to operate. so that the business may continue to operate. A plan for reorganization must be approved by the A plan for reorganization must be approved by the

court.court.Individual debtors with a regular income may Individual debtors with a regular income may

adopt extended-time payment plans under adopt extended-time payment plans under Chapter 13 for the payment of debts. Chapter 13 for the payment of debts. A plan for extended-time payment must also be A plan for extended-time payment must also be

confirmed by the court.confirmed by the court.

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Owners andcreditors haveonly such rightsas are specifiedin the plan

Confirmation ofplan — Approval bycourt

Identifies ownershipinterests and debtsnot affected byadoption of the plan

Identifies ownershipinterests and debtsaffected by adoptionof the plan

Specifies whatwill be done tointerests andclaims affected

Fileplan for

reorganizationof thedebtoror

debtor

or

party ininterest

committeeof creditors

Reorganization under Chapter 11Reorganization under Chapter 11