Introduction to Credit and
Secured Transactions
Security Interests in Personal Property
Bankruptcy
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Bankruptcy
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Success is not built on success. It's built on failure. It's built on frustration. Sometimes its built on catastrophe.
Sumner RedstoneExecutive Chairman
andFounder of Viacom
Learning Objectives
The Bankruptcy ActChapter 7 – liquidationDischarge in bankruptcyChapter 11 -- reorganizationsChapter 12 – family enterprisesChapter 13 – consumer debt
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Sometimes debtors are faced with financial ruin and the right to file for bankruptcy is guaranteed by the U.S. Constitution
Overview
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The federal Bankruptcy Code provides an organized procedure for insolvent debtors and is supervised by a federal court
Primary proceedings include: 1. Straight bankruptcy (liquidations)
2. Reorganizations
3. Family farms and commercial fishing operations
4. Consumer debt adjustments
The Bankruptcy Code
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All bankruptcy proceedings begin by filing a petition, either voluntary or involuntary
A voluntary petition may be filed by an individual, partnership, or corporate debtor
An involuntary petition may be filed by creditors of a debtor in an attempt to reach debtor’s assets in lieu of payment on debts
The Bankruptcy Code
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Filing 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 debtor’s property; Actions to create, perfect, or enforce a lien
against the debtor’s property; and Setoff of indebtedness owed to debtor before
commencement of the bankruptcy proceeding
The Automatic Stay
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Once 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.
Order of Relief
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To 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 creditors
The 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 paid
Creditor Claims
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In a liquidation proceeding (straight bankruptcy), the debtor must disclose all property s/he owns and surrender this bankruptcy estate to a bankruptcy trustee
The trustee segregates property that debtor may keep and then administers, liquidates, and distributes the remainder of the estate
Creditors’ relative rights determined by law
Liquidation (Chapter 7)
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Bankrupt person required to file a list of assets, liabilities, and creditors, plus a statement of bankrupt’s financial affairs
Failure to file the information within 45 days of petition results in automatic dismissal Extension of time possible
The Bankrupt’s Filings
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Creditors meet and may elect a trustee Whether appointed or elected, the trustee:
Sets aside property a debtor may keep Takes possession of debtor’s property and has it
appraised Examines creditor claims, objecting if necessary Separates unsecured property from the secured
and otherwise exempt property
Trustee Duties in Chapter 7
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The trustee also: Sells debtor’s nonexempt property as soon as
possible, consistent with best interests of creditors Operates debtor’s business for a time if necessary Keeps an accurate account of all property and
money received and promptly deposits money into the estate’s accounts
Trustee Duties
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The estate includes all of debtor’s legal and equitable interests in property
Exemptions permit the bankrupt person to retain a minimum amount of assets considered necessary to life and an ability to continue to earn a living Exemptions vary from state to state See In Re Kyllogen
The Bankruptcy Estate
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Bankruptcy Code permits court to dismiss cases for abuse of process if debtor acted in bad faith or had present or future means to pay a significant portion of their current debts Means test determines debtor’s ability to repay
general unsecured claims In re Siegenberg: court dismissed a Chapter 7
case on the grounds it was filed in bad faith
Dismissal for Abuse
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Debtor may void some liens against exempt properties that impair the exemptions
Debtors may redeem exempt personal property from secured creditors by paying the full value of the collateral at the time the property is redeemed
A debtor and creditors may engage in ordinary business transactions
Liens and Business Transactions
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If a debtor transfers property or incurs an obligation with intent to hinder, delay, or defraud creditors, the transfer is voidable by the trustee Includes transfers of property for less than
reasonable value See In re Manhattan Investment Fund Ltd.:
margin payments to brokerage firm presumed to be made with intent to hinder, delay, or defraud
Fraudulent Transfers
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Chapter 11 offers a procedure in which the debtor’s financial affairs can be reorganized rather than liquidated because creditors would benefit more from the continuation of a bankrupt debtor’s business than from the liquidation of debtor’s property
Chapter 11 is available to individuals and business enterprises
Chapter 11 Reorganization
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Rather than liquidating the debtor’s estate, a trustee for a Chapter 11 proceeding develops a plan for handling creditor claims and the various interests of persons such as shareholders
The reorganization plan is essentially a contract between a debtor and its creditors and may involve recapitalization or giving creditors some equity
Trustee Duties Under Chapter 11
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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 creditor in a particular class, unless creditors in the class consent to other treatment
In re Made In Detroit, Inc.: plan not feasible, therefore court unable to confirm plan
The Bankruptcy Plan
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A reorganization plan must be confirmed by the court before it becomes effective
Plans may be confirmed by voluntary agreement of creditors or a cram down: Court forces dissenting creditors whose claims
would be impaired to accept the plan if the court finds it is fair and equitable to the creditors
If confirmed, debtor must implement plan
The Bankruptcy Plan
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Bankruptcy petitions have been filed to avoid obligations under divorce judgments, collective bargaining agreements, and mass tort and product liability litigation (asbestos, breast implant, and birth control device litigation)
These cases aren’t merely a matter of economics, but are a matter of ethics
Bankruptcy & Ethics
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Chapter 12 is modeled after Chapter 13 and is available only for family farmers and fishermen with regular income
Chapter 12
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Chapter 13 gives individuals who do not want to be declared bankrupt the right to file a voluntary petition for federal bankruptcy protection, obtaining the opportunity to pay debts in installments and free of such problems as garnishments and attachments of property by creditors
Chapter 13 – Consumer Debt
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Only individuals with regular incomes (including business sole proprietors) who owe individually (or with a spouse) liquidated, unsecured debts of less than $336,900 and secured debts of less than $1,010,650 may file for bankruptcy relief
Chapter 13 – Consumer Debt
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After filing, the debtor submits a plan of payment to secured creditors for acceptance 3-5 year payment plan
If acceptable to creditors and the court, the court will approve the plan and appoint a trustee to carry out the plan In re Burt: unacceptable plan because it was a
“cram-down” of creditor’s secured interest
Chapter 13 – Consumer Debt
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A bankrupt person not guilty of dishonest acts and who fulfilled duties as a bankrupt is entitled to a discharge in bankruptcy
A discharge relieves the bankrupt person of further responsibility for dischargeable debts and gives him a fresh start.
A corporation or partnership is not eligible for a discharge in bankruptcy
Discharge
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Certain debts, including educational loans, are not dischargeable in bankruptcy
In re Gerhardt: court denied the request of a debtor that his student loans be discharged because their repayment would constitute an undue hardship to him
Discharge
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Test Your Knowledge
True=A, False = B All bankruptcy proceedings begin by filing a
voluntary bankruptcy petition Once a voluntary bankruptcy petition has
been filed, the automatic stay prevents a creditor from filing suit against the debtor for repossession of the property.
Chapter 11 is available only to business enterprises
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Test Your Knowledge
True=A, False = B A reorganization plan under Chapter 11
requires unanimous consent by all creditors before it becomes effective
To 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 creditors.
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Test Your Knowledge Multiple Choice
Days before filing for reorganization, Bernie gave six of his properties to friends in return for an agreement that they would sell 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 above
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Test Your Knowledge
Multiple Choice In JarlCo’s reorganization, the bankruptcy
court forced dissenting creditors whose claims would be impaired to accept the reorganization plan. The court:
(a) Improperly abused its power and will be reversed on appeal
(b) Prioritized execution of the plan
(c) Engaged in a cram down
(d) none of the above
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Thought Questions
Why did the founding fathers incorporate bankruptcy into the U.S. Constitution as a constitutional guarantee? What is your opinion of the current bankruptcy laws?
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