§1: Bankruptcy Proceedings

2. §1: Bankruptcy Proceedings • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. • Federal court under U.S. district court, can appeal to district courts. • Federally appointed judges.

3. Types of Bankruptcy Relief • Bankruptcy code has 8 chapters. • 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. • Chapter 7 - liquidation proceedings. • Chapter 9 - adjustment of debts of a municipality.

4. Types of Bankruptcy Relief • Chapter 11 – reorganizations. • Chapter 12 - adjustment of debts of family farmers with regular incomes. • Chapter 13 - adjustment of debts of individuals with regular incomes.

5. §2: Liquidation Proceedings • Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. • Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.

6. Liquidation Proceedings • Available for any person, individual, corporation, partnership. • Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

7. Filing the Chapter 7 Petition • Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. • Voluntary vs. Involuntary bankruptcy.

8. Voluntary Bankruptcy • Petitioner must understand there are other chapters available. • Debtor does not have to be insolvent. • List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. • Swear to these and sign. Federal crime to misrepresent.

9. Voluntary Bankruptcy • Court issues order of relief. • Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. • Court will deny if “substantial abuse” of Chapter 7. • Case 30.1: In Re Lamanna (1998).

10. Involuntary Bankruptcy • Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). • If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

11. Involuntary Bankruptcy • If there are less than 12 creditors, one or more having a claim of $10,000 may file. • Court will order relief if Debtor is generally not paying debts as they come due.

12. Involuntary Bankruptcy • Court will order relief if: • A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. • Penalties for frivolous petitions against debtors, including Punitive damages.

13. Automatic Stay • Either voluntary or involuntary. • Creditors cannot commence or continue most legal actions. • Damages for violation of stay. • Creditors can get “adequate protection.” • Periodic or one time cash payments or indubitable equivalent.

14. Property of the Estate • Debtor’s Estate includes: • All Debtor’s legal and equitable interests in property presently held, including community property; • Property transferred in a “voidable” transaction; and • Property which Debtor becomes entitled within 180 days after filing.

15. Property of the Estate • Estate includes (cont’d): • Proceeds and profits from the property of the estate. • After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

16. Creditor’s Meeting and Claims • Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. • Within 90 days, Creditors must file “proof of claim” with court clerk. • Leases cannot be for more than one year.

17. Creditor’s Meeting and Claims • Allowed unless disputed. • If claim is disputed or unliquidated, court will decide value. • It is a crime to file false claim. • Employment contracts and real estate.

18. Exemptions • See list in text pages 611-612. • States may pass law requiring Debtor use state exemptions. • In some states, Debtor may choose state or federal exemptions.

19. The Trustee • Court-appointed until first meeting of creditors. • Creditors elect permanent trustee • Administers estate. • Collects proceeds, liquidates assets and pays Creditors in order of priority.

20. Trustee’s Powers • Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: • Debtor against the creditors. • Lien creditors against the creditors. • Bona fide purchaser against the creditors. • Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.

21. Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

22. Preferences • A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. • For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

23. Preferences • Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. • Creditor gets more than he would in a Chapter 7. • Consumer can transfer up to $600 without constituting a preference.

24. Liens on Debtor’s Property • Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. • Can avoid liens which were unperfected on date of bankruptcy.

25. Fraudulent Transfers • Trustee may avoid fraudulent transfers made within one year of filing of petition. • Trustee may proceed under state law for fraud with a 3 year statute of limitations.

26. Distribution of Property • If Secured property: • Consumer debtors. • Have 30 days from filing petition or before first meeting of creditors. • Debtor must tell what she intends to do with collateral-- keep or surrender. • Trustee must enforce within 45 days. • If surrenders: creditor can keep or sell. • If creditor keeps = full satisfaction of debt. • If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

27. Distribution of Property • Unsecured property • Paid according to bankruptcy law. • All of one class must be paid before moving to next. • Creditor within last class receive proportionately if not enough. • See Priority List in text. • All creditors paid, trustee gives extra back to debtor.

28. Discharge • Exceptions. • Case 30.2:In re Savage (2004). • Objections to Discharge. • Case 30.3: Archer v. Warner (2003). • Effect of Discharge. • Revocation of Discharge. • Reaffirmation of a Debt.

29. Exceptions to Discharge • Claims for back taxes. • Claims for amounts borrowed by Debtor to pay federal taxes. • Claims against property/money obtained by Debtor under false pretenses. • Claims by Creditors who did not know about bankruptcy.

30. Reaffirmation of Debt • Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. • Agreement is filed with court. • Debtor can rescind agreement at any time.

31. § 3: Reorganizations • Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. • Same debtors as are eligible under Chapter 7.

32. Reorganizations • “Fast tract” Chapter 11 for small business debtors whose liabilities do not exceed $2 million and who do not own or manage real estate. • “Workouts”.

33. Reorganizations • Debtor in Possession (DIP). • Trustee may be appointed. • DIP has same powers as trustee in Chapter 7. • Strong-arm clause. • Collective Bargaining Agreements. • Creditors Committees.

34. The Reorganization Plan • Filing the Plan. • Within 120 days after date relief order. • Plan must be equitable. • Acceptance and Confirmation of the Plan. • Discharge.

35. §4: Bankruptcy Relief under Chapter 13 and Chapter 12 • Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. • Not for partnerships, corporations.

36. Bankruptcy Relief under Chapter 13 and Chapter 12 • Chapter 12: Family Farmer Plans • “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. • Procedure for filing. • Content of plan. • Court confirmation.