CHAPTER 28 BANKRUPTCY

1. CHAPTER 28BANKRUPTCY DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

2. HISTORICAL BACKGROUND • Constitutional provisions allowing “honest debtors” make “fresh start.” • Constitution allows Congress establish uniform bankruptcy law. • Constitution does not require Congress provide bankruptcy law or relief.

3. HISTORICAL BACKGROUND • Constitution seemingly calls for exclusive federal control, but bankruptcy laws tend to coexist with state law. • State law determines whether debtor chooses between state and federal exemptions. • For most of twentieth century, bankruptcy governed by Federal Bankruptcy Act.

4. BANKRUPTCY REFORM ACT • Provides for fair and equitable treatment of creditors in distribution of debtor’s property. • Gives “honest debtor” a “fresh start.” • Passed to modernize bankruptcy coverage. • Meets demands of credit-intensive, consumer-oriented society. • Had technical problems and declared unconstitutional.

5. BANKRUPTCY AMENDMENTS AND FEDERAL JUDGESHIP ACT OF 1984 • Intended to clarify jurisdictional authority of the bankruptcy courts. • Resolve constitutional problems discovered in the Bankruptcy Reform Act. • More sensitive to creditors. • Reduce/eliminate debtor abuses.

6. BANKRUPTCY AMENDMENTS & FEDERAL JUDGESHIP ACT OF 1984 • Changes aim of balancing protection and ensuring purpose of bankruptcy. • Three major types of bankruptcies are: • Chapter 7, Liquidation. • Chapter 11, Reorganization. • Chapter 13, Adjustments of Debts of an Individual with Regular Income. • Chapter 12, Adjustments of Debts of a Family Farmer with Regular Annual Income (expired).

7. BANKRUPTCY AMENDMENTS & FEDERAL JUDGESHIP ACT OF 1984 • Bankruptcy Reform Act established separate system of bankruptcy courts within each U.S. district court. • Supreme Court declared the Act unconstitutional placing entire area of bankruptcy in doubt. • Bankruptcy courts continued to operate under an “emergency rule” for two years before Congress intervened.

8. BANKRUPTCY AMENDMENTS & FEDERAL JUDGESHIP ACT OF 1984 • Act corrected constitutional problems identified by U.S. Supreme Court. • Changed appointment of bankruptcy judges. • Grants original and exclusive jurisdiction for all bankruptcy matters to the U.S. District Court, which: • Gave them discretion to refer cases to bankruptcy court for adjudication. • Bring case back to the District court with its motion or on motion of any party to the proceedings.

9. THE BANKRUPTCY REFORM ACT OF 1994 • Created a National Bankruptcy Review Commission. • Increased the compensation for trustees and debt limits for Chapter 13 debtors. • Provides for adjustments in dollar amounts based on the Consumer Price Index. • Recognizes bankruptcy fraud as a crime. • Small business investment companies not eligible for relief in bankruptcy.

10. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Liquidation of debtor’s assets to obtain discharge from debts. • Liquidation is a financial and legal option, to help people flooded in debt. • Two types of Chapter 7 bankruptcies: • Voluntary Bankruptcy Petition initiated by debtor. • Involuntary Bankruptcy Petition initiated by creditor.

11. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Five exception for filing voluntary bankruptcy petition: • Railroads. • Government units. • Banks. • Savings and loan associations. • Insurance companies.

12. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Seven exceptions subjected to an involuntary petition: • Railroads. • Government units. • Banks. • Savings and loan associations. • Insurance companies. • Farmers. • Charitable corporations.

13. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Filing Fees. • Connected to the various bankruptcy chapters are established by law.

14. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Voluntary Bankruptcy Petition • Debtor does not need to be insolvent for filing. • Law now permits bankruptcy judge to hold hearing to determine need of debtor for relief being sought. • If judge feel abuse of Chapter 7, petition can be dismissed. • Law requires for debtors to know of Chapter 13 repayment plans before filing Chapter 7.

15. CHAPTER 7: LIQUIDATION, A “STRAIGHT BANKRUPTCY” • Involuntary Bankruptcy Petition. • May be forced by creditors if: • Debtor Conduct: Debtor appointed a receiver or is not paying debts within 120 days before filing. • Number of Petitioning Creditors: Prescribed number of creditors sign the filing. • Debt Requirement: • Debt among the creditors who sign the petition is $10,000 or more. • Debtor successfully contests the bankruptcy petitioning creditors liable for damages.

16. THE BANKRUPTCY PROCEEDING • Once bankruptcy petition filed, order for relief issued and trustee appointed to administer debtor’s estate. • Trustee: Represents debtors estate and protect interests of unsecured creditors. • Automatic Stay Provision: Creditors must cease any action to collect debts once bankruptcy is filed.

17. THE BANKRUPTCY PROCEEDING • Creditors’ Meeting. • Trustee holds meeting with debtor and creditors to ask questions regarding debtor’s financial affairs. • The Debtor. • Must submit detailed financial schedules listing property and debts which creditors may review. • Debtor must cooperate with and surrender all property to trustee.

18. THE BANKRUPTCY PROCEEDING • Secured Creditors Must make a selection: • Take their collateral in full satisfaction of claim. • Dispose of collateral and surrender any surplus to trustee. • Dispose of collateral and participate as unsecured creditors. • Have trustee dispose of collateral, paying secured creditor the proceeds realized and allowing creditor participate as unsecured creditor for any balance owed.

19. THE BANKRUPTCY PROCEEDING • Exemptions. • Bankruptcy law provides that certain assets may be retained by debtor. • Exempted assets intended to provide “fresh start.” • Some states require resident debtor to use only state’s exemptions, other states allow debtor to choose state or federal. • Exemptions allow varying amounts of cash, equity in residence, clothing, tools of debtor’s trade, insurance and certain benefits be retained.

20. THE BANKRUPTCY PROCEEDING • Allowable Claims. • Creditors must file claims within six months of creditor’s meeting. • Two types of not allowable claims: • Claims which would otherwise be unenforceable against the debtor. • Claims including interest extending beyond the petition date.

21. THE BANKRUPTCY PROCEEDING • Allowable Claims. • Two types of partially allowable claims: • Damages based on a violation or termination of a lease. • Damages based on breach of employment contract.

22. THE BANKRUPTCY PROCEEDING • Recovery of Property. • Trustee may void certain transfers made by debtor and recover property for benefit of unsecured creditors. • Two major categories of improper transfers include: • Voidable Preferences: payments to some creditors at expense of other creditors. • Fraudulent Conveyance: transfer by a debtor that involves actual or constructive fraud.

23. THE BANKRUPTCY PROCEEDING • Distribution of Assets. • Once trustee gathered and liquidated all available assets and claims, the estate is distributed to creditors. • Estate distributed in priority set forth in the Bankruptcy Reform Act. • Following payment of priority claims, creditors receive pro rata distribution of balance of proceeds from the debtor’s property.

24. THE BANKRUPTCY PROCEEDING • Discharge Decision. • Granted only to an honest debtor. • Denied discharge if debtor: • Made a fraudulent conveyance. • Does not have adequate records. • Refuses to cooperate with court. • Received discharge in the previous six years. • Denial of discharge means unpaid portion of debts continue and are enforceable after proceedings.

25. THE BANKRUPTCY PROCEEDING • Discharge Decision. • Some classes of debts are not affected by a discharge. • Goods or services that are incurred within 40 days are presumed non-dischargeable. • Creditor or trustee may request revocation of discharge. • Debtor may voluntarily reaffirm a debt in spite of discharge.

26. OTHER BANKRUPTCY PLANS • In addition to liquidation proceedings under Chapter 7, Bankruptcy Reform Act also provides: • Reorganization under Chapter 11. • Repayment plan for family farmers under Chapter 12. (expired bills pending in Congress to reactivate Chapter 12). • Wage earner’s repayment plan under Chapter 13. • Non-bankruptcy Alternatives.

27. CHAPTER 11: REORGANIZATION PLANS • Corporations and individuals may use reorganization plans under chapter 11 to restructure debt without liquidation of assets. • Creditors receive more than they would if liquidation occurred under Chapter 7. • Objecting creditors may be forced to accept the plan. • A reorganization may be voluntary or involuntary.

28. CHAPTER 11: REORGANIZATION PLANS • The Proceedings. • Petition filed court will do: • Enter an order for relief. • Appoint a trustee, if requested by any interested party. • Appoint creditor committees to represent the creditors. • Automatic stay also applies.

29. CHAPTER 11: REORGANIZATION PLANS • The Proceedings (cont’d). • Debtor-in-possession is permitted to retain possession and control of assets/business. • Committees of creditors meet with the trustee/debtor to discuss treatment of proceedings. • No one asks for a trustee, court may appoint an examiner to investigate the debtor’s business activities and potential.

30. CHAPTER 11: REORGANIZATION PLANS • The Plan. • First 120 days after order of relief only debtor may propose reorganization plan. • Any party can propose a plan under: • If trustee appointed, any party can propose plan at any time until plan is approved by court. • If debtor fails to propose a plan within 120 days. • If debtor proposes plan within 120 days, but not accepted by all creditors within 180 days of order of relief.

31. CHAPTER 11: REORGANIZATION PLANS • The Plan (cont’d). • Small-business debtors using “fast-track” reorganization must file plan within 100 days plans by others must be filed within 160 days. • Court will examine in reviewing plan: • Sell any assets. • Merger, consolidation or dives. • Satisfy, or modify, any liens or claims. • Issue new stock to generate funds.

32. CHAPTER 11: REORGANIZATION PLANS • The Plan (cont’d). • Court confirm plan only if: • Plan proposed in good faith. • Payments made are subject to approval by court. • Each class of creditors has accepted plan or will receive or retain property of value. • Class of claims impaired, at least one has accepted plan. • Confirmation of plan not likely to be followed by liquidation .

33. CHAPTER 11: REORGANIZATION PLANS • The Plan (cont’d). • Creditors holding at least 2/3 of dollar amount of claims for given class of debt must vote for plan to be accepted. • If at least one class of creditors accepts plan, the court may confirm it. • Confirmed reorganization plans binds debtor and all creditors. • Court may order conversion to liquidation if it believes plan cannot be completed.

34. CHAPTER 11: REORGANIZATION PLANS • Chapter 11 as a Corporate Strategy. • Corporation have availed by using Chapter 11 to escape/avoid onerous debts or obligations. • The court can approve collective bargaining agreement as debtor’s reorganization plan if: • Debtor has made proposal to authorized representatives and assures affected parties are treated fairly and equitably. • Authorized representatives of employees has rejected proposal without good cause. • Balance of equities, favors rejection of collective bargaining despite action of authorized representatives.

35. CHAPTER 13: REPAYMENT PLANS • Allows debtor with regular source of income to adjust debts in a manner that will repay all creditors. • Only to debtors less than $1 million of debt, maximum of $750,000 secured debts, and maximum of $250,000 unsecured debts. • Debt ceiling for Chapter 13 proceedings are adjusted for inflation every three years. • Only voluntary petitions are permitted.

36. CHAPTER 13: REPAYMENT PLANS • The Proceedings. • Debtor files voluntary petition seeking relief. • Court issues order of relief, an automatic stay will take effect. • Trustee will be appointed and perform investigation duties only if debtor operates a business. • Trustee carries out plan proposed by debtor if approved by court.

37. CHAPTER 13: REPAYMENT PLANS • The Plan. • Plan must provide: • Equal treatment to each class of creditor claims. • Some provisions for clearing up any defaulted debts or payments on debts. • Not call for payments beyond three-year period, unless court feels longer period necessary.

38. CHAPTER 13: REPAYMENT PLANS • The Plan (cont’d). • Court approves plan if: • Fair to all parties. • In best interest of creditors. • Debtor can conform. • Pays at least as much as under Chapter 7. • Approved plan is binding on all parties with or without consent and results in discharge once plan completed.

39. CHAPTER 13: REPAYMENT PLANS • The Plan (cont’d). • Court may grant discharge before plan completed if: • Debtor cannot complete the plan owing to circumstances beyond control. • General creditors have received at least as much as they would have received in liquidation. • Court does not feel it is practical to alter the plan.

40. CHAPTER 13: REPAYMENT PLANS • 1984 Bankruptcy Amendments. • Recent law allows unsecured creditor to block debtor’s proposed repayment plan if: • Plan calls for payment of 100% of creditor’s claim. • Plan calls for debtor to pay 100% of income not necessary to support immediate family for at least three years. • Creditor challenges proposed plan, has no right to “approve” or vote on plan.

41. CHAPTER 13: REPAYMENT PLANS • 1984 Bankruptcy Amendments (cont’d). • Begin payments before plan confirmed by court. • Plan may be modified after it is confirmed, to increase decrease debtor’s payments.