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BANKRUPTCY

BANKRUPTCY. Form of Relief or Strategic Option?. BANKRUPTCY. Congress directed by Constitution to “establish…uniform laws on the subject of bankruptcies…” Art. I, §8, Cl. 4

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BANKRUPTCY

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  1. BANKRUPTCY Form of Relief or Strategic Option?

  2. BANKRUPTCY Congress directed by Constitution to “establish…uniform laws on the subject of bankruptcies…”Art. I, §8, Cl. 4 “Bankruptcy gives to the honest, but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”Local Loan Co. v. Hunt, 292 US 234 (1934)

  3. BANKRUPTCY USE OF BANKRUPTCY BANKRUPTCY FILINGS(Years Ended December 31, 2001 through 2005)

  4. BANKRUPTCY HISTORICAL CONTEXT • Articles of Confederation did not prevent “Judgment-Jumping” Motive: Enhance Creditors’ Ability to Collect/Not Debtor Relief • Debtors’ Prisons until mid-19th Century • 1898: Commercial Interests of Nationalized Economy motivated surprisingly Debtor-friendly Law

  5. BANKRUPTCY FRAMEWORK Federal Court Process for Individuals and Businesses to Reorganize or Discharge Debts NON-DISCHARGEABLE DEBTS • Alimony and Child Support • DUI Judgments • Student Loans • Fines and Income Taxes

  6. BANKRUPTCY EXEMPTIONS • Homestead: $50,425 • Insurance Proceeds, Partnership Property and Liquor Licenses • Retirement Plans, Welfare and Unemployment Benefits • Personal Property including Tools used in Work

  7. BANKRUPTCY PROCEEDINGS First Action: File and Elect Form • Chapter 7: Liquidation • Chapter 13: Personal Reorganization • Chapter 11: Business Reorganization Second Action: Court appoints Trustee Assumes Constructive Management of Bankrupt’s Financial Matters

  8. PROCEEDINGS • CHAPTER 7 LIQUIDATION • (1) Trustee/Court identify Exemptions and Exclusions; (2) Notify Debtor and Creditors of Disposition of Dischargeable Debt • CHAPTER 13 PERSONAL REORGANIZATION • (1) Debtor proposes Plan; (2) Negotiations with Creditors; (3) Reconcile Ability to Pay with Obligations; (4) Most Assets retained by Debtor BANKRUPTCY

  9. BANKRUPTCY PROCEEDINGS CHAPTER 11 BUSINESS REORGANIZATION Creditors (Committee) Accept/Reject Company Plan subject to Trustee/Court Oversight Final Plans usually Reconfigure Capital Structure: Creditors Swap Debt for Equity “Cram-Down Rule” Super-Majority (2/3) Agreement binds Minority/Dissenting Claimants; Effect can be Loss of Claim Priority

  10. BANKRUPTCY PROCEEDINGS PREFERENCE (“Reach-back”) RULE Creditors may Recover Payments made in Anticipation of Bankruptcy (Fraudulent Conveyances) under Certain Conditions • 90 Days prior to Filing if Effect favors Recipient over Other Creditors • One Year prior to Filing if Payments made to “Insiders” (Relatives or “Controlled” Persons or Entities)

  11. BANKRUPTCY CHANGES AS OF OCTOBER 17, 2005 • Shifts to Debtor More of Burden to Prove Eligibility for Bankruptcy • Requires Pre-Filing Credit Counseling • Chapter 7 “Means Test”: Above-median Income can convert Filing to Chapter 13 with “regular” payment requirement Businesses providing Customer Credit supported Changes as Essential for Mitigating Misuse of Law

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