1. CHAPTER 27
Bankruptcy
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2. Quote of the Day
“One could always begin again in America, even again and again. Bankruptcy, which in the fixed society of Europe was the tragic end of a career, might be merely a step in personal education.”
John A. Krout and Dixon Ryan Fox,
The Completion of Independence

3. Overview The Bankruptcy Code is divided into eight chapters.
Chapters 1, 3, and 5 are administrative rules that apply to all types of bankruptcy proceedings.
Chapters 7, 9, 11, 12, and 13 are substantive rules that apply to specific types of bankruptcies. These substantive chapters all have as their goal either rehabilitation or liquidation.
Congress has recently debated and attempted to amend the Bankruptcy Code to address a recent rise in bankruptcy filings.
Click here to see the text of the Bankruptcy Code online.

4. Rehabilitation or Liquidation
The objective of Chapters 11 and 13 of the Bankruptcy Code is rehabilitation of the debtor.
When debtors are unable to develop a feasible plan for rehabilitation, Chapter 7 allows for liquidation (also known as straight bankruptcy).
Chapters 9 and 12 are for specialized types of debtors and are not covered in this textbook.

5. Bankruptcy Chapters

6. Goals The Bankruptcy Code has three primary goals:
To preserve as much of the debtor’s property as possible.
To divide the debtor’s assets fairly between the debtor and the creditors.
To divide the debtor’s assets fairly among the creditors.

7. Chapter 7 -- Liquidation
Filing a Petition
Any individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the United States can file under the Code.
Petitions may be voluntary or involuntary.

8. Ch. 7 -- Voluntary Petition
May be filed by any debtor; not necessary to be insolvent or for liabilities to exceed assets.
Filed by providing a petition, list of creditors, schedule of assets and liabilities, claim of exemptions, schedule of income and expenditures, and a statement of financial affairs.

9. Ch. 7 -- Involuntary Petition
An involuntary petition must meet all the following requirements:
The debtor must owe at least $11,625 in unsecured claims to the creditors who file.
If the debtor has at least 12 creditors, three or more must sign the petition. If fewer than 12 creditors, any one can file.
The creditors must allege either that a custodian for the debtor’s property has been appointed in the prior 120 days or that the debtor has generally not been paying debts.

10. Trustee
In order to help insure impartiality, the U.S. Attorney General appoints a U.S. Trustee to each region of the country.
The trustee is responsible for gathering the bankrupt’s assets and dividing them among creditors.
The U.S. Trustee calls a meeting of creditors sometime within 20 to 40 days after the order of relief.

11. Creditors
Unsecured creditors must submit a proof of claim within 90 days after the meeting of creditors.
Secured creditors do not file proofs of claim unless the claim exceeds the value of their collateral.

12. Automatic Stay
An automatic stay prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed.
The purpose of the automatic stay is to give the debtor time and space to make a rational plan for paying debts without pressure from creditors.

13. Bankruptcy Estate Exempt Property
The Code permits individual debtors (but not organizations) to keep some property for themselves.
Usually, debtors cannot keep property that is the collateral for a secured loan. If the loan amount is for more than the debt, the property can be sold and the debtor may be able to keep the difference.

14. Voidable Preferences
A preference is a transfer of money or property just before filing bankruptcy.
The trustee can void a transfer that meets all of the following requirements:
The transfer was to a creditor of the bankrupt.
It was to pay an existing debt.
The creditor received more than she would have received during the bankruptcy process.
The debtor’s liabilities exceeded assets at the time of the transfer.
The transfer took place in the 90-day period before the filing of the petition.

15. Fraudulent Transfers
A transfer is fraudulent if it is made within a year before a petition is filed and its purpose is to hinder, delay, or defraud creditors.
A trustee cannot void pre-petition payments made in the ordinary course of business.

16. Payment of Claims
The trustee pays the bankruptcy estate to the various classes of claims in the following order of rank:
Secured Claims
Priority Claims (seven subcategories)
Unsecured Claims (three subcategories)
All creditors with Secured Claims are paid before any in the Priority Claims category, etc.

17. Discharge
Once a bankruptcy estate is distributed, the creditors cannot make claims on the debtor for money owed before filing.
There are some circumstances that prevent debts from being discharged, such as repeated bankruptcy filings, dishonesty, and conduct of some kinds of business.

18. Discharge (cont’d)
Debts that cannot be discharged include (among others):
Income taxes and property taxes
Money obtained fraudulently or illegally
Some loans for luxury goods
Recent cash advances on credit cards
Alimony and child support debt
Fines and penalties
Some student loans

19. Reaffirmation
To reaffirm a debt means the debtor promises to pay even after discharge.
In order to be valid, the reaffirmation must:
Not violate laws for fraud, duress or unconscionability.
Be filed in court.
Clearly state that the debtor has the right to rescind within 60 days.
Not impose undue hardship on the debtor.

20. Chapter 11-- Reorganization
Chapter 11 does not require a trustee; the petitioner (called debtor in possession) serves as the trustee. He:
Operates the business, and
Develops a plan of reorganization.
A creditors’ committee watches over the interests of the creditors.
A committee of equity security holders may be appointed to watch out for the interests of the shareholders.

21. Plan of Reorganization
The debtor has 120 days to come up with a plan that is acceptable to the creditors.
The creditors will usually only accept a reorganization plan that they believe will be better for them than liquidation.
If they reject the debtor’s proposal, the creditors or shareholders may submit alternative plans.

22. Confirmation of the Plan
A confirmation hearing is held to determine whether it should accept the plan.
The court will approve a plan if a majority of each class votes in favor of it.

23. Discharge
A confirmed plan is binding on the debtor, creditor and shareholders.
A typical plan of reorganization gives some current assets to the creditors and promises to pay them a portion of future earnings.
The debtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the plan.

24. Chapter 13 -- Consumer Reorganization
The purpose of Chapter 13 is to rehabilitate an individual debtor.
Creditors cannot use an involuntary petition to force a debtor into Ch. 13.
A trustee is appointed to supervise the debtor, who remains in possession of all assets.

25. Ch Plan of Payment
Plan of payment must be submitted by the debtor within 15 days after filing the petition. The plan must:
Commit some future earnings to pay off debts,
Promise to pay all secured and priority claims in full, and
Treat all remaining classes equally.

26. Discharge Once confirmed, the plan is binding on all creditors.
The debtor is washed clean of all pre-petition debts except those provided for in the plan, but (unlike under Chapter 7), the debts are not permanently discharged.

27. “As in many areas of law, bankruptcy law must balance between competing interests. When an individual or business files for bankruptcy protection, generally neither debtor or creditor comes out whole.”

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