1. Chapter 26 Bankruptcy

2. Learning Objectives
In a bankruptcy proceeding, what constitutes the debtor’s estate in property? What property is exempt from the estate under federal bankruptcy law?
What is a trustee? What does a trustee do? 
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3. Learning Objectives
Are all creditors’ claims allowed in a bankruptcy proceeding? In what order are unsecured creditors’ claims paid?
What is the difference between an exception to discharge and an objection to discharge?
In a Chapter 11 reorganization, what is the role of the debtor in possession?
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4. Bankruptcy Proceedings
Goals of Bankruptcy Law.
Bankruptcy Courts.
Types of Bankruptcy Relief: Chapter 7, Chapter 11, Chapter 12 and Chapter 13 for individuals. 
Special Requirements for Consumer Debtors.
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5. Bankruptcy Proceedings
Types of Bankruptcy Relief.
Chapter 7 – liquidation.
Chapter 11 – reorganizations.
Chapter 12 - adjustment of debts of family farmers and fishermen with regular incomes.
Chapter 13 - adjustment of debts of individuals with regular incomes.
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6. Bankruptcy Proceedings
Special Treatment of Consumer-Debtors.
A consumer-debtor is a debtor whose debts result primarily from the purchase of goods for personal, family, or household use. 
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7. Bankruptcy Proceedings
Special Treatment of Consumer-Debtors (cont’d).
First, clerk must give consumer-debtors written notice of the general purpose, benefits, and costs of each chapter of bankruptcy under which they may proceed. Second, the clerk must provide consumer-debtors with informational materials on the types of services available from credit counseling agencies.
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8. Chapter 7 – Liquidation
Chapter 7: referred to as ordinary or straight bankruptcy.
Debtor turns all assets over to the bankruptcy trustee.
Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.
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9. Chapter 7 – Liquidation
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.
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10. Chapter 7 – Liquidation
Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.
If a debtor files the petition, it is voluntary. 
If creditors file a petition, it is involuntary. 
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11. Chapter 7 – Liquidation Voluntary Bankruptcy.
Prior to filing, debtor(s) must receive credit counseling within 180 days of filing, and submit certificate.
Debtor must confirm accuracy of contents; attorney must file affidavit informing debtor about other chapters.
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12. Chapter 7 – Liquidation Voluntary Bankruptcy (cont’d).
Chapter 7 Schedules:
1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each.
2. A statement of the financial affairs of the debtor.
3. A list of all property owned by the debtor, including property claimed by the debtor to be exempt.
4. A listing of current income and expenses. 
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13. Chapter 7 – Liquidation Voluntary Bankruptcy (cont’d).
Chapter 7 Schedules:
5. A certificate of credit counseling (as discussed previously).
6. Proof of payments received from employers within sixty days prior to the filing of the petition.
7. A statement of the amount of monthly income, itemized to show how the amount is calculated.
8. A copy of the debtor’s federal income tax return for the most recent year ending immediately before the filing of the petition.
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14. Chapter 7 – Liquidation Voluntary Bankruptcy (cont’d).
Tax Returns During Bankruptcy.
Substantial Abuse—Means Test: to determine whether debtor’s petition will be dismissed under Chapter 7.
Applying the Means Test to Future Disposable Income: if debtor’s income is above the median income, then further calculations are necessary, including calculations of disposable income. 
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15. Ex. 26-1 Means Test for Chapter 7 Eligibility
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16. Chapter 7 – Liquidation Voluntary Petition.
Additional Grounds for Dismissal.
Conviction of violent crime or drug-trafficking.
Debtor fails to pay post-petition domestic-support obligations.
Order for Relief: if filing is proper, filing itself is an order for relief.
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17. Chapter 7 – Liquidation Involuntary Petition.
Creditors force debtor into bankruptcy.
If there are 12 or more creditors, need three or more with unsecured claims totaling at least $14,425 to join in petition. If less than 3 creditors, one or more creditors with $14,425 debt may file.
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18. Chapter 7 – Liquidation Involuntary Petition (cont’d).
Debtor can challenge involuntary bankruptcy but court will enter an order for relief if:
Debtor is not paying debts as they come due, OR
The debtor was in receivership for the 120 days before filing the petition.
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19. Chapter 7 – Liquidation Automatic Stay.
The moment a petition is properly filed, an automatic stay is granted protecting debtor from all creditors.
Creditors cannot commence or continue most legal actions.
Damages for knowing violation of stay. 
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20. Chapter 7 – Liquidation Automatic Stay.
CASE In re Kuehn (2009). Did the university violate the automatic stay be refusing to provide a transcript?
Exceptions to the Automatic Stay.
Domestic Support Obligations.
Proceedings against Debtor related to divorce, support, custody, and maintenance.
Investigations by securities regulatory agency. 
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21. Chapter 7 – Liquidation Automatic Stay (cont’d).
Limitations on the Automatic Stay.
Secured party can petition bankruptcy court for relief from automatic stay.
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22. Chapter 7 – Liquidation Property of the 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.
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23. Chapter 7 – Liquidation Property of the Estate (cont’d):
Proceeds and profits from the property of the estate.
After-acquired property such as inheritances, property settlements, and life insurance death proceeds.
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24. Chapter 7 – Liquidation Creditors’ Meetings and Claims.
Creditors’ Meeting: Trustee calls meeting of creditors, to examine debtor under oath.
Creditors’ Claims: to receive a portion of debtor’s estate, each creditor must file a proof of claim. Necessary if there is any dispute.
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25. Chapter 7 – Liquidation Exemptions.
Up to $21,625 in equity in the debtor’s residence and burial plot (the homestead exemption).
Interest in a motor vehicle up to $3,450.
Interest, up to $550 for a particular item, in household goods and personal effects (up to $11,525). 
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26. Chapter 7 – Liquidation Exemptions (cont’d).
Interest in jewelry up to $1,450.
Interest in any other property up to $1,150, plus any unused part of the $21,625 homestead exemption up to $10,825.
Interest in any tools up to $2,175.
A life insurance contract owned by the debtor. 
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27. Chapter 7 – Liquidation Exemptions (cont’d).
Certain interests in accrued dividends and interest not to exceed $11,525.
Professionally prescribed health aids.
Social Security and other benefits.
The right to receive certain personal-injury and other awards up to $21,625.
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28. Chapter 7 – Liquidation Homestead Exemption.
Places limits on the amounts of home equity debtors can shield from creditors.
Debtor must have lived in state two years prior to filing.
Maximum equity: $146,450, if within previous 3.5 years of filing.
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29. Chapter 7 – Liquidation Bankruptcy Trustee.
Appointed by Court: duties include collecting assets and paying creditors in order of priority.
Duties for Means Testing: to determine whether there is substantial abuse. Must file statement within 10 days after 1st meeting with creditors.
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30. Chapter 7 – Liquidation Bankruptcy Trustee (cont’d).
Trustee’s Powers: has right to ‘strong arm’ creditors return debtor’s property to trustee.
Has “Avoidance Powers” to set aside certain transfers:
Voidable Rights. 
Preferences. 
Fraudulent Transfers. 
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31. Chapter 7 – Liquidation Bankruptcy Trustee (cont’d).
Voidable Rights: Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.
Preferences.
Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. 
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32. Chapter 7 – Liquidation Bankruptcy Trustee (cont’d).
Preferences (cont’d).
For a Trustee to recover payment, debtor must be insolvent and transferred property for preexisting debt within previous 90 days.
Preferences to Insiders: avoidance power of Trustee extends to transfers made within ONE YEAR before filing. 
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33. Chapter 7 – Liquidation Bankruptcy Trustee (cont’d).
Preferences (cont’d).
Transfers That Do NOT Constitute Preferences: payments for services within 15 days, payments made in ordinary course of business, and generally debts that are not preexisting.
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34. Chapter 7 – Liquidation Bankruptcy Trustee (cont’d).
Fraudulent Transfers.
Trustee may avoid fraudulent transfers if made: (1) within two years of filing of petition, or (2) with actual intent to hinder, delay or defraud a creditor.
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35. Chapter 7 – Liquidation Distribution of Property.
Debtor must file a statement of intention regarding secured collateral.
Distribution to Secured Creditors.
Distribution to Unsecured Creditors: paid in the order of their priority (see page 558). If any amount is left over, it is returned to debtor.
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36. Ex. 26-2 Distribution of Property
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37. Chapter 7 – Liquidation Discharge.
Exceptions to Discharge: discharge of a debt may be denied.
Objections to Discharge: court may deny claims based on debtor’s conduct (see pages ).
Revocation of Discharge: within one year of decree.
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38. Chapter 7 – Liquidation Discharge.
Reaffirmation of Debt: debtor agrees to pay a debt in bankruptcy by executing a reaffirmation agreement.
Reaffirmation Disclosures.
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39. Chapter 11: Reorganization
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. 
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40. Chapter 11: Reorganization
“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.
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41. Chapter 11: Reorganization
The Creditors’ Best Interests.
Debtor in Possession (DIP): business operates under court supervision.
DIP has same powers as trustee.
But court may appoint trustee (receiver) with ‘strong arm’ powers.
Creditors Committees.
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42. Chapter 11: Reorganization
Reorganization Plan.
Plan must be fair and equitable to all parties.
Filing the Plan: within 120 days after date relief order.
Acceptance and Confirmation of the Plan.
Discharge.
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43. Bankruptcy Relief under Chapters 12 and 13
Chapter 12: Family Farmers and Fishermen.
Definitions: “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related.
Family Fisherman: 50% of gross income dependent on commercial fishing operations. 
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44. Bankruptcy Relief under Chapters 12 and 13
Chapter 12 (cont’d).
Filing the Petition: similar to process under Chapter 13.
Content and Confirmation of the Plan:
Confirmed or denied within 45 days of filing, same as repayment plan.
Unsecured creditors.
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45. Bankruptcy Relief under Chapters 12 and 13
Chapter 13: Individuals’ Repayment Plans. Not for partnerships, corporations.
For individuals with regular income who owe fixed unsecured debts of <$360,475 or fixed secured debts of <1,081,400. 
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46. Bankruptcy Relief under Chapters 12 and 13
Chapter 13 (cont’d).
Filing the Petition: within 120 days after order of relief.
Good Faith Requirement.
The Repayment Plan must provide for:
1. The turning over to the trustee of such future earnings or income of the debtor as is necessary for execution of the plan.
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47. Bankruptcy Relief under Chapters 12 and 13
Chapter 13 (cont’d).
The Repayment Plan must provide for:
2. Full payment through deferred cash payments of all claims entitled to priority, such as taxes. 21
3. Identical treatment of all claims within a particular class. (The Code permits the debtor to list co-debtors, such as guarantors or sureties, as a separate class.)
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48. Bankruptcy Relief under Chapters 12 and 13
Chapter 13 (cont’d).
The Repayment Plan.
Acceptance and Confirmation of the Plan: court may refuse to accept or accept with “cram down.” Court will confirm if:
Secured creditors accept the plan.
Secured creditors can retain liens.
Debtor surrenders property.
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49. Bankruptcy Relief under Chapters 12 and 13
Chapter 13 (cont’d).
Discharge: after debtor has completed all payments, court grants discharge.
2005 reforms deleted most of the ‘superdischarge’ debts.
CASE United States Aid Funds, Inc. v. Espinosa (2010). Why wasn’t Espinosa’s plan ‘void’?
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