BANKRUPTCY OUTLINE
INTRODUCTION:
The Primary Bankruptcy Players:
– Debtor- in debt, cannot pay it off
– Creditor- owed $- may have different interest as to how that $ is owed or what their status is
o Secured
§ Over – more common- collateral kept by creditor exceeds amount of debt; Debt = 30k, Collateral = 100k
· Typically occurs when you are paying things off and as you get close to finishing paying it off, the debt owed drops below the value of the collateral.
· Over secured is best position to be in during bankruptcy proceeding
§ Fully- very rare- creditor has collateral that matches the debt owed to them. Debt = 100k, Collateral = 100k
§ Under- more common- loan over values the collateral; Debt = 100k, Collateral = 90k
o Unsecured : Ex. – Visa- not promising them “collateral” nothing to secure the debt
§ Priority- special category of unsecured- debtors attorneys and priority creditors; it is the highest ranked unsecured
· Only a bankruptcy concept
§ General unsecured
§ Subordinated unsecured (equity)
– Trustee or Debtor-in-Possession:
o Compare U.S. Trustee- charged with oversight of whole bankruptcy system
§ Keeps statistics- maintain all the data about how many bankruptcies are filed, the # etc
§ Might get involved in individual bankruptcy filing, but rareà only get involved when allegations or suspicions of fraud or wrong doing are implicated
o Panel Trustee- is to an individual bankruptcy case what the US Trustee is to entire system
§ Assigned to oversee the case
§ Involved in every decision made in that bankruptcy proceeding
§ Collect assets and distribute money to creditors
o Exceptionà Chapter 11à corporate reorganizationsà trustee is NOT required
§ Instead the person running bankruptcy is the debtor in possession
§ They are the debtor’s; the people in charge of the company that filed
· Concernà allowing people that got themselves into bankruptcy to continue to run the company
– Judge- like tax court judges, given powers from Federal DC’s.
o DC’s delegated job to bankruptcy courts
o Do not have lifetime appointments- 14 year appointment
o Do not have same protections/powers of Article III courts (lifetime, salary protection)
Types of Bankruptcy
– Chapters of General Applicability- no matter what type of bankruptcy it is, these chapters will always be implicated
o Chapters 1, 3, 5, and 15
o Section 101- index and definitions
o Not concerned with Chapter 15 (int’l bankruptcy) for this class
– Liquidation –
o Chapter 7- the most common chapter filed.
§ Individual or business
§ Primary goal = collect assets of debtor, sell them, distribute to all creditors
§ Very quick, usually taking 4-6 months
§ Liquidating assets into cash and distributing
– Reorganization and repayment- take longer, more publicized
o Chapter 11 (business)- generally business reorganization
§ Can take years; continue to run business and make $ to pay off debt
o Chapter 13 (person)- similar concept as business
§ Working Man’s Plan- concept that you will work for 5 years to pay off your debt, whatever not paid is then cleared.
– Miscellaneous
o Chapter 12 (family farms)
o Chapter 9 (municipal reorganizations)
The Basic Bankruptcy Process
– Filing of the bankruptcy petition and schedules
o Petition- usually voluntary, but sometimes debt is so bad creditors can force you into bankruptcy (rare)
o Schedules- there are a lot
§ Where the work is: tell your income, who you owe $ to, creditors status, budget that lists possible future debts
o Order for relief- judge grants at beginning- yes you are granted relief and protections of bankruptcy court
§ It is ordered at beginning, it is simultaneously given when petition is filed
§ Only exception is involuntary bankruptcy, that is not granted in beginning
– 341 Meeting of Creditors
o Run by Trustee- chance for creditors to come together and ask debtor questions about your assets, reasons for filing, etc
o Chance for trustee and creditors to ensure nothing suspicious is going onà very few creditors go
§ Only one’s owed a ton of $
o Trustee normally asks a lot of ?’s.
– Proof of Claim Forms
o Once debtor files schedules, Court sends notice to creditors informing of pending bankruptcy
o Creditors file proof of claim forms- showing $ owed
§ Acts as a COMPLAINT that the creditor files against debtor
o Court has mechanisms to protect creditors omitted by debtor (purposely or accidentally)
o State law determines whether creditor deserves to get paid
§ Bankruptcy court just acts as distribution system
§ Rarely intervenes to say it disagrees with decision of state law
– Collection of property of estate
o Everything debtor owns that will be used in proceeding
o Usually not EVERYTHING they own- there are exceptions
– Discharge of indebtedness
o Chapter 7 (liquidation) vs. Chapter 11 (reorganization business) vs. Chapter 13 (reorganization person)
o Debtor pays all they can or required to pay, then go forward debt free
o Difference in chapter bankruptcies determine process of paying back
The Bankruptcy Court System
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
– Signed into law on April 20, 2005
– Effective date of October 17, 2005 (usually)
– Major Changes:
o Means Testing- determines whether you can file bankruptcy, and what type of bankruptcy you should file
o Credit Counseling- determines whether you can file bankruptcy, attempts to help person manage debt before resorting to filing.
o Responsibilities of Debtor’s Attorney’s-
o Homestead Exemption
o Chapter 15
UCC Article 9 (a.k.a. the Almost-Complete Guide to Secured Transactions in an hour)
– Who is the debtor?
– Who are the Creditors and which are secured?
– What is the collateral and does Article 9 even apply?
– Has the security interest in the collateral attached?
– Has the creditor perfected the interest?
– Who has priority as to the collateral?
Who are the Creditors and Who is Secured?
– Unsecured Creditors:
o Unsecured creditors have NO collateral supporting their claim.
– Under-Secured Creditors:
o Have collateral worth LESS (or, even if the collateral is worth more, the particular creditor’s interest is less) than the
s/insurance companies
o Want these financial institutions to satisfy their debts and continue to run
– No Constitutional Right to File Bankruptcy- under case law, there is no constitutional right to be able to file for bankruptcy and, thus, someone who cannot pay for the bankruptcy is not entitled to it.. (U.S. v. Kras, 409 U.S. 434 (1973) (see J. Stewart, dissenting: “[t]he Court today holds that Congress may say that some of the poor are too poor even to go bankrupt.”)
§ 707- Dismissal or Conversion from Chapter 7 *** MEANS TEST*****
– Part of the rules which makes it harder to get into Chapter 7 b/c too many people were filing for bankruptcy.
– Goal: Figuring out how much this person can pay to the creditor’s, so as to prevent putting people through Chapter 13 for 5 years if they can only pay 5% of the debt.
o Flipside of That:if you could pay off a majority of the debt with the assets that you already have, then you need to go to Chapter 13.
o Policy: b/c under Chapter 7 creditors were only getting pennies on the dollar for the $ owed to them; whereas Chapter 13 the debtor has to pay off a majority of his debt without screwing them over
– Rule of Debtor’s Attorney: Diligence Required by Attorney in Filing Chapter 7
o §707(b)(4)(C) requires that you conduct a “reasonable investigation to ensure that the bankruptcy filing is grounded in fact. (bankruptcy code in a sense adopted FRCP #11)
o Signing of the Petition = to the best of my knowledge all information on schedules is true- you investigated the facts.
o Therefore, attorney should NEVER just file a Chapter 7 b/c the client wants it and assume that the trustee/creditor’s will sort out whether it should be in Chapter 7 or not….
o Reasonable Investigation Undetermined by Courts- since the amendment, the courts have not addressed what amounts to a reasonable investigation.
§ Is it enough to ask debtor?
§ Do you have to go to the debtor’s house and dig through his/her things?
§ Do you need to conduct searches at banks/examine the accounts?
– §707(a)- very specific basis for dismissing the case; failure of the debtor to complete something that is required
o Court CANNOT dismiss until giving notice and a hearing,
o Must have cause (i.e. failure of debtor to complete something that is required)
o (1)- unreasonable delay by debtor that is prejudicial to creditors;
o (2)- nonpayment of any fees; AND
o (3)- fails to file schedules (pursuant to 521(1))
§ must be done w/i 15 days of filing (or within the additional time allowed by the Court)
