Section 1 – Introduction
I. Background and Introduction
A. Overview of Types of Bankruptcy
1. Voluntary v. Involuntary
a) Voluntary à can be commenced under Ch. 7, 11, 12, 13 by the filing of a petition in bankruptcy court by an entity that may be a debtor. §301. File Form 1.
b) Involuntary àcommenced only under Ch.7 and 11 and only against a person (except a farmer) or a corporation that is not a moneyed business or commercial corp. that is a debtor. §303(a).
2. Chapter 7 – Liquidation
a) Eligibility à May be an individual or an entity properly falling under the “debtor” definition.
b) Liquidation or Surrender of Assets Results
(i) All property of the debtor owned at the date of bankruptcy becomes part of the bankruptcy estate. Exempt property is then released to the debtor. The estate is then liquidated or debtor surrenders assets to creditors.
c) Trustee Appointed – administers the bankruptcy estate and may be either an individual or a corporation. §321, §§701-704
(i) Job is to maximize assets available to pay unsecured creditors.
(ii) Must be disinterested person and is considered to act in a fiduciary capacity; Code doesn’t define.
d) Views on Chapter 7 by Debtor and Creditor
(i) Three Prongs of Ch. 7 from Debtor’s Perspective (“Fresh Start”)
(a) Discharge à Debtor gets a discharge of the debtor’s debts (with the exception of some nondischargeable debts). Debtor walks away from the prepetition debts. §727, 1141(d).
(b) Exemptions à Debtors can “exempt property” and hold such property free and clear of most claims after bankruptcy. Non-exempt property gets taken.
(c) Future Earnings à After discharge, the debtor gets to keep all of its future earnings.
(ii) Chapter 7 From Creditors’ Perspective
(a) Get a forum for debt collection and equality of treatment of creditors. Aggressive creditors cannot take advantage of the debtor.
(b) Creditor may be able to file an involuntary bankruptcy to avoid fraudulent transfers, preferences, wasting of assets, etc.
3. Chapter 11 – Reorganization
a) Eligibility à For individuals and businesses (primarily large businesses due to expenses and delay).
b) Result à May result in rehabilitation or liquidation under a plan.
4. Chapter 12 – Rehabilitation for Farmers (similar to Ch. 13).
5. Chapter 13 – Reorganization for Individuals
a) Eligibility à Used only by an individual (no corporations), and has maximum debt limits. §109(e).
b) Result à Debtor can get the benefit of discharge w/o losing even nonexempt property. Debtor must formulate a plan to pay debts over a series of years. Plan need not be approved by creditors. §1327(a). Approval of the plan is restricted by §1322, §1325, and §1328.
B. Overview of the Bankruptcy Case
1. Eligibility for Bankruptcy – Generally (for all chapters)
a) Must be a “Debtor”
(i) §301 – a voluntary case can be commenced by any “entity that may be a debtor.”
(a) Entity = person, estate, trust, gov. unit and U.S. trustee. §101(15).
(b) Debtor = person/municipality concerning which a case has been commenced. §101(13).
i Note – Only a (1) person that resides/has domicile, place of business or property in the U.S. or (2) a municipality may be debtor. §109(a).
(c) Person = individual, partnerships, corporations, but NOT gov. units. §101(41).
(d) Municipality = political subdivision or public agency or instrumentality of a State. §101(40).
i City of New York may file bankruptcy, but not the State of New York.
(ii) §302 provides for a “joint case” where a husband and wife can file a single petition for relief.
b) Insolvency is defined in §101(32) but is not required for bankruptcy protection.
c) Debtors Encouraged to File Chapter 13
(i) §707(b) – encourages debtors to convert to Chapter 13 and use disposable income.
2. Filing the Petition and the Resulting Automatic Stay
a) Petition Results in a
it to creditors.
(ii) Must keep track of money coming in and distribute it out appropriately.
(iii) Trustee can object to the plan, and can check on the debtor’s good faith.
(iv) Does not collect the property, since the debtor stays in possession.
4. The “First Meeting of Creditors” – §§341/343
a) Meeting must be convened w/ creditors and US Trustee within a reasonable time after filing. §341. The debtor must attend. §343. Creditors can then examine the debtor under oath concerning his list of assets and determine grounds for objecting to discharge of the debtor.
5. Filing of the Proof of Claim
a) “Proof of claim” = a written statement setting forth the creditor’s claim; filed by the creditor. §501.
6. Allowance of Claims
a) A claim can only be paid if it is “allowed.” §502 governs this.
7. Distribution of Assets to Creditors
a) Chapter 7
(i) Secured claims are satisfied first, then remaining proceeds are distributed under §726, which governs the order of priority of unsecured creditors. §507 contains the list of priority.
(ii) Unsecured claims are usually paid out on a pro rata basis.
b) Chapter 11-13
(i) §507 priorities also apply.
(ii) Secured creditors must be paid the full amount of secured claim (to the value of their collateral).
8. Discharge of Debts
a) Debtor will usually receive a discharge of all prebankruptcy debts, but may not.
Section 2 – Property of the Estate
I. Property of the Bankruptcy Estate (§541)
A. The “Bankruptcy Estate” Defined – §541
1. General Rule – §541(a)(1)
