BANKRUPTCY OUTLINE
A. Abbreviations used
1. JW – Jay Westbrook
2. UFTA – Uniform Fraudulent Transfers Act
3. TIB – Trustee in Bankruptcy; DIP – Debtor in Possession
4. FMV – Fair Market Value; TVM – Time Value of Money; PV – Present Value; FV – Future Value
5. PMSI – Purchase Money Security Interest
B. Definitions:
1. Liquidation – debts are paid out of current assets (i.e., by selling them)
2. Payout – debts are paid out of future earnings; the debtor keeps the assets
3. “Code” – The bankruptcy code
C. In all instances, code citations are to the bankruptcy code unless otherwise indicated.
D. A brief overview of the bankruptcy code (Title 11 of the US Code):
1. Chapters of General Application
a) Ch. 1 – definitions, types of eligibility
b) Ch. 3 – administration of the bankruptcy estate
c) Ch. 5 – creditor’s claims, debtor’s duties, and the definition of the estate
2. Operating Chapters
a) Ch. 7 – “straight” liquidation
b) Ch. 9 – municipal bankruptcies
c) Ch. 11 – business reorganizations (some individuals use, also)
d) Ch. 12 – family farms
e) Ch. 13 – individual reorganizations (“payouts” for natural persons)
E. Classic bankruptcy dichotomies
1. Individual vs. Creditors – under state law, it’s all a race to the courthouse (the law of the jungle); bankruptcy is different – it is based on collective action, preventing one creditor from getting ahead of another.
2. Liquidation vs. Payout – Bankruptcy is divided into liquidations (Ch. 7) and payouts/reorganizations (Ch. 11 and 13.)
3. Purpose: Business vs. Consumer Bankruptcy – consumer bankruptcy is premised on the idea of a “fresh start” for an overwhelmed debtor; business bankruptcy is focused more on saving the business (not killing the goose that lays golden eggs).
F. Historical tidbits on bankruptcy
1. The first US bankruptcy law was enacted in 1800 and lasted 1½ years; another was passed in 1841 (lasted about 2 years) and another right after the Civil War. Finally, in 1898 a bankruptcy code was passed and the US has had one ever since.
2. Congress is expressly given the power to create a bankruptcy law in Ar
de nearly as much protection as it appears because it doesn’t cover in-house debt collection.
(2) Heintz – A lawyer is a “debt collector” for FCRA purposes (so be careful!)
B. State-law debt collection
1. Judgment collection
a) Execution (by a lien creditor) – being a judgment creditor alone gives no interest in the debtor’s property or income; you have to go get a writ of execution and have the sheriff levy (or execute) on a specific piece of the debtor’s property.
(1) Note that in most states, judicial sales are governed by antiquated statutes – returns on the sales are typically quite low. A low price alone won’t invalidate the sale, but it might increase judicial scrutiny for other problems.
(2) A lien can apply to after-acquired real property (Estate of Robbins) (min. rule), but you have to take steps to keep the judgment alive (Weaver).