Bankruptcy: John Czarnetzky
Fall 2013
Introduction to Debtor and Creditor Law
Overview of Bankruptcy Law
Bankruptcy:
· Financial death of a transaction for a debtor (consumer or corporation)
· Means by which our society tries to heal the wound to the circulatory system
o Clean up credit problems for a debtor
Circulatory System:
· Credit is the circulatory system of our economy; we want stuff immediately
· Consumers and business starters (debt financing to start up); convinces banks and investors to take a chance on you
· American law fosters the ability for people to get credit and minimize risks to the lenders (benefits the lender and the creditor)
Federal Law: Article I, Section 8, Clause 4
Bankruptcy Code (formerly known as the Bankruptcy Act):
· In 2005, Congress made major amendments to the Bankruptcy Code, the chief aim of which was to make it more difficult for individuals to file a liquidation bankruptcy under Chapter 7 (therefore forcing these people to file under Chapter 13)
Sections of the Code:
· 1 = definitions
· 1, 3, 5 = General Provisions
· 7 = Liquidation
· 9 = Municipalities
· 11 = Business reorganization
· 12 = Farmers reorganization
· 13 = Individuals reorganization
Title 11: Comprise the entirety of Title 11 of the United States Code
· Courts are established under Article I of the Constitution (not Article III courts)
o Can be removed easier, 14 year terms, no pay guarantee (can be lowered)
o Final orders are appealable to the district court
Goals of Bankruptcy: Tension between the two
1. Seeks the orderly and equitable repayment of claims for the benefit of creditors, and
2. Offers an economic fresh start to the proverbial “honest but unfortunate debtor”
Types of Bankruptcy Cases:
Goal of Debtor = obtaining a discharge of debts
Note: Chapters 11, 12, and 13 anticipate the payment of a debtor’s obligations (in whole or in part) out of the debtor’s future income
Twin Pillars of Bankruptcy:
(1) Orderly liquidation of assets and payments to creditors (double check this pillar), and
(2) Discharge of debts for the debtor
1) Liquidation (Chapter 7)- sell off all their assets (business will go out of operation)
· Romans used to have the death penalty for debtors and England did too
· Liquidation Defined= debtors assets are sold by the trustee and the assets are distributed to the debtors creditors and debtor receives a discharge of debts
o Must give up everything they have
Chapter 7 Details (most common form of bankruptcy):
· The commencement of the case creates an automatic stay against creditor collection efforts (§ 362) and it also operates to create a bankruptcy estate comprised, inter alia, of all of the debtor’s interest in property as of the commencement of the case (§ 541(a)(1))
· Creditors receive notice of the bankruptcy and have a limited amount of time to object to the discharge or file a complaint
· A trustee is appointed or elected to represent the interests of the bankruptcy estate (may also object to the discharge)
o Duty is to collect and liquidate the assets of the estate so they may be redistributed to creditors according to the priority established by the Bankruptcy Code
2) Reorganization (the American way)- depends on the nature of the debtor
· Chapter 9 = Not many Chapter 9 municipality Bankruptcies because they have to have permission from the state
· Chapter 11 = designed for businesses but individuals can file under Chapter 11
· Chapter 12 = family farmers and family fishermen with regular incomes
· Chapter 13 = individuals with regular income
Chapter 11 Details:
· The debtor who initiates the case becomes the debtor in possession or “DIP”
o Relatively drastic to appoint a trustee in this situation
· While the DIP is operating the business, an automatic stay is holding off creditor collection efforts just as it does in Chapter 7 cases
· DIP must formulate a repayment plan (offers repayment over a period of time)
· A confirmation of the plan in Chapter 11 operates as a discharge of the debtor’s past obligations (substitute the new obligations for the old)
Chapter 12 Details:
· May only be commenced voluntarily and only by family farmers (or family fishermen); in reaction to the mid-1980’s financial crisis
· Creditors have no vote on the plan
Chapter 13 Details:
· Only available to individuals with a regular income whose unsecured debts do not exceed $360, 475 and whose secured debts do not exceed $1,081,400 (adjusted every three years for inflation)
o This chapter is available to individual debtors who operate business and consumers
· Make payments on various debts over a three to five year period
· Debtor does not receive discharge until all of the payments called for under the plan have been made*
Reorganization: Debtor keeps their property, not sold by the trustee
· At the end of the day, the debtor gets a discharge of their debts
o Requirement that the debtor present a plan to the court on how they plan to repay the debt
Ex) Keep planes and employees and present a plan to repay the creditors
Policy = allow them to keep generating income and keep their assets and get the creditor at least what would happen if they were to liquidate, however
Creditors apply to the court to appoint a receiver, who will take charge of the debtor’s property and make sure it is preserved (state law remedy, rarely used instead of bankruptcy)
Ex) Business is being looted by the shareholder to fuel their vice, creditors observe this and say we can make money without the looters
3. Assignment for the Benefit of Creditors (“ABC”): Precursor to Chapter 11
· The assignee takes control over all the debtor’s property not already subject to perfected liens, and this typically creates a judicial lien over that property in favor of the unsecure creditors
o Advantage = creditors have to stop hounding him from the moment of the assignment
o Disadvantage = after the ABC is over, the debtor still owes the unpaid balance (NO DISCHAREGE OF DEBT)
Composition of Creditors: work out with creditors after an ABC
· Debtor assigns assets to judge and judge gets all the creditors around a table and works out a deal (give creditors assets and get a discharge by contract)
Ex) Like a receivership except its voluntary for the benefit of the debtor’s creditors (might as well file a chapter 11) (No discharge of debt)
C. Statutory Liens (Involuntary)
1. Mechanic’s Lien: Those who perform work on construction projects on real property (mechanics) or those who supply materials to the jobsite (materialmen) are entitled to file a lien on the realty in the real property records to secure the monies owed them from the construction project
· Makes the owner of the realty very interested in seeing that the payments are correctly applied so that all who worked on the project or supplied materials to it get paid
2. Artisan’s Lien: Those who perform work on personal property (car repair ship, appliance repair department, etc.)
3. Tax Liens: Taxing entity slaps a tax lien on your property, seizes it and sells it, then comes after you for any amount still due
4. Many Others: Landlords, innkeepers, those caring for livestock, etc.
· Attorney’s Retaining Lien = on any property of the client in the possession of the attorney
· Attorney’ s Charging Lien = on any judgment obtained by the attorney’s efforts
