25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization ...

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25-1 Chapter 28 Bankruptcy and Reorganization

Transcript of 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization ...

Page 1: 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization  Bankruptcy Reform Act of 1978  Debtor friendly  Bankruptcy.

25-1

Chapter 28Bankruptcy and Reorganization

Page 2: 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization  Bankruptcy Reform Act of 1978  Debtor friendly  Bankruptcy.

Introduction to Bankruptcy and Reorganization

Bankruptcy Reform Act of 1978 Debtor friendly

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Creditor friendly

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Types of Bankruptcy

Chapter Type of Bankruptcy

Chapter 7 Liquidation

Chapter 11 Reorganization

Chapter 12 Adjustment of Debts of a Family Farmer or

Fisherman with Regular Income

Chapter 13 Adjustment of Debts of an Individual with Regular Income

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Bankruptcy Law

U.S. Bankruptcy Courts: Special federal courts that hear and decide bankruptcy cases

Part of federal court system

One for each federal district

Judges appointed for 14-year terms

Judges assisted by bankruptcy trustees

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Bankruptcy Procedure

Pre- and Post-Petition Counseling Debtor must receive pre-petition counseling within

180 days prior to filing petition Types and uses of credit, budget analysis Provided by nonprofit credit counseling

agencies

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Bankruptcy Procedure

Filing the Petition Voluntary petition

filed by the debtor Chapters 7, 11, 12, and 13 cases

Involuntary petition Filed by the creditor Chapters 7 and 11 cases only

The 2005 act requires attorney certification of the information in the bankruptcy petition

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Bankruptcy Procedure

Order for relief: An order that occurs upon the filing of either a voluntary petition or an unchallenged involuntary petition, or an order that is granted after a trial of a challenged involuntary petition

Proof of claim: A document required to be filed by a creditor that states the amount of his or her claim against the debtor

Proof of interest: A document required to be filed by an equity security holder that states the amount of his or her interest against the debtor

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Bankruptcy Procedure

Automatic stay: The suspension of certain legal actions by creditors against a debtor or the debtor’s property that include: Instituting or maintaining legal actions to collect

prepetition debts Enforcing judgments obtained against the debtor Obtaining, perfecting, or enforcing liens against

property of the debtor Nonjudicial collection efforts

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Bankruptcy Procedure

Discharge: A court order that relieves a debtor of the legal liability to pay his or her debts that were not paid in the bankruptcy proceeding

All or part of a debt can be discharged Some debts are not discharged Reaffirmation agreement: An agreement entered

into by a debtor with a creditor prior to discharge, whereby the debtor agrees to pay the creditor a debt that would otherwise be discharged in bankruptcy

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Page 10: 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization  Bankruptcy Reform Act of 1978  Debtor friendly  Bankruptcy.

Exhibit 28.1: Debts that cannot be discharged in bankruptcy

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Bankruptcy Estate

Bankruptcy estate: The debtor’s property and earnings that comprise the estate of a bankruptcy proceeding

Includes interest of debtor and the debtor’s spouse in community property

Exempt property: Property that may be retained by the debtor pursuant to federal or state law that does not become part of the bankruptcy estate

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Page 12: 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization  Bankruptcy Reform Act of 1978  Debtor friendly  Bankruptcy.

Exhibit 28.2: Federal Exemptions from the Bankruptcy Estate

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Bankruptcy Estate

State Exemptions: States may Give debtors the option of choosing between

federal and state exemptions Require debtors to follow state law

Homestead exemption: Equity in a debtor’s home that the debtor is permitted to retain

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Page 14: 25-1 Chapter 28 Bankruptcy and Reorganization. Introduction to Bankruptcy and Reorganization  Bankruptcy Reform Act of 1978  Debtor friendly  Bankruptcy.

Chapter 7—Liquidation

Chapter 7—Liquidation: A form of bankruptcy in which the debtor’s nonexempt property is sold for cash, the cash is distributed to the creditors, and any unpaid debts are discharged

Also termed as straight bankruptcy

Debtor’s future income cannot be reached

Abusive filing: A Chapter 7 filing that is found to be an abuse of Chapter 7 liquidationbankruptcy

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Chapter 7—Liquidation

Median income test: If a debtor’s median family income is at or below the state’s median family income for a family the same size as the debtor’s family, the debtor can receive Chapter 7 relief

Categories:

Median family income equal to or below the state’s median family income

Median family income higher than the state’s median family income

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Chapter 7 – Liquidation

Statutory Distribution of Property Oversecured secured creditor Undersecured secured creditor

Chapter 7 discharge: The termination of the legal duty of an individual debtor to pay unsecured debts that remain unpaid upon the completion of a Chapter 7 proceeding The debtor is not responsible for paying

prepetition debts out of postpetition income

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Exhibit 28.3: Priority of Unsecured Creditor Claims

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Chapter 7 – Liquidation

Acts that bar discharge Debtor lied about financial position when

obtaining credit Debtor transferred, concealed, removed, or

destroyed estate with intent to defraud creditors Debtor falsified, destroyed, or concealed records

about financial condition Debtor failed to appear at meeting of creditors Debtor failed to complete course on personal

financial management

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Rehabilitation form of bankruptcy Court supervises plan for payment of unpaid debts by

installments Advantages

Debtor may avoid stigma, retain more property, incur fewer expenses

Creditor may recover greater percentage of debts

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Filing a Chapter 13 petition Voluntary filing of petition by debtor with regular

income Cannot be filed involuntarily by a creditor Debts must be primarily consumer debt Amount of debt must not exceed certain dollar

amounts $360,475 in unsecured debts $1,081,400 in secured debts

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Property of a Chapter 13 Estate All nonexempt property of debtor at

commencement of case Nonexempt property acquired before case is closed Earnings and future income

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Chapter 13 Plan of Payment Must be filed within 90 days after the order for

relief Must be accepted by secured and unsecured

creditors or approved by the court During the plan period, unsecured creditors might

not receive full payment of the debt owed to them

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Confirmation of a Chapter 13 plan of payment Conditions

The plan was proposed in good faith The plan passes the feasibility test The plan is in the best interests of the creditors The debtor has paid all domestic support

obligations owed The debtor has filed all applicable federal, state,

and local tax returns

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Chapter 13 – Adjustment of Debts of anIndividual with Regular Income

Chapter 13 Discharge: A discharge in a Chapter 13 case that is granted to the debtor after the debtor’s plan of payment is completed Cannot be discharged under Chapter 13 if the

debtor has received discharge under Chapter 7, 11, or 12 within 4 years, or Chapter 13 within 2 years

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Chapter 11 – Reorganization

Chapter 11: A bankruptcy method that allows the reorganization of the debtor’s financial affairs under the supervision of the bankruptcy court For individuals, partnerships, corporations, and

other business entities Debtor reorganizes with new capital structure

May be relieved of portion of debts, burdensome executory contracts and unexpired leases

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Chapter 11 – Reorganization

Debtor-in-possession: A debtor who is left in place to operate the business during the reorganization proceeding

Creditors’ committee: A committee of unsecured creditors that is appointed by the court to represent the class of unsecured claims Committee may be appointed to represent secured

creditors and equity holders

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Chapter 11 – Reorganization

Executory contract: A contract or lease that has not been fully performed Unexpired lease A debtor may reject executory contracts and

unexpired leases in bankruptcy Chapter 11 Plan of Reorganization: Sets forth a

proposed new capital structure for a debtor to assume when it emerges from Chapter 11 reorganization bankruptcy

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Chapter 11 – Reorganization

Confirmation of a Chapter 11 Plan of Reorganization Acceptance method is used to confirm the plan if:

The plan is in the best interests of the creditors The plan is feasible Each class of creditors accepts the plan

Cram-down provision: A provision whereby the court confirms a plan of reorganization over an objecting class of creditors if certain requirements are met

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Chapter 11 – Reorganization

Small Business Bankruptcy Total debts of less than $2,343,300 Fast-track form of Chapter 11 reorganization

bankruptcy is used for resolution

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