bankruptcy basics – understanding your client's options - tully rinckey pllc cle

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Robert J. Rock, Esq.Tully Rinckey PLLC

441 New Karner RoadAlbany, New York 12205

[email protected]

Bankruptcy Basics: Understanding Your Client’s Options

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About Your Presenter

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Managing Partner of Tully Rinckey’s Albany, NY office Over 3 decades of experience in both state and federal

courts. His experience includes disputes between individuals,

businesses, non profit organizations, municipalities, and the full range of legal entities.

As a long-time ally of distressed and insolvent businesses and individuals throughout New York’s Capital Region, Bob has been expanding Tully Rinckey PLLC’s bankruptcy practice, particularly in the areas of Chapter 11 (business) and Chapter 12 (farm) reorganization.

Bob received a juris doctorate from Albany Law School and a bachelor’s degree in political science from Le Moyne College.

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Is Bankruptcy the Appropriate Option?

Debt Consolidation Deed in Lieu Short Sale Home Affordable Modification Program (“HAMP”)

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Bankruptcy Basics The current bankruptcy law enacted by

Congress in 1978 is known as the Bankruptcy Code

– The code consists of nine Chapters: Chapters 1, 3 and 5 are of general applicability Chapters 7, 9, 11, 12, 13 and 15 deal with a

particular type of bankruptcy case

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First alteration: change the standard for dismissal under 11 U.S.C. §707 from "substantial abuse" to "abuse: in order to lower the standard and, presumably, make dismissal easier.

The second change was to attempt to implement an objective test for abuse based on a statutory formula and IRS expense standards with the intent of establishing a "bright line“ test for abuse. This objective test is known as "the means test.”

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Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

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The “Means Test” Compares a debtor's hypothetical future income, based

upon a review of the last six (6) months of actual income, with certain actual and hypothetical expenses.

Used to determine whether a presumption of bankruptcy abuse exists under Section 707.

All gross income, whether taxable or not must be included.

After this analysis, if a debtor has disposable income sufficient to pay creditors $100.00 to $166.67 dollars per month, then bankruptcy abuse is presumed.

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Financial Education Requirements

Another creation of the 2005 Amendments to the "Code" are the mandatory financial education classes for debtors filing for Chapter 7 or Chapter 13 bankruptcy protection.

Individuals filing for bankruptcy must complete an approved Credit Counseling Course before a bankruptcy petition can be filed.

The failure to complete these courses will result in either the dismissal of the bankruptcy case or the failure to obtain an Order of Discharge.

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Chapter 7 Cases Available to natural persons and business entities Section 109(h):

– "may not be a debtor ... unless such individual has, during the 180-day period preceding the date of filing ... received from an approved nonprofit budget and credit counseling agency ... an individual or group briefing ... that outlines the available credit counseling and assisted such individual in performance of a related budget analysis.“

Section 707(b):– amended to provide for dismissal of Chapter 7 cases or

conversion to Chapter 13 (with or without debtor's consent) upon a finding of "abuse" by an individual debtor with primarily consumer debts.

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Certain assets may be claimed as exempt property Secured creditors usually retain their interests in collateral In exchange for the potential loss of his or her pre-

bankruptcy assets, an individual debtor filing for Chapter 7 relief receives a discharge of personal liability for pre-bankruptcy debt and keeps assets acquired after a filing for use in a "fresh start.“

The bankruptcy discharge is the primary incentive for a voluntary Chapter 7 filing.

When the debtor is an entity, other than a natural person, no discharge may be granted.

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Chapter 11 Cases Originally designed as business reorganization,

natural persons are eligible for Chapter 11 relief as well.

A debtor pays its debts, in whole or in part, through a plan that must be confirmed in accordance with specific statutory criteria.

The debtor is referred to as a debtor-in-possession and remains in control of its assets, unless a trustee is appointed "for cause.“

Upon confirmation of a reorganization, individuals or businesses may obtain a discharge of "personal" liability for debt incurred prior to confirmation.

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Chapter 13 Cases Debt reorganization opportunity available only to

individuals with regular income. Specific eligibility criteria limit accessibility to Chapter 13

to persons with less than $1,081,400 in non-contingent, liquidated secured debt and less than $460,475 in non-contingent, and liquidated unsecured debt.

Chapter 13, the debtor's assets are not liquidated. Instead, the debtor pays his or her debts, in whole or in part, through a plan that must be confirmed in accordance with specific statutory criteria. Creditors do not have the right to vote on the plan.

Referred to as the debtor, the Chapter 13 debtor remains in control of his assets. A Trustee, however, is appointed.

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Differences Between Chapters 11 and 13

Chapter 11 bankruptcy is available for businesses and individuals with a very large amount of debts and income.

Chapter 13 bankruptcies are available for almost all individuals as well as sole proprietorships; however there are debt/income limits for eligibility. These limits change each year.

In both Chapter 11 and Chapter 13 bankruptcy, the debtor and the debtor's attorney create a plan to reorganize and consolidate all debt.

In Chapter 13 bankruptcy, the creditors must accept this plan provided that it meets certain legal standards.

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In Chapter 11 Bankruptcy, the creditors cast votes to determine whether they will accept or reject the plan.

Under Chapter 11, if the creditors reject the plan, the debtor may come up with a new plan.

The judge may force the creditors to accept the debtor's plan or the negotiations may simply fail.

If the negotiations fail, the business will either have to file for business Chapter 7 bankruptcy, or, the case may be dismissed.

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Principal Bankruptcy Code Sections and Rules

Section 362(a) of the Code provides for a statutory stay that goes into effect automatically upon the filing of most bankruptcy cases. – Provides most debtors with a respite from collection activities

when a bankruptcy case if filed. Section 362(b) provides a list of exceptions to the

automatic stay. Section 362(c) sets forth the temporal extent of the

stay.– Examples of the time limits imposed on the extent of the stay

include the grant of a discharge and the closing or the dismissal of a bankruptcy case. The stay for individual debtors who are serial filers or who file without complete documentation is much more limited (as short as 30 or 45 days unless extended).

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Code sections 362(d)-G) describe the process for obtaining relief

from the automatic stay. Section 362(k) allows individual debtors injured by a willful

violation of the stay to recover monetary damages. Code Section 105 may be used for the imposition of appropriate sanctions. Ruse 9011 may also be employed where appropriate.

Section 363 governs the sale, use and other dispositions of a debtor's property.

Section 365 governs executory contracts and unexpired leases. Such contracts and leases may be "assumed" or "rejected" by the debtor.

Section 541 delineates the property of a debtor's bankruptcy estate.

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