Prentice Hall © 2007 1

PowerPoint Slides to accompanyThe Legal Environment of Business

and Online Commerce 5E, by Henry R. Cheeseman

Chapter 29Bankruptcy and the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005

Prentice Hall © 2007 2

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 substantially amended previous federal bankruptcy law.

The goal of federal bankruptcy law is to discharge the debtor from burdensome debts while protecting creditors by requiring the debtor to pay more of his or her debts than would have been required prior to the 2005 Act.

Prentice Hall © 2007 3

Types of Bankruptcy The Bankruptcy Code provides for

different types 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

Prentice Hall © 2007 4

Bankruptcy Courts Bankruptcy courts are part of the

federal court system. Bankruptcy judges hear core

proceedings regarding bankruptcy issues, such as creditor claims and preferences.

Noncore proceedings involving the debtor, such as divorce, are heard by state or federal district courts.

Prentice Hall © 2007 5

Bankruptcy Procedure Prepetition and

Postpetition Counseling Debtor must receive

prepetition credit counseling within 180 prior to filing petition.

Debtors in Chapter 7 or 13 bankruptcy must attend a personal financial management course before discharge.

Prentice Hall © 2007 6

Filing a Voluntary Petition May be filed by debtor for Chapters 7,

11, 12, and 13 bankruptcy. Must state that debtor has debts Must include information about

Secured and unsecured creditors Property owned Current income and expenses

Order for relief

Prentice Hall © 2007 7

Filing an Involuntary Petition

May be filed by creditors for Chapter 7 or 11 bankruptcy.

Must state that debtor is not paying debts as they become due

Order for relief

Prentice Hall © 2007 8

Procedural Requirements Attorneys are required to certify the

accuracy of information contained in the bankruptcy petition.

Meeting of creditors Proof of claim and proof of interest filed Bankruptcy trustee appointed for

Chapter 7, Chapter 12, and Chapter 13 cases

Automatic stay of collection efforts

Prentice Hall © 2007 9

Discharge When requirements

of bankruptcy are met, the court grants a discharge of some or all debts in Chapter 7, Chapter 11, Chapter 12, and Chapter 13 bankruptcies.

Prentice Hall © 2007 10

Discharge When discharge is granted, the

debtor is no longer legally liable to pay the discharged debt.

There are some debts that are not dischargeable, including: Taxes owed Alimony and child support Judgments for willful or malicious injury

Prentice Hall © 2007 11

Reaffirmation Agreement A debtor and creditor may

voluntarily enter into a reaffirmation agreement in which the debtor agrees to pay a debt that is dischargeable.

The reaffirmation agreement must be entered into before discharge and filed with the court.

Prentice Hall © 2007 12

The Bankruptcy Estate The bankruptcy estate includes all

the debtor’s legal and equitable interests in all forms of property.

Gifts, inheritances, life insurance proceeds, and property from divorce settlements receivable within 180 days of petition are included.

Prentice Hall © 2007 13

Exempt Property Exemptions are not part

of bankruptcy estate, and include:

Homestead exemption—interest up to $18,500 in property used as a residence and burial plots

Interest of up to $2,950 in value for one motor vehicle

Interest of up to $475 per item for household goods

Exemptions enacted by states

Prentice Hall © 2007 14

Preferential and Fraudulent Transfers

The bankruptcy code prevents debtors from making unusual payments or transfers of property during a certain time period that would unfairly benefit the debtor or some creditors at the expense of others.

These transfers may be voided by the bankruptcy court.

Prentice Hall © 2007 15

Preferential Transfers Preferential transfers of an interest

in property To any party, within 90 days prior to

filing petition To an insider, between 90 days and 1

year prior to filing

Prentice Hall © 2007 16

Fraudulent Transfers Fraudulent transfers within 2 years of

filing petition Transfer made or obligation incurred with

intent to hinder, delay, or defraud creditors

Debtor received less than a reasonable equivalent in value

Fraudulent transfers to a self-established living trust

Prentice Hall © 2007 17

Chapter 7: Liquidation Liquidation bankruptcy Debtor keeps a substantial portion of

his or her assets (exempt assets). Nonexempt property is sold for cash

and cash is distributed to creditors. Unpaid debt is discharged. Debtor’s future income cannot be

reached to pay discharged debts.

Prentice Hall © 2007 18

Chapter 7 Procedure Individuals, partnerships, corporations, and

other business entities may file under Chapter 7.

Abuse – if debts are primarily consumer debts, the court may find that Chapter 7 would be abuse. Court may dismiss the proceeding or convert it to Chapter 13 or Chapter 11.

Eligibility for Chapter 7 for an individual debtor Median income test Means test

Prentice Hall © 2007 19

Statutory Distribution Under Chapter 7

Nonexempt property is distributed according to the Bankruptcy Code. Secured creditors

Oversecured Undersecured

Priority unsecured creditors, in order of priority

Nonpriority unsecured creditors

Prentice Hall © 2007 20

Discharge Under Chapter 7

After exempt assets are sold and proceeds distributed, the remaining unpaid debts of individual debtor are discharged.

Business entities must liquidate after completing Chapter 7 proceedings.

There are some acts that bar discharge of unsatisfied debts.

Prentice Hall © 2007 21

Chapter 13: Adjustment of Debts

A rehabilitation form of bankruptcy that permits bankruptcy courts to supervise the debtor’s plan for the payment of unpaid debts in installments over the plan period.

Petition for Chapter 13 can only be voluntarily filed by an individual debtor with regular income.

Prentice Hall © 2007 22

Chapter 13 Procedure Debtor files a list of

creditors, assets, and liabilities with the court.

Court schedules a creditor’s meeting; creditors submit proof of claims.

A trustee is appointed. Automatic stay

Prentice Hall © 2007 23

Property of the Chapter 13 Estate

Nonexempt property of the debtor at the filing of the petition

Earnings and future income earned by debtor after filing but before case is closed

Debtor remains in possession of all the property of the estate.

Prentice Hall © 2007 24

Plan of Payment Plan may be up to 3

or up to 5 years, depending on the amount of debtor’s income.

Court will discharge debtor from unpaid unsecured debts after payments required by the plan are made.

Prentice Hall © 2007 25

Chapter 11: Reorganization

Debtor-in-possession – debtor is left in place to operate the business.

Court appoints a creditors’ committee to represent the class of unsecured claims.

Automatic stay suspends actions by creditors to recover debtor’s property.

Prentice Hall © 2007 26

Executory and Labor Union Contracts

Debtor has the opportunity to accept or reject certain executory contracts and unexpired leases.

Debtor and union representatives can voluntarily modify collective bargaining agreements. If an agreement is not reached, debtor can

petition the bankruptcy court to reject collective bargaining agreement and modify retirement benefits.

Prentice Hall © 2007 27

Plan of Reorganization Debtor has the exclusive right to file

plan of reorganization in first 120 days.

If the debtor fails, any party in interest may propose a plan.

Debtor must supply creditors and equity holders with a disclosure statement.

Prentice Hall © 2007 28

Chapter 11 Plan Confirmation

Bankruptcy court must confirm the plan. Acceptance method

Plan is in creditors’ best interests

Plan is feasible Each class of

creditors accepts the plan

Cram-down provision

Prentice Hall © 2007 29

Chapter 12: Family Farmer and Family Fisherman Bankruptcy

Adjustment of debts of a family farmer or family fisherman with regular income

Under 2005 Act, Chapter 12 is a permanent part of the Bankruptcy Code and includes family fishermen as debtors who may use its provisions.

Prentice Hall © 2007 30

Chapter 12 Procedure and Estate

Petition may only be filed voluntarily by debtors.

Automatic stay against creditor’s actions, such as foreclosures

Estate includes property acquired after filing and before completion of plan, and earnings during same period.

Prentice Hall © 2007 31

Claims Plan can be confirmed as to secured

creditors if certain conditions are met. Debtor and unsecured creditor can agree

to settlement of an unsecured creditor’s priority claim, reducing it or extending the payment time.

Nonpriority unsecured claims – plan can modify claims of unsecured creditors

Executory contracts can be accepted or rejected.

Prentice Hall © 2007 32

Chapter 12 Plan Confirmation

If requirements are met, bankruptcy court will confirm the plan if: Plan is proposed in good faith Plan is in best interests of each allowed

unsecured claim Plan is feasible Debtor must submit all or part of future

earnings to trustee for completion of the plan.

Cram-down provision

Prentice Hall © 2007 33

Discharge Under Chapter 12

Bankruptcy court will discharge debtor after the plan of payment is completed.

Prentice Hall © 2007 34

Special Forms of Bankruptcy

The Bankruptcy Code includes other provisions for special forms of bankruptcy.

Railroad reorganization Municipality adjustment of

debts Stockbroker and

commodity broker liquidation

Commercial banks, savings banks, and credit unions