Consumer Bankruptcy Condensed Outline

History of Bankruptcy

• Bankruptcy Act (1898-1978)

• Created Chapter 7

• Heavily supplemented by Chandler Act in 1930s which:

• Created Chapters 11

• Before under Chapter 7 assets had to be liquidated & sold for scrap

• Created Chapter 13 as simplified version of 11 but for individuals

• Used Roman Numerals

• Individual debtors are eligible for any of the 3 types

• Bankruptcy Reform Act of 1978

• Called the Bankruptcy Code Resulted in huge increase in bankruptcies

• Created Modern BK Code

• No insolvency requirement

• Uses all odd-numbered Arabic numerals

• 2005 Amendments

• Reduced number of bankruptcy cases Created the “means test” for Chapter 7 filings (which wipe out all debt)

• Debtor only eligible if he can show that he lacks the means to make some payments on the debt

TYPES OF BANKRUPTCY OVERVIEW

• Chapter 7: Bankruptcy Liquidation (Straight BK)

• Purpose: is to give debtor a fresh start free and clear of prior debts

• Rule: All property of the debtor owned at time BK petition filed becomes part of the BK estate.

• This creates an automatic stay-to prevent any creditor from getting an unfair advantage.

• An individual is entitled to EXEMPT certain property from the BK- later released to the debtor.

• Under Chpt. 7, only an INDIVIDUAL can be discharged. (businesses don’t need fresh start, they are just dissolved)

• Access for individuals whose income prior to the BK exceeded state medians is limited by the “means test” (leaves Chpt. 13 as only practical alternative)

• If the secured claim is greater than the value of the collateral (determined by replacement value=retail value) then the property has no value to the estate and will be abandoned.

• If secured claim is less than value of collateral (debtor has equity) then the property goes into the BK estate.

• Trustee can sell the collateral; pay off secured claim, and use rest for the other creditors.

• Liquidation- any remaining non-exempt property is sold for cash

• Proceeds of liquidation:

-First to secured creditors

-Second to pay certain administrative expenses

-Last to unsecured creditors pro rata according to priority

• For Debtor this means:

• Personal liability for prepetition debts discharged

• Debtor post petition income protected from pre petition debts (limited by means test)

• Debtor must give up any nonexempt property or pay the liens (redemption)

• Doesn’t allow debtor to modify liens or retain any nonexempt property (liens flow through BK)

• Chapter 13: Reorganization Bankruptcy

• Only available to :

(1) Individuals

(2) With regular income

(3) Owing less than $336,900 in noncontingent, liquidated, unsecured debt and less than $1,010,650 in noncontingent, liquidated, secured debt.

• Consumer version of Chapter 11

• Allows debtor the benefit of discharge w/o losing nonexempt property

• Liens on nonexempt property can be MODIFIED (don’t flow through BK to extent that they are modified)

• Debtor can “cram down” the amount of the debt that exceeds the value of the collateral (replacement value)

• Debtors post petition income is NOT protected from prepetition debts

• Debtor required to come up with plan where promises to pay some or all of preBK debts over period of time (5 years max)

• Doesn’t require creditor approval

• When all payments completed the debtor entitled to discharge of debts provided for under plan (secured debt paid first)

• Unsecured creditors prefer Chpt. 13

• Secured Creditors prefer Chpt. 7 because liens can’t be modified.

• Chapter 11: Reorganization Bankruptcy

• Can be used by Individuals and Organizations, but primarily designed for businesses

• Debtor normally allowed keep assets and continue operation of its business as a debtor in possession

• Debtor in possession proposes a plan of reorganization under which creditors will be paid, sometimes over a period of time, from assets of the estate or post confirmation earnings of debtor

• Unlike Chpt 13, plan considered only after voted on by the various classes of creditors and stockholders of debtor

INITIAL MISCELLANEOUS PROVISIONS

• Eligibility for Bankruptcy

• BC §301: A voluntary case can be commenced by an ENTITY that may be a DEBTOR

• Entity= person, estate, trust, or governmental unit

• Not all entities can qualify as debtors-

• only a Person or Municipality may be a debtor

• Person includes individuals, partnerships, and corporations (not governmental units)

• Banks and Insurance Companies cannot be debtors

• Railroads: only debtors under Chapter 11 but not Chapter 7

• Automatic Stay

• Filing of petition results in Automatic Stay against variety of acts by creditors

• Automatic Stay bars:

• The commencement or continuation of judicial proceedings against the debtor or against property of the estate

• The enforcement of any pre-BK judgment against debtor or property of estate

• Any act to obtain possession of property of estate

• Any act to create, perfect, or enforce any lien against property of estate

• If a creditor violates automatic stay, BK judge may subordinate creditor’s claim to all other claims even if secured

• Purposes:

• to freeze status quo

• assure a pro rata distribution of nonexempt assets to unsecured creditors based on priority at moment of filing

• to create a BK estate

• Gives trustee in BK a lien on all property of estate

• This line has priority over all SUBSEQUENTLY obtained interests

• Trustee in Bankruptcy

• US & administrative trustees are federal employees

• Job is to monitor bankruptcy filing to prevent abuses

• Case Trustee is administrator of estate

• Gathers assets and makes decisions regarding disposition of assets and proceeds to creditors

• Acts primarily for benefit of unsecured creditors (fiduciary relationship)

• Trustee has lien in amount of all unsecured claims

• Goal is to maximize assets avail to unsecured creditors

• Can employ professional to help (lawyers & accountants)

• Has power of TURNOVER, LIEN AVOIDANCE, PREFERENCE, LIEN MODIFICATION

Liens

• All liens are a secured claim in Bankruptcy

  • The distinction is whether they are consensual or non-consensual.

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Buy the full version of these notes or essay plans and more in our Consumer Bankruptcy Outlines.