• Bankruptcy and the Bankruptcy Abuse
Prevention and Consumer Protection act
of 2005
Do creditors need the protection
of the law? Why or why not?
LAWS THAT
PROTECT CREDITORS
• Laws allowing secured debts
– Pledges
– Involuntary liens
• Laws involving third parties
– Guaranty
• Laws concerning unsecured debts
• Laws allowing garnishment of wages
DEBTOR PROTECTION
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Laws setting maximum interest rates
Laws requiring disclosure of terms
Laws challenging unconscionable contracts
Laws prohibiting abuses in the credit system
Laws requiring notice of debt payment to be
recorded
• Laws allowing debtors to cancel debts and start
over
LAWS PROHIBITING ABUSES
IN THE CREDIT SYSTEM
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Federal Equal Credit Opportunity Act
Federal Fair Debt Collection Practices Act
Federal Fair Credit Billing Act
Federal Fair Credit Reporting Act
Credit Repair Organizations Act
PROTECTIONS FOR CREDIT
CARD USERS
• Issuer of card specifies the limit of
available credit
• Cardholder is liable for all purchases
• Liability limited under certain conditions
FOCUS
• Is bankruptcy fair?
Federal Bankruptcy Law
• Article I, section 8, clause 4 of the U.S.
Constitution provides that “The congress shall
have the power. . .to establish. . . uniform laws
on the subject of bankruptcies throughout the
United States.”
• Bankruptcy law is federal law.
• There are no state bankruptcy laws.
The Fresh Start
• The primary purpose of federal bankruptcy
law is to discharge the debtor from
burdensome debts.
• The law gives debtors a fresh start by
freeing them from legal responsibility for
past debts.
Types of Bankruptcy
• The Bankruptcy Code is divided into
chapters.
• The most common forms of bankruptcy
are provided by the following chapters:
– Chapter 7 – Liquidation Bankruptcy
– Chapter 11 – Reorganization Bankruptcy
– Chapter 12 – Family Farmer Bankruptcy
– Chapter 13 – Consumer Debt Adjustment
THE BANKRUPTCY ACT
Chapter 7
Liquidation, or “straight bankruptcy”
Chapter 11
Reorganization
Chapter 12 Debt relief for family farms
Chapter 13 Extended time payment plan
BANKRUPTCY PROCEDURE
UNDER CHAPTER 7
• The bankruptcy petition
– Voluntary bankruptcy
– Involuntary bankruptcy
– Required informational filing
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Selection of the trustee in bankruptcy
Non-dischargeable debts
Exempt property
Liquidation and distribution of proceeds
Liquidation Bankruptcy Chapter 7
• The most familiar form of Bankruptcy.
– The debtor’s nonexempt property is sold for
cash,
– The cash is distributed to the creditors, and
– Any unpaid debts are discharged.
Liquidation Bankruptcy - Chapter 7
(continued)
• Any person (including individuals, partnerships,
and corporations) may be debtors in a Chapter 7
proceeding.
• Certain businesses (including banks, savings
and loan associations, credit unions, insurance
companies, and railroads) are prohibited from
filing bankruptcy under Chapter 7.
Reorganization Bankruptcy –
Chapter 11
• A bankruptcy method that allows
reorganization of the debtor’s financial
affairs under the supervision of the
Bankruptcy Court.
Reorganization Bankruptcy –
Chapter 11 (continued)
• Chapter 11 is used primarily by
businesses to reorganize their finances
under the protection of the Bankruptcy
Court.
• The debtor usually emerges from
bankruptcy a “leaner” business, having
restructured and discharged some of its
debts.
Reorganization Proceeding
• Chapter 11 is available to individuals,
partnerships, corporations, nonincorporated associations, and railroads.
• Chapter 11 is not available to banks,
savings and loan associations, credit
unions, insurance companies,
stockbrokers, or commodities brokers.
Debtor-in-Possession
• A debtor who is left in place to operate the
business during the reorganization
proceeding.
• The court may appoint a trustee to operate
the debtor’s business only upon a showing
of cause.
Creditors’ Committee
• The creditors holding the seven largest
unsecured claims are usually appointed to
the creditors’ committee.
• Representatives of the committee appear
at Bankruptcy Court hearings, participate
in the negotiation of a plan of
reorganization, assert objections to the
plan, etc.
Automatic Stay
• The result of the filing of a voluntary or
involuntary petition.
• The suspension of certain actions by
creditors against the debtor or the debtor’s
property.
• Relief from stay – asked for by a secured
creditor.
Plan of Reorganization
• A plan that sets forth a proposed new
capital structure for the debtor to have
when it emerges from reorganization
bankruptcy.
• The debtor has the exclusive right to file
the first plan of reorganization.
• Any party of interest may file a plan
thereafter.
Executory Contracts
• A contract that has not been fully
performed.
• Chapter 11 reorganization bankruptcy
permits a debtor (with court approval) to
assume or reject executory contracts.
– e.g., leases for office space, and sales and
purchase contracts.
Rejection of Collective Bargaining
Agreements
•
A collective bargaining agreement may
be rejected or modified as an executory
contract if:
1. It is necessary to the reorganization,
2. The debtor acted in good faith, and
3. The balance of the equities favors rejection or
modification of the agreement.
Confirmation of a Plan of
Reorganization
• A plan of reorganization must be
confirmed by the court before it becomes
effective.
• Confirmation is either by:
– The acceptance method, or
– The “cram down” method
Confirmation by the Acceptance
Method
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2.
3.
4.
The Bankruptcy Court must
approve a plan of
reorganization if:
The plan is in the best
interests of each class of
claims and interests,
The plan is feasible,
At least one class of claims
votes to accept the plan, and
Each class of claims and
interests is non-impaired.
Confirmation by the Cram Down
Method
• A method of confirmation of a plan of
reorganization where the court forces an
impaired class to participate in the plan of
reorganization.
• The plan must be fair to the impaired
class:
– Secured Creditors
– Unsecured Creditors
– Equity Holders
Discharge
• Upon confirmation of a plan of
reorganization, the debtor is granted a
discharge of all claims not included in the
plan.
• The plan is binding on all parties once it is
confirmed.
Chapter 13 Consumer Debt
Adjustment
• A rehabilitation form of bankruptcy that
permits the courts to supervise the
debtor’s plan for the payment of unpaid
debts by installments.
Filing the Petition
• A Chapter 13 proceeding can be initiated only by
the voluntary filing of a petition by the debtor.
– Must allege insolvency or inability to pay debts as they
become due
– Extension gives longer period to pay debt
– Composition provides for reduction of debt
• Creditors cannot file an involuntary petition to
place a debtor in Chapter 13 bankruptcy.
Automatic Stay
• The filing of a Chapter 13 petition
automatically stays:
– Liquidation bankruptcy proceedings
– Judicial and non-judicial actions by creditors
to collect prepetition debts from the debtor
– Collection activities against co-debtors and
guarantors of consumer debts
– Obtaining, perfecting, or enforcing liens
– Attempts to set off debts
The Plan of Payment
• A Chapter 13 is a form of reorganization
bankruptcy.
• The debtor must file a proposed plan of
payment on how the debts are to be
rescheduled.
• The debtor’s plan of payment must be filed
within 15 days of filing the petition.
• Payments must begin within 30 days of
filing plan.
Confirmation of the Plan
• The plan may modify the rights of
unsecured creditors and some secured
creditors.
• The plan must:
– Be proposed in good faith
– Pass the feasibility test
– Be in the interests of the creditors
• Plan confirmation
– Automatic if secured creditors accept plan.
– Court may confirm and allow creditor to retain lien.
– Vote of unsecured creditors not necessary.
Discharge
• A discharge is granted to a debtor in a
Chapter 13 consumer debt adjustment
bankruptcy only after all the payments
under the plan are completed by the
debtor.
• Even if the debtor does not complete the
payments called for in the plan, the court
may grant the debtor a hardship
discharge.
Family Farmer Bankruptcy Chapter 12
• Chapter 12 is a reorganization provision of
the Bankruptcy Code.
• Allows family farmers to reorganize
financially.
• Gives family farmers added protection not
available under Chapter 11.
Bankruptcy Procedure
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Filing a petition
Order for relief
Meeting of the creditors
Appointment of a trustee
Proof of claims
Filing a Petition
• Voluntary petition
– Filed by debtor.
– Only needs to state that filer has debts.
– Must include schedules showing creditors, property
owned, financial affairs, current income and
expenses, and be sworn to.
• Involuntary petition
– Filed by any creditor.
– Placed debtor in bankruptcy.
– If more than 12 creditors, must be filed by 3 of them.
Order for Relief
• Filing a voluntary petition or an
unchallenged involuntary petition
constitutes an order for relief.
• If involuntary petition is challenged, court
will decide if relief should be granted.
Meeting of Creditors
• Within 10 to 30 days of the court granting
the order for relief, the court will call a first
meeting of creditors
• Judge will not be present
• Debtor must answer questions, but can
have counsel
• Bankruptcy trustee is elected
Bankruptcy Trustee
• Takes possession of property
• determines secured, unsecured, and
exempt property
• Examines claims
• Invests, manages, sells, or disposes of
property
• Distributes the proceeds of the estate
• Reports to the court
The Bankruptcy Estate
• An estate created upon the
commencement of a Chapter 7
proceeding.
• It includes all the debtor’s legal and
equitable interests in real, personal,
tangible, and intangible property, wherever
located, that exist when the petition is
filed, minus exempt property.
Exempt Property
• Property that may be retained by the debtor
pursuant to federal or state law.
• Debtor’s property that does not become part of
the bankruptcy estate.
• The Bankruptcy Code also permits states to
enact their own exemptions.
• Many states require the debtor to file a
Declaration of Homestead prior to bankruptcy.
Statutory Distribution of Property
• Nonexempt property of the bankruptcy
estate must be distributed to the debtor’s
secured and unsecured creditors pursuant
to the statutory priority established by the
Bankruptcy Code.
– A secured creditor’s claim to the debtor’s
property has priority over the claims of
unsecured creditors.
Distribution to Secured Creditors
• All secured creditors claims have priority
over those of unsecured creditors
• Secured creditors may:
– Accept collateral as full payment
– Foreclose on collateral and use proceeds to
pay debt
– Allow trustee to retain collateral, dispose of it,
and remit proceedings of sale
Distribution to unsecured Creditors
• The statutory priority of unsecured creditors is:
– Fees and expenses of administering the estate.
– Secured claims of “gap” creditors.
– Wages, salaries, commissions.
– Contributions to employee benefit plans.
– Farm producers and fishermen for storage or
processing.
– Claims for cash deposited by consumers with debtor.
– Child support, alimony, spousal support.
– Certain tax obligations.
– Claims of general unsecured creditors.
– Any balance is returned to debtor.
Discharge
• The termination of the legal duty of a
debtor to pay debts that remain unpaid
upon the completion of a bankruptcy
proceeding.
• Only individuals may be granted a
discharge.
– Not all debts are dischargeable in bankruptcy.
• Discharge is not available to partnerships
and corporations.
Acts That Bar Discharge
Certain acts by the debtor may bar
discharge:
• Making false representations about his or her
financial position when he or she obtained an
extension of credit
• Transferring, concealing, or removing property
from the estate with the intent to hinder, delay,
or defraud creditors
Acts That Bar Discharge (continued)
• Falsifying, destroying, or concealing
records of his or her financial condition
• Failure to account for any assets
• Failure to submit to questioning at the
meeting of the creditors (unless excused)
Fraudulent and Preferential
Transfers
• The Bankruptcy Code prevents debtors
from making unusual payments or
transfers of property on the eve of
bankruptcy that would unfairly benefit the
debtor or some creditors at the expense of
others.
Voidable Transfers (continued)
• The following transfers may be avoided by
the bankruptcy court:
– Preferential transfers within 90 days before
bankruptcy
– Preferential liens
– Preferential transfers to insiders
– Fraudulent transfers
Chapter 33 Quiz
[True or False]
Chapter 33Quiz
[True or False]
• 1) The founders of the United States
thought the plight of debtors was so
important that they included a provision in
the U.S. Constitution.
• 2) Bankruptcy cases are heard in federal
courts.
• 3) One of the goals of federal bankruptcy
law is to give debtors a chance at a fresh
start financially.
Chapter 33Quiz
• 4) The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, makes
it easier for debtors to escape from their
debts under federal bankruptcy law.
• 5) In addition to federal bankruptcy laws,
there are individual state bankruptcy laws
as well.
• 6) Under the 2005 Act, a debtor may be
given only a partial fresh start as s/he may
have to pay more of their pre-petition
debts out of post-petition earnings.
Chapter 33Quiz
• 7) The U.S. Trustee may perform many of
the tasks that the bankruptcy judge had
previously performed.
• 8) An involuntary petition for bankruptcy is
filed by creditors and places the debtor
into bankruptcy.
• 9) Attorneys may be fined for factual
discrepancies under the 2005 Act.
• 10) The effect of an automatic stay is to
suspend certain legal actions by creditors
against the debtor or debtor’s property.