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Chapter 30 Bankruptcy Law. Bankruptcy and Reorganization. Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. Federal court under U.S. district court, can appeal to district courts. Federally appointed judges. .

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Chapter 30 bankruptcy law

Chapter 30Bankruptcy Law

Bankruptcy and reorganization
Bankruptcy and Reorganization

  • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction.

  • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994.

  • Federal court under U.S. district court, can appeal to district courts.

  • Federally appointed judges.

1 types of bankruptcy relief 1
§1: Types of Bankruptcy Relief [1]

  • Bankruptcy code has 8 chapters.

  • 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate.

  • Chapter 7 - liquidation proceedings.

  • Chapter 9 - adjustment of debts of a municipality.

Types of bankruptcy relief 2
Types of Bankruptcy Relief [2]

  • Chapter 11 – reorganizations.

  • Chapter 12 - adjustment of debts of family farmers with regular incomes.

  • Chapter 13 - adjustment of debts of individuals with regular incomes.

2 liquidation proceedings
§2: Liquidation Proceedings

  • Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee.

  • Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.

  • Available for any person, individual, corporation, partnership.

  • Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

Filing the chapter 7 petition
Filing the Chapter 7 Petition

  • Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.

  • Voluntary vs. Involuntary bankruptcy.

Voluntary petition 1
Voluntary Petition [1]

  • Petitioner must understand there are other chapters available.

  • Debtor does not have to be insolvent.

  • List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.

  • Swear to these and sign. Federal crime to misrepresent.

Voluntary petition 2
Voluntary Petition [2]

  • Court issues order of relief.

  • Clerk of court gives trustee and Creditors mailed notice of the order within 20 days.

  • Court will deny if “substantial abuse” of Chapter 7.

Involuntary bankruptcy 1
Involuntary Bankruptcy [1]

  • Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution).

  • If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

Involuntary bankruptcy 2
Involuntary Bankruptcy [2]

  • If there are less than 12 creditors, one or more having a claim of $10,000 may file.

  • Court will order relief if Debtor is generally not paying debts as they come due.

Involuntary bankruptcy 3
Involuntary Bankruptcy [3]

  • Court will order relief if:

    • A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing.

  • Penalties for frivolous petitions against debtors, including Punitive damages.

Automatic stay
Automatic Stay

  • Either voluntary or involuntary.

  • Creditors cannot commence or continue most legal actions.

  • Damages for violation of stay.

  • Creditors can get “adequate protection.”

    • Periodic or one time cash payments or indubitable equivalent.

Property of the estate 1
Property of the Estate [1]

  • Debtor’s Estate includes:

    • All Debtor’s legal and equitable interests in property presently held, including community property;

    • Property transferred in a “voidable” transaction; and

    • Property which Debtor becomes entitled within 180 days after filing.

Property of the estate 2
Property of the Estate [2]

  • Estate includes (cont’d):

    • Proceeds and profits from the property of the estate.

    • After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

    • Case 30.2: In Re Andrews(1996).

Creditor s meeting and claims 1
Creditor’s Meeting and Claims [1]

  • Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets.

  • Within 90 days, Creditors must file “proof of claim” with court clerk.

  • Leases cannot be for more than one year.

Creditor s meeting and claims 2
Creditor’s Meeting and Claims [2]

  • Allowed unless disputed.

  • If claim is disputed or unliquidated, court will decide value.

  • It is a crime to file false claim.

  • Employment contracts and real estate.


  • See list in text pages 549-550.

  • States may pass law requiring Debtor use state exemptions.

  • In some states, Debtor may choose state or federal exemptions.

Bankruptcy trustee
Bankruptcy Trustee

  • Court-appointed until first meeting of creditors.

  • Creditors elect permanent trustee

  • Administers estate.

  • Collects proceeds, liquidates assets and pay Creditors in order of priority.

Trustee s powers
Trustee’s Powers

  • Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of:

    • Debtor against the creditors.

    • Lien creditors against the creditors.

    • Bona fide purchaser against the creditors.

    • Trustee still loses to the pmsi creditor who perfects within his “magic” 10-day period.

Voidable rights
Voidable Rights

Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

Preferential transfers 1
Preferential Transfers [1]

  • A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another.

  • For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

Preferential transfers 2
Preferential Transfers [2]

  • Trustee can use preferential payment to pay a real preexisting debt, not for current consideration.

  • Creditor gets more than he would in a Chapter 7.

  • Consumer can transfer up to $600 without constituting a preference.

Liens on debtor s property
Liens on Debtor’s Property

  • Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent.

  • Can avoid liens which were unperfected on date of bankruptcy.

Fraudulent transfers
Fraudulent Transfers

  • Trustee may avoid fraudulent transfers made within one year of filing of petition.

  • Trustee may proceed under state law for fraud with a 3 year statute of limitations.

Distribution of property 1
Distribution of Property [1]

  • If Secured property:

    • Consumer debtors.

      • Have 30 days from filing petition or before first meeting of creditors.

      • Debtor must tell what she intends to do with collateral-- keep or surrender.

      • Trustee must enforce within 45 days.

    • If surrenders: creditor can keep or sell.

      • If creditor keeps = full satisfaction of debt.

      • If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

Distribution of property 2
Distribution of Property [2]

  • Unsecured property

    • Paid according to bankruptcy law.

    • All of one class must be paid before moving to next.

    • Creditor within last class receive proportionately if not enough.

    • See Priority List in text.

    • All creditors paid, trustee gives extra back to debtor.


  • Exemptions.

  • Objections to Discharge.

  • Effect of Discharge.

  • Revocation of Discharge.

  • Reaffirmation of a Debt.

Exceptions to discharge list on p 604
Exceptions to Discharge(List on p.604)

  • Claims for back taxes.

  • Claims for amounts borrowed by Debtor to pay federal taxes.

  • Claims against property/money obtained by Debtor under false pretenses.

  • Claims by Creditors who did not know about bankruptcy.

Reaffirmation of debt
Reaffirmation of Debt

  • Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy.

  • Agreement is filed with court.

  • Debtor can rescind agreement at any time.

3 reorganizations
§ 3: Reorganizations

  • Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest.

  • Same debtors as are eligible under Chapter 7.

Reorganizations 2
Reorganizations [2]

  • “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate.

  • “Workouts”.

Reorganizations 3
Reorganizations [3]

  • Debtor in Possession (DIP).

    • Trustee may be appointed.

    • DIP has same powers as trustee in Chapter 7.

      • Strong-arm clause.

  • Collective Bargaining Agreements.

  • Creditors Committees.

  • The Reorganization Plan.

4 additional forms of bankruptcy relief
§4: Additional Forms of Bankruptcy Relief

  • Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750.

  • Not for partnerships, corporations.

Additional forms of bankruptcy relief 2
Additional Forms of Bankruptcy Relief [2]

  • Chapter 12: Family Farmer Plans

    • “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related.

    • Procedure for filing.

    • Content of plan.

    • Court confirmation.

Case 30 1 in re lamana voluntary bankruptcy
Case 30.1: In Re Lamana(Voluntary Bankruptcy)

  • FACTS:

    • Lamanna lived with his parents and had no plans to move out. His monthly expenses were $580. His monthly income was $1,350.96, leaving a difference of $770.96.

    • During a four-week period, he charged $9,994.45 on credit cards. Three months latter, when his total unsecured debt was $15,911.96, he filed a Chapter 7 petition in a federal bankruptcy court.

    • The court dismissed Lamanna’s case because he was capable of paying all of his debts under a Chapter 13 repayment plan and dismissed the case.

Case 30 1 in re lamana voluntary bankruptcy1
Case 30.1: In Re Lamana(Voluntary Bankruptcy)


    • Lamanna argued that he was being penalized for living with his parents.

    • Granting Lamanna’s petition would constitute substantial abuse. Under a “totality of the circumstances” test, Lamanna “has sufficient disposable income to repay his debts under a Chapter 13 repayment plan in three to five years.”

Case 30 2 in re andrews property of the estate
Case 30.2: In Re Andrews(Property of the Estate)

  • FACTS:

    • Tarmac Acquisition, Inc., bought AMAX Corp. The AMAX owners, including John Andrews, signed agreements not to compete with Tarmac.

    • Andrews was to receive $1 million, payable in quarterly installments over a five-year period.

    • Three years later, Andrews filed a bankruptcy petition. He asked the court not to include, in the property of his estate, any future installments. The court refused. Andrews appealed.

Case 30 2 in re andrews property of the estate1
Case 30.2: In Re Andrews(Property of the Estate)

  • HELD:

    • The Fourth Circuit affirmed.

    • “Pre-petition assets, like the NCA [noncompetition agreement] payments, are those assets rooted in the debtor’s pre-petition activities, including any proceeds that may flow from those assets in the future.”

    • The payments “are plainly rooted in, and grow out of, Andrews’s pre-petition activities.”

Case 30 3 in re jercich discharge
Case 30.3: In Re Jercich(Discharge)

  • FACTS:

    • In 1981, Petralia began to work for Jercich, Inc., a mortgage company wholly owned and operated by George Jercich.

    • Petralia’s primary duty was to obtain investors to fund the home loans. Jercich agreed to pay Petralia a salary plus monthly commissions for loans that were funded through his efforts.

    • When Jercich failed to pay the commissions, Petralia quit and sued Jercich. Jercich filed bankruptcy. The bankruptcy court held the debt was dischargeable. Petralia appealed.

Case 30 3 in re jercich discharge1
Case 30.3: In Re Jercich(Discharge)


    • Jercich’s debt to Petralia was not dischargeable.

    • “An intentional breach of contract generally will not give rise to a nondischargeable debt.”

    • The court held, however, that “where an intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge.”