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BANKRUPTCY. Form of Relief or Strategic Option?. BANKRUPTCY. Congress directed by Constitution to “establish…uniform laws on the subject of bankruptcies…” Art. I, §8, Cl. 4

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bankruptcy

BANKRUPTCY

Form of Relief or Strategic Option?

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BANKRUPTCY

Congress directed by Constitution to “establish…uniform laws on the subject of bankruptcies…”Art. I, §8, Cl. 4

“Bankruptcy gives to the honest, but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”Local Loan Co. v. Hunt, 292 US 234 (1934)

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BANKRUPTCY

USE OF BANKRUPTCY

BANKRUPTCY FILINGS(Years Ended December 31, 2001 through 2005)

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BANKRUPTCY

HISTORICAL CONTEXT

  • Articles of Confederation did not prevent “Judgment-Jumping”

Motive: Enhance Creditors’ Ability to Collect/Not Debtor Relief

  • Debtors’ Prisons until mid-19th Century
  • 1898: Commercial Interests of Nationalized Economy motivated surprisingly Debtor-friendly Law
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BANKRUPTCY

FRAMEWORK

Federal Court Process for Individuals and Businesses to Reorganize or Discharge Debts

NON-DISCHARGEABLE DEBTS

  • Alimony and Child Support
  • DUI Judgments
  • Student Loans
  • Fines and Income Taxes
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BANKRUPTCY

EXEMPTIONS

  • Homestead: $50,425
  • Insurance Proceeds, Partnership Property and Liquor Licenses
  • Retirement Plans, Welfare and Unemployment Benefits
  • Personal Property including Tools used in Work
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BANKRUPTCY

PROCEEDINGS

First Action: File and Elect Form

  • Chapter 7: Liquidation
  • Chapter 13: Personal Reorganization
  • Chapter 11: Business Reorganization

Second Action: Court appoints Trustee

Assumes Constructive Management of Bankrupt’s Financial Matters

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PROCEEDINGS

  • CHAPTER 7 LIQUIDATION
    • (1) Trustee/Court identify Exemptions and Exclusions; (2) Notify Debtor and Creditors of Disposition of Dischargeable Debt
  • CHAPTER 13 PERSONAL REORGANIZATION
    • (1) Debtor proposes Plan; (2) Negotiations with Creditors; (3) Reconcile Ability to Pay with Obligations; (4) Most Assets retained by Debtor
BANKRUPTCY
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BANKRUPTCY

PROCEEDINGS

CHAPTER 11 BUSINESS REORGANIZATION

Creditors (Committee) Accept/Reject Company Plan subject to Trustee/Court Oversight

Final Plans usually Reconfigure Capital Structure: Creditors Swap Debt for Equity

“Cram-Down Rule”

Super-Majority (2/3) Agreement binds Minority/Dissenting Claimants; Effect can be Loss of Claim Priority

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BANKRUPTCY

PROCEEDINGS

PREFERENCE (“Reach-back”) RULE

Creditors may Recover Payments made in Anticipation of Bankruptcy (Fraudulent Conveyances) under Certain Conditions

  • 90 Days prior to Filing if Effect favors Recipient over Other Creditors
  • One Year prior to Filing if Payments made to “Insiders” (Relatives or “Controlled” Persons or Entities)
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BANKRUPTCY

CHANGES AS OF OCTOBER 17, 2005

  • Shifts to Debtor More of Burden to Prove Eligibility for Bankruptcy
  • Requires Pre-Filing Credit Counseling
  • Chapter 7 “Means Test”: Above-median Income can convert Filing to Chapter 13 with “regular” payment requirement

Businesses providing Customer Credit supported Changes as Essential for Mitigating Misuse of Law