25-1
Chapter 28Bankruptcy and Reorganization
Introduction to Bankruptcy and Reorganization
Bankruptcy Reform Act of 1978 Debtor friendly
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Creditor friendly
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-2
Types of Bankruptcy
Chapter Type 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
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-3
Bankruptcy Law
U.S. Bankruptcy Courts: Special federal courts that hear and decide bankruptcy cases
Part of federal court system
One for each federal district
Judges appointed for 14-year terms
Judges assisted by bankruptcy trustees
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-4
Bankruptcy Procedure
Pre- and Post-Petition Counseling Debtor must receive pre-petition counseling within
180 days prior to filing petition Types and uses of credit, budget analysis Provided by nonprofit credit counseling
agencies
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-5
Bankruptcy Procedure
Filing the Petition Voluntary petition
filed by the debtor Chapters 7, 11, 12, and 13 cases
Involuntary petition Filed by the creditor Chapters 7 and 11 cases only
The 2005 act requires attorney certification of the information in the bankruptcy petition
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-6
Bankruptcy Procedure
Order for relief: An order that occurs upon the filing of either a voluntary petition or an unchallenged involuntary petition, or an order that is granted after a trial of a challenged involuntary petition
Proof of claim: A document required to be filed by a creditor that states the amount of his or her claim against the debtor
Proof of interest: A document required to be filed by an equity security holder that states the amount of his or her interest against the debtor
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-7
Bankruptcy Procedure
Automatic stay: The suspension of certain legal actions by creditors against a debtor or the debtor’s property that include: Instituting or maintaining legal actions to collect
prepetition debts Enforcing judgments obtained against the debtor Obtaining, perfecting, or enforcing liens against
property of the debtor Nonjudicial collection efforts
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-8
Bankruptcy Procedure
Discharge: A court order that relieves a debtor of the legal liability to pay his or her debts that were not paid in the bankruptcy proceeding
All or part of a debt can be discharged Some debts are not discharged Reaffirmation agreement: An agreement entered
into by a debtor with a creditor prior to discharge, whereby the debtor agrees to pay the creditor a debt that would otherwise be discharged in bankruptcy
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-9
Exhibit 28.1: Debts that cannot be discharged in bankruptcy
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-10
Bankruptcy Estate
Bankruptcy estate: The debtor’s property and earnings that comprise the estate of a bankruptcy proceeding
Includes interest of debtor and the debtor’s spouse in community property
Exempt property: Property that may be retained by the debtor pursuant to federal or state law that does not become part of the bankruptcy estate
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-11
Exhibit 28.2: Federal Exemptions from the Bankruptcy Estate
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-12
Bankruptcy Estate
State Exemptions: States may Give debtors the option of choosing between
federal and state exemptions Require debtors to follow state law
Homestead exemption: Equity in a debtor’s home that the debtor is permitted to retain
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-13
Chapter 7—Liquidation
Chapter 7—Liquidation: A form of bankruptcy in which the debtor’s nonexempt property is sold for cash, the cash is distributed to the creditors, and any unpaid debts are discharged
Also termed as straight bankruptcy
Debtor’s future income cannot be reached
Abusive filing: A Chapter 7 filing that is found to be an abuse of Chapter 7 liquidationbankruptcy
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-14
Chapter 7—Liquidation
Median income test: If a debtor’s median family income is at or below the state’s median family income for a family the same size as the debtor’s family, the debtor can receive Chapter 7 relief
Categories:
Median family income equal to or below the state’s median family income
Median family income higher than the state’s median family income
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-15
Chapter 7 – Liquidation
Statutory Distribution of Property Oversecured secured creditor Undersecured secured creditor
Chapter 7 discharge: The termination of the legal duty of an individual debtor to pay unsecured debts that remain unpaid upon the completion of a Chapter 7 proceeding The debtor is not responsible for paying
prepetition debts out of postpetition income
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-16
Exhibit 28.3: Priority of Unsecured Creditor Claims
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-17
Chapter 7 – Liquidation
Acts that bar discharge Debtor lied about financial position when
obtaining credit Debtor transferred, concealed, removed, or
destroyed estate with intent to defraud creditors Debtor falsified, destroyed, or concealed records
about financial condition Debtor failed to appear at meeting of creditors Debtor failed to complete course on personal
financial management
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-18
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Rehabilitation form of bankruptcy Court supervises plan for payment of unpaid debts by
installments Advantages
Debtor may avoid stigma, retain more property, incur fewer expenses
Creditor may recover greater percentage of debts
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-19
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Filing a Chapter 13 petition Voluntary filing of petition by debtor with regular
income Cannot be filed involuntarily by a creditor Debts must be primarily consumer debt Amount of debt must not exceed certain dollar
amounts $360,475 in unsecured debts $1,081,400 in secured debts
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-20
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Property of a Chapter 13 Estate All nonexempt property of debtor at
commencement of case Nonexempt property acquired before case is closed Earnings and future income
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-21
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Chapter 13 Plan of Payment Must be filed within 90 days after the order for
relief Must be accepted by secured and unsecured
creditors or approved by the court During the plan period, unsecured creditors might
not receive full payment of the debt owed to them
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-22
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Confirmation of a Chapter 13 plan of payment Conditions
The plan was proposed in good faith The plan passes the feasibility test The plan is in the best interests of the creditors The debtor has paid all domestic support
obligations owed The debtor has filed all applicable federal, state,
and local tax returns
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-23
Chapter 13 – Adjustment of Debts of anIndividual with Regular Income
Chapter 13 Discharge: A discharge in a Chapter 13 case that is granted to the debtor after the debtor’s plan of payment is completed Cannot be discharged under Chapter 13 if the
debtor has received discharge under Chapter 7, 11, or 12 within 4 years, or Chapter 13 within 2 years
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-24
Chapter 11 – Reorganization
Chapter 11: A bankruptcy method that allows the reorganization of the debtor’s financial affairs under the supervision of the bankruptcy court For individuals, partnerships, corporations, and
other business entities Debtor reorganizes with new capital structure
May be relieved of portion of debts, burdensome executory contracts and unexpired leases
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-25
Chapter 11 – Reorganization
Debtor-in-possession: A debtor who is left in place to operate the business during the reorganization proceeding
Creditors’ committee: A committee of unsecured creditors that is appointed by the court to represent the class of unsecured claims Committee may be appointed to represent secured
creditors and equity holders
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-26
Chapter 11 – Reorganization
Executory contract: A contract or lease that has not been fully performed Unexpired lease A debtor may reject executory contracts and
unexpired leases in bankruptcy Chapter 11 Plan of Reorganization: Sets forth a
proposed new capital structure for a debtor to assume when it emerges from Chapter 11 reorganization bankruptcy
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-27
Chapter 11 – Reorganization
Confirmation of a Chapter 11 Plan of Reorganization Acceptance method is used to confirm the plan if:
The plan is in the best interests of the creditors The plan is feasible Each class of creditors accepts the plan
Cram-down provision: A provision whereby the court confirms a plan of reorganization over an objecting class of creditors if certain requirements are met
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-28
Chapter 11 – Reorganization
Small Business Bankruptcy Total debts of less than $2,343,300 Fast-track form of Chapter 11 reorganization
bankruptcy is used for resolution
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-29
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 28-30