Bankruptcy Law Lecture Notes

 

What is Bankruptcy?: A legally declared inability or impairment of ability of an individual/organizations to pay their creditors. Bankruptcy law is used to create a plan for a debtor to divide his assets to repay his creditors.

 

-Can be filed by creditor (with a court’s agreement) or debtor (does not require a court’s agreement). Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).

- When an individual files bankruptcy, the creditors must stop any attempts to collect the debts outside of the court’s efforts, at least temporarily.  Bankruptcy can stop a pending foreclosure sale of your home (assuming you own it), a garnishment of your wages, or a threatened repossession.  During a bankruptcy, most creditors cannot call, write, or sue you after your bankruptcy is complete.

-Bankruptcy doesn’t cover: child support payments, alimony, fines, taxes, and student loan obligations.  It usually doesn’t allow you to keep property when your creditor has unpaid mortgage/lien on it.

 

Early History of Bankruptcy Law:

 

- Ancient Greeks had no bankruptcy law, just debt slavery (no more than 5 years; entire family went into debt slavery; debt slaves treated better than regular slaves.)


-The
first time a bankruptcy law was put into action was in England in 1542.  The law originally was meant give creditors some remedies against the debtors who did not pay their debts.  Under the law, the debtors were considered criminals under the law and would be sent to “debtor’s prison.

 

-- Under the Constitution, Congress is the source of bankruptcy law because the founders felt the need for consistent business law across the states

- In 1800, by one vote, the U.S. Congress passed the first American bankruptcy law.  The law was similar to the British law, although a fraudulent debtor could not be sentenced to death.  The law was repealed three years later.

-The Modern American bankruptcy law started with the Bankruptcy Act of 1898.  This law allowed for the voluntary and involuntary filing of bankruptcy, allowed the debtors to claim some exemptions and also removed most barriers for discharging all debts.

 

 

Legal Background:

-Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish... uniform laws on the subject of Bankruptcy throughout the United States."

- States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship.

-Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts, which are a part of the District Courts of The United States. Constitutional power comes under Article 1, Section 8, Clause 4, which allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States."

 

Two basic types of Bankruptcy proceedings: Ch. 7 & Ch. 11, 13

 

Chapter 7 -- -Liquidation (or “straight bankruptcy”): filed under Chapter 7, it is the most common type of bankruptcy proceeding.  It involves the appointment of a trustee who collects non-exempt property of the debtor, sells it, ranks the creditors, and distributes proceeds to the creditors.

-Exempt property: houses (with no mortgages), may include cars, work-related tools and basic household furnishings.

- You can receive a discharge of your debts under Chapter 7 only once every six years.  Stays on credit report for 10 years.

-Debtors need to compile the following:

(1) A list of all creditors and the amount and nature of their claims
(2) The source, amount and frequency of the debtor's income
(3) A list of all of the debtor's property
(4) A detailed list of the debtor's monthly living expenses (i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.)

- If an individual, the income after the bankruptcy is beyond the reach of pre-bankruptcy creditors, if a corporation or business then the entity is dissolved when the bankruptcy is concluded

 

 

-Chapter 11 bankruptcy (for businesses), 13 (for individuals): -- similar to a re-payment plan that re-organizes debt, the individual or company retains control of assets with oversight from the courts -- stays on your credit report for 7 years.

-Seen as less serious than a Ch. 7 filing, allows debtors to retain control of assets and affected businesses to continue to operate while creditors, debtors, and the court’s trustee come to a solution

-Debtors need to file these things in court (as well as the 4 things compiled above in Ch. 7 bankruptcy)

(1) Schedules of assets and liabilities
(2) A schedule of current income and expenditures
(3) A schedule of executory contracts and unexpired leases
(4) A statement of financial affairs. 

-- goal is that company/individual will be able to get themselves back on firm financial footing, but can lead to chapter 7

 

 

-If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.

 

Filing Requirements: Credit Counseling, Means Test, Debtor Education

            -Credit Counseling: the person wishing to file bankruptcy must attend.  You must attend this session six months prior to applying for bankruptcy.  The session must be done by a non-profit agency that has been approved by the United States Trustees office. 

-Means Test: Under new law, your income will be tested by a two-part "means test” (it was originally determined by bankruptcy court whether or not one could file) The first test is a formula that exempts certain expenses (rent, food, etc.) to determine if you can afford to pay 25 percent of your unsecured debt, such as credit card bills.  Next, your income will be compared to your state's average income.

-The court will not allow you to file chapter 7 bankruptcy if your income is above average for your state and you are able to pay 25 percent of your unsecured debt, but you may file under Chapter 13.

-If your income falls below your state's average but you are able to pay 25 percent of your unsecured debt, you may be able to file chapter 7, but the bankruptcy court will still have the authority to require you to file chapter 13.

-Debtor Education:  attending some type of debtor education class from an approved provider.  This class is commonly called the Debtor Education Class. You must complete the class before your bankruptcy can be finalized. Also, under the new law, the court will apply living standards derived by the IRS to determine what is reasonable to pay for food, rent, and other expenses to determine how much you have available to pay on your debts.

 

Recent Developments:

            -Rousey v. Jacoway (2005): Power shifted toward the debtor.  The court held that assets in IRAs are protected under Chapter 11 and exempt from withdrawal of bankruptcy estate.

            -Bankruptcy Prevention and Consumer Protection Act (2005): Resulted in major reforms.  Expanded responsibilites of the US Trustees Program to include supervision of random/targeted audits, certification of entities to provide credit counseling, certification of entities that provide financial education to individuals before being discharged from debt, and greater oversight of small business Chapter 11 reorganization cases.

 

Statistics:

-Bankruptcy filings grew from 110,000 in 1960, to over 1.6 million in 2003.

-Nationally, only 1/3 of all chapter 13 filings reach a successful discharge and the end of the repayment plan.  The 2/3 of the chapter 13 bankruptcy cases are either dismissed or converted to a chapter 7 bankruptcy.

 

 

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