Bankruptcy Law Lecture
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
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
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.)
-- 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 The law was repealed three years later.
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
-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
- 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.
to compile the following:
(1) A list of
all creditors and the amount and nature of their claims
- 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
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
to file these things in court (as well as the 4 things compiled above in Ch. 7
of assets and liabilities
-- 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
Filing Requirements: Credit Counseling,
Means Test, Debtor Education
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.
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
-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.
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.
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.