Law for Accountants II (GenBus 305)

Dr. Decateur Reed

CHAPTER 39: Bankrutc!
I. "e#era$ Law% Going to file for bankruptcy going to file in federal court
A. Purposes:
1. Bring about a quick, equitable distribution of the debtors property aong the
creditors and
!. Discharge the debtor fro debts. Take the debtor out of the situation they are in
get rid of those debts and get them back on track.
B. "he #.$. Bankruptcy %ode gi&es Con&ress the po'er to establish unifor la's on
bankruptcy. Across US Across al juridistations. All states.
II% Case A#'(n(strat(on%
A. C)ater 3:
1. %ontains pro&isions dealing 'ith the coenceent of the case, the eetings of
creditors, the officers 'ho adinister the case, and the officers adinistrati&e
po'ers.
What does it take to start a bankruptcy proceeding? Have to have the right forms
petition etc. !eetings of creditors giving them notice of bankruptcy trustee "ho
"ill appoint trustee etc.
B. *o$untar! Pet(t(ons: 99% of all bankruptcies are voluntary, very few 1% are invol.
1. (ust list all creditors, property o'ned #substantial property that creditors "ould
"ant to kno" about stock options futures contracts for e$ample% list of e)ept
property, and a stateent of the debtors affairs *ho" much did you make "hat
investments do you have inheritance if you stand to inherit &uickly etc.%
!. +iling constitutes an autoatic order for relief. 'alled an automatic stay keeps
from creditors from trying to recover their debt. Usually for () days it protects
the debtor from creditor harassment until court gets involved.
,. All indi&idual debtors ust recei&e cre#(t counse$(n& fro an appro&ed
nonprofit budget and credit counseling agency w(t)(n t)e +,0-#a! er(o#
.efore f($(n& t)e et(t(on. An accredited agency councils you on credit tries to
get you out of bankruptcy before filing for it.
%. In/o$untar! Pet(t(ons:
1. A debtor ay be forced into in&oluntary bankruptcy
a. By , or ore creditors 'ho ha&e unsecure# #*+T secured% clais
*having a right to payment% 'hich total -1.,.!/ or ore, or
b. 0f the debtor has fe'er than 1! creditors, by 1 or ore creditors 'hose
total unsecured clais equal -1.,.!/ or ore.
!. +iling does not constitute an autoatic order for relief. ,ifferent from voluntary.
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,. 0f the petition is not conteste# (.! #e.tor), the court 'ill enter an order for relief
against the debtor *in fa&or of the creditors1.
.. 0f the petition (s conteste# successfu$$!, the court 'ill disiss the petition.
-,ebtor comes in and says . can meet my obligations court says you are right
you "ere just being la/y dismissed 01) day "aiting period must pass before
petition can be refiled again.2
/. 2)ceptions: These parties cannot be involuntary brought in to bankruptcy by
creditors3
3+arers
3Banks
30nsurance %opanies
34on Profits
D. 0(s'(ssa$:
1. "he court is epo'ered to disiss a %hapter 5 case *liquidation1 filed by an
indi&idual debtor 'hose debts are ostly consuer debts.
!. #nder %hapter 11, the court ay disiss a case for cause. That is if the debtor is
determined to be committing fraud or can meet their obligations it is cause
enough to not? ,ismiss.
,. #nder %hapter 1,, the debtor has an absolute right to ha&e the case disissed
even "ithout providing proof. All they have to say is judge . "ish for my 'hapter
04 case to be dismissed. 5udge says ok "ill be dismissed and you say you are
going to be meeting your obligations . "ill dismiss.
2. Auto'at(c 1ta!s: Creditors cannot seek recovery of debt from the debtor
1. +ollo'ing the filing of a petition, an order of relief is issued.
+. Trustees:
1. (ay be selected by the creditors, or
!. Appointed by the court
Trustee stands in the shoes of the debtor (could be business) and
handles the estate as if they own it. Appointed by the court
might be a little fairer.
6. 2eet(n&s of Cre#(tors:
1. 7ithin a reasonable tie after relief is ordered. After the petition is file and it6s
automatic or after the order is issued. They have to meet. 'reditors get together
and have to do certain things.
!. Debtor ust appear at eeting and subit to an e)aination of his8her financial
situation. 'reditors "ill ask "here you "ork "hat is your source of income do
you o"n real estate you get 77 from parents etc. etc. etc. !ostly their financial
situation the &uestions
III% Cre#(tors3 0e.tor3 4 t)e Estate: C)ater 5
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A. Cre#(tors:
1. Defined: any entity ha&ing a clai against the debtor that arose at t)e t('e of
or .efore t)e or#er for re$(ef. 'an be an entity individual business any "ould
&uality. -8ou filed a petition today there "as an automatic stay put in then day
after buy a T9 at best buy "ith credit card. .s :est :uy a creditor? *+.2
B. Proof of C$a('s:
1. (ust be filed in a tiely anner. Have to submit proof that creditors have a
claim or a right to payment. ,rop ,ead Test.
%. 1ecure# an# 5nsecure# C$a('s:
1. L(en:
a. (ust be satisfied before the property is a&ailable to satisfy the clais of
unsecured creditors.
$ecured %reditor:
;!S.3 ;urchase !oney security interest holders. They are not &uite
secure creditors but not &uite unsecured creditors. <et6s say a bank gives
debtor 777 not to buy specific money but to buy general property in
contract. :ank says "e loan you money to buy office e&uipment not
going to tell you "hat specific e&uipment but just has to be for
e&uipment. That is ;!S.. *ot specific but general.
#nsecured %reditor: *ot going to tell you "hat to buy bank just gives
you line of credit and tells you to use it for "hatever.
D. Pr(or(t! of C$a('s:
1. All secure# clais are paid first.
!. Any reaining assets are distributed aong creditors 'ith unsecure# clais
according to their priority. "he or#er of r(or(t! is:
a. 0o'est(c suort o.$(&at(ons. 'hild Support
b. E6ense of adinistration of the debtors estate.
c. Ga creditors.
d. 7a&es3 sa$ar(es3 or co''(ss(ons earned 'ithin 19: days of filing or
date of cessation of business, 'hiche&er coes first, u to 8++39:5.
e. Contr(.ut(ons to eployee benefit plan up to -11,5!/ ultiplied by the
nuber of eployees co&ered by the plan, less the aggregate aount
paid to such eployees under nuber . abo&e.
f. 6rain or fish producer clais against a storage facility up to -/,55/.
g. Consu'er #eos(ts u to 8:3;00.
h. Ta6es.
i. %lais for #eat) or ersona$ (n<ur(es resulting fro the debtors
operation of a otor &ehicle or &essel 'hile legally into)icated fro
using alcohol, a drug, or other substance.
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2. 1u.or#(nat(on of C$a('s:
1. 7hen ! clais ha&e equal priority, the court ay decide 'hich shall be paid first.
We have creditors "ith e&ual level of priority. Therefore court decides "ho "ill
be paid first. Ho"? There are four "ays. 0. <evel of culpability or guilt of
creditors. <evel of guilt that creditors have. What do "e mean by guilt? 'reditor
=0 runs credit report sees credit report of >)) lends money. 'reditor ( runs
report and sees creditor score of ). Who is guiltier? 'reditor to "as probably
more guilty because they "ere more a"are of the risk and guilt.
=(. Time. .f it is a really old debt compared to a more recent one subordinate the
more recent one.
=4. Amount of the debt3 .f they are e&ual in priority one is 7?) and one is 7?)
million get rid of the smaller one first they have priority.
=@. Aelative hard ship bet"een the creditors. !icrosoft loan 70))))) ,r. Aeed
give 7?) "ho "ould suffer more? ,r. ,ree !icrosoft makes 70)))) every nano
second.
'ourt makes decision at discretion based on all of those factors.
+. 0e.tors:
1. 0ut(es:
a. (ust file a list of creditors, a schedule of assets and liabilities, and a
stateent of financial affairs. .f they accidentally leave off a creditor
creditor "on6t be included in the bankruptcy. Have to list schedule of
your assets liabilities "hat do you o"n o"e and a statement of your
financial affairs #"hat do you make "here is your money coming from
ho" much is going out etc%.
b. (ust cooperate 'ith the trustee and surrender to the trustee all property
of the estate and all records.
;Trustee asks you for the deed contract debtor has to go and provide that proof.
What is the debtor doesn6t have that? ,ebtor has to then provide access
and sign form giving authori/ation fir trustee to get that info.2
6. 0e.tor=s E6e't(ons:
1. up to -!1,<!/ in equity in property used as a residence or burial plot=
;
!. up to -,,./: in equity in one otor &ehicle= :asic transportation. 8ou buy
7?)))) !ercedes and put do"n 74@?) on it the 74@?) not reachable the rest is2
,. up to -//: for any particular ite, and not to e)ceed -11,/!/ in aggregate &alue,
of household furnishings, household goods, 'earing apparel, appliances, books,
anials, crops, or usical instruents that are priarily for personal, faily, or
household use=
.. up to -1,./: in >e'elry=
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/. any property up to -1,1/: plus up to -1:,9!/ of any unused aount of the first
e)eption=
<. up to -!,15/ in ipleents, professional books, or tools of the debtors trade=
5. unatured life insurance contracts o'ned by the debtor, other than a credit life
insurance contract=
9. professionally prescribed health aids= 8ou are in a "heelchair can6t get e$empt
from that.
?. social security, &eterans, and disability benefits=
1:. uneployent copensation=
11. aliony and support payents, including child support=
1!. payents fro pension, profit@sharing, and annuity plans=
1,. ta) e)ept retireent funds= and
1.. payents fro an a'ard under a crie &ictis reparation la', a 'rongful death
a'ard, and up to -!1,<!/, not including copensation for pain and suffering or
for actual pecuniary loss, fro a personal in>ury a'ard.
$tate la' can, by specific legislation, liit e)eptions.
7here do you file for bankruptcyA 7here you ha&e li&ed for the preceding 5,: days. Ba&e to go
back to the place 'here you ha&e li&ed a continuous 5,: days last and that 'ould be 'here you
filed. ;(o&ed / different places *not equal 5,:, but then li&ed for < years in "e)as pre&ious,
'ould be "e)as1
B. 0(sc)ar&e:
1. Relie&es the debtor fro liability.
!. 4ot dischargeable:
A. certain ta)es and custos duties and debt incurred to pay such ta)es or
custo duties=
b. legal liabilities for obtaining oney, property, or ser&ices by false
pretenses, false representations, or actual fraud= *ot going to be able to
commit fraud and get it discharged
c. legal liability for 'illful and alicious in>uries to the person or property
of another= ;Dri&ing do'n the road, get ad at soeone and ra the,
in>ured 'ants their -<:: for crash, file for bankruptcy right after, doesnt
'ork still 'ont be discharged because it 'as alicious.C
d. doestic support obligations and property settleents arising fro
di&orce or separation proceedings=
e. debts not scheduled, unless the creditor kne' of the bankruptcy=
f. debts the debtor created by fraud or defalcation 'hile acting in a
fiduciary capacity, ebeDDleent, or larceny=
g. student loans unless e)cluding the debt fro discharge 'ould ipose
undue hardship=
h. debts that 'ere or could ha&e been listed in a pre&ious bankruptcy in
'hich the debtor 'ai&ed or 'as denied a discharge=
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i. consuer debts for lu)ury goods or ser&ices in e)cess of -<:: per
creditor, if incurred by an indi&idual debtor on or 'ithin ninety days
before the order for relief, are presued to be non@dischargeable=
>. cash ad&ances aggregating ore than -95/ obtained by an indi&idual
debtor under an open end credit plan 'ithin se&enty days before the
order for relief are presued to be non@dischargeable=
k. liability for death or personal in>ury based upon the debtors operation of
a otor &ehicle, &essel, or aircraft 'hile legally into)icated= .f you "ere
legally into$iacated .f you had a ,U. hit somebody claim for payment
not dischargeable if you file for bankruptcy.
l. fines, penalties, or forfeitures o'ed to a go&ernental entity= and
. certain debts incurred for &iolations of securities fraud la'.
,. An a&ree'ent bet'een a debtor and a creditor peritting the creditor to enforce
a discharged debt is enforceable to the e)tent $tate la' perits.
"'o parties enter into contract. Debtor gets it discharged but then says later on
0 going to pay it e&en though 0 dont ha&e to. Requires it to be in 'riting.
%reditor can then pursue debtor because thats a brand ne' contract.
0. T)e Estate:
1. 0ncludes a$$ $e&a$ an# e>u(ta.$e (nterests of the debtor in none)ept property at
the tie of filing, and
!. %o&ers property acquired by the debtor 'ithin 19: days after coenceent of
the case *through inheritance, property settleent, di&orce decree, or life
insurance proceeds1. 8ou final the petition and one of these things happens "ithin
01) it goes into your estate creditors can reach it.
E. Trustee as L(en Cre#(tor: Trustee (s secure# cre#(tor
1. "he trustee acquires the rights and po'ers of a hypothetical >udicial lien creditor.
!. Bas priority o&er a creditor 'ith an unperfected security interest.
F. *o(#a.$e Preferences: rustee can avoid payments made to a creditor under certain
circumstances.
1. Allo's the trustee to in&alidate pre@bankruptcy transfers:
a. ade to or for the creditors benefit,
b. ade for or on account of an antecedent debt *prior to petition being
filed1
c. ade 'hile the debtor 'as insol&ent,
d. ade 'ithin ?: days of the filing= and
e. if the creditor recei&es ore than they 'ould under %hapter 5.
!. "he trustee ay not &oid transfers of property of less than -<:: for debtors
'hose debts are priarily consuer debts *stuff you get at E% Penny regular
stuff1.
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G. "rau#u$ent Transfers:
1. 0f ade w(t)(n + !ear of the filing date, the trustee ay &oid it. Trustee says
that6s a fraudulent transfer .6m going to avoid it and pull it back into the estate of the debtor.
B$amples include divorce.
(. 1tatutor! L(ens:
1. Arise by statute and do not include a security interest or >udicial lien. 'ertain
types of transactions that "ill be consider statutory and "ill have priority over everything. Cor
e$ample ta$es court judgments "ill have priority as secured creditors because the la" says so.2
!. (ay be &oided by the trustee. At their discretion.
.
I*% ?t)er C)aters%
A. C)ater 9: L(>u(#at(on !nything you want can be a business, individual, entity
1. 0n&ol&es:
a. terinating the business of the debtor, it ends
b. distributing none)ept assets, *e)ept assets kept by debtor1 and
c. discharging all dischargeable debts.
0f there is an o&erage goes back to the debtor
!. Con/ers(on:
a. "he debtor ay con&ert a case to %hapter 11 or 1, *ReorganiDation of
business instead of terination1.
,. 0(s'(ssa$:
a. "he court ay disiss a %hapter 5 case for cause. .f you are sho"n to
have reasonable assets to meet your obligations.
b. 2eans test: abuse is presued if net current onthly incoe is greater
than the 1tate edian incoe *&aries by state1 and if either
11 the debtor has a&ailable net incoe for repayent to creditors
o&er / years totaling at least -11,5!/, or
!1 the a&ailable net incoe for repayent to creditors o&er / years
is bet'een -5,:!/ and -11,5!/ and such a&ailable net incoe is
at least !/ percent of non@priority unsecured clais.
B% C)ater ++: Reor&an(@at(on Bus(ness ?ALB
1. De&elopent of an equitable and feasible $an of reor&an(@at(on to allo' a
business to continue operation and to keep possession of its assets.
!. Procee#(n&s:
a. Petitions are either &oluntary or in&oluntary. %an a bank be pulled into a
%hapter 11 bankruptcy in&oluntarilyA 4o. Because fro list abo&e.
b. A coittee of unsecured creditors 'ill be appointed to assist.
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c. "he court ay or#er for cause t)e ao(nt'ent of a trustee to take
o&er and run the business. 0f they person running the business got us into
this ess, that 'ould be cause.
,. P$an of Reor&an(@at(on:
a. +or 1!: days after the order for relief, the debtor has the e)clusi&e right
to file a plan, unless a trustee has been appointed.
11 (ust be court appro&ed.
%. C)ater +3: A#<ust'ent of 0e.ts of In#(/(#ua$s3 In#(/(#ua$s w)o )a/e re&u$ar
strea's of (nco'e
1. Debtor f($es a rea!'ent $an that 'ill discharge all debts 'hen the payents
are coplete.
!. 0f the debtor does not ake the required payents under the plan, the case 'ill
be con&erted to %hapter 5 or disissed.
,. Procee#(n&s:
a. Petitions are &oluntary only. *o involuntary under chapter 04.
b. Pro&ides for ad>ustent of debts of an indi&idual 'ith regular incoe
'ho o'es liquidated *cash1 unsecured debts of less than -,<:,.5/ and
secured debts of less than -1,:91,.::.
c. A trustee is appointed in e&ery case.
.. Con/ers(on or 0(s'(ssa$:
a. "he debtor ay con&ert a case to %hapter 5.
b. Hn request of the debtor, the court shall disiss a %hapter1, case.
/. T)e P$an:
a. (ust pro&ide that all or a portion of future earnings 'ill be turned o&er
to a trustee,
b. ust allo' for full payent of all priority debts on a deferred basis, and
c. ust treat the each eber of the sae class equally. 'lass "e are
talking about is secured ;!S. unsecured must treat e&ually "ithin
each class.
d. %annot pro&ide for payents o&er a period e)ceeding , years, unless
appro&ed by a court to e)tend up to / years.

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