Twomey  Jennings
Anderson’s Business Law and the Legal Environment, Comprehensive 20e
Anderson’s Business Law and the Legal Environment, Standard 20e
Business Law: Principles for Today’s Commercial Environment 2e
Chapter 35
Bankruptcy
Copyright © 2008 by West Legal Studies in Business
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Bankruptcy Law
• Jurisdiction over bankruptcy cases is in U.S.
district courts, which may refer all cases and
related proceedings to adjunct bankruptcy
courts.
• Three bankruptcy proceedings are available:
– Chapter 7 (consumer liquidation),
– Chapter 11 (business reorganization) and
– Chapter 13 (consumer time payment plan).
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Bankruptcy Law
• In 2005, bankruptcy reforms, court can dismiss
an individual debtor’s (consumer) petition for
abuse if the debtor does not satisfy the
“means” test.
– Only those debtors who fall below their state’s
median disposable income will be able to continue.
– Formula: Disposable Income (Debtors monthly
income minus allowable expenses) x 60.
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How Bankruptcy is Declared
Chapter 7
Chapter 11
Chapter 13
Trustee
Yes
No
Yes
Eligible persons:
Individuals
Partnerships
Corporations
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Voluntary
Yes
Yes
Yes
Involuntary
Yes, except Farmers and
Nonprofit
Yes, except Farmers and
Nonprofit
No
Exemptions
Railroads, insurance
companies, S&L’s, small
businesses (under SBA),
municipalities, farmers
Same as Chapter 7 except
for railroads are eligible
for Chapter 11 and stock
brokers are ineligible for
Chapter 11
Only individuals
Requirements —
Voluntary
Debts
Debts
unsecured <$290,250
secured <$871,550
<
*special sections (chapter 9 - municipalities; chapter 12 - farmers)
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Administration of a
Bankruptcy Case
Dismissal
Order
of
Relief
Executory
Contracts
(60 days)
Property Rights
(180 days)
Petition—either voluntary
or involuntary
List
of
Creditors
Appt.
of
Trustee
Collection
of Assets
Creditors*
meeting
*Automatic
with
Involuntary Petition
Evaluation
of Claims
Voidable
preference
Exemptions
Discharge
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Sale and
Payment
Priority of
creditors
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Chapter 7
• A liquidation proceeding under Chapter 7
may be either voluntary or involuntary.
– A voluntary case is commenced by the
debtor’s filing a petition with the bankruptcy
court.
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Chapter 7
• (cont’d)
• An involuntary case is commenced by the
creditors’ filing a petition with the court.
• If there are 12 or more creditors, at least 3
whose unsecured claims total $12,300 or
more must sign the involuntary petition.
• If there are fewer than 12 creditors, any
creditor whose unsecured claim is at least
$12,300 may sign the petition.
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Administration
• Automatic stay prevents creditors from
taking legal action against the debtor.
• Order of relief granted by bankruptcy
court.
• List of creditors and notice given.
• The trustee in bankruptcy is elected by the
creditors. Trustee acquires the rights and
ownership of the debtor.
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Administration
• Voidable Preferences.
• Voidable Transfers: Trustee can avoid
(cancel) transfers of property.
– Preferential Transfers to creditors.
– ‘Insider’ transfers.
• Proof of Claim.
• Priority of Claims.
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Creditors and Claims
• Bankruptcy law regulates the way
creditors present their claims and the
assets of the debtor are to be distributed
in payment of the claims.
• Certain property of the debtor is exempt
from the claims of creditors.
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Creditors and Claims
• Proof of Claim.
– Creditors object to discharge of debt and
demand payment.
– Must be filed within 90 days of bankruptcy
petition filing.
• Priority of Claims.
– Creditors with security interests (such as a
mortgage or lien) are not affected.
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Creditors and Claims
• Unsecured claims are paid in this order:
– (1) administrative expenses;
– (2) claims arising in the ordinary course of the
debtor’s business;
– (3) wage claims, with limits;
– (4) contributions to employee benefit plans;
– (5) claims by consumer creditors;
– (6) certain taxes; and
– (7) general creditors.
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Debtor’s Duties and
Exemptions
• List of creditors, debts, and assets.
• List of exemptions (both federal and state
laws).
• Debtor’s protection against
discrimination.
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Discharge in Bankruptcy
• The decree terminating bankruptcy
proceedings is generally a discharge that
releases the debtor from most debts.
• Exemptions from Discharge:
– Income taxes, student loans, loans obtained
by fraud, alimony, judgments based on
willful and malicious injury.
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Reorganization under
Chapter 11
• Individuals, partnerships, and
corporations in business may be
reorganized under Chapter 11 so that the
business may continue to operate.
– A plan for reorganization must be approved
by the court.
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Reorganization under
Chapter 11
debtor
or
party in
interest
or
File
plan for
reorganization
of the
debtor
Identifies ownership
interests and debts
not affected by
adoption of the plan
Identifies ownership
interests and debts
affected by adoption
of the plan
committee
of creditors
Owners and
creditors have
only such rights
as are specified
in the plan
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Confirmation of
plan — Approval by
court
Specifies what
will be done to
interests and
claims affected
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Payment Plans under
Chapter 13
• Individual debtors with a regular income
may adopt extended-time payment plans
under Chapter 13 for the payment of
debts.
– A plan for extended-time payment must also
be confirmed by the court.
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