BUSINESS LAW
Twomey • Jennings 1stEd.
Twomey & Jennings
BUSINESS LAW
Chapter 34
Bankruptcy
© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW
Twomey • Jennings 1stEd.
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).
• Automatic stay prevents creditors from taking
legal action against the debtor.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
2
BUSINESS LAW
Twomey • Jennings 1stEd.
Declaration of Bankruptcy
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)
© 2004 West Legal Studies in Business
A Division of Thomson Learning
3
BUSINESS LAW
Twomey • Jennings 1stEd.
Trustee in Bankruptcy
• The trustee is elected by the creditors.
• Trustee acquires the rights of the debtor.
• Trustee can avoid (cancel) transfers of
property.
– Preferential Transfers to creditors.
– ‘Insider’ transfers.
McClellan v Cantrell (2000) Was this a
fraudulent transfer?
© 2004 West Legal Studies in Business
A Division of Thomson Learning
4
BUSINESS LAW
Twomey • Jennings 1stEd.
Administration
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
© 2004 West Legal Studies in Business
A Division of Thomson Learning
Sale and
Payment
Priority of
creditors
5
BUSINESS LAW
Twomey • Jennings 1stEd.
Liquidation Proceedings
• 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.
– 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 $10,775 or more must sign the involuntary
petition.
• If there are fewer than 12 creditors, any creditor whose
unsecured claim is at least $10,775 may sign the petition.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
6
BUSINESS LAW
Twomey • Jennings 1stEd.
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.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
7
BUSINESS LAW
Twomey • Jennings 1stEd.
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.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
8
BUSINESS LAW
Twomey • Jennings 1stEd.
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.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
9
BUSINESS LAW
Twomey • Jennings 1stEd.
Distribution Priorities
1.
Secured creditors (to the extent of repossession)
2.
Administration costs
Attorneys, Accountants, Trustees, Appraisers
3.
Claims arising in ordinary course of business after bankruptcy petition is filed
but before of relief (involuntary)
4.
Employee wages (not officers)
$4,000 maximum
3 months preceding petition
5.
Contributions to benefit plans
$4,000 maximum (reduced by wages received) 180 days preceding bankruptcy
6.
Consumer deposits
$1,800 maximum
7.
Alimony and child support
8.
Taxes
9.
Unsecured creditors
© 2004 West Legal Studies in Business
A Division of Thomson Learning
10
BUSINESS LAW
Twomey • Jennings 1stEd.
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.
In Re Innes (2002) Student Loan Relief.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
11
BUSINESS LAW
Twomey • Jennings 1stEd.
NonDischargeable Debts
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Taxes within Three Years of Filing Bankruptcy Petition
Liability for Obtaining Money or Property by False Pretenses
Willful and Malicious Injuries
Debts Incurred by Driving DWI
Alimony, Maintenance, or Child Support
Unscheduled Debts (unless actual notice)
Debts Resulting from Fraud as a Fiduciary (embezzlement)
Government Fines or Penalties Imposed within Three Years Prior
Educational Loans Due within Seven Prior Years
Prior Bankruptcy Debts in Which Debtor Waived Discharge
Presumption on Luxury Goods: $1,100 Goods; $1150 Cash.
Reaffirmation Agreements
Writing
Filed with Court
Not rescinded prior to Discharge
© 2004 West Legal Studies in Business
A Division of Thomson Learning
12
BUSINESS LAW
Twomey • Jennings 1stEd.
Reorganization &
Payment Plans
• 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.
• 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.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
13
BUSINESS LAW
Twomey • Jennings 1stEd.
Reorganization Under Ch. 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
© 2004 West Legal Studies in Business
A Division of Thomson Learning
Confirmation of
plan — Approval by
court
Specifies what
will be done to
interests and
claims affected
14