PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
5th Edition
by Henry R. Cheeseman
Chapter 23
Bankruptcy and Reorganization
Slides developed by
Les Wiletzky
Wiletzky and Associates
Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.
Federal Bankruptcy Code (1 of 2)
 Article I, section 8, clause 4 of the U.S.
Constitution provides that “The congress
shall have the power. . .to establish. . .
uniform laws on the subject of
bankruptcies throughout the United
States”
 Bankruptcy law is exclusively federal law
 There are no state bankruptcy laws
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Federal Bankruptcy Code (2 of 2)
 Congress enacted the original Bankruptcy
Act in 1878

Amended by the Chandler Act (1938)
 Bankruptcy Reform Act (1978) completely
revised the law
This is the Bankruptcy Code
 The Bankruptcy Code establishes rules and
procedures for filing and completing
bankruptcy

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Bankruptcy Courts (1 of 2)
 Bankruptcy Amendments and Federal
Judgeship Act (1984) – federal statute that
created federal bankruptcy courts
 Bankruptcy courts decide core
proceedings regarding bankruptcy cases:
e.g., allowing creditor claims
 e.g., deciding preferences
 e.g., confirming plans of reorganization

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Bankruptcy Courts (2 of 2)
 Only federal bankruptcy courts can hear
core proceedings regarding bankruptcy
cases
 Noncore proceedings concerning the
debtor are resolved in federal or state
court:
e.g., decisions on personal injury
 e.g., divorce
 e.g., other civil proceedings

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Types of Bankruptcy
 The Bankruptcy Code is divided into
chapters
 The most common forms of bankruptcy
are provided by the following chapters:
Chapter 7 – Liquidation Bankruptcy
 Chapter 11 – Reorganization Bankruptcy
 Chapter 13 – Consumer Debt Adjustment
 Chapter 12 – Family Farmer Bankruptcy

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Fresh Start
 The primary purpose of federal
bankruptcy law is to discharge the debtor
from burdensome debts
 The law gives debtors a fresh start by
freeing them from legal responsibility for
past debts
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Chapter 7 Liquidation Bankruptcy
 The most familiar form of Bankruptcy
 The debtor’s nonexempt property is sold for
cash,
 The cash is distributed to the creditors, and
 Any unpaid debts are discharged
 Any person (including individuals,
partnerships, and corporations) may be
debtors in a Chapter 7 proceeding
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Chapter 7: Bankruptcy Procedure
1. Filing a petition
Voluntary petition
 Involuntary petition

2. Order for relief
3. Meeting of the creditors
4. Appointment of a trustee
5. Proof of claims
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Chapter 7: The Bankruptcy Estate
 An estate created upon the
commencement of a Chapter 7 proceeding
 It includes all the debtor’s legal and
equitable interests in real, personal,
tangible, and intangible property, wherever
located, that exist when the petition is filed,
minus exempt property
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Chapter 7: Exempt Property
 Property that may be retained by the
debtor pursuant to federal or state law
 Debtor’s property that does not become
part of the bankruptcy estate
 The Bankruptcy Code also permits states
to enact their own exemptions
 Many states require the debtor to file a
Declaration of Homestead prior to
bankruptcy
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Chapter 7: Voidable Transfers (1 of 2)
 The Bankruptcy Code prevents debtors
from making unusual payments or
transfers of property on the eve of
bankruptcy that would unfairly benefit the
debtor or some creditors at the expense of
others
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Chapter 7: Voidable Transfers (2 of 2)
 The following transfers may be avoided by
the bankruptcy court:
 Preferential
transfers within 90 days before
bankruptcy
 Preferential liens
 Preferential transfers to insiders
 Fraudulent transfers
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Chapter 7: Distribution of
Property
 Nonexempt property of the bankruptcy
estate must be distributed to the debtor’s
secured and unsecured creditors pursuant
to the statutory priority established by the
Bankruptcy Code

A secured creditor’s claim to the debtor’s
property has priority over the claims of
unsecured creditors
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Chapter 7: Discharge
 The termination of the legal duty of a
debtor to pay debts that remain unpaid
upon the completion of a bankruptcy
proceeding
 Only individuals may be granted a
discharge

Not all debts are dischargeable in bankruptcy
 Discharge is not available to partnerships
and corporations
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Chapter 7: Acts That Bar Discharge
(1 of 2)
Certain acts by the debtor may bar
discharge:
 Making false representations about his or
her financial position when he or she
obtained an extension of credit
 Transferring, concealing, or removing
property from the estate with the intent to
hinder, delay, or defraud creditors
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Chapter 7: Acts That Bar Discharge
(2 of 2)
 Falsifying, destroying, or concealing
records of his or her financial condition
 Failure to account for any assets
 Failure to submit to questioning at the
meeting of the creditors (unless excused)
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Chapter 11 Reorganization Bankruptcy
 A bankruptcy method that allows reorganization of
the debtor’s financial affairs under the supervision
of the Bankruptcy Court
 Chapter 11 is used primarily by businesses to
reorganize their finances under the protection of
the Bankruptcy Court
 The debtor usually emerges from bankruptcy a
“leaner” business, having restructured and
discharged some of its debts
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Chapter 11: Reorganization
Proceeding
 Chapter 11 is available to individuals,
partnerships, corporations, nonincorporated associations, and railroads
 Chapter 11 is not available to banks,
savings and loan associations, credit
unions, insurance companies,
stockbrokers, or commodities brokers
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Chapter 11: Debtor-in-Possession
 A debtor who is left in place to operate the
business during the reorganization
proceeding
 The court may appoint a trustee to
operate the debtor’s business only upon a
showing of cause
 The debtor-in-possession has the same
powers and duties as a trustee in a
Chapter 7 proceeding
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Chapter 11: Creditors’ Committee
 The creditors holding the seven largest
unsecured claims are usually appointed to
the creditors’ committee
 Representatives of the committee appear
at Bankruptcy Court hearings, participate
in the negotiation of a plan of
reorganization, assert objections to the
plan, etc.
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Chapter 11: Automatic Stay
 The result of the filing of a voluntary or
involuntary petition
 The suspension of certain actions by
creditors against the debtor or the debtor’s
property
 Relief from stay – may be granted in
situations involving depreciating assets
where the secured property is not
adequately protected during the bankruptcy
proceedings
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Chapter 11: Plan of Reorganization
 A plan that sets forth a proposed new
capital structure for the debtor to have
when it emerges from reorganization
bankruptcy
 The debtor has the exclusive right to file
the first plan of reorganization
 Any party of interest may file a plan
thereafter
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Chapter 11: Disclosure Statement
 A statement that must contain adequate
information about the proposed plan of
reorganization that is supplied to the
creditors and equity holders
 The court must approve the disclosure
statement before it is distributed
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Chapter 11: Executory Contracts
 A contract that has not been fully
performed
 Chapter 11 reorganization bankruptcy
permits a debtor (with court approval) to
assume or reject executory contracts

e.g., leases for office space, and sales and
purchase contracts
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Chapter 11: Rejection of Collective
Bargaining Agreements
 A collective bargaining agreement may
be rejected or modified as an executory
contract if:
1. It is necessary to the reorganization,
2. The debtor acted in good faith, and
3. The balance of the equities favors rejection
or modification of the agreement
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Chapter 11: Confirmation of a Plan of
Reorganization
 The final step is the confirmation of the
plan of reorganization by the court
 A plan of reorganization must be
confirmed by the court before it becomes
effective
 Confirmation is either by:
The acceptance method; or
 The cram down method

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Chapter 11: Confirmation by the
Acceptance Method
1.
2.
3.
4.
The Bankruptcy Court must approve a
plan of reorganization if:
The plan is in the best interests of each class of
claims and interests;
The plan is feasible;
At least one class of claims votes to accept the
plan; and
Each class of claims and interests is nonimpaired
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Chapter 11: Confirmation by the Cram
Down Method
 A method of confirmation of a plan of
reorganization where the court forces an
impaired class to participate in the plan of
reorganization
 The plan must be fair to the impaired
class:
Secured Creditors
 Unsecured Creditors
 Equity Holders

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Chapter 11: Discharge
 Upon confirmation of a plan of
reorganization, the debtor is granted a
discharge of all claims not included in the
plan
 The plan is binding on all parties once it is
confirmed
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Chapter 13 Consumer Debt
Adjustment
 A rehabilitation form of bankruptcy that
permits the courts to supervise the
debtor’s plan for the payment of unpaid
debts by installments
 Debtor avoids the stigma of Chapter 7
liquidation
 Creditors may recover a greater
percentage of the debts owed them than
they would under a Chapter 7 proceeding
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Chapter 13: Filing the Petition
 A Chapter 13 proceeding can be initiated only by
the voluntary filing of a petition by the debtor
 Creditors cannot file an involuntary petition to
place a debtor in Chapter 13 bankruptcy
 A Chapter 13 is a form of reorganization
bankruptcy
 The debtor must file a proposed plan of payment
on how the debts are to be rescheduled
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Chapter 13: Automatic Stay
 The filing of a Chapter 13 petition
automatically stays:
Liquidation bankruptcy proceedings
 Judicial and non-judicial actions by creditors
to collect prepetition debts from the debtor
 Collection activities against co-debtors and
guarantors of consumer debts

 The automatic stay continues until the
Chapter 13 plan is completed or dismissed
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Chapter 13: Plan of Payment
 The debtor’s plan of payment must be
filed within 15 days of filing the petition
 The debtor must file information about his
or her finances
 The plan period cannot exceed three
years unless the court approves a longer
period
 Installment payments to the trustee must
begin within 30 days after the plan is filed
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Chapter 13: Confirmation of the Plan
 The plan may modify the rights of
unsecured creditors and some secured
creditors
 The plan must:
 Be proposed in good faith
 Pass the feasibility test
 Be in the interests of the creditors
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Chapter 13: Discharge
 A discharge is granted to a debtor in a
Chapter 13 consumer debt adjustment
bankruptcy only after all the payments
under the plan are completed by the
debtor
 Even if the debtor does not complete the
payments called for in the plan, the court
may grant the debtor a hardship discharge
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Chapter 12 Family Farmer Bankruptcy
 Chapter 12 is a reorganization provision of the
Bankruptcy Code
 Allows family farmers to reorganize financially
under the supervision of the Bankruptcy Court
 The major provision of Chapter 12 allows family
farmers to have mortgage loans rewritten to the fair
market value of the property in cases where the
value of the farm land has decreased below the
value of the loan
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