BUS 116 Chap021 bankruptcy


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BUS 116 Chap021 bankruptcy

  1. 1. Bankruptcy and Debt Adjustment Chapter 21
  2. 2. Learning Objectives 1. Summarize the history of bankruptcy law in the United States. 2. Discuss restoring credit following bankruptcy. 3. State the criteria necessary to be eligible to file voluntarily for Chapter 7 bankruptcy. 4. Explain the ―means test‖ that is required for filing Chapter 7 bankruptcy. 5. State the criteria necessary for creditors to force debtors into involuntary bankruptcy. 2
  3. 3. Learning Objectives (cont.) 6. Distinguish between an order for relief and automatic stay in the bankruptcy process. 7. List the federal exemptions debtors can exclude from the bankruptcy process. 8. Recognize those debts that have priority payment status under the Bankruptcy Code. 9. Explain Chapter 11 bankruptcy, emphasizing the reorganization process. 10.Discuss the requirements for Chapters 12 and 13 bankruptcy. 3
  4. 4. Bankruptcy’s History • The first federal bankruptcy law in the United States was enacted in 1800. Under that law, only creditors could begin a bankruptcy proceeding, and only merchants could qualify as debtors • In 1840, debtor’s prisons were abolished 4
  5. 5. Bankruptcy’s History • The Bankruptcy Reform Act of 1978 make it easier for businesses and individuals to obtain bankruptcy relief. • In 1978, Chapters 11 and 13 of the Bankruptcy were created, allowing businesses and individuals to reorganize and keep going. 5
  6. 6. Constitutional Authority The U.S. Constitution gives the federal government jurisdiction over bankruptcy proceedings by stating: • ―Congress shall have the Power . . . To establish . . . uniform laws on the subject of Bankruptcies throughout the United States.‖ 6
  7. 7. Restoring Credit Following Bankruptcy • A personal bankruptcy filing remains on a debtor’s credit report for 10 years and has a detrimental effect on the ability to establish a line of credit. • Filing bankruptcy gives most debtors an opportunity to begin anew. 7
  8. 8. Liquidation—Chapter 7 • Chapter 7 of the Bankruptcy Code – Provides a system in which debtors are forced to sell (liquidate) much of their property and use the cash to pay their creditors a portion of the amount owed each one – After assets have been liquidated, remaining debt is discharged, with some exceptions 8
  9. 9. Types of Bankruptcy Procedures 9
  10. 10. Voluntary Proceedings To qualify, debtors must do all of the following: • Satisfy the means test • Meet with an approved nonprofit credit counselor before filing for bankruptcy. • Provide a federal income tax return for the most recent tax year. • Take a course in financial management after filing for bankruptcy. 10
  11. 11. The Means Test 1. Compare the debtor’s average income during the previous six months with the median income for a family of that size in the debtor’s state. (if lower, eligible) NC levels – Median Income by State 2. Determine if income is enough to pay off some of their unsecured debts. – If disposable income: – <$100/month($6,000 in 5 years), can file – >$167/month(~$10,000 in 5 years), cannot 11
  12. 12. The Means Test 3. Determine whether the debtor has the ability to pay unsecured debts over a five-year period. • If disposable income between $100-$167/month, but not enough to pay more than 25% of unsecured debts over a 5-year period. 12
  13. 13. Involuntary Proceedings • Creditors may be able to force debtors into involuntary bankruptcy if the debtor fails to pay bills generally as they become due. – If fewer than 12 creditors, a single creditor may file (if owed >$14,425 more than the value of any secured property) – If greater than 12 creditors, three must file • Debtor has 20 days to contest the filing • Involuntary petitions cannot be filed against farmers, non-profits, banks, cities, insurance companies 13
  14. 14. Order for Relief • The court’s command that the liquidation begin. – If filing is voluntary, petition becomes order for relief and is effective when filed – If involuntary, debtor is allowed 20 days from filing to contest, after which a hearing is held to determine if order will be issued • Case Trustee - Appointed by the court to carry out creditor meetings, handle liquidation/disbursement of assets, and report back to the court 14
  15. 15. Automatic Stay • A postponement of collection proceedings against the debtor – Goes into effect the moment the order for relief occurs – Creditors who violate the stay may be held in contempt of court • Some exceptions for debts caused by fraud, back taxes, family support, student loans. 15
  16. 16. Automatic Stay The stay prohibits creditors from beginning or continuing: •Lawsuits to collect debts incurred before the filing of the petition. •Attempts to enforce a judgment against the debtor. •Foreclosure sales. •Collection proceedings. •Repossession activities. 16
  17. 17. Federal Exemptions • Homestead Exemption – Allows debtors to keep a maximum of $21,625 ($35,000 in NC) in equity in the debtor’s place of residence and in property used as a burial ground • Necessities – Allows debtors to maintain a minimum standard of living • Benefits and support payments – Alimony, child support, social security, disability, etc. 17
  18. 18. Federal Exemptions • Changes to exemption amounts • U.S.C. exemption code 18
  19. 19. State Exemptions • Dollar amounts included in state statutes will be a more accurate assessment of property values within each state • NC Exemptions 19
  20. 20. 11 USC section 507 Priorities 20
  21. 21. Trustee’s Duties • The trustee sets aside, under the trustee’s avoiding powers, certain sales and property transfers made by the debtor • The trustee sells the debtor’s property to obtain cash. • The trustee then distributes the cash among the creditors according to set priorities 21
  22. 22. Exceptions to Discharge • Debts Created by Misconduct – Ex: fraud • Debts Enforced by the Government – Student loans that don’t impose hardship – Gov’t fines/penalties – Certain back taxes – Some court ordered debt (child support, alimony) • Debts Created by Excessive Spending – In case you wanted to go on a pre-bankruptcy shopping spree 22
  23. 23. Reorganization—Chapter 11 • Chapter 11 of the Bankruptcy Code – provides a method for businesses to reorganize their financial affairs and still remain in business. – a qualified debtor creates a plan that alters the repayment schedule. 23
  24. 24. Special Features of Chapter 11 • Debtor in possession – debtor keeps possession and control of the assets, continues to run the firm, and performs most of the functions that a trustee performs in other types of bankruptcy. 24
  25. 25. The Reorganization Plan • Creditors’ Committee – Appointed to investigate the business and help come up with a plan – Normally consists of the 7 creditors with the largest unsecured claims • Plan Qualifications – Bankruptcy code requires grouping claims into classes and treating all creditors in the same class equally – Secured creditors, unsecured creditors, equity security holders 25
  26. 26. The Reorganization Plan • Plan Approval – If plan doesn’t change a class’ legal rights, no approval necessary – If a class will get less than full value of their claim (impaired class), they have the right to vote on the plan • Plan Confirmation – Court holds a hearing to confirm the plan – Confirmation • Officially places a reorganization plan into action 26
  27. 27. The Chapter 12 Plan For farmers and fishers The plan must: • Provide for payment of fixed amounts to the trustee on a regular basis over a three-year period. • Make certain that all priority claims are paid in full • Must not take longer than three years to complete 27
  28. 28. Individual Debt Adjustment—Chapter 13 • Only individual debtors may file – includes sole proprietors and the self-employed – excludes corporations and partnerships • Permits an individual debtor to put in place a repayment plan (to be completed within 3-5 years). • Upon completion of payments under the plan, they receive a discharge from most remaining debt. 28
  29. 29. Question? Which part of the bankruptcy code provides a system in which debtors are forced to sell much of their property and use the cash to pay their creditors a portion of the amount owed? A. Chapter 7 B. Chapter 11 C. Chapter 12 D. Chapter 13 29
  30. 30. Question? What is a self-operating postponement of collection proceedings against the debtor? A. Automatic stay B. Focused lien C. Debt relief D. Reimbursement rule number 9 30
  31. 31. Question? • • • • • • What are creditors who receive less than full value of their claims? Reduced class Impaired class Prejudiced class LIFO class 31
  32. 32. Question? What allows debtors to keep equity in the debtor’s place of residence? A. Mortgage exemption B. Household exemption C. Homestead rule D. Domicile rule 32
  33. 33. Question? • • • • • • • Which part of the bankruptcy code provides a method for businesses to reorganize their financial affairs and still remain in business? Chapter 7 Chapter 11 Chapter 12 Chapter 13 33
  34. 34. Question? What is the legal process by which the assets of a debtor are sold to pay off creditors ? A. Restitution B. Re-compensation C. Reimbursement D. Bankruptcy 34