Chapter 30: Bankruptcy

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 30:
Bankruptcy

S-2
Learning Objectives
• Recognize bankruptcy terminology.
• Distinguish between the various types of
bankruptcy proceedings.
• Understand the general principles of
bankruptcy.
• Explain the procedural steps to bankruptcy.
• Understand the duties and powers of the
trustee.
• Recognize the priorities of creditor’s claims.

S-3
30.0 In the News
What you Should Know Before Filing For
Bankruptcy (7:13)
http://bvtlab.com/937KY
Most people who are suffering with financial
problems and who need to think about filing
bankruptcy have similar questions and
concerns.
• What is bankruptcy?
• Discuss when bankruptcy protection should be
sought.

S-4
30.1 Terminology
Debtor: The individual, business organization,
municipality, or farmer that a bankruptcy proceeding
involves
Claim: A right to payment from the debtor
Order of relief: Ruling by a bankruptcy judge that a
particular case is properly before the bankruptcy court
Discharge: An order by the bankruptcy judge that a
debtor is relieved of paying specific debts
Trustee: Person responsible for managing debtor’s
assets, satisfying creditor’s claim to the extent possible

S-5
30.2a In General: Types of Proceedings
(Slide 1 of 2)
Federal bankruptcy approaches:
• Liquidation approach: liquidate debts
• Reorganization approach: postpone time of
payment or reduce size of payments
• Three types of bankruptcy:
– Chapter 7, Liquidation
– Chapter 11, Reorganization
– Chapter 13, Adjustment of Debts of an Individual
with Regular Income

S-6
30.2a In General: Types of Proceedings
(Slide 2 of 2)
Chapter Type Debtor Who Files Impact
Chapter 7 Liquidation Individuals,
partnerships,
corporations, and
other business
Entities
Debtor or
creditors
Most or all debts are
discharged,
economic activity
ceases, and debtor
may start anew.
Chapter 11 Reorganization Individuals,
partnerships,
corporations, and
other business
Entities
Debtor or
creditors
Debtor remains in
business and debts
are liquidated through
approved
plan.
Chapter 13 Adjustment of
Debts
Individual Debtor only Debt repayment plan is
executed.

S-7
30.2a Critical Thinking
CASE: Marshall
This case questions whether the Bankruptcy
Court had the authority to enter judgment on
Vickie’s counterclaim.
– Did the court find that federal law granted
bankruptcy court jurisdiction over the debtor’s
counterclaim to the creditor’s claim? Why?
– Did the court find that the bankruptcy court has
the constitutional authority to do so? Why?

S-8
30.2b Liquidation Proceedings
Under Chapter 7
Used to eliminate most of the debts of debtor.
• Discharge
– Covers all scheduled debts that arose before the
date of the order for relief
– Operates as an injunction against all attempts to
collect the debt
• Bankruptcy judge has power to dismiss a petition
for “substantial abuse” where the debtor’s
income fails to meet the “means test.”

S-9
30.2c Reorganization Proceedings
Under Chapter 11
Utilized when debtors wish to restructure
finances and attempt to pay creditors over an
extended period, as required by a court-
approved plan
• Committee of creditors is formed.
• Trustee is appointed.
• Plan of reorganization is submitted.
• Holders of claims and interests are allowed to vote
to accept or reject the plan.
• A hearing is held on the confirmation of a plan.

S-10
30.2d Adjustment of Individuals’ Debts
Under Chapter 13
Used to adjust debts of individuals with regular
income whose debts are small enough and
whose income is significant enough that
substantial repayment is feasible.
• Individuals utilizing Chapter 13 are limited by the
amount of debt.
• Debtor files a plan.
• Court conducts a hearing to approve plan.
• Once debtor completes all payments under the
plan, court grants debtor a discharge of all debts.

S-11
30.3 General Principles
• Property of the estate
• Exemptions
– Federal
– State
• Debts that are not discharged
– See list
– Grounds for denying discharge

S-12
30.3c Critical Thinking
CASE: Gerhard
Debtor has to show that repayment of the government-
issued student loans would be an undue hardship in
order to have the court discharge the loans.
• Did it surprise you that the debtor had repaid only
$755 of his over $77,000 debt?
• Do you believe this fact might have influenced the
decision of the judges on appeal? Why?
• What are the provisions of the test used to
determine undue hardship?

S-13
30.4 Procedural Steps
Chapter 3 of the 1978 Bankruptcy Reform
Act provides procedural aspects and
administration of all types of bankruptcy
cases.
• Voluntary commencement
• Involuntary commencement
• Conversion of cases
• Automatic stay
• Meeting of creditors

S-14
30.4e Critical Thinking
Case: Adams
Within the 2005 Act, Congress was adamant
under Chapter 13 that debtors should receive
credit counseling.
• Are there exceptions to the credit-counseling
requirement? Explain.
• Why might the debtors be pleased with the
decision of the court?

S-15
30.5 Trustee and Case Administration
• Trustee and the estate
• General duties and powers
• Executory contracts and unexpired
leases
• Voidable preferences
• Fraudulent transfers

S-16
30.6 Creditors
• Creditors and claims
• Right of setoff
• Priorities

Chapter 30: Bankruptcy

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Chapter 30: Bankruptcy