What actions occur in a bankruptcy?
Bankruptcy gives debtors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt.
The filing halts collection activity, grants an automatic stay (with certain exceptions), and stops creditors from suing a debtor.
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For what debts does bankruptcy NOT stop collections?
Bankruptcy does not stop collections for:
- Student Loans
- Income taxes from previous 3 years
- Alimony & Child Support
- Debts/judgments resulting from drunk driving
- Pension obligations
- Debts relating to SOX violations
- Debts arising from illegal activities
- Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
It doesn’t because the corporation is a separate legal entity.
- Under bankruptcy, corporations are dissolved.
- Under bankruptcy, individuals are discharged.
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents, a discharge will be denied.
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Characteristics of a Chapter 7 bankruptcy:
- Discharges all non-exempt debt.
- Can only be filed every eight (8) years from previous Chapter 7 filing
- Voluntary or involuntary filing
- Certain businesses are disallowed from Chapter 7 bankruptcies (Think: 7th inning RBIs)
- Railroads
- Banks
- Insurance companies
- Savings & loans
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
To file for a voluntary bankruptcy filing under Chapter 7, one must:
- Pass means test.
- Income must be below the median income for the state.
Note - median, i.e. middle; not mean, i.e. average)
Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005.
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases, your creditors can force you into Chapter 7 or Chapter 11 bankruptcy.
Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property.
If there are more than 12 unsecured creditors, at least three (3) must file; claims must be in excess of $16,750.
If less than 12 unsecured creditors, only one (1) must file; claim(s) must be in excess of $15,775.
See REG NINJA Book (Debtor & Creditor Relationships) for a breakdown of the new Bankruptcy thresholds (updated through April 2022)
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Involuntary Chapter 7 bankruptcy filings are disallowed for:
- Charities
- Farms
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK, they can reclaim possession of their property from the interim BK trustee.
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Characteristics of a Chapter 11 bankruptcy filing:
- Allows a business a reprieve from creditors.
- Creates a payment plan for the debt.
- Business remains in operation.
- At least 2/3 of each debt class of creditors must consent to reorganization.
- Ch. 11 Involuntary petitions are allowed.
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Chapter 13 bankruptcy filing is similar to Chapter 11 but for individuals. It:
- Gives individuals a reprieve from creditors
- Creates a payment plan for the debt.
Ch. 13 Involuntary petitions are not allowed.
What are the duties and abilities of a bankruptcy trustee?
A bankruptcy trustee represents the bankruptcy estate. It:
- can sue or be sued.
- oversees bankruptcy and watches for preferential creditor payments.
- oversees priority transfer of assets to creditors.
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide.
It can be elected by creditors or can be appointed by the court.
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing.
A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value.
A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference).
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Preferential transfers can be voided by a BK trustee if:
- Made within One Year of BK to insider: Corporate officers/directors, Partners, Relatives
- Made within three (3) months of BK non-insider
- Creditor receives larger payment than BK liquidation would have granted.
See REG NINJA Book (Debtor & Creditor Relationships) for a breakdown of the new Bankruptcy thresholds (updated through April 2022) on Preferential Transfers.
What is the treatment of a secured creditor in a bankruptcy?
- Superior to claims of other types of creditors
- Can take either collateral or cash proceeds from the sale of an asset
- If collateral doesn’t satisfy the amount owed, Secured Creditors become a general creditor for the difference.
What is the order of priority given to unsecured creditors in a bankruptcy?
- Court Costs and Fees
- Child Support & Alimony
- Expenses from ordinary course of business during bankruptcy proceedings
- Wages owed to employees
- Retirement contributions within last six (6) months
- Consumer deposits for undelivered goods
- Taxes
- Other general unsecured claims
What are the key aspects of bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors.
The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected.
What is the bankruptcy estate?
The bankruptcy estate is the pool of assets available to creditors until liquidation.
What assets are exempt from creditors in a bankruptcy estate?
The following assets are exempt from creditors in a bankruptcy estate:
- Social security
- Disability payments
- Unemployment
- Child Support
- Alimony
- Wages
- Pensions
- Annuities
to the extent that they provide reasonable support for debtor and dependents.
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate.
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor’s paycheck.
What is a mechanics lien?
A mechanics lien is a lien on real property to secure payment for a repair/improvement done to the house.
A contractor builds an addition to your house and you won’t pay. They can’t repo your house, so they get a Mechanics Lien that sticks until you sell your house and they get paid.
What is an artisan’s lien?
An artisan’s lien applies to personal property like a car.
If the dealership does $500 in repairs to your car, you don’t get the car back until you pay.
What is a surety (co-signing)?
A third party agrees to be liable for a loan.
Example: A parent co-signs on their child’s car loan.
How is a surety liable in a transaction?
A surety is primarily liable.
Surety can be released from liability if:
- The creditor behaves in a way that increases the risk that they initially agreed to.
- The debtor changes the loan agreement in a way that materially increases the surety’s risk.
What is a cosurety and how are they liable in a transaction?
Two sureties are guaranteeing the same debt.
Proportionately liable:
- If one cosurety is released from their obligation, then the remaining cosureties have their proportionate share reduced by the released party’s percentage.
- If one surety pays more than their proportionate share of the risk, then the other sureties must compensate them for the difference, which is called Right of Contribution.
What is a guarantor?
A guarantor is similar to surety but is secondarily liable.
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Under the Fair Debt Collection Practices Act, your creditors have the right to collect from you, but not abuse you or embarrass you.
- They can’t contact you once you’re represented by an attorney.
- They can call other people to find out where you are, but they cannot identify themselves as collectors.
- They must stop calling you at work if you send them a certified letter that says my employer doesn’t allow me to take calls at work.
- They must call you only at reasonable hours of the day - according to your time zone; not theirs.
