Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 21 Bankruptcy
LESSON OVERVIEW
Chapter 21 deals extensively with bankruptcy. Students will learn the distinctions between the many
different ways individuals or businesses can file for bankruptcy when facing financial hardship that
may render them insolvent. Next students will learn that bankruptcy filings can be voluntary or
involuntary. Chapters 7, 9, 11, 12, 13, and 15 of the federal bankruptcy law are discussed. This chapter
also introduces students to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.
CHAPTER OUTLINE
A. INSOLVENCY AND DEFAULT (p. 336)
B. THE LAW OF BANKRUPTCY (p. 336)
C. CHAPTER 7 OF THE FEDERAL BANKRUPTCY LAW (pp. 336–338)
D. THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF
2005 (pp. 339–340)
1. The Means Test (p. 339)
2. Debtor Education and Credit Counseling (p. 340)
E. CHAPTER 13 OF THE FEDERAL BANKRUPTCY LAW (pp. 340–341)
F. CHAPTERS 9, 11, 12, AND 15 OF THE FEDERAL BANKRUPTCY LAW (pp. 341–343)
1. Chapter 9 (p. 341
2. Chapter 11 (pp. 341–342)
3. Chapter 12 (p. 342)
4. Chapter 15 (p. 343)
G. CHAPTER SUMMARY (pp. 343–344)
H. CHAPTER ASSESSMENT (pp. 344–350)
1. Matching Legal Terms (pp. 344–345)
2. True/False Quiz (pp. 345–346)
3. Discussion Questions (p. 346)
4. Thinking Critically about the Law (p. 347)
5. Case Questions (pp. 347–348)
6. Case Analysis (pp. 349–350)
7. Legal Research (p. 350)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in boldface in the copy. They are listed here for your quick reference.
§ debtor (p. 336)
§ creditor (p. 336)
§ insolvency (p. 336)
§ default (p. 336)
§ bankruptcy (p. 336)
§ voluntary filing (p. 336)
§ involuntary filing (p. 336)
§ liquidation (p. 337)
§ straight or liquidation bankruptcy (p. 337)
§ secured debt (p. 339)
§ preferential payment (p. 337)
§ fraudulent transfer (p. 337)
§ Bankruptcy Abuse and Consumer Protection Act of 2005 (p. 339)
§ means test (p. 339)
§ reorganization bankruptcy (p. 340)
§ priority debts (p. 340)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 21 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the instructor notes, but they are
shown here in total as an overview of the sections being presented in Chapter 21. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to
1. Explain the conditions under which individuals and businesses become insolvent and default on
their loans. (p. 336, PPT slides 2–4)
2. Distinguish between voluntary filing and involuntary filing in bankruptcy (p. 336, PPT slide 6)
3. Explain the provisions and applications of Chapter 7 of the federal bankruptcy law. (pp. 336–338,
PPT slides 7–13)
4. Describe the means test and the requirement for debtor education and credit counseling under the
Bankruptcy Abuse Prevention and Consumer Protection Act. (pp. 339–340, PPT slides 14–18)
5. Explain the provisions and applications of Chapter 13 of the federal bankruptcy law. (pp.
340–341, PPT slides (19–22)
6. Explain the major applications of Chapters 9, 11, 12, and 15 of the federal bankruptcy law. (pp.
341–343, PPT slides 23–27)
LECTURE OUTLINE
A. INSOLVENCY AND DEFAULT
There are times when individuals and businesses face significant financial challenges that cannot be
overcome. An individual or business that owes money is said to be a debtor; an individual or business
to which money is owed is said to be a creditor. Insolvency occurs when an individual’s or business’s
liabilities exceed assets, and it often leads to default, wherein the debtor fails to meet one or more
financial obligations to his or her creditors.
Bankruptcy is the legal state that occurs when a debtor is insolvent, is in default, and is unable to
fulfill his or her obligations to pay back his or her creditors. In most instances, when bankruptcy is
filed, the debtor’s assets are sold and the money is distributed among the debtor’s creditors to pay the
debt that is owed. Under federal law, bankruptcy filings must not be made in bad faith.
B. THE LAW OF BANKRUPTCY
Bankruptcy filings are governed by Congress under Article 1, Section 8 of the United States
Constitution. Bankruptcies are governed under both federal law and state laws, which vary greatly.
Bankruptcy filings can be either voluntary or involuntary. A voluntary filing occurs when the debtor
himself or herself files a bankruptcy petition; an involuntary filing occurs when creditors pressure the
debtor to file. Bankruptcy cases are administered by the United States Bankruptcy Courts, which are
part of the district courts of the United States.
C. CHAPTER 7 OF THE FEDERAL BANKRUPTCY LAW
The most common type of bankruptcy filed by individuals and businesses is Chapter 7. Under Chapter
7 a trustee is assigned to the case and the debtor assets are liquidated. The trustee also distinguishes
between secured debt versus unsecured debt. There are two actions by the debtor that are prohibited
under this chapter: preferential payment and fraudulent transfer.
D. THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT
OF 2005
This federal law instituted strict rules and eligibility requirements for debtors
filing for bankruptcy. Among the many provisions in the law were the application of a new means test
and the requirement of debtor education and credit counseling.
1. The Means Test
The means test uses a complex formula that measures an individual’s income relative to
the median income of the people in the state where he or she resides. If an individual
earns an income that is too high to meet these standards, a court may disallow a Chapter
7 bankruptcy petition.
2. Debtor Education and Credit Counseling
The Bankruptcy Abuse Prevention and Consumer Protection
Act requires that a debtor who wishes to file under any chapter of the bankruptcy law
must, unless exempt, receive individual or group credit counseling from an approved,
not-for-profit, individual or group budget or credit counseling agency, and the debtor
must obtain a certificate from this agency outlining the assistance in budgeting that the
debtor received. The counseling must be performed by telephone or online within 180
days prior to the bankruptcy filing.
E. CHAPTER 13 OF THE FEDERAL BANKRUPTCY LAW
Under the provisions of Chapter 13 of the federal bankruptcy law, the debtor retains his or her property
but agrees to pay back all or a portion of his or her debts on an interest-free basis over a period
spanning from three to five years. Chapter 13 bankruptcy is sometimes referred to as a reorganization
bankruptcy.
Under Chapter 13, certain debts are considered to be priority debts. Priority debts are deemed to be
sufficiently important that they must be paid in full.
F. CHAPTERS 9, 11, 12, AND 15 OF THE FEDERAL BANKRUPTCY LAW
In addition to Chapter 7, the federal bankruptcy law contains several other chapters that might apply to
individuals or businesses that become insolvent and default on their debts. Chapter 21 reviews several
of these chapters:
1. Chapter 9
Chapter 9 bankruptcy involves the adjustment of debts for a municipality. The purpose
of this chapter is to provide a municipality with a debt repayment plan rather than to
require the liquidation of municipal assets.
2. Chapter 11
In a Chapter 11 bankruptcy, used mostly by corporations, the debtor proposes a
reorganization plan in order to pay back creditors over time. Daily business decisions
continue to be made and implemented by management, but major decisions must be
approved by the bankruptcy court.
3. Chapter 12
Chapter 12 bankruptcy was created specifically to adjust the debts of family farmers or
fishers who earn an annual income. Under a Chapter 12 bankruptcy, a plan is created to
ensure that these debtors repay their debt over a period spanning from three to five
years. The family farmer or fisher can be an individual, corporation, or partnership. To
be eligible for a Chapter 12 bankruptcy, a debtor cannot owe more than $1,500,000, with
at least 80 percent of these debts being related to farming or fishing. Furthermore, at
least 50 percent of the debtor’s income must come from his or her farming or fishing
activities.
4. Chapter 15
Chapter 15 bankruptcy involves ancillary and other cross-border cases. Added to the
bankruptcy code by the Bankruptcy Abuse Prevention and Consumer Protection Act,
Chapter 15 provides a framework for bankruptcy cases in which foreign countries are
involved. The purpose of this chapter is to promote cooperation between U.S. courts and
those of foreign countries in bankruptcy cases.
INSTRUCTOR NOTES
A resulting answer or explanation is provided here for each Learning Outcome in Chapter 21. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Explain the conditions under which individuals and businesses become insolvent and default
on their loans.
Insolvency occurs when an individual’s or business’s liabilities exceed assets, and it often leads to
default, wherein the debtor fails to meet one or more financial obligations to his or her creditors.
Text Pages: 336
PowerPoint: Slides 2–4
LO2. Distinguish between voluntary filing and involuntary filing in bankruptcy.
A voluntary filing occurs when the debtor himself or herself files a bankruptcy petition; an
involuntary filing occurs when creditors pressure the debtor to file
Text Pages: 336
PowerPoint: Slide 6
LO3. Explain the provisions and applications of Chapter 7 of the federal bankruptcy law.
The most common type of bankruptcy filed by individuals and businesses is Chapter 7. Under Chapter
7 a trustee is assigned to the case and the debtor assets are liquidated. The trustee also distinguishes
between secured debt versus unsecured debt. There are two actions by the debtor that are prohibited
under this chapter: preferential payment and fraudulent transfer.
Text Pages: 336–338
PowerPoint: Slides 7–13
Discussion Questions: 26–28
Thinking Critically about the Law: 32
Case Questions: 37
Case Analysis: 41
LO4. Describe the means test and the requirement for debtor education and credit counseling
under the Bankruptcy Abuse Prevention and Consumer Protection Act.
The means test uses a complex formula that measures an individual’s income relative to the median
income of the people in the state where he or she resides. The Bankruptcy Abuse Prevention and
Consumer Protection Act also requires that a debtor who wishes to file under any chapter of the
bankruptcy law must, unless exempt, receive individual or group credit counseling from an approved,
not-for-profit, individual or group budget or credit counseling agency, and the debtor must obtain a
certificate from this agency outlining the assistance in budgeting that the debtor received. The
counseling must be performed by telephone or online within 180 days prior to the bankruptcy filing.
Text Pages: 339–340
PowerPoint: Slides 14–18
Discussion Questions: 29
Thinking Critically about the Law: 33
LO5. Explain the provisions and applications of Chapter 13 of the federal bankruptcy law.
Under the provisions of Chapter 13 of the federal bankruptcy law, the debtor retains his or her property
but agrees to pay back all or a portion of his or her debts on an interest-free basis over a period
spanning from three to five years. Chapter 13 bankruptcy is sometimes referred to as a reorganization
bankruptcy.
Under Chapter 13, certain debts are considered to be priority debts. Priority debts are deemed to be
sufficiently important that they must be paid in full.
Text Pages: 340–341
PowerPoint: Slides 19–22
Discussion Questions: 30
Thinking Critically about the Law: 34
Case Questions: 39
LO6. Explain the major applications of Chapters 9, 11, 12, and 15 of the federal bankruptcy law.
Chapter 9 bankruptcy involves the adjustment of debts for a municipality. In Chapter 11 bankruptcy,
used mostly by corporations, the debtor proposes a reorganization plan in order to pay back creditors
over time. Chapter 12 bankruptcy was created specifically to adjust the debts of family farmers or
fishers who earn an annual income. Chapter 15 bankruptcy involves ancillary and other cross-border
cases.
Text Pages: 341–343
PowerPoint: Slides 23–27
Discussion Questions: 31
Thinking Critically about the Law: 35
Case Questions: 38
Case Analysis: 40, 42