Ch. 22: Bankruptcy Law – No. 1
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
Liquidation: The sale of all nonexempt assets of a debtor and
to Chapter 7 of the Bankruptcy Code.
October 17, 2005, has sharply curtailed the availability
Reorganization: A form of bankruptcy, under Chapter 11 of
Repayment: A form of bankruptcy, under Chapter 13 of the
Bankruptcy Code, whereby an individual debtor and his or
her creditors formulate a new payment schedule under which
the debtor pays all secured debts (and at least as much of his
or her unsecured debts as would be paid under Chapter 7) and
is discharged from the remainder upon completion of the
repayment plan. Individuals with regular income who owe
fixed unsecured debts of less than $360,475 or fixed secured
debts of less than $1,081,400 may voluntarily petition the
Ch. 22: Bankruptcy Law – No. 2
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
VOLUNTARY BANKRUPTCY
Voluntary Bankruptcy: A debtor who finds himself unable
to pay debts as they become due may voluntarily petition
for bankruptcy relief. The petition must contain
(1) a list of all secured and unsecured creditors, their
addresses, and the amount owed to each;
(2) a statement of the debtor’s finances;
(3) a list of all property (real and personal) owned by the
debtor, including property the debtor claims as exempt;
(4) a list of current income and expenses, including
(5) an itemization of monthly income and
(6) proof of payments received from employers within 60
days of filing;
(7) proof of pre-petition credit counseling; and
(8) a copy of the debtor’s federal income tax return for the
most recent pre-petition tax year.
Ch. 22: Bankruptcy Law – No. 3
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
BAPCPA LIMITS ON VOLUNTARY
BANKRUPTCY
“Means Testing”: BAPCPA restricts the availability of
Chapter 7 liquidation to debtors whose family income
exceeds the median family income for their state.
If the debtor’s income exceeds the median income for
her state and her disposable income exceeds $2,200 per
year, the trustee, any creditor, or any other party in
interest may petition the bankruptcy court to force the
debtor into Chapter 11 or 13.
Faced with such a petition, the debtor must convince the
bankruptcy court that “special circumstances” warrant
permitting the debtor to proceed under Chapter 7.
“Penal” Dismissals: In addition, BAPCPA authorizes the
bankruptcy court to dismiss a debtor’s Chapter 7 petition if
(1) the debtor has been convicted of a violent crime or
drug trafficking offense and her victim files a petition
to dismiss; or
(2) the debtor fails to pay post-petition domestic-support
obligations.
Ch. 22: Bankruptcy Law – No. 4
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
INVOLUNTARY BANKRUPTCY
Involuntary Bankruptcy: A debtor’s creditors may file a
bankruptcy petition against the debtor.
If the debtor has twelve or more creditors, three or
more creditors having unsecured claims totaling at least
$14,425 must jointly file the petition.
If the debtor has fewer than twelve creditors, one or
more creditors having unsecured claims totaling at least
$14,425 may file the petition.
If the debtor challenges the bankruptcy, the court will
hold a hearing and enter an order against the debtor if
(1) the debtor is generally not paying debts as they
become due, or
(2) a receiver, custodian, or assignee took possession
of, or was appointed to take charge of, substantially
all of the debtor’s property within 120 days before
the involuntary petition was filed.
Ch. 22: Bankruptcy Law – No. 5
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
AUTOMATIC STAY
Filing a bankruptcy petition suspends virtually all other
litigation and other actions by creditors or potential creditors
against the debtor or the debtor’s property until the
bankruptcy is resolved and the stay is lifted.
If a creditor knowingly violates the automatic stay, any
party injured thereby is entitled to recover actual
damages, costs, and attorneys’ fees from the violator.
A secured creditor may, while the debtor is still in
bankruptcy, move to lift the stay against its collateral if the
creditor’s interest in the collateral is not adequately protected
or if the debtor has no equity in the collateral and it is not
essential to the debtor’s successful reorganization.
The stay terminates 60 days after the motion, unless the
court extends it or the parties agree to extend it.
Exempt Assets: The automatic stay does not affect domestic
support obligations or proceedings related to divorce, child
custody, visitation, or domestic violence.
Bad Faith: The stay does not protect the assets of a debtor
who has had two or more bankruptcy petitions dismissed in
Ch. 22: Bankruptcy Law – No. 6
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
the prior 12 months until the bankruptcy court finds that the
debtor has filed in good faith.
Ch. 22: Bankruptcy Law – No. 7
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
THE BANKRUPTCY ESTATE
Once a bankruptcy proceeding begins, the following legal and
equitable interests in property, subject to certain exemptions,
become property of the bankruptcy estate:
(1) property currently held by the debtor,
(2) jointly-held property,
(3) certain property the debtor transferred to a third party
shortly before the bankruptcy filing,
(4) proceeds and profits from the use or sale of property of
the estate, and
(5) certain interests in property to which the debtor will
become entitled within 180 days after the filing.
Proof of Claim: To receive a portion of the debtor’s estate, a
creditor must typically file with the bankruptcy court clerk its
name and address and the amount the creditor claims the
debtor owes it. A creditor failing to timely file a proof of
claim may lose its right to share in distributions from the
bankruptcy estate.
Ch. 22: Bankruptcy Law – No. 8
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
EXEMPT PROPERTY
Unless superseded by an individual state’s exemptions, an
individual debtor is entitled to exempt from her bankruptcy
estate limited dollar amounts of the following:
(1) equity in the debtor’s homestead, burial plot, and other
real property;
(2) an interest in a motor vehicle;
(3) household goods and furnishings, apparel, appliances,
books, animals, crops, and musical instruments;
(4) jewelry;
(5) tools of the debtor’s trade;
(6) certain life insurance contracts, and interests in accrued
dividends or interests therein;
(7) prescription health aids;
(8) Social Security and certain welfare benefits, alimony
and support payments, and certain pension benefits;
and
Ch. 22: Bankruptcy Law – No. 9
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
(9) rights in certain personal injury awards.
Ch. 22: Bankruptcy Law – No. 10
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
TRUSTEE’S DUTIES UPON FILING
Means Testing: The trustee must promptly review the
debtor’s petition and accompanying materials and file a
statement with the court, copied to all creditors, opining
whether the debtor’s Chapter 7 filing is presumptively
abusive.
If abuse is presumed, the trustee must either file
a motion to dismiss the Chapter 7 case (or convert
it to a Chapter 11 or 13) or
a statement why the debtor overcomes the
presumption and a motion is inappropriate.
Domestic-Support Obligations: If the debtor owes a
domestic-support obligation, the trustee must notify the
person entitled to receive the support about the debtor’s
bankruptcy filing.
Ch. 22: Bankruptcy Law – No. 2
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
VOLUNTARY BANKRUPTCY
Voluntary Bankruptcy: A debtor who finds himself unable
to pay debts as they become due may voluntarily petition
for bankruptcy relief. The petition must contain
(1) a list of all secured and unsecured creditors, their
addresses, and the amount owed to each;
(2) a statement of the debtor’s finances;
(3) a list of all property (real and personal) owned by the
debtor, including property the debtor claims as exempt;
(4) a list of current income and expenses, including
(5) an itemization of monthly income and
(6) proof of payments received from employers within 60
days of filing;
(7) proof of pre-petition credit counseling; and
(8) a copy of the debtor’s federal income tax return for the
most recent pre-petition tax year.
Ch. 22: Bankruptcy Law – No. 3
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
BAPCPA LIMITS ON VOLUNTARY
BANKRUPTCY
“Means Testing”: BAPCPA restricts the availability of
Chapter 7 liquidation to debtors whose family income
exceeds the median family income for their state.
If the debtor’s income exceeds the median income for
her state and her disposable income exceeds $2,200 per
year, the trustee, any creditor, or any other party in
interest may petition the bankruptcy court to force the
debtor into Chapter 11 or 13.
Faced with such a petition, the debtor must convince the
bankruptcy court that “special circumstances” warrant
permitting the debtor to proceed under Chapter 7.
“Penal” Dismissals: In addition, BAPCPA authorizes the
bankruptcy court to dismiss a debtor’s Chapter 7 petition if
(1) the debtor has been convicted of a violent crime or
drug trafficking offense and her victim files a petition
to dismiss; or
(2) the debtor fails to pay post-petition domestic-support
obligations.
Ch. 22: Bankruptcy Law – No. 4
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
INVOLUNTARY BANKRUPTCY
Involuntary Bankruptcy: A debtor’s creditors may file a
bankruptcy petition against the debtor.
If the debtor has twelve or more creditors, three or
more creditors having unsecured claims totaling at least
$14,425 must jointly file the petition.
If the debtor has fewer than twelve creditors, one or
more creditors having unsecured claims totaling at least
$14,425 may file the petition.
If the debtor challenges the bankruptcy, the court will
hold a hearing and enter an order against the debtor if
(1) the debtor is generally not paying debts as they
become due, or
(2) a receiver, custodian, or assignee took possession
of, or was appointed to take charge of, substantially
all of the debtor’s property within 120 days before
the involuntary petition was filed.
Ch. 22: Bankruptcy Law – No. 5
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
AUTOMATIC STAY
Filing a bankruptcy petition suspends virtually all other
litigation and other actions by creditors or potential creditors
against the debtor or the debtor’s property until the
bankruptcy is resolved and the stay is lifted.
If a creditor knowingly violates the automatic stay, any
party injured thereby is entitled to recover actual
damages, costs, and attorneys’ fees from the violator.
A secured creditor may, while the debtor is still in
bankruptcy, move to lift the stay against its collateral if the
creditor’s interest in the collateral is not adequately protected
or if the debtor has no equity in the collateral and it is not
essential to the debtor’s successful reorganization.
The stay terminates 60 days after the motion, unless the
court extends it or the parties agree to extend it.
Exempt Assets: The automatic stay does not affect domestic
support obligations or proceedings related to divorce, child
custody, visitation, or domestic violence.
Bad Faith: The stay does not protect the assets of a debtor
who has had two or more bankruptcy petitions dismissed in
Ch. 22: Bankruptcy Law – No. 6
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
the prior 12 months until the bankruptcy court finds that the
debtor has filed in good faith.
Ch. 22: Bankruptcy Law – No. 7
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
THE BANKRUPTCY ESTATE
Once a bankruptcy proceeding begins, the following legal and
equitable interests in property, subject to certain exemptions,
become property of the bankruptcy estate:
(1) property currently held by the debtor,
(2) jointly-held property,
(3) certain property the debtor transferred to a third party
shortly before the bankruptcy filing,
(4) proceeds and profits from the use or sale of property of
the estate, and
(5) certain interests in property to which the debtor will
become entitled within 180 days after the filing.
Proof of Claim: To receive a portion of the debtor’s estate, a
creditor must typically file with the bankruptcy court clerk its
name and address and the amount the creditor claims the
debtor owes it. A creditor failing to timely file a proof of
claim may lose its right to share in distributions from the
bankruptcy estate.
Ch. 22: Bankruptcy Law – No. 8
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
EXEMPT PROPERTY
Unless superseded by an individual state’s exemptions, an
individual debtor is entitled to exempt from her bankruptcy
estate limited dollar amounts of the following:
(1) equity in the debtor’s homestead, burial plot, and other
real property;
(2) an interest in a motor vehicle;
(3) household goods and furnishings, apparel, appliances,
books, animals, crops, and musical instruments;
(4) jewelry;
(5) tools of the debtor’s trade;
(6) certain life insurance contracts, and interests in accrued
dividends or interests therein;
(7) prescription health aids;
(8) Social Security and certain welfare benefits, alimony
and support payments, and certain pension benefits;
and
Ch. 22: Bankruptcy Law – No. 9
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
(9) rights in certain personal injury awards.
Ch. 22: Bankruptcy Law – No. 10
Clarkson et al.’s Business Law: Commercial Law for Accountants (1E)
TRUSTEE’S DUTIES UPON FILING
Means Testing: The trustee must promptly review the
debtor’s petition and accompanying materials and file a
statement with the court, copied to all creditors, opining
whether the debtor’s Chapter 7 filing is presumptively
abusive.
If abuse is presumed, the trustee must either file
a motion to dismiss the Chapter 7 case (or convert
it to a Chapter 11 or 13) or
a statement why the debtor overcomes the
presumption and a motion is inappropriate.
Domestic-Support Obligations: If the debtor owes a
domestic-support obligation, the trustee must notify the
person entitled to receive the support about the debtor’s
bankruptcy filing.