Bankruptcy and Reorganization

Increased number of bankruptcy filings

 

Significant creditor losses associated with bankruptcy filings

 

Debtor abuse of bankruptcy protection rights

 

Debtor ability to repay

 

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Chapter 32Bankruptcy and ReorganizationCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.32-2The Bankruptcy Act And Its GoalsProvide debtors with opportunity to realize a “fresh financial start”Offer protection to creditorsBankruptcy Law Is A Matter Of Federal JurisdictionUnited States Constitution Article I, Section 8: “Congress shall have the powerTo establishuniform laws on the subject of bankruptcies throughout the United States”32-332-4The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)Most comprehensive change to bankruptcy law in over 25 yearsBAPCPA Effect: More difficult for individual debtor to qualify for Chapter 7 (Liquidation) bankruptcy32-5Reasons Cited For The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005Increased number of bankruptcy filingsSignificant creditor losses associated with bankruptcy filingsDebtor abuse of bankruptcy protection rightsDebtor ability to repay32-6Exhibit 32-1: Types of Bankruptcy Relief by ChapterChapter 7 Bankruptcy: Sale of non-exempt assets, and distribution of money to creditorsChapter 9 Bankruptcy: Adjustment of municipalities’ debtsChapter 11 Bankruptcy: Reorganization of debtor’s financial affairs under supervision of bankruptcy courtChapter 12 Bankruptcy: Reorganization of family farmers’ debtsChapter 13 Bankruptcy: Reorganization of individual’s debtsChapter 15 Bankruptcy: Recognition of insolvency proceedings pending in foreign country, and relief for foreign debtors32-7Exhibit 32-2: Bankruptcy Filing Statistics, Calendar Year 2011Total Filings-Consumer Filings-Business Filings-Chapter 7-Chapter 11-Chapter 12-Chapter 13-1,410,6531,362,847 47,806 992,332 11,529 637 406,08432-8Attributes of Bankruptcy CasesProcedural rules for bankruptcy cases set forth in Federal Bankruptcy RulesCases filed in federal district courts and referred to bankruptcy judgesBankruptcy judges appointed and serve 14-year terms; judges make decisions regarding administration of bankruptcy proceedingsBankruptcy appeals proceed to federal district court judge32-9Bankruptcy ProceedingsBankruptcy petition filedCourt grants automatic stay, “freezing” creditor actions outside bankruptcy court against debtor’s estateCourt determines whether order of relief should be grantedCreditors meet with debtorPayment plan created and approved, usually by creditors and courtPayment plan carried out through actions of trustee and debtorDebts remaining after plan executed usually discharged32-10Chapter 7 Bankruptcy: “Voluntary” Versus “Involuntary” PetitionVoluntary Petition: Debtor filesInvoluntary Petition: Creditor(s) file, forcing debtor into bankruptcyTwelve or more creditors: Three or more creditors with unsecured claims totaling at least $14,425 must sign involuntary petitionLess than twelve creditors: Single creditor with claim totaling at least $14,425 can file involuntary petition32-11Exhibit 32-3: Required Schedules For Chapter 7 Liquidation (Debtor Required To File) Schedule A: All real propertySchedule B: All personal propertySchedule C: Exempt property listed in Schedules A and BSchedule D: Secured creditors and their addressesSchedule E: Unsecured priority claimsSchedule F: Unsecured non-priority claimsSchedule G: Executory contracts and expired leasesSchedule H. List of co-debtorsSchedule I: Statement of debtor’s current incomeSchedule J: Statement of current expenditures32-12Exhibit 32-4: Federal Bankruptcy ExemptionsUp to $21,625 for residence (“homestead” exemption)Interest in motor vehicle up to $3,450Interest, up to $550 for particular item, in personal and household goods (aggregate total limited to $11,525)Interest in jewelry up to $1,450$1,150 of any property debtor chooses (“wild-card” exemption)32-13Exhibit 32-4: Federal Bankruptcy Exemptions (Continued)Up to $2,175 in “tools of trade” and professional booksAny unmatured life insurance contract owned by debtorProfessionally prescribed health aidsRight to receive certain personal injury awards up to $21,625Retirement funds in IRA/SEP up to $1,171,650 per person32-14Voidable TransfersPreferential Payments: Trustee can recover (and include in bankruptcy estate) payments made by insolvent debtor that give preferential treatment to one creditor over another, if debtor made such payments within 90 days of bankruptcy filingFraudulent Transfers: Trustee can recover (and include in bankruptcy estate) transfers made with intent to defraud creditors, if debtor made such transfers within two years of bankruptcy filing32-15Exhibit 32-5: Classes of Priority Claims Among Unsecured CreditorsClass 1: Alimony/child supportClass 2: Court costs, trustee fees, attorney, fees, other costs associated with administration of bankruptcy estateClass 3: Unsecured claims in involuntary bankruptcy that arise through debtor’s ordinary business expenses, from date of filing petition to date of trustee appointmentClass 4: Unsecured claims for unpaid wages, salaries, and commissions earned within 180 days of filing of petitionClass 5: Unsecured claims for contributions to employee retirement plans32-16Exhibit 32-5: Classes of Priority Claims Among Unsecured Creditors (Continued)Class 6: Unsecured claims by farmers and fishers against grain operators of grain storage facilities /fish storage/processing facilitiesClass 7: Claims for deposits given to debtor in connection with property/services never givenClass 8: Certain taxes and penalties due governmentClass 9: Claims in bankruptcies related to federal depository institutionsClass 10: Unsecured claims for personal injuries and deaths caused by debtor’s operation of motor vehicle under influence of alcohol/drugs32-17Exhibit 32-6: Non-Dischargeable Debts Under The Bankruptcy CodeClaims for back taxes/government fines within 3 years of bankruptcy filingClaims for liabilities against debtor for his/her obtaining money/property under false pretenses, false representation, or fraudClaims by creditors not listed on schedule and who did not have notification of bankruptcy proceedingsClaims based on fraud, embezzlement, and larceny by debtor while he/she acting in fiduciary capacityAlimony, child support, and certain property settlements32-18Exhibit 32-6: Non-Dischargeable Debts Under The Bankruptcy Code (Continued)Claims of willful/malicious conduct by debtor that caused injury to another person/propertySpecific student loans, unless payment of loans would impose “undue hardship” on debtorJudgments against debtor for claims resulting from debtor’s driving under the influenceDebts not discharged in previous bankruptciesClaims for money borrowed to pay tax to federal government that would be non-dischargeableCash advances on credit card32-19Exhibit 32-7: Largest Corporate Bankruptcy FilingsCompany, Filing Date, and Pre-Bankruptcy Assets (In Billions)Lehman Brothers Holdings, Inc., 2008, $639Washington Mutual, 2008, $327.9Worldcom, Inc., 2002, $103.9General Motors Corporation, 2009, $91CIT Group, 2009, $71Enron Corporation, 2001, $65.5Conseco, Inc., 2002, $61.3MF Global Holdings, 2011, $40.5Chrysler, 2009, $39.3

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