Lecture Dynamic business law - Chapter 32: Bankruptcy and reorganization

After reading this chapter, you will be able to answer the following questions: What are the goals of the Bankruptcy Act? What is the basic set of procedures for bankruptcy cases? What specific types of relief are available through bankruptcy?

Bankruptcy and  Reorganization

The Bankruptcy Act And Its Goals

 Provide debtors with opportunity to realize a “fresh 

financial start”

 Offer protection to creditors

Bankruptcy Law Is A Matter 

Of Federal Jurisdiction

United States Constitution Article I, Section 8:  

“Congress shall have the power…To establish…

uniform laws on the subject of bankruptcies 

throughout the United States”

Protection Act of 2005 (BAPCPA)

 Most comprehensive change to bankruptcy law in over 25  years

 BAPCPA Effect:  More difficult for individual debtor to 

qualify for Chapter 7 (Liquidation) bankruptcy

Prevention and Consumer Protection Act of 2005

 Increased number of bankruptcy filings

 Significant creditor losses associated with bankruptcy  filings

 Debtor abuse of bankruptcy protection rights

 Debtor ability to repay

Exhibit 32­1:  Types of Bankruptcy Relief by 

Chapter

money to creditors

supervision of bankruptcy court

in foreign country, and relief for foreign debtors

Year 2011

1,410,653 1,362,847      47,806    992,332      11,529       637    406,084

Attributes of Bankruptcy Cases

 Procedural rules for bankruptcy cases set forth in Federal 

Bankruptcy Rules

 Cases filed in federal district courts and referred to bankruptcy  judges

 Bankruptcy judges appointed and serve 14­year terms; judges 

make decisions regarding administration of bankruptcy 

proceedings

 Bankruptcy appeals proceed to federal district court judge

court against debtor’s estate

Chapter 7 Bankruptcy:  “Voluntary” Versus 

“Involuntary” Petition

claims totaling at least $14,425 must sign involuntary petition

$14,425 can file involuntary petition

(Debtor Required To File)

Exhibit 32­4:  Federal Bankruptcy Exemptions

 Up to $21,625 for residence (“homestead” exemption)

 Interest in motor vehicle up to $3,450

 Interest, 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 (“wild­card” 

exemption)

(Continued)

Voidable Transfers

 Preferential 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 

filing

 Fraudulent 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 filing

Unsecured Creditors

with administration of bankruptcy estate

debtor’s ordinary business expenses, from date of filing petition to date of 

trustee appointment

earned within 180 days of filing of petition

Exhibit 32­5:  Classes of Priority Claims Among 

Unsecured Creditors (Continued)

of grain storage facilities /fish storage/processing facilities

property/services never given

debtor’s operation of motor vehicle under influence of alcohol/drugs

Bankruptcy Code

under false pretenses, false representation, or fraud

notification of bankruptcy proceedings

acting in fiduciary capacity

Exhibit 32­6:  Non­Dischargeable Debts Under The 

Bankruptcy Code (Continued)

person/property

hardship” on debtor

the influence

be non­dischargeable

Company, Filing Date, and Pre­Bankruptcy Assets (In Billions)

 Lehman Brothers Holdings, Inc., 2008, $639

 Washington Mutual, 2008, $327.9

 Worldcom, Inc., 2002, $103.9

 General Motors Corporation, 2009, $91

 CIT Group, 2009, $71

 Enron Corporation, 2001, $65.5

 Conseco, Inc., 2002, $61.3

 MF Global Holdings, 2011, $40.5

 Chrysler, 2009, $39.3