1. Bankruptcy and Debt
Adjustment
Chapter 21

2. Learning Objectives
1. Summarize the history of bankruptcy law in the
United States.
2. Discuss restoring credit following bankruptcy.
3. State the criteria necessary to be eligible to file
voluntarily for Chapter 7 bankruptcy.
4. Explain the ―means test‖ that is required for filing
Chapter 7 bankruptcy.
5. State the criteria necessary for creditors to force
debtors into involuntary bankruptcy.
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3. Learning Objectives (cont.)
6. Distinguish between an order for relief and
automatic stay in the bankruptcy process.
7. List the federal exemptions debtors can exclude
from the bankruptcy process.
8. Recognize those debts that have priority payment
status under the Bankruptcy Code.
9. Explain Chapter 11 bankruptcy, emphasizing the
reorganization process.
10.Discuss the requirements for Chapters 12 and 13
bankruptcy.
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4. Bankruptcy’s History
• The first federal bankruptcy law in the United
States was enacted in 1800. Under that law,
only creditors could begin a bankruptcy
proceeding, and only merchants could qualify
as debtors
• In 1840, debtor’s prisons were abolished
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5. Bankruptcy’s History
• The Bankruptcy Reform Act of 1978 make it
easier for businesses and individuals to obtain
bankruptcy relief.
• In 1978, Chapters 11 and 13 of the Bankruptcy
were created, allowing businesses and
individuals to reorganize and keep going.
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6. Constitutional Authority
The U.S. Constitution gives the federal
government jurisdiction over bankruptcy
proceedings by stating:
• ―Congress shall have the Power . . . To
establish . . . uniform laws on the subject of
Bankruptcies throughout the United States.‖
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7. Restoring Credit Following Bankruptcy
• A personal bankruptcy filing remains on a
debtor’s credit report for 10 years and has a
detrimental effect on the ability to establish a
line of credit.
• Filing bankruptcy gives most debtors an
opportunity to begin anew.
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8. Liquidation—Chapter 7
• Chapter 7 of the Bankruptcy Code
– Provides a system in which debtors are forced to
sell (liquidate) much of their property and use the
cash to pay their creditors a portion of the amount
owed each one
– After assets have been liquidated, remaining debt
is discharged, with some exceptions
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9. Types of Bankruptcy Procedures
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10. Voluntary Proceedings
To qualify, debtors must do all of the
following:
• Satisfy the means test
• Meet with an approved nonprofit credit counselor
before filing for bankruptcy.
• Provide a federal income tax return for the most
recent tax year.
• Take a course in financial management after filing for
bankruptcy.
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11. The Means Test
1. Compare the debtor’s average income during the
previous six months with the median income for a
family of that size in the debtor’s state. (if lower,
eligible) NC levels
–
Median Income by State
2. Determine if income is enough to pay off some of
their unsecured debts.
– If disposable income:
– <$100/month($6,000 in 5 years), can file
– >$167/month(~$10,000 in 5 years), cannot
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12. The Means Test
3. Determine whether the debtor has the ability
to pay unsecured debts over a five-year
period.
•
If disposable income between $100-$167/month,
but not enough to pay more than 25% of
unsecured debts over a 5-year period.
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13. Involuntary Proceedings
• Creditors may be able to force debtors into
involuntary bankruptcy if the debtor fails to pay
bills generally as they become due.
– If fewer than 12 creditors, a single creditor may file (if owed
>$14,425 more than the value of any secured property)
– If greater than 12 creditors, three must file
• Debtor has 20 days to contest the filing
• Involuntary petitions cannot be filed against
farmers, non-profits, banks, cities, insurance
companies
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14. Order for Relief
• The court’s command that the liquidation
begin.
– If filing is voluntary, petition becomes order for
relief and is effective when filed
– If involuntary, debtor is allowed 20 days from filing
to contest, after which a hearing is held to
determine if order will be issued
• Case Trustee - Appointed by the court to carry out
creditor meetings, handle liquidation/disbursement of
assets, and report back to the court
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15. Automatic Stay
• A postponement of collection proceedings
against the debtor
– Goes into effect the moment the order for relief
occurs
– Creditors who violate the stay may be held in
contempt of court
• Some exceptions for debts caused by fraud,
back taxes, family support, student loans.
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16. Automatic Stay
The stay prohibits creditors from beginning
or continuing:
•Lawsuits to collect debts incurred before the filing of
the petition.
•Attempts to enforce a judgment against the debtor.
•Foreclosure sales.
•Collection proceedings.
•Repossession activities.
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17. Federal Exemptions
• Homestead Exemption
– Allows debtors to keep a maximum of $21,625
($35,000 in NC) in equity in the debtor’s place of
residence and in property used as a burial ground
• Necessities
– Allows debtors to maintain a minimum standard of
living
• Benefits and support payments
– Alimony, child support, social security, disability,
etc.
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18. Federal Exemptions
• Changes to exemption amounts
• U.S.C. exemption code
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19. State Exemptions
• Dollar amounts included in state statutes will
be a more accurate assessment of property
values within each state
• NC Exemptions
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20. 11 USC
section
507
Priorities
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21. Trustee’s Duties
• The trustee sets aside, under the trustee’s
avoiding powers, certain sales and property
transfers made by the debtor
• The trustee sells the debtor’s property to
obtain cash.
• The trustee then distributes the cash among
the creditors according to set priorities
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22. Exceptions to Discharge
• Debts Created by Misconduct
– Ex: fraud
• Debts Enforced by the Government
– Student loans that don’t impose hardship
– Gov’t fines/penalties
– Certain back taxes
– Some court ordered debt (child support, alimony)
• Debts Created by Excessive Spending
– In case you wanted to go on a pre-bankruptcy
shopping spree
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23. Reorganization—Chapter 11
• Chapter 11 of the Bankruptcy Code
– provides a method for businesses to reorganize
their financial affairs and still remain in business.
– a qualified debtor creates a plan that alters the
repayment schedule.
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24. Special Features of Chapter 11
• Debtor in possession
– debtor keeps possession and control of the assets,
continues to run the firm, and performs most of the
functions that a trustee performs in other types of
bankruptcy.
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25. The Reorganization Plan
• Creditors’ Committee
– Appointed to investigate the business and help
come up with a plan
– Normally consists of the 7 creditors with the largest
unsecured claims
• Plan Qualifications
– Bankruptcy code requires grouping claims into
classes and treating all creditors in the same class
equally
– Secured creditors, unsecured creditors, equity
security holders
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26. The Reorganization Plan
• Plan Approval
– If plan doesn’t change a class’ legal rights, no
approval necessary
– If a class will get less than full value of their claim
(impaired class), they have the right to vote on
the plan
• Plan Confirmation
– Court holds a hearing to confirm the plan
– Confirmation
• Officially places a reorganization plan into action
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27. The Chapter 12 Plan
For farmers and fishers
The plan must:
• Provide for payment of fixed amounts to the
trustee on a regular basis over a three-year
period.
• Make certain that all priority claims are paid in
full
• Must not take longer than three years to
complete
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28. Individual Debt Adjustment—Chapter 13
• Only individual debtors may file
– includes sole proprietors and the self-employed
– excludes corporations and partnerships
• Permits an individual debtor to put in place a
repayment plan (to be completed within 3-5
years).
• Upon completion of payments under the plan,
they receive a discharge from most remaining
debt.
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29. Question?
Which part of the bankruptcy code provides a
system in which debtors are forced to sell much of
their property and use the cash to pay their
creditors a portion of the amount owed?
A. Chapter 7
B. Chapter 11
C. Chapter 12
D. Chapter 13
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30. Question?
What is a self-operating postponement of
collection proceedings against the debtor?
A. Automatic stay
B. Focused lien
C. Debt relief
D. Reimbursement rule number 9
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31. Question?
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What are creditors who receive less than full
value of their claims?
Reduced class
Impaired class
Prejudiced class
LIFO class
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32. Question?
What allows debtors to keep equity in the
debtor’s place of residence?
A. Mortgage exemption
B. Household exemption
C. Homestead rule
D. Domicile rule
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33. Question?
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Which part of the bankruptcy code provides
a method for businesses to reorganize their
financial affairs and still remain in business?
Chapter 7
Chapter 11
Chapter 12
Chapter 13
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34. Question?
What is the legal process by which the
assets of a debtor are sold to pay off
creditors ?
A. Restitution
B. Re-compensation
C. Reimbursement
D. Bankruptcy
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