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BUSINESS LAW Today STANDARD EDITION TEXT & SUMMARIZED CASES, 12e

Roger LeRoy Miller

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Bankruptcy

Chapter 26

Chapter Outline

26-1 The Bankruptcy Code

26-2 Chapter 7—Liquidation

26-3 Chapter 11—Reorganization

26-4 Bankruptcy Relief under Chapter 13 and Chapter 12

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives (slide 1 of 2)

What are the two main goals of bankruptcy?

In a Chapter 7 bankruptcy, what happens if a court finds that there was “substantial abuse”? How is the means test used?

In a Chapter 11 reorganization, what is the role of the debtor in possession?

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives (slide 2 of 2)

How does a Chapter 13 bankruptcy differ from bankruptcy under Chapter 7 and Chapter 11?

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-1 The Bankruptcy Code

26-1a Goals of Bankruptcy Law

To protect a debtor by giving him or her a fresh start without creditors’ claims.

To ensure equitable treatment of creditors who are competing for a debtor’s assets.

26-1b Bankruptcy Courts

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-1c Types of Bankruptcy Relief

Chapter 7 provides for liquidation proceedings.

Chapter 11 governs reorganizations.

Chapter 12 (family farmers/fishermen) and Chapter 13 (individuals) provide for adjustment of the debts of parties with regular income.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-1d Special Treatment of Consumer-Debtors

Consumer-Debtor: One whose debts result primarily from the purchase of goods for personal, family, or household use.

The Bankruptcy Code requires that the clerk of the court give all consumer-debtors:

Written notice of the general purpose, benefits, and costs of each chapter of bankruptcy under which they may proceed

Information on the types of services available from credit counseling agencies

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Landmark in the Law

The Bankruptcy Abuse Prevention and Consumer Protection Act

Makes it more difficult for debtors to obtain a “fresh start” financially

Bankruptcy process has become more time consuming and costly

Changes in the law have left many Americans unable to obtain debt relief

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2 Chapter 7—Liquidation (slide 1 of 2)

Liquidation: Sale of the nonexempt assets of a debtor and the distribution of the funds received to creditors.

Bankruptcy Trustee: A person appointed by the court to manage the debtor’s funds.

Discharge: Termination of a bankruptcy debtor’s obligation to pay debts.

Petition in Bankruptcy: The document that is filed with a bankruptcy court to initiate bankruptcy proceedings.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2 Chapter 7—Liquidation (slide 2 of 2)

26-2a Voluntary Bankruptcy

Chapter 7 Schedules

List of secured and unsecured creditors

Statement of financial affairs of debtor

List of all owned property

List of current income and expenses

Certificate of credit counseling

Proof of payments received from employers

Statement of monthly income, itemized

Copy of debtor’s federal income tax return

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2a Voluntary Bankruptcy (slide 1 of 3)

Tax Returns during Bankruptcy

Substantial Abuse and the Means Test

The Basic Formula

Applying the Means Test to Future Disposable Income

Can the Debtor Afford to Pay Unsecured Debts?

Case Example 26.1 In re Buoy (2017)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2a Voluntary Bankruptcy (slide 2 of 3)

Additional Grounds for Dismissal

Convicted of violent crime or drug-trafficking

Fails to pay postpetition domestic-support

Order for Relief

A court’s grant of assistance to a debtor in bankruptcy that relieves the debtor of the immediate obligation to pay debts.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2a Voluntary Bankruptcy (slide 3 of 3)

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2b Involuntary Bankruptcy

Requirements

If the debtor has twelve or more creditors, three or more of those creditors having unsecured claims totaling at least $15,325 must join in the petition.

If a debtor has fewer than twelve creditors, one or more creditors having a claim of $15,325 or more may file.

Order for Relief

The debtor generally is not paying debts as they become due.

A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2c Automatic Stay (slide 1 of 2)

Automatic Stay: In bankruptcy proceedings, the suspension of almost all litigation and other actions by creditors against the debtor or the debtor’s property. The stay is effective the moment the debtor files a petition in bankruptcy.

The Adequate Protection Doctrine

A doctrine that protects secured creditors from losing the value of their security (because the collateral depreciates, for instance) as a result of an automatic stay in a bankruptcy proceeding.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2c Automatic Stay (slide 2 of 2)

Exceptions to the Automatic Stay

Domestic-support

Proceedings related to divorce, child custody, domestic violence, and support enforcement

Securities regulatory agency investigations

Certain statutory liens for property taxes

Requests for Relief from the Automatic Stay

Secured Property

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2d Estate in Bankruptcy

Estate in Bankruptcy: All of the property owned by a person, including real estate and personal property. It includes:

Community property (property jointly owned by a husband and wife in certain states).

Property transferred in a transaction voidable by the trustee.

Proceeds and profits from the property of the estate.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2e The Bankruptcy Trustee (slide 1 of 2)

The trustee collects the debtor’s available estate and reduces it to cash for distribution, preserving the interests of both the debtor and the unsecured creditors.

Review for Substantial Abuse

Trustee’s Powers

Voidable Rights

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2e The Bankruptcy Trustee (slide 2 of 2)

Preferences

A debtor is not permitted to make a property transfer or a payment that gives a preference to one creditor over others.

Preferences to Insiders

Transfers That Do Not Constitute Preferences

Fraudulent Transfers

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2f Exemptions

Federal Exemptions

State Exemptions

Limitations on the Homestead Exemption

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2g Creditors’ Meeting and Claims

The trustee must call a meeting of the creditors listed in the schedules filed by the debtor.

To receive a portion of the debtor’s estate, each creditor normally files a proof of claim with the bankruptcy court clerk within ninety days of the creditors’ meeting.

In “no-asset cases,” the unsecured creditors will receive no payment and most (if not all) of these debts will be discharged.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2h Distribution of Property

Distribution to Secured Creditors

Secured creditors have priority.

Distribution to Unsecured Creditors

Bankruptcy law establishes an order of priority for classes of debts owed to unsecured creditors, and they are paid in the order of their priority.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2i Discharge (slide 1 of 3)

Debts That Are Not Dischargeable

Certain federal and state income taxes

Claims against property or funds obtained by false pretenses, fraud, theft, or breach of a fiduciary duty.

Claims by creditors who were not notified of the bankruptcy.

Domestic-support obligations and property settlements that are part of a divorce or separation.

Claims for amounts due on a retirement account loan.

Claims based on willful or malicious conduct by the debtor toward another or the property of another.

Certain government fines and penalties.

Consumer debts of more than $675 for luxury goods or services owed to a single creditor incurred within ninety days of the order for relief.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2i Discharge (slide 2 of 3)

Debts That Are Not Dischargeable

Cash advances totaling more than $950 that are extensions of open-end consumer credit obtained by the debtor within seventy days of the order for relief.

Judgments against a debtor resulting from the debtor’s operation of a motor vehicle, boat, or plane while intoxicated.

Debts arising from a violation of securities laws.

Student loans, unless payment of the loans imposes an undue hardship on the debtor and the debtor’s dependents.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2i Discharge (slide 3 of 3)

Case Example 26.6 In re Mickletz (2016)

Reasons That a Court Can Deny a Discharge

The debtor’s concealment or destruction of property with the intent to hinder, delay, or defraud a creditor.

The debtor’s fraudulent concealment or destruction of financial records.

The granting of a discharge to the debtor within eight years prior to the filing of the petition.

The debtor’s failure to complete the required consumer education course.

The debtor’s involvement in proceedings in which the debtor could be found guilty of a felony.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case 26.2

In re Cummings (2015)

Why would a debtor risk the denial of a discharge to conceal assets? Discuss.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-2j Reaffirmation of Debt

Reaffirmation Agreement: An agreement between a debtor and a creditor in which the debtor voluntarily agrees to pay a debt dischargeable in bankruptcy.

Procedures

Required Disclosures

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-3 Chapter 11—Reorganization

26-3a Workouts

26-3b Best Interests of the Creditors

26-3c Debtor in Possession

Debtor in possession (DIP): In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations.

26-3d Creditors’ Committees

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-3e The Reorganization Plan

A plan must be fair, equitable and do the following:

Designate classes of claims and interests.

Specify the treatment to be afforded the classes.

Provide an adequate means for execution.

Provide for payment of tax claims over a five-year period.

Filing the Plan

Acceptance and Confirmation of the Plan

Discharge

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-4 Bankruptcy Relief under Chapter 13 and Chapter 12

26-4a Individuals’ Repayment Plan—Chapter 13

Filing the Petition

Good Faith Requirement

The Repayment Plan

The turning over to the trustee of future earnings or income of the debtor as necessary for execution of the plan.

Full payment through deferred cash payments of all claims entitled to priority, such as taxes.

Identical treatment of all claims within a particular class.

The Length of the Plan

Confirmation of the Plan

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-4a Individuals’ Repayment Plan—Chapter 13

Discharge

Allowed claims not provided for by the plan.

Certain long-term debts provided for by the plan.

Certain tax claims and payments on retirement accounts.

Claims for domestic-support obligations.

Debts related to injury or property damage caused while driving under the influence of alcohol or drugs.

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26-4b Family Farmers and Fishermen—Chapter 12

Filing the Petition

Content and Confirmation of the Plan

Miller, Business Law Today, Comprehensive Edition: Text & Cases, 12th Edition. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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