Chapter 32Chapter 32Bankruptcy and Bankruptcy and ReorganizationReorganization

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The Bankruptcy Act And Its GoalsThe Bankruptcy Act And Its Goals

Provide debtors with opportunity to Provide debtors with opportunity to realize a “fresh financial start”realize a “fresh financial start”

Offer protection to creditorsOffer protection to creditors

Bankruptcy Law Is A Bankruptcy Law Is A Matter Of Federal Matter Of Federal

JurisdictionJurisdictionUnited States Constitution Article I, United States Constitution Article I, Section 8: “Congress shall have the Section 8: “Congress shall have the

power…To establish…uniform laws on power…To establish…uniform laws on the subject of bankruptcies throughout the subject of bankruptcies throughout

the United States”the United States”

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The Bankruptcy Abuse Prevention and The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Consumer Protection Act of 2005

(BAPCPA)(BAPCPA)

Most comprehensive change to bankruptcy law Most comprehensive change to bankruptcy law in over 25 yearsin over 25 years

BAPCPA Effect: More difficult for individual BAPCPA Effect: More difficult for individual debtor to qualify for Chapter 7 (Liquidation) debtor to qualify for Chapter 7 (Liquidation) bankruptcybankruptcy

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Reasons Cited For The Bankruptcy Reasons Cited For The Bankruptcy Abuse Prevention and Consumer Abuse Prevention and Consumer

Protection Act of 2005Protection Act of 2005

Increased number of bankruptcy filingsIncreased number of bankruptcy filings

Significant creditor losses associated with Significant creditor losses associated with bankruptcy filingsbankruptcy filings

Debtor abuse of bankruptcy protection Debtor abuse of bankruptcy protection rightsrights

Debtor ability to repayDebtor ability to repay

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Exhibit 32-1: Types of Bankruptcy Exhibit 32-1: Types of Bankruptcy Relief by ChapterRelief by Chapter

Chapter 7 Bankruptcy: Sale of non-exempt assets, and Chapter 7 Bankruptcy: Sale of non-exempt assets, and distribution of money to creditorsdistribution of money to creditors

Chapter 9 Bankruptcy: Adjustment of municipalities’ debtsChapter 9 Bankruptcy: Adjustment of municipalities’ debts

Chapter 11 Bankruptcy: Reorganization of debtor’s financial Chapter 11 Bankruptcy: Reorganization of debtor’s financial affairs under supervision of bankruptcy courtaffairs under supervision of bankruptcy court

Chapter 12 Bankruptcy: Reorganization of family farmers’ Chapter 12 Bankruptcy: Reorganization of family farmers’ debtsdebts

Chapter 13 Bankruptcy: Reorganization of individual’s debtsChapter 13 Bankruptcy: Reorganization of individual’s debts

Chapter 15 Bankruptcy: Recognition of insolvency Chapter 15 Bankruptcy: Recognition of insolvency proceedings pending in foreign country, and relief for proceedings pending in foreign country, and relief for foreign debtorsforeign debtors

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Exhibit 32-2: Bankruptcy Filing Exhibit 32-2: Bankruptcy Filing Statistics, Calendar Year 2011Statistics, Calendar Year 2011

Total Filings-Total Filings-

Consumer Filings-Consumer Filings-

Business Filings-Business Filings-

Chapter 7-Chapter 7-

Chapter 11-Chapter 11-

Chapter 12-Chapter 12-

Chapter 13-Chapter 13-

1,410,6531,410,653

1,362,8471,362,847

47,80647,806

992,332992,332

11,52911,529

637637

406,084406,084

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Attributes of Bankruptcy CasesAttributes of Bankruptcy Cases

Procedural rules for bankruptcy cases set forth Procedural rules for bankruptcy cases set forth in Federal Bankruptcy Rulesin Federal Bankruptcy Rules

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

Bankruptcy judges appointed and serve 14-year Bankruptcy judges appointed and serve 14-year terms; judges make decisions regarding terms; judges make decisions regarding administration of bankruptcy proceedingsadministration of bankruptcy proceedings

Bankruptcy appeals proceed to federal district Bankruptcy appeals proceed to federal district court judgecourt judge

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Bankruptcy ProceedingsBankruptcy Proceedings

Bankruptcy petition filedBankruptcy petition filed

Court grants automatic stay, “freezing” creditor actions Court grants automatic stay, “freezing” creditor actions outside bankruptcy court against debtor’s estateoutside bankruptcy court against debtor’s estate

Court determines whether order of relief should be Court determines whether order of relief should be grantedgranted

Creditors meet with debtorCreditors meet with debtor

Payment plan created and approved, usually by creditors Payment plan created and approved, usually by creditors and courtand court

Payment plan carried out through actions of trustee and Payment plan carried out through actions of trustee and debtordebtor

Debts remaining after plan executed usually dischargedDebts remaining after plan executed usually discharged

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Chapter 7 Bankruptcy: “Voluntary” Chapter 7 Bankruptcy: “Voluntary” Versus “Involuntary” PetitionVersus “Involuntary” Petition

Voluntary Petition: Debtor filesVoluntary Petition: Debtor files

Involuntary Petition: Creditor(s) file, forcing debtor into Involuntary Petition: Creditor(s) file, forcing debtor into bankruptcybankruptcy

Twelve or more creditors: Three or more creditors with Twelve or more creditors: Three or more creditors with unsecured claims totaling at least $14,425 must sign unsecured claims totaling at least $14,425 must sign involuntary petitioninvoluntary petition

Less than twelve creditors: Single creditor with claim Less than twelve creditors: Single creditor with claim totaling at least $14,425 can file involuntary petitiontotaling at least $14,425 can file involuntary petition

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Exhibit 32-3: Required Schedules For Chapter Exhibit 32-3: Required Schedules For Chapter 7 Liquidation7 Liquidation

(Debtor Required To File)(Debtor Required To File) Schedule A: All real propertySchedule A: All real property

Schedule B: All personal propertySchedule B: All personal property

Schedule C: Exempt property listed in Schedules A and BSchedule C: Exempt property listed in Schedules A and B

Schedule D: Secured creditors and their addressesSchedule D: Secured creditors and their addresses

Schedule E: Unsecured priority claimsSchedule E: Unsecured priority claims

Schedule F: Unsecured non-priority claimsSchedule F: Unsecured non-priority claims

Schedule G: Executory contracts and expired leasesSchedule G: Executory contracts and expired leases

Schedule H. List of co-debtorsSchedule H. List of co-debtors

Schedule I: Statement of debtor’s current incomeSchedule I: Statement of debtor’s current income

Schedule J: Statement of current expendituresSchedule J: Statement of current expenditures

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Exhibit 32-4: Federal Bankruptcy Exhibit 32-4: Federal Bankruptcy ExemptionsExemptions

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

Interest in motor vehicle up to $3,450Interest in motor vehicle up to $3,450

Interest, up to $550 for particular item, in personal Interest, up to $550 for particular item, in personal and household goods (aggregate total limited to and household goods (aggregate total limited to $11,525)$11,525)

Interest in jewelry up to $1,450Interest in jewelry up to $1,450

$1,150 of any property debtor chooses (“wild-card” $1,150 of any property debtor chooses (“wild-card” exemption)exemption)

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Exhibit 32-4: Federal Bankruptcy Exhibit 32-4: Federal Bankruptcy Exemptions (Continued)Exemptions (Continued)

Up to $2,175 in “tools of trade” and professional booksUp to $2,175 in “tools of trade” and professional books

Any unmatured life insurance contract owned by debtorAny unmatured life insurance contract owned by debtor

Professionally prescribed health aidsProfessionally prescribed health aids

Right to receive certain personal injury awards up to Right to receive certain personal injury awards up to $21,625$21,625

Retirement funds in IRA/SEP up to $1,171,650 per personRetirement funds in IRA/SEP up to $1,171,650 per person

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Voidable TransfersVoidable Transfers

Preferential Payments: Trustee can recover (and Preferential Payments: Trustee can recover (and include in bankruptcy estate) payments made by include in bankruptcy estate) payments made by insolvent debtor that give preferential treatment insolvent debtor that give preferential treatment to one creditor over another, if debtor made such to one creditor over another, if debtor made such payments within 90 days of bankruptcy filingpayments within 90 days of bankruptcy filing

Fraudulent Transfers: Trustee can recover (and Fraudulent Transfers: Trustee can recover (and include in bankruptcy estate) transfers made include in bankruptcy estate) transfers made with intent to defraud creditors, if debtor made with intent to defraud creditors, if debtor made such transfers within two years of bankruptcy such transfers within two years of bankruptcy filingfiling

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Exhibit 32-5: Classes of Priority Claims Exhibit 32-5: Classes of Priority Claims Among Unsecured CreditorsAmong Unsecured Creditors

Class 1: Alimony/child supportClass 1: Alimony/child support

Class 2: Court costs, trustee fees, attorney, fees, other Class 2: Court costs, trustee fees, attorney, fees, other costs associated with administration of bankruptcy estatecosts associated with administration of bankruptcy estate

Class 3: Unsecured claims in involuntary bankruptcy that Class 3: Unsecured claims in involuntary bankruptcy that arise through debtor’s ordinary business expenses, from arise through debtor’s ordinary business expenses, from date of filing petition to date of trustee appointmentdate of filing petition to date of trustee appointment

Class 4: Unsecured claims for unpaid wages, salaries, and Class 4: Unsecured claims for unpaid wages, salaries, and commissions earned within 180 days of filing of petitioncommissions earned within 180 days of filing of petition

Class 5: Unsecured claims for contributions to employee Class 5: Unsecured claims for contributions to employee retirement plansretirement plans

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Exhibit 32-5: Classes of Priority Claims Exhibit 32-5: Classes of Priority Claims Among Unsecured Creditors Among Unsecured Creditors

(Continued)(Continued) Class 6: Unsecured claims by farmers and fishers against Class 6: Unsecured claims by farmers and fishers against

grain operators of grain storage facilities /fish grain operators of grain storage facilities /fish storage/processing facilitiesstorage/processing facilities

Class 7: Claims for deposits given to debtor in connection Class 7: Claims for deposits given to debtor in connection with property/services never givenwith property/services never given

Class 8: Certain taxes and penalties due governmentClass 8: Certain taxes and penalties due government

Class 9: Claims in bankruptcies related to federal Class 9: Claims in bankruptcies related to federal depository institutionsdepository institutions

Class 10: Unsecured claims for personal injuries and Class 10: Unsecured claims for personal injuries and deaths caused by debtor’s operation of motor vehicle deaths caused by debtor’s operation of motor vehicle under influence of alcohol/drugsunder influence of alcohol/drugs

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Exhibit 32-6: Non-Dischargeable Debts Exhibit 32-6: Non-Dischargeable Debts Under The Bankruptcy CodeUnder The Bankruptcy Code

Claims for back taxes/government fines within 3 years of Claims for back taxes/government fines within 3 years of bankruptcy filingbankruptcy filing

Claims for liabilities against debtor for his/her obtaining Claims for liabilities against debtor for his/her obtaining money/property under false pretenses, false money/property under false pretenses, false representation, or fraudrepresentation, or fraud

Claims by creditors not listed on schedule and who did not Claims by creditors not listed on schedule and who did not have notification of bankruptcy proceedingshave notification of bankruptcy proceedings

Claims based on fraud, embezzlement, and larceny by Claims based on fraud, embezzlement, and larceny by debtor while he/she acting in fiduciary capacitydebtor while he/she acting in fiduciary capacity

Alimony, child support, and certain property settlementsAlimony, child support, and certain property settlements

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Exhibit 32-6: Non-Dischargeable Debts Exhibit 32-6: Non-Dischargeable Debts Under The Bankruptcy Code Under The Bankruptcy Code

(Continued)(Continued) Claims of willful/malicious conduct by debtor that caused Claims of willful/malicious conduct by debtor that caused

injury to another person/propertyinjury to another person/property

Specific student loans, unless payment of loans would Specific student loans, unless payment of loans would impose “undue hardship” on debtorimpose “undue hardship” on debtor

Judgments against debtor for claims resulting from Judgments against debtor for claims resulting from debtor’s driving under the influencedebtor’s driving under the influence

Debts not discharged in previous bankruptciesDebts not discharged in previous bankruptcies

Claims for money borrowed to pay tax to federal Claims for money borrowed to pay tax to federal government that would be non-dischargeablegovernment that would be non-dischargeable

Cash advances on credit cardCash advances on credit card

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Exhibit 32-7: Largest Corporate Exhibit 32-7: Largest Corporate Bankruptcy FilingsBankruptcy Filings

Company, Filing Date, and Pre-Bankruptcy Assets Company, Filing Date, and Pre-Bankruptcy Assets (In Billions)(In Billions)

Lehman Brothers Holdings, Inc., 2008, $639Lehman Brothers Holdings, Inc., 2008, $639 Washington Mutual, 2008, $327.9Washington Mutual, 2008, $327.9 Worldcom, Inc., 2002, $103.9Worldcom, Inc., 2002, $103.9 General Motors Corporation, 2009, $91General Motors Corporation, 2009, $91 CIT Group, 2009, $71CIT Group, 2009, $71 Enron Corporation, 2001, $65.5Enron Corporation, 2001, $65.5 Conseco, Inc., 2002, $61.3Conseco, Inc., 2002, $61.3 MF Global Holdings, 2011, $40.5MF Global Holdings, 2011, $40.5 Chrysler, 2009, $39.3Chrysler, 2009, $39.3