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KU BLAW 301 - Chapter 16--Part 2 (FA14)

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Slide 1Sec. 4: Protection for DebtorsWhat Can a Debtor Do?Options for DebtorsConsumer Bankruptcy FactorsPurpose of Bankruptcy LawSec. 4: Bankruptcy LawBankruptcy LawTypes of Bankruptcy FilingsBankruptcy BenefitsBankruptcy CostsFor background purposes only U.S. Bankruptcy FilingsFor background purposes only U.S. Bankruptcy FilingsSec. 6: Liquidation Proceedings (Ch. 7)Chapter 7 Means TestChapter 7 Case ProcessChapter 7 Case ProcessChapter 7 Case ProcessBankruptcy EstateExempt PropertyBankruptcy Trustee’s PowersDistributions to Secured CreditorsDistributions to Unsecured CreditorsDischarge of DebtsNondischargeable Debts (know these)Other Nondischargeable Debts (skip these)Sec. 7: Reorganizations (Ch. 11)Chapter 11Chapter 11Sec. 8: Chapter 13 BankruptcyChapter 13Chapter 131Debtor-Creditor Relations and Bankruptcy—Part 2Chapter 16—Sections 4-8Sec. 4: Protection for DebtorsDebtors are protected by state and federal consumer protection statutes and regulations, as well as federal bankruptcy law.State laws protect certain items of property owned debtors from seizure to satisfy debts (“exempt property”). Exempt property may include all or a portion of a debtor’s equity in their home (“homestead exemption”).Certain types of personal property are often exempt—see list on p. 368. 23What Can a Debtor Do?4Options for DebtorsTry to work out a payment plan and/or a debt reduction plan with creditors (“composition agreement”); refinance debts; or consolidate debts.Try to protect assets by keeping current on secured debt payments, even if unsecured debts are delinquent.If sued for collection, or if foreclosure or repossession proceedings are commenced, filing for bankruptcy protection may be the best alternative. Bankruptcy occurs when a debtor is who is unable to pay their bills when due seeks protection from creditors by filing a bankruptcy petition under the U.S. Bankruptcy Code. Debtor does not have to be “insolvent.”5Consumer Bankruptcy FactorsWhat are the primary factors that cause debtors to file for bankruptcy?Purpose of Bankruptcy Law“[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)67Sec. 4: Bankruptcy LawThe goals of bankruptcy law are to: Protect debtors by giving them a “fresh start” free from creditors’ claims; and Ensure equitable treatment for creditors who have claims against debtors.Secured creditors are allowed to repossess their collateral (after a period of time).Unsecured creditors share in the debtor’s assets (if any) in proportion to the unpaid debt owed to them.8 Bankruptcy LawThe Constitution gives Congress the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” (Art. I, Sec. 8).“Bankruptcy Code”—federal statutes that govern bankruptcies. The Code has 8 chapters: some cover definitions/administrative provisions applicable to all cases; the remaining chapters (7, 9, 11, 12, and 13) contain rules for specific types of bankruptcy filings.U.S. Bankruptcy Courts (part of the federal district court system) have exclusive jurisdiction over bankruptcy cases.9Types of Bankruptcy FilingsChapter 7 (liquidation)Individuals and businesses seeking to liquidate and have their debts discharged (extinguished)Chapter 13 (individual repayment plan)Individuals with regular income seeking to establish a repayment plan for debts.Chapter 11 (business reorganization)Businesses, and some individuals with extensive business holdings, seeking to reorganize and continue operationsChapter 9 (municipalities) and Chapter 12 (family farmers)—Not covered in this class.10Bankruptcy Benefits Automatic Stay becomes effective as soon as petition is filed.Creditors cannot commence or continue lawsuits against debtor or take other actions to collect debts or judgments while the automatic stay is in effect. Secured creditors may petition the court to lift the stay (generally, where debtor has no equity in the secured property).Discharge of most debts (Ch. 7)Fresh start: Money earned by an individual debtor after filing a Ch. 7 bankruptcy petition is not subject to creditors’ claims relates to pre-petition debts.(Ch. 7)Ch. 13 debtors can keep their house and other assets if they comply with their repayment plan. Unpaid balances of most unsecured debts are discharged if/when plan is completed.Ch. 11 debtors can continue operations (free from collection pressures) while developing a plan to reorganize business and modify debt obligations.11Bankruptcy CostsCh. 7 debtors forfeit all nonexempt assetsExempt assets are defined by both state law and the Bankruptcy Code (which permits states to require that debtors use the state exemptions).Filing goes on credit report for 10 yearsFiling costs (estimates) Court fees: $335--Ch. 7; $310--Ch.13Chapter 7 (consumer filings) attorney fees: $1,200 and upChapter 13 attorney fees: $3,000 and upChapter 11—very high attorney fees.12For background purposes only U.S. Bankruptcy Filings2008 1.1 million filings2009 1.47 million filings (32% increase)2010 1.59 million (8% increase)2011 1.38 million (12% decrease from 2010)2012 1.19 million (14% decrease from 2011)2013 1.03 million ( 13% decrease from 2012; 95.7% consumer filings) 2014 YTD filings down 12%For background purposes only U.S. Bankruptcy FilingsThe average nationwide per capita bankruptcy filing rate for 2014 (as of 9/30) is 3.03 (total filings per 1,000 per population), down from 3.33 for the 2013 calendar year. For 2014 (as of 9/30/14) 96% of bankruptcy filings were noncommercial filings (67%--Ch. 7 and 33%--Ch. 13). States with highest per capita filing rates for 2014 (as of 9/30):1. Tennessee (6.31)2. Alabama (5.34)3. Georgia (5.29)4. Utah (4.98)5. Indiana (5.24)1314Sec. 6: Liquidation Proceedings (Ch. 7)Bankruptcies under Chapter 7 are called “liquidation” or “straight” bankruptcies. Most debts are discharged in Chapter 7, and secured creditors get to repossess collateral held by debtors (after the automatic stay is lifted).Chapter 7 is the most common form of bankruptcy; it is available to individuals and businesses (but only once every 8 years). Purposes: a fair distribution to


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