Bankruptcy: Attachment

Front 1

Business Reorganizations (Ch. 11)

Chapter 11 commonly used to rehabilitate business by extending, reducing or modifying debtor’s obligations

Back 1

1) Businesses and individuals [for individuals; those w/unsecured debt exceeding $333k and secured debt exceeding $1 million]

2) Plan can only be approved if it meets “best interest of the creditors” test (same as Ch. 11)

Front 2

Ch. 11 Procedure

Back 2

1) Filing bankruptcy petition.

2) Generally, debtor may continue to operate in bankruptcy as “debtor in possession” without having to appoint a separate trustee. (Trustee always for Ch. 13 and 7)

Ch. 11 trustee may be appointed for cause including fraud, dishonesty, incompetence or gross mismanagement

Front 3

Ch. 11 Plan of Reorganization

Back 3

1) Ch. 11 has technical requirements as to how much creditors are paid under plan; approval of plan by creditors is important component and leads to substantial negotiations between debtors and creditors.

2) Confirmation of plan by bankruptcy judge vests title to property of the estate in the debtor and will bind the debtor and all creditors to plan, though under terms certain debts may reduce in amount and pay over time.

Front 4

Liquidations

Ch. 7 ("Straight Bankruptcy")

Back 4

Effect of a liquidation: debtor’s non-exempt assets are liquidated

For individual debtor, his debts are discharged (“magic eraser”)

Front 5

Dismissal for "abuse" *** 2005 amendment areas

Back 5

Ch. 7 petition filed by an individual debtor with primarily consumer debts may be dismissed (or with debtor’s consent converted to Ch. 11 or 13) upon a finding that granting Ch. 7 relief would constitute an abuse.

Front 6

Establish abuse by:
1) Showing debtor filed in bad faith or by establishing lack of good faith under “totality of the circumstances of the debtor’s financial situation” (won’t come up)

2. **Via a means test

Back 6

Court look at debtor’s income in 6 months before bankruptcy. Compares income to median income of similar families in state where debtor has filed. If not over median, can file for ch. 7.

If over median, means test. In general, a Chapter 7 filing considered abuse and there would be a presumption that debtor should file under Chapter 13 if you have enough to reorganize.

Premise that debtors who can afford to pay creditors at least between $6,575 and $10,950 over 5 years, should pay under Chapter 13.

Front 7

Voluntary Bankruptcy

Back 7

1) Individuals and entities may both file under Chapter 7 (exception of certain industries: railroads, insurance companies, banks, credit unions, municipalities)

2) Insolvency is not a prerequisite

3) Filing of bankruptcy petition commences

Front 8

Involuntary Bankruptcy

Any debtor eligible to file voluntary petition may be subject of involuntary petition under Ch. 7 or 11 (not 13)

Back 8

Creditors may file to end the race to the courthouse (bankruptcy is more orderly) and to obtain rights only available in bankruptcy (e.g., right of trustee to recover preferences made to certain creditors at the expense of other creditors.

Preferences are not illegal or voidable under Texas state law and thus can’t be recovered under that law. Only the federal bankruptcy laws provide for the recovery of preferences

Front 9

Rules for starting involuntary case

Back 9

1) Counting creditors

2) Adequate grounds for filing involuntary petition

Front 10

Counting Creditors

Back 10

1) If 12 or more creditors, then 3 or more with aggregate unsecured (or undersecured—i.e., debt>value of lien collateral) claims of at least $13,475 must file. Policy is that we don’t want 1 or 2 disgruntled able to force bankruptcy.

2) If fewer than 12 creditors, one or more whose unsecured (or undersecured) claims aggregate $13,475 may file.

3) Employees, insiders and creditors who have received transfers voidable by the trustee are not included in counting 12 creditors. These people are not counted because presumably they would not be interested in forcing bankruptcy.