Key Concepts and Liquidations (Excerpts from Forthcoming Expansion to Chapter 21, "Bankruptcy")

The blog has been quiet of late due to other commitments, among which is a substantial overhaul and expansion of Chapter 21 of Business Law Basics, "Bankruptcy."

The revised "key concepts" section:

21.2   Key Concepts
 
Bankruptcy court; federal jurisdiction. In the United States, bankruptcy is permitted by Article 1, Section 8, Clause 4 of the US Constitution[1]; it is thus a matter of federal law regulated by Congress (under Title 11 of the United States Code, or the Bankruptcy Code) rather than by the individual states.[2] Bankruptcy cases are normally filed in US Bankruptcy Courts, which are divisions of the US District Courts.
 
Bankruptcy estate. The “estate” in a bankruptcy matter is created by the commencement of a bankruptcy action. The bankruptcy estate is a taxable entity.  trustees or debtors in possession overseeing the estate may have to file federal and state income tax returns on behalf of the estate.  The estate consists of all of the debtor’s property, with certain exclusions set out in federal (and in some cases, state) statute.[3]  The principal federal exemptions are:
 

  • An aggregate interest valued at $22,975 or less in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor.
  • The debtor's interest in one motor vehicle, not to exceed $3,675 in value.
  • The debtor's interest in household furnishings, household goods, clothing, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor, not to exceed $575 in value in any particular item or $12,250 in aggregate value.
  • The debtor's aggregate interest, not to exceed $1,550 in value, in jewelry held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.
  • The debtor's aggregate interest in any property, not to exceed in value $1,225 plus up to $11,500 of any unused amount of the exemption provided under paragraph (1) of this subsection.
  • The debtor's aggregate interest, not to exceed $2,300 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.
  • Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.
  • The debtor's aggregate interest, not to exceed in value $12,250 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.
  • Professionally prescribed health aids for the debtor or a dependent of the debtor.
  • With limited exceptions, the debtor's right to receive (a) a social security benefit, unemployment compensation, or a local public assistance benefit; (b) a veterans' benefit; (c) a disability, illness, or unemployment benefit; (d) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; (e) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
  • The debtor's right to receive, or property that is traceable to (a) an award under a crime victim's reparation law; (b) a payment on account of the wrongful death of an individual of whom the debtor was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; (c) a payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; (d) a payment, not to exceed $22,975, on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent; or (e) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.
  • With limited exceptions, tax-exempt retirement funds.[4]

Voluntary and involuntary bankruptcy. Voluntary bankruptcy cases are the most common type of bankruptcy filing in the United States. Voluntary filings are done by the debtor, who petitions the bankruptcy court for protection from creditors and, in the case of companies, assistance liquidating or reorganizing the debtor. Involuntary bankruptcy actions are filed by creditors, who seek to force the commencement of bankruptcy proceedings in the hopes that they will be paid.
         
Automatic stay. US law imposes an automatic stay that comes into effect at the time a bankruptcy petition is filed; generally, this stay prohibits commencing, enforcing, or appealing judicial or administrative actions and judgments against a debtor for any claim arising before the filing of the petition.[5] There are some narrow exceptions to the automatic stay. Some creditors, particularly secured creditors who have perfected a security interest under UCC Article 9, may be able to get around the protection of the automatic stay by filing a “motion for relief from automatic stay.”
 
Prepetition and postpetition debt.  Bankruptcy actions must address both prepetition debt (debt incurred prior to the filing of the bankruptcy petition) and postpetition debt (debt incurred after the date of filing).  These types of debt are treated differently in different types of bankruptcy actions.
 
Secured and unsecured creditors. Creditors can have secured (as in a transaction under UCC Article 9) or unsecured (as with most credit card debt) interests in the bankruptcy estate. Generally, secured creditors are paid the full amount of their interest, in the order in which their interests were perfected. Whatever is left over (and very often, nothing is left) is then distributed to the unsecured creditors.

 
The section on Chapter 7 liquidation suits is being expanded in part as follows:
 

Liquidations. Chapter 7 filings are the most common type of bankruptcy action.[6] In a Chapter 7 case, a trustee assigned by the US Trustee’s Office is appointed by the court to oversee the bankruptcy. Once a Chapter 7 bankruptcy has been filed, the debtor may not pay any prepetition debt until a final order is entered by the Court.  Postpetition debt may only be incurred under extremely limited circumstances;   The trustee collects all of the debtor’s non-exempt property, conducts a sale and distributes the sale proceeds among the creditors. In most cases involving business entity debtors, a Chapter 7 bankruptcy is the functional equivalent of a termination of the business.  However, Chapter 7 debtors are normally permitted to keep “essential” property. As a result, many Chapter 7 actions lead to “no asset” cases in which debtors keep all of their property and creditors receive nothing.
 
The goal of most Chapter 7 bankruptcies is the discharge of prepetition debt (either through liquidation and distribution of the debtor’s assets to the creditors, or by court order absolving the debtor of debt for which insufficient assets exist to pay.[7]  Some debt is non-dischargable, however, particularly in cases involving fraud or other wrongful conduct.  In addition, past-due federal taxes (other than certain income tax liability) or other debts or fines owed to government agencies, debts for child support or alimony, most student loans, debts for personal injury caused by the debtor’s driving while intoxicated, certain attorneys’ fees, court fines and penalties, and most debts owed to tax-advantaged retirement plans, condominium or homeowners association, are never dischargeable.



[1] Article 1, Section 8, Clause 4 of the US Constitution provides in relevant part that “Congress shall have power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”
[2] See 11 USC §§ 101 et seq.
[3] See 11 USC §§ 522, 541.
[4] 11 USC § 522(d).
[5] 11 USC § 362.
[6] 11 USC § 701 et seq.
[7] 11 USC § 727.

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