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24.3: Bankruptcy Proceedings

  • Page ID
    49188
  • Although there are some differences among Chapter 7, 11, and 13, bankruptcy proceedings have some common characteristics.

    Bankruptcy Estate

    The bankruptcy estate is the debtor’s legal and equitable interests in property at the time a bankruptcy petition is filed. Under the bankruptcy code, the bankruptcy estate includes real and personal property, bank and investment accounts, life insurance benefits, and inheritances. Debtors are allowed to claim some property as exemptions. In other words, certain property is returned to the debtor from the bankruptcy estate.

    Common exemptions include:

    • Equity interest in a residence, vehicle, and personal property (up to a certain value);
    • Prescribed health aids, such as walkers and wheelchairs;
    • Benefits, such as social security, unemployment compensation, public assistance, disability benefits, and child support;
    • Retirement funds and pension (up to a certain value); and
    • Education savings accounts.

    Debts that Cannot be Discharged

    Bankruptcy does not discharge all debts. There are some types of debts that a debtor remains legally liable for, regardless of being bankrupt.

    Common debts that are not discharged through bankruptcy include:

    • Child support and maintenance to a former spouse;
    • Taxes and fines payable to a governmental agency;
    • Debt incurred by fraud;
    • Liability for intentional torts;
    • Liability for accidents caused while driving while intoxicated;
    • Student loans less than 5 years old; and
    • Debts owed under a prior bankruptcy plan.

    Grounds for Denying Bankruptcy Relief

    Discharge of debts through bankruptcy is a privilege, not a legal right. Therefore, Congress specified certain situations in which a debtor is not eligible for bankruptcy relief. These grounds include:

    • Fraudulent transfers;
    • Keeping inadequate records;
    • Committing a “bankruptcy crime,” such as perjury, making a false claim, bribery, and withholding or destroying records;
    • Failure to explain a loss or deficiency of assets;
    • Refusing to testify in the proceedings or to obey a court order; and
    • Failure to complete the required consumer credit education course.

    The grounds for denying a discharge in bankruptcy usually exist when wrongful conduct occurs by the debtor, the debtor does not fully cooperate in the proceedings, or the debtor does not maintain sufficient records to allow the proceedings to move forward.

    Procedural Steps

    Bankruptcy proceedings begin when a debtor or creditor files a petition for bankruptcy with the bankruptcy court. Married couples may file a joint petition. The petition lists the identity of the debtor(s), the identity of all secured and unsecured creditors, the property in the bankruptcy estate, any claimed exemptions, and a statement of affairs of the debtor.

    Filing a bankruptcy petition results in an automatic stay, which prevents creditors from beginning or continuing collection efforts against the debtor. The stay is designed to protect both the debtor and creditors. Debtors are protected from collection efforts while they focus on creating plans for reorganization and repaying debts. Creditors are protected from assets being transferred to prevent payment of debts and the inequitable distribution of assets among creditors.

    The bankruptcy court has decision-making power in bankruptcy cases. The court decides matter connected with a bankruptcy case, from the filing of the petition through final discharge of the bankruptcy. The court determines whether a debtor is eligible for bankruptcy, approves the bankruptcy plan, and oversees the bankruptcy proceedings.

    If a trustee is required or needed, a trustee will be appointed by the U.S. Trustee and approved by the bankruptcy court. The trustee takes charge of and administers the debtor’s estate during bankruptcy proceedings. A trustee is the representative of the estate and is responsible for prioritizing and satisfying creditors’ claims. To achieve this goal, trustees may hire professionals such as accountants, attorneys, and appraisers.

    The main job of the trustee is to execute the bankruptcy plan. The bankruptcy plan is a detailed plan of action for the liquidation or reorganization of the debtor’s assets and to satisfy creditors’ claims.

    Bankruptcy plans identify and prioritize debts. The first debts to be paid off are to secured creditors who have interest is a particular property to “secure” the debt. Mortgages, car loans, and liens are common examples of secured debts. If the individual or business defaults on the loan payments, a secured creditor may force the debtor to sell or forfeit the property to satisfy the debt. The second category of debts are to unsecured creditors, who do not have an interest in any particular property.

    The bankruptcy code prioritizes claims from unsecured creditors as follows:

    1. Child support and maintenance to a former spouse;
    2. Administrative expenses of the bankruptcy estate, including the trustees’ and accountants’ fees;
    3. Creditors who loan money to the debtor during the bankruptcy;
    4. Wages, salaries and commissions;
    5. Contributions to employee benefit plans;
    6. Consumer deposits;
    7. Specific taxes and governmental fees;
    8. Wrongful death and personal injury claims; and
    9. General creditors.

    Once the bankruptcy plan is completely implemented, a discharge occurs. A bankruptcy discharge releases the debtor from monetary obligations that existed at the time the petition was filed and ends the bankruptcy case.