Bankruptcy

Chapter 12 Hardship Discharge

A Chapter 12 hardship discharge may only be granted if the unsecured creditors have received at least as much as they would have received through a Chapter 7 liquidation and if modification of the plan is not feasible.

Chapter 12 Hardship Discharge

A family farmer may be excused from completing payments under a plan of reorganization if payments under the plan are not completed due to circumstances for which the family farmer cannot be held accountable and other statutory criteria have been met..

Grant of Discharge of All Unsecured Debts in Plan

The bankruptcy court may grant the debtor a discharge of all unsecured debts provided for in the plan or disallowed by the court, with the exception of those types of debts which are excepted from discharge, if the court finds that such circumstances exist and that unsecured creditors already have received at least what they would have received if the debtor’s estate had been liquidated under Chapter 7 of the Bankruptcy Code.

Illness that Precludes Employment may Serve as Basis for Discharge

Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a discharge. This type of discharge is often referred to as a “hardship discharge.” A Chapter 12 hardship discharge may only be granted if the unsecured creditors have received at least as much as they would have received through a Chapter 7 liquidation and if modification of the plan is not feasible.


First Meeting of Creditors

Under the Bankruptcy Code, the United States trustee must convene and preside at a meeting of creditors, which is often referred to as the section 341 meeting. This must occur within a reasonable time after the order for relief in a case.

First Meeting of Creditors

Under the Bankruptcy Code, the United States Trustee must convene and preside at a meeting of creditors, which is often referred to as the Section 341 meeting. This must occur within a reasonable time after the order for relief in a case. However, the court may order the United States trustee not to convene a meeting of creditors or equity security holders if the debtor has filed a plan for which the debtor solicited acceptances prepetition.

Debtor’s duties at and after the meeting of creditors

The debtor is required to attend the meeting and to submit to examination under oath. The purpose of the meeting is to give creditors and the trustee an opportunity to examine the debtor regarding the debtor’s acts and property, and to address any other matter that may affect the debtor’s right to a discharge or the administration of the bankruptcy estate. An individual chapter 7 debtor shall not retain possession of personal property in which a creditor has a purchase-money security interest unless the debtor, within 45 days after the first meeting of creditors under section 341(a), either enters into a reaffirmation agreement on the creditor’s claim or redeems the property. If the debtor fails to so act, the automatic stay with respect to such property is terminated, the property is no longer property of the estate, and the creditor can take whatever action with respect to the property is permitted by applicable nonbankruptcy law. However, the court, on motion of the trustee, may find that the property is of consequential value or benefit to the estate and order delivery of the property to the trustee.

Chapter 7 Creditors’ Committees

An important purpose of the Section 341 meeting in a Chapter 7 case is the election of a creditors’ committee. A creditors’ committee may consult with the trustee or the United States Trustee in connection with the administration of the estate, make recommendations to the trustee or United States Trustee respecting the performance of the trustee’s duties, and submit questions to the court or the United States Trustee concerning the administration of the estate. Only creditors with undisputed general unsecured claims can join Chapter 7 creditors’ committees.

Chapter 11 Creditors’ Committees

In Chapter 11 cases, creditors’ committees play a prominent role in many cases and the members are selected by the United States Trustee. The committee functions as the representative of creditors who hold allowable, unsecured, nonpriority claims. Governmental entities are generally excluded from participation on Chapter 11 creditors’ committees.


Introduction to Chapter 11 Bankruptcy

The Bankruptcy Code is a collection of federal laws that apply in bankruptcy cases or proceedings. The Code is made up of various “Chapters” that each apply to a different type of debtor or bankruptcy. One purpose of Chapter 11 is to “rehabilitate” or “reorganize” a business so that it can continue without folding or closing.

Introduction to Chapter 11 Bankruptcy

You may have heard a news report about a company that has emerged from Chapter 11 so that it can continue doing business. Similarly, you may have read about how a financially troubled company proposes, in its Chapter 11 reorganization plan, to pay its employees. In 2003, nearly 10,000 debtors — both individuals and businesses — filed for Chapter 11 bankruptcy.

What is “Chapter” 11?

The Bankruptcy Code is a collection of federal laws that apply in bankruptcy cases or proceedings. The Code is made up of various “Chapters” that each apply to a different type of debtor or bankruptcy. One purpose of Chapter 11 is to “rehabilitate” or “reorganize” a business so that it can continue without folding or closing. Chapter 11 also allows an individual debtor or a consumer to “reorganize” his or her debts and, thus, his or her financial situation. In Chapter 11, the debtor will not “liquidate” or wipe out most debts, as would be the case in a Chapter 7 bankruptcy proceeding. In Chapter 7, much of a debtor’s property can be sold to pay debts owed to creditors.

A consumer with debts that do not exceed certain amounts can file for personal bankruptcy under Chapter 13. This type of debtor must have regular income. As in Chapter 11, a Chapter 13 debtor seeks “reorganization.” Not all debtors, however, are able to file for Chapter 13 bankruptcy.

Who can file for bankruptcy under Chapter 11?

An individual debtor or consumer or a business or company can file under Chapter 11. These debtors are seeking a “second chance” to pay their creditors. They wish to avoid having to liquidate or sell off property and assets. Businesses wish to remain in business. For example, an airline in financial distress may seek a Chapter 11 reorganization in an effort to keep its planes flying.

In order to file a Chapter 11 petition, a consumer must have debts or liabilities in amounts that exceed the limits for Chapter 13 bankruptcy.

What happens in a Chapter 11 bankruptcy proceeding?

A Chapter 11 bankruptcy proceeding is a lengthy, complex, and costly process. For this reason, many consumers or individuals do not seek Chapter 11 bankruptcies; instead, they file under Chapter 7 or Chapter 13. In 2003, fewer than 1,000 consumers or individuals sought the protection of the bankruptcy laws under Chapter 11. In comparison, approximately 467,000 consumers filed for Chapter 13 bankruptcy that same year. Well over one million Chapter 7 bankruptcy proceedings were filed in 2003.

As in all other types of bankruptcy proceedings, a Chapter 13 debtor starts the process by filing a “petition” with a United States Bankruptcy Court. The petition consists of the paperwork, documentation, and forms required by the court . The debtor will be asked to provide a great deal of financial information, including the amounts of debts owed, the names of the creditors, and assets and property.

After a Chapter 11 petition has been filed, most creditors cannot try to collect debts; instead, they must work within the requirements of the law as it applies to bankruptcy proceedings. Similarly, the debtor must follow the requirements of the bankruptcy laws. During the proceedings, the debtor cannot transfer or sell property or assets without approval of the court.

The Chapter 11 debtor will file a reorganization plan that explains how the debtor proposes to repay creditors. The court appoints a bankruptcy trustee to supervise the case. If the court approves the plan, the debtor will have to repay specified debts according to the terms set forth in the plan. Not surprisingly, the outcomes of Chapter 11 proceedings vary widely, due to the individual nature of the financial situation of each debtor.


Tax Claims

The treatment of tax debts in bankruptcy proceedings is an attempt to reconcile two conflicting policies. The first policy concerns the government’s interest in collecting taxes. The second policy concerns the fresh start that bankruptcy is to give honest debtors. Under the Bankruptcy Code, a debtor’s ability to discharge any tax debt is based upon the classification of that particular tax debt.

Tax Claims

The treatment of tax debts in bankruptcy proceedings is an attempt to reconcile two conflicting policies. The first policy concerns the government’s interest in collecting taxes. The second policy concerns the fresh start that bankruptcy is to give honest debtors. Under the Bankruptcy Code, a debtor’s ability to discharge any tax debt is based upon the classification of that particular tax debt.

Characterization of Tax Claims

A tax claim can be characterized as a trust fund tax, a secured claim, an administrative tax claim, a priority tax claim, a general unsecured claim or a penalty claim. The debtor holds trust fund taxes, which have been collected by the debtor from third parties, in trust for the appropriate taxing authority. The amounts held in trust are not property of the debtor or of the bankruptcy estate. The taxing authority will have a priority tax claim if the debtor failed to collect and/or remit a trust fund tax to the appropriate taxing authority. Secured claims are claims that are secured by a lien on the debtor’s property. A claim is secured to the extent of the value of the property securing the claim. Administrative tax claims consist of taxes that have accrued during the pendency of the bankruptcy. The Bankruptcy Code accords administrative status to any tax that is incurred by the estate with two exceptions. Priority tax claim status is granted to certain allowed unsecured claims of governmental units. General unsecured taxes are taxes that are not entitled to secured or administrative tax claim status. Generally, these are old claims that are not entitled to qualify for priority tax claim status.

Dischargeability of Taxes

Taxes may be discharged in bankruptcy either through liquidation or reorganization. In a liquidation proceeding, the taxes of an individual may be discharged. Taxes may also be discharged pursuant to a Chapter 11 plan. Discharges under Chapter 13 are available to individual wage earners upon the confirmation of a plan of reorganization. Certain tax liabilities may be discharged under Chapter 13 that are not otherwise dischargeable. Also, under Chapter 13, creditors must file a proof of claim with the Bankruptcy Court. However, a governmental unit is not required to file a request for payment of an administrative expense for a tax or a tax penalty as a condition to allowance of an administrative expense.

Dischargeability Determination

Whether taxes are priority tax claims or general unsecured claims determines their dischargeability. A priority claim is nondischargeable. A taxpayer must file a tax return in order to get a discharge of the tax liability. Taxes are nondischargeable if the debtor files a fraudulent return or willfully attempts to defeat taxes. Fraud includes activities such as submitting false withholding statements for the purpose of eliminating withholding and failing to report embezzlement income. Willful attempts to evade or defeat tax liabilities include concealing assets and failing to file returns or to pay taxes over an extended period. Federal tax liens are not discharged even if the underlying taxes are discharged.


The Bankruptcy Appellate Panels and Review of Bankruptcy Decisions

Bankruptcy Appellate Panels or “BAPs”

The Bankruptcy Appellate Panels and Review of Bankruptcy Decisions

Bankruptcy Appellate Panels or “BAPs”

In each of the past few years, approximately 1.5 million cases were filed in federal bankruptcy courts. Only a very small percentage of these cases are ever likely to be appealed. Federal district court judges will hear some of these appeals. In five judicial circuits, and arguably a sixth, however, a bankruptcy appellate panel (BAP) may also hear appeals. The Ninth Circuit was the first to establish a BAP. It did so in 1979 after the Bankruptcy Reform Act of 1978 provided that bankruptcy appeals would continue to be heard by district judges unless a circuit created a BAP.

A BAP consists of bankruptcy judges who are assigned in groups of three to hear appeals of cases handed down by district judges within that circuit. A federal circuit is comprised of the federal district courts in at least one — and usually several –states. A bankruptcy judge who sits on a BAP may not hear an appeal of a case that originated in that judge’s federal district.

What can be appealed in a bankruptcy case?

For the most part, only final and interlocutory orders issued in a bankruptcy case can be appealed. A bankruptcy plan confirmation can also be the subject of an appeal. Furthermore, the parties to a bankruptcy case must agree to have an appeal heard by a BAP instead of a district judge.

A BAP has discretion to deny leave to appeal an interlocutory order. In deciding whether to grant a motion for leave to appeal, a BAP will likely determine if (1) the question involved is one of law, rather than one of fact; (2) the question is controlling; (3) there is a substantial ground of opinion respecting the correctness of the order in question; and (4) there is a finding that an immediate appeal would “materially advance” the termination of the case or litigation.

A federal circuit court of appeals can hear appeals from rulings issued by both BAPs and district judges. On appeal, a circuit court will typically apply a “de novo” standard of review by which it considers the case “anew.” The Federal Rules of Bankruptcy Procedure set forth the various requirements that apply in the appellate process.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provided for the first time that the Circuit Courts of Appeals have jurisdiction to hear an appeal directly from a judgment or order of the bankruptcy court if certain conditions are satisfied. First, the bankruptcy court, district court, or bankruptcy appellate panel where the matter is pending, on request of a party or on its own motion, or all the appellants and appellees acting jointly, must certify that the judgment or order (a) involves a question of law as to which there is no controlling decision of the court of appeals for that circuit or the Supreme Court, or involves a matter of public importance; (b) involves a question of law requiring resolution of conflicting decisions; or that (c) an immediate appeal from the judgment or order may materially advance the progress of the case or proceeding in which the appeal is taken. In addition, the court of appeals must authorize the direct appeal after the certification is made. If the bankruptcy court, district court, or bankruptcy appellate panel, on its own motion or on a request for certification made within 60 days after entry of the judgment or order, determines that the above circumstances exist to warrant such certification, or within the 60-day period receives a request for certification made by a majority of the appellants and a majority of appellees, then the certification must be made by the bankruptcy court, district court, or bankruptcy appellate panel.