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Debtors discharge. 
Key concepts in bankruptcy 

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include the debtors discharge 
and the related fresh start. 

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Discharge is available in some 
but not all cases. 

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For example, in a Chapter 7 case
only an individual debtor, not a

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corporation partnership etcetera
can receive a discharge. 

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The effect of a bankruptcy 
discharge is to eliminate only 

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the debtors personal liability, 
not the in REM liability for a 

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secured debt to the extent of 
the value of collateral. 

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The term in rent essentially 
means with respect to the thing 

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itself, for example, the 
collateral. 

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For example, if a debt in the 
amount of $100,000 is secured by

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property having a value of only 
$80,000, the $20,000 deficiency 

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is treated in bankruptcy as an 
unsecured claim, even though it 

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is part of a secured debt. 
The $80,000 portion of the debt 

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is treated as a secured claim, 
assuming a discharge is granted 

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and none of the $20,000 
deficiency is paid, for example.

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Due to insufficiency of funds, 
the $20,000 deficiency, the 

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debtors personal liability is 
discharged assuming the debt is 

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not nondischargeable under 
another Bankruptcy Code 

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provision, the $80,000 portion 
of the debt is the in REM 

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liability and it is not 
discharged by the courts 

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discharge order. 
This liability can presumably be

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satisfied by the creditor taking
the asset itself. 

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An essential concept is that 
when commentators say that a 

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debt is dischargeable. 
They are referring only to the 

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debtors personal liability on 
the debt. 

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To the extent that a liability 
is covered by the value of 

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collateral, the debt is not 
discharged. 

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This analysis assumes, however, 
that the collateral does not 

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increase in value after 
commencement of the case. 

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If the collateral increases in 
value in the debtor rather than 

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the estate keeps the collateral,
for example, where the asset is 

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exempt or is abandoned by the 
trustee back to the debtor, the 

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amount of the creditor security 
interest may or may not 

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increase. 
In situations where the debtor, 

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rather than the creditor, is 
allowed to benefit from the 

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increase in collateral value, 
the effect is called lien 

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stripping or paring down. 
Lien stripping is allowed only 

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in certain cases, depending on 
the kind of collateral and the 

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particular chapter of the code 
under which the discharge is 

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granted. 
The discharge also does not 

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eliminate certain rights of a 
creditor to stop or offset 

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certain mutual debts owed by the
creditor to the debtor against 

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certain claims of that creditor 
against the debtor. 

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Were both the debt owed by the 
creditor and the claim against 

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the debtor arose prior to the 
commencement of the case. 

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Not every debt may be discharged
under every chapter of the code.

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Certain taxes owed to federal, 
state, or local government 

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student loans and child support 
obligations are not 

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dischargeable. 
Guaranteed student loans are 

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potentially dischargeable. 
However, if the debtor prevails 

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in a difficult to win adversary,
proceeding against the lender 

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commenced by a complaint to 
determine dischargeability. 

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Also, the debtor can petition 
the court for a financial 

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hardship discharge, but the 
grant of such discharges is 

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rare. 
The debtors liability on a 

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secured debt such as a mortgage 
or mechanics lien on a home may 

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be discharged. 
The effects of the mortgage or 

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mechanics lien, however, cannot 
be discharged in most cases if 

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the lien affixed prior to 
filing. 

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Therefore, if the debtor wishes 
to retain the property, the debt

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must usually be paid as agreed. 
See also Lien Avoidance 

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Reaffirmation Agreement note. 
There may be additional 

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flexibility available in Chapter
13 for debtors dealing with 

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oversecured collateral such as a
financed auto, so long as the 

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oversecured property is not the 
debtors primary residence. 

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Any debt tainted by one of a 
variety of wrongful acts 

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recognized by the Bankruptcy 
Code, including defalcation or 

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consumer purchases or cash 
advances above a certain amount 

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incurred a short time before 
filing cannot be discharged. 

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However, certain kinds of debt, 
such as debts incurred by way of

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fraud. 
May be dischargeable through the

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Chapter 13 super discharge. 
All in all, as of 2005, there 

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are 19 general categories of 
debt that cannot be discharged 

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in a Chapter 7 bankruptcy and 
fewer debts that cannot be 

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discharged under Chapter 13 
valuation and recapitalization 

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in a corporate or business 
bankruptcy. 

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An indebted company that files 
bankruptcy is typically 

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recapitalized so that it emerges
from bankruptcy with more equity

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and less debt during this 
process. 

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Many debts may be discharged, 
meaning that the company will no

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longer be legally obligated to 
pay them. 

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Which debts are discharged and 
how equity and other 

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entitlements are distributed to 
various groups of investors 

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typically turns on valuation 
issues. 

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Bankruptcy valuation is often 
highly contentious because it is

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both subjective and important to
case outcomes. 

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The methods of valuation used in
bankruptcy have changed over 

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time. 
Generally tracking methods used 

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in investment banking, Delaware 
corporate law, and corporate and

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academic finance, but with a 
significant time lag. 

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Entities that cannot be debtors.
The section of the Bankruptcy 

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Code that governs which entities
are permitted to file a 

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bankruptcy petition is 11 US 
C-section 109 Banks and other 

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deposit institutions, insurance 
companies, railroads, and 

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00:05:10,100 --> 00:05:12,700
certain other financial 
institutions and entities 

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regulated by the federal and 
state governments. 

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And private and personal trusts,
except statutory business trusts

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as permitted by some states, 
cannot be a debtor under the 

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Bankruptcy Code. 
Instead, special state and 

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federal laws govern the 
liquidation or reorganization of

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these companies. 
In the US context, at least, it 

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is incorrect to refer to a bank 
or insurers being bankrupt. 

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The terms insolvent, in 
liquidation or in receivership 

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would be appropriate under some 
circumstances. 

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Status of certain defined 
benefit pension plan liabilities

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in bankruptcy The Pension 
Benefit Guaranty Corporation, 

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PBGCAUS Government Corporation 
that ensures certain defined 

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benefit pension plan obligations
may assert liens in bankruptcy 

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under either of two separate 
statutory provisions. 

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The 1st is found in the Internal
Revenue Code at 26 US C-section 

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412 in which provides that liens
held by the PBGC have the status

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of a tax lien. 
Under this provision, the unpaid

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mandatory pension contributions 
must exceed $1,000,000 for the 

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lien to arise. 
The 2nd statute is 29 US 

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C-section 1368, under which 
APBGC Lien has the status of a 

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tax lien in bankruptcy. 
Under this provision, the lien 

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may not exceed 30% of the net 
worth of all persons liable 

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under a separate provision, 29 
US C-section 1362 A in 

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bankruptcy PBGC liens. 
Like federal tax liens generally

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are not valid against certain 
competing liens that were 

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perfected before a notice of the
PPGC Lien was filed. 

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Bankruptcy costs. 
In 2013, ninety 1% of US 

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individuals filing bankruptcy 
hired an attorney to file their 

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Chapter 7 petition. 
The typical cost of an attorney 

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was 1170 dollars. 
Alternatives to filing with an 

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00:07:02,550 --> 00:07:06,150
attorney are filing pro se, 
meaning without an attorney. 

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Which requires an individual to 
fill out at least 16 separate 

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forms, hiring a petition for 
pair or using online software to

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00:07:13,350 --> 00:07:17,350
generate the petition. the US 
Bankruptcy Court also charges 

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fees. 
The amounts of these fees vary 

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depending on the chapter of 
bankruptcy being filed. 

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As of 2016, the filing fee is 
$335 for Chapter 7 and $310 for 

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Chapter 13. 
It is possible to apply for an 

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installment payment plan in 
cases of financial hardship. 

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Additional fees are charged for 
adding creditors after filing 

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$31.00, converting the case from
one chapter to another dollar 

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00:07:43,640 --> 00:07:50,720
$10.45, and reopening the case 
$245 for Chapter 7 and $235 in 

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Chapter 13. 
Bankruptcy Crimes in the United 

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States Criminal provisions 
relating to Bankruptcy Fraud and

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other Bankruptcy Crimes are 
found in Sections 151 through 

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158 of Title 18 of the United 
States Code. 

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Bankruptcy fraud includes filing
a bankruptcy petition or any 

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00:08:08,790 --> 00:08:11,350
other document in a bankruptcy 
case for the purpose of 

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attempting to execute or conceal
A scheme or artifice to defraud.

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Bankruptcy fraud also includes 
making a false or fraudulent 

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representation claim or promise 
in connection with a bankruptcy 

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case, either before or after the
commencement of the case for the

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purpose of attempting to execute
or conceal A scheme or artifice 

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to defraud. 
Bankruptcy fraud is punishable 

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by a fine. 
Or by up to five years in 

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prison, or both knowingly and 
fraudulently concealing property

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of the estate from a custodian, 
Trustee, Marshall, or other 

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court officers. 
A separate offense, and may also

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be punishable by a fine or by up
to five years in prison, or 

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both. 
The same penalty may be imposed 

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for knowingly and fraudulently 
concealing, destroying, 

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mutilating, falsifying, or 
making a false entry in any 

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books, documents, records, 
papers. 

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Or other recorded information 
relating to the property or 

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00:09:03,470 --> 00:09:06,390
financial affairs of the debtor 
after a case has been filed. 

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Certain offenses regarding fraud
in connection with the 

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bankruptcy case may also be 
classified as racketeering 

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activity for purposes of the 
Racketeer Influenced and Corrupt

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Organizations Act. 
RICL Any person who receives 

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income directly or indirectly 
derived from a pattern of such 

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00:09:22,630 --> 00:09:26,510
racketeering activity, generally
2 or more offensive acts within 

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a 10 year period. 
And who uses or invests any part

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of that income in the 
acquisition, establishment, or 

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operation of any enterprise 
engaged in or affecting 

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Interstate or foreign commerce 
may be punished by up to 20 

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years in prison. 
Bankruptcy crimes are prosecuted

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by the United States Attorney, 
typically after a reference from

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the United States Trustee, the 
case trustee, or a bankruptcy 

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judge. 
Bankruptcy fraud can also 

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sometimes lead to criminal 
prosecution in state courts. 

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Under the charge of theft of the
goods or services obtained by 

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the debtor, for which payment, 
in whole or in part, was evaded 

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00:10:01,790 --> 00:10:05,110
by the fraudulent bankruptcy 
filing, bankruptcy and 

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federalism. 
On January 23rd, 2006, the 

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Supreme Court in Central 
Virginia Community College V 

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Cats declined to apply state 
sovereign immunity from Seminole

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Tribe V Florida to defeat a 
Trustees action under 11 US 

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C-section 547 to recover 
preferential transfers made by a

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debtor to a state agency. 
The Court ruled that Article I, 

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Section 8, Clause Four of the US
Constitution empowering Congress

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to establish uniform laws on the
subject of bankruptcy abrogates 

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the state sovereign immunity and
suits to recover preferential 

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00:10:38,860 --> 00:10:41,820
payments, social and economic 
factors. 

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00:10:42,300 --> 00:10:49,020
In 2008, there were 1,117,771 
bankruptcy filings in the United

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00:10:49,020 --> 00:10:54,720
States courts. 
Of those, 744,424 were Chapter 7

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00:10:54,720 --> 00:10:59,800
bankruptcies, while 362,762 were
Chapter 13. 

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00:11:00,320 --> 00:11:03,840
Apart from social and economic 
factors such as education and 

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00:11:03,840 --> 00:11:07,080
income, there is often also a 
correlation between race and 

195
00:11:07,080 --> 00:11:11,440
bankruptcy outcome, for example 
for personal bankruptcy claims. 

196
00:11:11,760 --> 00:11:14,560
Minority debtors had an 
approximately 40% decreased 

197
00:11:14,560 --> 00:11:17,800
chance of receiving a discharge 
in Chapter 13 bankruptcy. 

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00:11:18,280 --> 00:11:21,360
These racial disparities are 
aggravated by the fact that many

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00:11:21,360 --> 00:11:23,480
minority debtors lack 
appropriate attorney 

200
00:11:23,480 --> 00:11:27,320
representation. 
Personal bankruptcy personal 

201
00:11:27,320 --> 00:11:30,080
bankruptcies may be caused by a 
number of factors. 

202
00:11:30,560 --> 00:11:35,360
In 2008 / 96% of all bankruptcy 
filings were non business 

203
00:11:35,360 --> 00:11:39,120
filings and of those 
approximately 2/3 were Chapter 7

204
00:11:39,120 --> 00:11:41,730
cases. 
Although the individual causes 

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00:11:41,730 --> 00:11:45,090
of bankruptcy are complex and 
multifaceted, the majority of 

206
00:11:45,090 --> 00:11:48,210
personal bankruptcies involve 
substantial medical bills. 

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00:11:48,730 --> 00:11:51,890
Personal bankruptcies are 
typically filed under Chapter 7 

208
00:11:51,890 --> 00:11:55,610
or Chapter 13. 
Personal Chapter 11 bankruptcies

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are relatively rare. 
The American Journal of Medicine

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00:11:58,970 --> 00:12:01,970
says over three out of five 
personal bankruptcies are due to

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00:12:01,970 --> 00:12:07,130
medical debt. 
There were 175,146 individual 

212
00:12:07,130 --> 00:12:10,210
bankruptcies filed in the United
States during the first quarter 

213
00:12:10,210 --> 00:12:14,330
of 2020. 
Some 66.5% were directly tied to

214
00:12:14,330 --> 00:12:17,130
medical issues. 
Critical Illness Insurance 

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00:12:17,130 --> 00:12:21,530
Association Report, June 2nd, 
2020 Corporate Bankruptcy. 

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00:12:22,050 --> 00:12:25,050
Corporate bankruptcy can arise 
as a result of 2 broad 

217
00:12:25,050 --> 00:12:28,250
categories, business failure or 
financial distress. 

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00:12:28,840 --> 00:12:31,560
Business failure stems from 
flaws in the company's business 

219
00:12:31,560 --> 00:12:34,600
model that prohibited from 
producing the necessary level of

220
00:12:34,600 --> 00:12:37,040
profit to justify its capital 
investment. 

221
00:12:37,520 --> 00:12:40,800
Conversely, financial distress 
stems from flaws in the way the 

222
00:12:40,800 --> 00:12:43,360
company is financed or its 
capital structure. 

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00:12:43,840 --> 00:12:46,720
Continued financial distress 
leads to either technical 

224
00:12:46,720 --> 00:12:50,280
insolvency, assets outweigh 
liabilities, but the firm is 

225
00:12:50,280 --> 00:12:53,280
unable to meet current 
obligations or bankruptcy 

226
00:12:53,520 --> 00:12:56,960
liabilities outweigh assets and 
the firm has a negative net 

227
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worth. 
A company experiencing business 

228
00:12:59,550 --> 00:13:02,710
failure can stave off bankruptcy
as long as it has access to 

229
00:13:02,710 --> 00:13:05,150
funding. 
Conversely, a company that is 

230
00:13:05,150 --> 00:13:08,350
experiencing financial failure 
will be pushed into bankruptcy 

231
00:13:08,350 --> 00:13:10,830
regardless of the soundness of 
its business model. 

232
00:13:11,310 --> 00:13:14,310
The actual causes of corporate 
bankruptcies are difficult to 

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establish due to the compounding
effects of external 

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00:13:17,470 --> 00:13:21,390
macroeconomic, industry, and 
internal business or financial 

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factors. 
However, some studies have 

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00:13:24,290 --> 00:13:26,890
indicated that financial 
leverage and working capital 

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00:13:26,890 --> 00:13:29,810
mismanagement are likely two of 
the major causes of corporate 

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00:13:29,810 --> 00:13:31,730
failure and bankruptcy in the 
US. 

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00:13:32,210 --> 00:13:35,690
Largest bankruptcies, the 
largest bankruptcy in U.S. 

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00:13:35,690 --> 00:13:39,690
history, occurred on September 
15th, 2008 when Lehman Brothers 

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00:13:39,690 --> 00:13:42,970
Holdings Incorporated filed for 
Chapter 11 protection with more 

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00:13:42,970 --> 00:13:47,970
than $639 billion in assets 
alternatives to bankruptcy. 

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00:13:48,610 --> 00:13:52,090
A Texas divisional merger is a 
process allowed by Texas law in 

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which a company can create a 
separate company to take over 

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liabilities, with the existing 
company operating normally. 

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00:13:58,690 --> 00:14:02,330
The new company with a different
name can locate in a state such 

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00:14:02,330 --> 00:14:05,090
as North Carolina where 
bankruptcy laws are different, 

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00:14:05,290 --> 00:14:08,290
and then declare bankruptcy 
paying less than the original 

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00:14:08,290 --> 00:14:11,130
company would have. 
The latest case of a Texas 

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00:14:11,130 --> 00:14:14,210
divisional merger was by company
Johnson and Johnson. 

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00:14:14,840 --> 00:14:18,560
Recently, J&J has been hit by 
thousands of lawsuits by women 

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00:14:18,560 --> 00:14:22,440
claiming that J&J baby powder 
containing talc caused their 

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00:14:22,440 --> 00:14:25,320
ovarian cancer. 
While the company has held that 

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00:14:25,320 --> 00:14:28,640
their products do not cause 
ovarian cancer, they lost many 

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00:14:28,640 --> 00:14:32,080
cases and a lot of money. 
This is what led them to perform

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00:14:32,080 --> 00:14:35,320
a Texas divisional merger. 
They split their company, 

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00:14:35,520 --> 00:14:38,960
putting all talc liabilities on 
the new company and keeping all 

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00:14:38,960 --> 00:14:42,680
assets within the original This 
health at all cases by women 

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00:14:42,680 --> 00:14:44,910
with ovarian cancer. 
And has been seen as 

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00:14:44,910 --> 00:14:47,310
controversial since it keeps 
women from receiving 

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00:14:47,310 --> 00:14:49,390
compensation from Johnson and 
Johnson.