Debtors discharge. Key concepts in bankruptcy
include the debtors discharge and the related fresh start.
Discharge is available in some but not all cases.
For example, in a Chapter 7 case only an individual debtor, not a
corporation partnership etcetera can receive a discharge.
The effect of a bankruptcy discharge is to eliminate only
the debtors personal liability, not the in REM liability for a
secured debt to the extent of the value of collateral.
The term in rent essentially means with respect to the thing
itself, for example, the collateral.
For example, if a debt in the amount of $100,000 is secured by
property having a value of only $80,000, the $20,000 deficiency
is treated in bankruptcy as an unsecured claim, even though it
is part of a secured debt. The $80,000 portion of the debt
is treated as a secured claim, assuming a discharge is granted
and none of the $20,000 deficiency is paid, for example.
Due to insufficiency of funds, the $20,000 deficiency, the
debtors personal liability is discharged assuming the debt is
not nondischargeable under another Bankruptcy Code
provision, the $80,000 portion of the debt is the in REM
liability and it is not discharged by the courts
discharge order. This liability can presumably be
satisfied by the creditor taking the asset itself.
An essential concept is that when commentators say that a
debt is dischargeable. They are referring only to the
debtors personal liability on the debt.
To the extent that a liability is covered by the value of
collateral, the debt is not discharged.
This analysis assumes, however, that the collateral does not
increase in value after commencement of the case.
If the collateral increases in value in the debtor rather than
the estate keeps the collateral, for example, where the asset is
exempt or is abandoned by the trustee back to the debtor, the
amount of the creditor security interest may or may not
increase. In situations where the debtor,
rather than the creditor, is allowed to benefit from the
increase in collateral value, the effect is called lien
stripping or paring down. Lien stripping is allowed only
in certain cases, depending on the kind of collateral and the
particular chapter of the code under which the discharge is
granted. The discharge also does not
eliminate certain rights of a creditor to stop or offset
certain mutual debts owed by the creditor to the debtor against
certain claims of that creditor against the debtor.
Were both the debt owed by the creditor and the claim against
the debtor arose prior to the commencement of the case.
Not every debt may be discharged under every chapter of the code.
Certain taxes owed to federal, state, or local government
student loans and child support obligations are not
dischargeable. Guaranteed student loans are
potentially dischargeable. However, if the debtor prevails
in a difficult to win adversary, proceeding against the lender
commenced by a complaint to determine dischargeability.
Also, the debtor can petition the court for a financial
hardship discharge, but the grant of such discharges is
rare. The debtors liability on a
secured debt such as a mortgage or mechanics lien on a home may
be discharged. The effects of the mortgage or
mechanics lien, however, cannot be discharged in most cases if
the lien affixed prior to filing.
Therefore, if the debtor wishes to retain the property, the debt
must usually be paid as agreed. See also Lien Avoidance
Reaffirmation Agreement note. There may be additional
flexibility available in Chapter 13 for debtors dealing with
oversecured collateral such as a financed auto, so long as the
oversecured property is not the debtors primary residence.
Any debt tainted by one of a variety of wrongful acts
recognized by the Bankruptcy Code, including defalcation or
consumer purchases or cash advances above a certain amount
incurred a short time before filing cannot be discharged.
However, certain kinds of debt, such as debts incurred by way of
fraud. May be dischargeable through the
Chapter 13 super discharge. All in all, as of 2005, there
are 19 general categories of debt that cannot be discharged
in a Chapter 7 bankruptcy and fewer debts that cannot be
discharged under Chapter 13 valuation and recapitalization
in a corporate or business bankruptcy.
An indebted company that files bankruptcy is typically
recapitalized so that it emerges from bankruptcy with more equity
and less debt during this process.
Many debts may be discharged, meaning that the company will no
longer be legally obligated to pay them.
Which debts are discharged and how equity and other
entitlements are distributed to various groups of investors
typically turns on valuation issues.
Bankruptcy valuation is often highly contentious because it is
both subjective and important to case outcomes.
The methods of valuation used in bankruptcy have changed over
time. Generally tracking methods used
in investment banking, Delaware corporate law, and corporate and
academic finance, but with a significant time lag.
Entities that cannot be debtors. The section of the Bankruptcy
Code that governs which entities are permitted to file a
bankruptcy petition is 11 US C-section 109 Banks and other
deposit institutions, insurance companies, railroads, and
certain other financial institutions and entities
regulated by the federal and state governments.
And private and personal trusts, except statutory business trusts
as permitted by some states, cannot be a debtor under the
Bankruptcy Code. Instead, special state and
federal laws govern the liquidation or reorganization of
these companies. In the US context, at least, it
is incorrect to refer to a bank or insurers being bankrupt.
The terms insolvent, in liquidation or in receivership
would be appropriate under some circumstances.
Status of certain defined benefit pension plan liabilities
in bankruptcy The Pension Benefit Guaranty Corporation,
PBGCAUS Government Corporation that ensures certain defined
benefit pension plan obligations may assert liens in bankruptcy
under either of two separate statutory provisions.
The 1st is found in the Internal Revenue Code at 26 US C-section
412 in which provides that liens held by the PBGC have the status
of a tax lien. Under this provision, the unpaid
mandatory pension contributions must exceed $1,000,000 for the
lien to arise. The 2nd statute is 29 US
C-section 1368, under which APBGC Lien has the status of a
tax lien in bankruptcy. Under this provision, the lien
may not exceed 30% of the net worth of all persons liable
under a separate provision, 29 US C-section 1362 A in
bankruptcy PBGC liens. Like federal tax liens generally
are not valid against certain competing liens that were
perfected before a notice of the PPGC Lien was filed.
Bankruptcy costs. In 2013, ninety 1% of US
individuals filing bankruptcy hired an attorney to file their
Chapter 7 petition. The typical cost of an attorney
was 1170 dollars. Alternatives to filing with an
attorney are filing pro se, meaning without an attorney.
Which requires an individual to fill out at least 16 separate
forms, hiring a petition for pair or using online software to
generate the petition. the US Bankruptcy Court also charges
fees. The amounts of these fees vary
depending on the chapter of bankruptcy being filed.
As of 2016, the filing fee is $335 for Chapter 7 and $310 for
Chapter 13. It is possible to apply for an
installment payment plan in cases of financial hardship.
Additional fees are charged for adding creditors after filing
$31.00, converting the case from one chapter to another dollar
$10.45, and reopening the case $245 for Chapter 7 and $235 in
Chapter 13. Bankruptcy Crimes in the United
States Criminal provisions relating to Bankruptcy Fraud and
other Bankruptcy Crimes are found in Sections 151 through
158 of Title 18 of the United States Code.
Bankruptcy fraud includes filing a bankruptcy petition or any
other document in a bankruptcy case for the purpose of
attempting to execute or conceal A scheme or artifice to defraud.
Bankruptcy fraud also includes making a false or fraudulent
representation claim or promise in connection with a bankruptcy
case, either before or after the commencement of the case for the
purpose of attempting to execute or conceal A scheme or artifice
to defraud. Bankruptcy fraud is punishable
by a fine. Or by up to five years in
prison, or both knowingly and fraudulently concealing property
of the estate from a custodian, Trustee, Marshall, or other
court officers. A separate offense, and may also
be punishable by a fine or by up to five years in prison, or
both. The same penalty may be imposed
for knowingly and fraudulently concealing, destroying,
mutilating, falsifying, or making a false entry in any
books, documents, records, papers.
Or other recorded information relating to the property or
financial affairs of the debtor after a case has been filed.
Certain offenses regarding fraud in connection with the
bankruptcy case may also be classified as racketeering
activity for purposes of the Racketeer Influenced and Corrupt
Organizations Act. RICL Any person who receives
income directly or indirectly derived from a pattern of such
racketeering activity, generally 2 or more offensive acts within
a 10 year period. And who uses or invests any part
of that income in the acquisition, establishment, or
operation of any enterprise engaged in or affecting
Interstate or foreign commerce may be punished by up to 20
years in prison. Bankruptcy crimes are prosecuted
by the United States Attorney, typically after a reference from
the United States Trustee, the case trustee, or a bankruptcy
judge. Bankruptcy fraud can also
sometimes lead to criminal prosecution in state courts.
Under the charge of theft of the goods or services obtained by
the debtor, for which payment, in whole or in part, was evaded
by the fraudulent bankruptcy filing, bankruptcy and
federalism. On January 23rd, 2006, the
Supreme Court in Central Virginia Community College V
Cats declined to apply state sovereign immunity from Seminole
Tribe V Florida to defeat a Trustees action under 11 US
C-section 547 to recover preferential transfers made by a
debtor to a state agency. The Court ruled that Article I,
Section 8, Clause Four of the US Constitution empowering Congress
to establish uniform laws on the subject of bankruptcy abrogates
the state sovereign immunity and suits to recover preferential
payments, social and economic factors.
In 2008, there were 1,117,771 bankruptcy filings in the United
States courts. Of those, 744,424 were Chapter 7
bankruptcies, while 362,762 were Chapter 13.
Apart from social and economic factors such as education and
income, there is often also a correlation between race and
bankruptcy outcome, for example for personal bankruptcy claims.
Minority debtors had an approximately 40% decreased
chance of receiving a discharge in Chapter 13 bankruptcy.
These racial disparities are aggravated by the fact that many
minority debtors lack appropriate attorney
representation. Personal bankruptcy personal
bankruptcies may be caused by a number of factors.
In 2008 / 96% of all bankruptcy filings were non business
filings and of those approximately 2/3 were Chapter 7
cases. Although the individual causes
of bankruptcy are complex and multifaceted, the majority of
personal bankruptcies involve substantial medical bills.
Personal bankruptcies are typically filed under Chapter 7
or Chapter 13. Personal Chapter 11 bankruptcies
are relatively rare. The American Journal of Medicine
says over three out of five personal bankruptcies are due to
medical debt. There were 175,146 individual
bankruptcies filed in the United States during the first quarter
of 2020. Some 66.5% were directly tied to
medical issues. Critical Illness Insurance
Association Report, June 2nd, 2020 Corporate Bankruptcy.
Corporate bankruptcy can arise as a result of 2 broad
categories, business failure or financial distress.
Business failure stems from flaws in the company's business
model that prohibited from producing the necessary level of
profit to justify its capital investment.
Conversely, financial distress stems from flaws in the way the
company is financed or its capital structure.
Continued financial distress leads to either technical
insolvency, assets outweigh liabilities, but the firm is
unable to meet current obligations or bankruptcy
liabilities outweigh assets and the firm has a negative net
worth. A company experiencing business
failure can stave off bankruptcy as long as it has access to
funding. Conversely, a company that is
experiencing financial failure will be pushed into bankruptcy
regardless of the soundness of its business model.
The actual causes of corporate bankruptcies are difficult to
establish due to the compounding effects of external
macroeconomic, industry, and internal business or financial
factors. However, some studies have
indicated that financial leverage and working capital
mismanagement are likely two of the major causes of corporate
failure and bankruptcy in the US.
Largest bankruptcies, the largest bankruptcy in U.S.
history, occurred on September 15th, 2008 when Lehman Brothers
Holdings Incorporated filed for Chapter 11 protection with more
than $639 billion in assets alternatives to bankruptcy.
A Texas divisional merger is a process allowed by Texas law in
which a company can create a separate company to take over
liabilities, with the existing company operating normally.
The new company with a different name can locate in a state such
as North Carolina where bankruptcy laws are different,
and then declare bankruptcy paying less than the original
company would have. The latest case of a Texas
divisional merger was by company Johnson and Johnson.
Recently, J&J has been hit by thousands of lawsuits by women
claiming that J&J baby powder containing talc caused their
ovarian cancer. While the company has held that
their products do not cause ovarian cancer, they lost many
cases and a lot of money. This is what led them to perform
a Texas divisional merger. They split their company,
putting all talc liabilities on the new company and keeping all
assets within the original This health at all cases by women
with ovarian cancer. And has been seen as
controversial since it keeps women from receiving
compensation from Johnson and Johnson.