Bankruptcy Code Chapters - Term Paper Example

Bankruptcy law Bankruptcy defines a legal condition of an entity or person that cannot service the debts that one owes tohis/her creditors. In a majority of jurisdictions, bankruptcies get ordered through court orders, frequently stated by the debtor. The key objectives of bankruptcy law are public protection as well as assisting the debtor. Thus, there is protection of the public since bankruptcy law offers for an equitable and just distribution of existing property of the debtor amongst his/her creditors. In addition, the debtor shall also be relieved of his obligations in addition to being able to start afresh after the discharge by the court (Buchbinder, 2009). History Prior to 1898, there were many brief laws regarding bankruptcy in the US. The year 1800 marked the formation of the very first act. The first Act was revoked in 1803 and later on got followed by 1841 Act. The 1841 Act got also got revoked in 1843, and then came the 1867 Act, that got altered in 1874 and later on in 1878 repealed (Frey & Swinson 2013). The initial Bankruptcy Act in US, occasionally, referred to as the “Nelson Act”, therefore, was originally, in 1898, enacted. The modern day Bankruptcy Code was entered into force in 1978 and regularly became effectual on 1st October 1979. The code implies that, the present day Code entirely reinstated the earlier Bankruptcy Act also known as (the Chandler Act) of 1938.It is this Chandler Act that gave exceptional powers to the Securities and Exchange Commission as far as supervision of bankruptcy filings gets concerned. The present Code since 1978 has been severally amended, most recently in 2005(Cross & Miller, 2014). In America, bankruptcy stands administered under the US Constitution (Article1, Sec 8, and Clause 4). The Constitution allows Congress to endorse Laws that are standardized regarding Bankruptcies throughout America. Congress has implemented this right many times from 1801. More lately, Congress has assume the 1978 Bankruptcy Reform Act, as modified and codified in Title eleven of the US Code plus frequently known as the “Bankruptcy Code” (Cross & Miller, 2014). Nevertheless, the Code has been altered many times since then, the most latest and relevant amendments enacted in the year 2005 via the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Consequently, some law that is applicable to bankruptcy is available in other elements of the US Code. For instance, crimes pertaining to bankruptcy are available in Title 18 of the US Code (Crimes).In addition, bankruptcy tax implications are available in Title 26 of the US Code. Also, the establishment and control of bankruptcy courts are set up in Title 28of the US Code (Cross & Miller, 2014). Whereas cases involving bankruptcy are filed in US Bankruptcy Court with federal law governing course of action, in cases involving bankruptcy, state laws get used frequently when establishing property rights. Rules protecting particular assets from creditors or laws preside overseeing the legitimacy of liens, for instance, may be derived from federal law or state law. Given that state law plays a significant role in several bankruptcy cases, it is frequently not wise to generalize a few bankruptcy matters across various state lines (Frey & Swinson, 2013). Bankruptcy Code Chapters Entities or Persons seeking reprieve under the Bankruptcy Code can file an appeal for a reprieve under a number of various chapters of the Bankruptcy Code, which mainly depends on the state of affairs. Thus, Title 11 includes nine chapters, 6 of which give provisions for one to file a petition. The remaining three chapters provide regulations, overseeing a bankruptcy case. Typically, a case is submitted to by the chapter under which the filing of a petition gets done (Frey & Swinson, 2013). Chapters of the bankruptcy code Chapter Seven: Liquidation One of the most common types of bankruptcy is a liquidation under the seventh chapter filing. Liquidation entails appointing a trustee to collect the non-exempt debtor’s asset, selling it, together with distributing the earnings to the respective creditors. Since every state permits debtors to keep valuable property, nearly all Chapter Seven cases are referred to as “no asset” cases, implying that there are not adequate non-exempt assets to finance allotment to creditors (Buchbinder, 2009). In 2005, the US Bankruptcy law significantly changed when BAPCPA was passed, making it hard for consumer debtors to file generally for bankruptcy, Chapter Seven included in particular. BAPCPA advocates alleged that its passage could diminish losses incurred by creditors such as credit corporations. Additionally, those creditors could then forward the discounts to fellow borrowers in the form of reduced interest rates. Nonetheless, critics stressed that these claims turned out to be untrue, viewing that even though credit card corporations losses reduced after the Act was passed, prices charged to consumers rose, as credit card Corporation profits swelled (Frey & Swinson, 2013). Chapter Nine: Municipalities Reorganization A bankruptcy under Chapter Nine is only available to municipalities. Chapter Nine is a kind of reorganization and not liquidation. Some most prominent illustrations of municipal bankruptcies comprise that of California (1994-1996), Orange County as well as that of Detroit city in Michigan, 2013(Frey & Swinson,2013). Chapter Eleven, Twelve, and Thirteen: Reorganization Bankruptcy under these chapters is more complicated reorganization that entails letting the debtors maintain some or all of their properties as well as utilize future revenues to clear debts of their creditors. Frequently, consumers primarily file Chapter Seven or Chapter Thirteen. Nonetheless, a filing of Chapter Eleven is permitted, though on rare occasions. Consequently, Chapter Twelve and Chapter Thirteen are alike, though it is offered just to “family fisherman” as well as “family farmers” in definite circumstances. Usually, Chapter Twelve has extra generous debtor terms as compared to a Chapter Thirteen case would offer. Chapter Twelve was as lately as mid-2004, planned to expire. Nonetheless, it got renewed in late 2004 in addition to being turned permanent (Buchbinder, 2009). Chapter Fifteen: Cross-border Insolvency Chapter Fifteen was added as a substitution for part 304 by BAPCPA and mostly deals with cross-border bankruptcy; foreign corporations with America liabilities (Cross & Miller, 2014). Aspects of US Bankruptcy Law Involuntary versus Voluntary Bankruptcy-As a matter of threshold bankruptcy cases can either be involuntary or voluntary. Involuntary bankruptcy entails filing of petition by creditors instead of the debtors. On the other hand, voluntary cases account for the bulk of instances that are petitioned by debtors in the bankruptcy court. Nevertheless, involuntary petitions are infrequent, however, and are intermittently utilized during business situations to coerce a firm into bankruptcy such that creditors are empowered to put into effect their rights as well as authority. The estate With the exception of Chapter Nine cases, beginning of any bankruptcy case generates an “estate.” Generally, the creditors of the debtor ought to look to the property of the estate for their allegations to get fulfilled. Generally, the estate comprises of all debtors’ property interests as at the time of the beginning of the case, subject to specific exemptions and exclusions. The estate could comprise of specific community asset interest of the spouse of the debtor, even though, the concerned spouse has not filed for any bankruptcy; in the case of a person who is married in a community property state. In addition, the estate could also comprise of other things, including though not restricted to property obtained by inheritance or will within 180 days since the beginning of the case (Cross & Miller, 2014). For the purposes of federal revenue tax, the bankruptcy property of a person in either a Chapter Seven or Eleven case is a distinct entity that is taxable from the debtor. US trustee -Normally, the US Attorney General chooses a distinct US Trustee for every 21 geographical sections for a five year term. Every trustee can be removed from office by the Attorney General in addition to working with overall administration of the same. It is important to note that US Trustees retain regional offices that communicate with federal judicial quarters in addition to being overseen administratively by the US Trustees Executive Office in Washington. Every US Trustee; an official from the US Justice Department, is accountable for the maintenance as well as supervision of private trustees team for bankruptcy cases of Chapter Seven. The Trustee also gets charged with other roles including administration of the majority of bankruptcy trustees and cases (Cross & Miller, 2014). Automatic stay An automatic stay is imposed by the Bankruptcy Code 362 at the time of filing a bankruptcy petition. An automatic stay prevents the beginning, enforcement or petition of any judgments and actions, administrative or judicial, against the debtor for claim collection arising prior to bankruptcy petition filing. In addition, an automatic stay also forbids collection proceedings and actions aimed at the assets. In most cases, a secured creditor may be permitted to obtain the appropriate security if the creditor first acquires court consent. Consent is usually asked for by a creditor through filing a reprieve motion from the automatic stay. It is up to the court to either give the motion or offer sufficient security to the secured creditor and guarantee that the worth of their safety will not reduce throughout the stay. Devoid of the bankruptcy security of the automatic stay, there may be a race by the creditors to the courthouse so as to enhance their debtor positions. For instance, if the business of the debtor were facing a crunch temporarily, but, nonetheless were feasible in the long run; it may not endure creditors’ “run”. It is important to note that a term may lead to unfairness and waste amongst similarly positioned creditors. There are four methods that a creditor can have the automatic stay detached(Buchbinder,2009). Avoidance actions Fundamentally, debtors or their trustee representatives get the capability to decline or shun acts implemented with respect to the assets of the debtor for a precise moment prior to bankruptcy filing. Whereas the particulars of avoidance Acts are tinged, three general groups of avoidance laws; non-bankruptcy creditor, fraudulent transfer and preferences. Usually, avoidance actions try to lower the risk of the legal frameworks speeding up the financial end of a fiscally unsound debtor yet to announce his bankruptcy. Thus the bankruptcy framework usually attempts to compensate creditors continuously extending funding to debtors as well as discouraging creditors from speeding up their efforts of debt collection. Thus an avoidance action is one of the most evident mechanisms for encouraging this objective (Buchbinder, 2009). Non-bankruptcy creditor arises from Chapter 11 of the US Code and is also known as strong arm, allows the trustee to effectively exercise the authority that a debtor in similar circumstance would have under the appropriate state law (Cross & Miller, 2014). Fraudulent transfer is, practice wise, the same as non-bankruptcy transfer law. Nevertheless some phrases are extra liberal in bankruptcy than otherwise they are. For example, the limitations statute within bankruptcy is two years as contrasted to a shorter span of time in some other non-bankruptcy circumstances. Usually a fraudulent transfer act functions in almost the same approach as preference avoidance. All the same, fraudulent transfer acts, at times need a portraying of intention so as to protect the asset from a creditor (Cross & Miller, 2014). In general changing nonexempt property into exempt property on the verge of bankruptcy may not be an indicator of fraud per se. Moreover, relying on the quantity of exemption as well as the conditions surrounding the conversion, there is a possibility of the court discovering the conversion to be a fraudulent transfer. In fact, this is particularly when conversion equals to nothing more than a mere a temporary plan (Frey & Swinson, 2013). Preference-Generally, preference actions allow the trustee to steer clear of particular transfers of the property of the debtor that profit creditors especially in situations where transfers take place within ninety days from the date the bankruptcy petition was filed. Creditors Mostly secured creditors lucky to have their collateral interests endure the beginning of the case might look to the asset that is the focus of their collateral interests, after getting court’s consent. On the other hand, unsecured creditors commonly are divided into two categories; general unsecured creditors as well as unsecured priority creditors, who are subdivided further into various classes according to the statute. In other instances, the property of the estate is inadequate to meet all the obligations of priority unsecured creditors entirely; in circumstances such as those, there is nothing given to general unsecured creditors. Due to the rank and priority ordering aspect of bankruptcy law, at times, debtors inappropriately conspire with others(usually associated with the debtor) to be preferred ,by for instance giving them security interests in assets not pledged(Frey & Swinson, 2013). Because of the above reason, the bankruptcy trustee is usually allowed to reverse definite contracts of the debtor within a given period prior to bankruptcy filing date. It is important to note that time differs depending on the rapport of the entities to the debtor as well as the transaction nature. Chapters Seven, Twelve and Thirteen, calls for creditors to file a “proof of claim” so as to receive compensation. Nonetheless, for a Chapter Eleven case, filing a proof of claim is not necessary (since evidence of claim is already “deemed filed”) as long as the creditor’s allegation is listed on the bankruptcy schedules of the debtor, except if the alleged claim is programmed as unliquidated, contingent, or disputed. Consequently if the claim by a creditor does not get recorded in a Chapter Eleven case, it is the requirement of the creditor to file a proof of the alleged complaint. Executory Contracts Bankruptcy trustee may reject some definite unexpired leases and executory contracts. For the purposes of bankruptcy, a contract is commonly regarded as executory when all parties to the contract are yet wholly to perform a material responsibility regarding the contract. In the case of the Trustee (or at times debtor in ownership, in several Chapter Eleven cases) declining a contract, the bankruptcy estate of the debtor is subject to regular violation of contract damages, however, the damages equal to an obligation in addition to being frequently taken as a claim that is unsecured (Frey & Swinson, 2013). Committees In some chapters such as Seven, Nine and Eleven, the bankruptcy court appoints the committees of different stakeholders. These committees in Chapter Nine and Eleven comprise of entities holding the seven biggest claims of the types that the board usually acts as a representative. The court may also appoint other committees. Committees usually have a day to day communications with both the debtor as well as the debtor’s advisers, in addition to having access to a broad range of documents as an aspect of their responsibilities and functions. Exempt property Whereas, in theory, all debtor’s property that is excluded from the estate according to the Bankruptcy Code turns out to be estate’s property (that is by design transferred to the land from the debtor) as soon as the case commences, a debtor (but not corporation or partnership)may ask for particular things of assets as “exempt”, hence keeping such things (though subject to any legitimate liens or other encumbrances).Exemption laws differ to a great extent from one state to another since majority of states property that is exempt comprises of equity in a car or home, tools of the trade as well as other personal effects. However, in some states a class comprising of tools of trade may not be subject to exemption because of its class, unless to the degree that it is alleged under an all-purpose exemption for individual asset (Frey & Swinson, 2013). One key objective of bankruptcy is ensuring reasonable and orderly management of debt. Therefore, exceptions to personal effects are considered to avert punitive captures of things of no or little value economically because this frequently does not encourage any attractive economic result. Likewise, tools of trade might according to the existing exceptions, be an allowed exception since their continued possession permits the bankrupt debtor to carry on with work that is productive as soon as may be possible(Frey & Swinson, 2013). Spendthrifts –majority of states’ property laws permits a trust accord so as to hold a lawfully enforceable limitation of a valuable interest transfer in the trust also identified as anti-alienation provision. Thus, the anti-alienation provision usually averts beneficiary’s creditors from possessing beneficiary’s trust share. Such a trust reflects a spendthrift trust. In order to prevent fraud, majority of states permit this safeguard only to the level that the beneficiary has not in any way transferred assets to the trust. Provisions such as those do not safeguard money or other property immediately after transfer has been done to the beneficiary from the trust. According to the US Bankruptcy, there is recognition of a provision of anti-alienation in a spendthrift, implying that the trust share of the beneficiary usually does not turn out to be the bankruptcy estate’s property (Cross & Miller, 2014). Works cited Cross Frank, Miller Roger. The Legal Environment of Business:Text and Cases. New York: Cengage Brain, 2014. David, Buchbinder. Basic Bankruptcy Law for Parelegals. New York: Aspen Publishers, 2009. Frey Martin, Swinson Sidney. Introduction to Bankruptcy Law. New York: Cengage Brain, 2013. Read More