1. Bankruptcy Law

Bankruptcy Law

Playlist: 22 Videos: 69 Minutes



Topics: Learning Material

Introduction to Bankruptcy Law
Bankruptcy is a federal body of law concerning the relationship between a debtor and creditors. Specifically, bankruptcy law provides several methods for a debtor to recover from financial situations that are overwhelming to the individual’s continued well-being or existence. The bankruptcy process differs for individuals and businesses. This chapter introduces the bankruptcy system. It introduces the applicable bankruptcy laws and key provisions. It begins by explaining the types of bankruptcy — Chapters 7, 11, and 13. It then explains the method for initiating and processing a bankruptcy filing. It explores the role of the debtor, creditors, bankruptcy court, and trustee and the rights of each during the bankruptcy process. This includes the trustee or debtor in possession’s right to stop collection efforts; the right to disaffirm contracts; the right to recover certain prior payments made to creditors, etc. A key concept throughout the bankruptcy process is the priority of secured and unsecured creditors. Lastly, it explains the rights and obligations of the parties at the conclusion of the bankruptcy process. For further written and video explanation, discussion and practice questions, see Bankruptcy Law (Intro)

What is “Bankruptcy”?
  • Insolvency
  • System for liquidating or reorganizing assets.
  • Rehabilitate and allow for the future prosperity of individuals.

For further written and video explanation, discussion and practice questions, see What is "Bankruptcy"?

Types of Business Bankruptcy
  • Liquidation
  • Reorganization
  • Voluntary vs Involuntary

For further written and video explanation, discussion and practice questions, see What are the types of business bankruptcy?

Participants in Bankruptcy Process
  • Debtor
  • Creditor
  • Bankruptcy Trustee (or Debtor-in-Possession)

Personal & Business Liquidation Bankruptcy

Personal Reorganization Bankruptcy

Business Reorganization Bankruptcy

  • Bankruptcy Court

For further written and video explanation, discussion and practice questions, see Who are the participants in the bankruptcy process?

Key Concepts in Bankruptcy Process
  • Filing for Bankruptcy
  • Bankrupt Estate
  • Automatic Stay
  • Creditor Priority
  • Discharge

For further written and video explanation, discussion and practice questions, see Key concepts behind the bankruptcy process?

Rules Governing Bankruptcy Process
  • Title 11 of the US Code of Statutes.
  • Relevant sections

For further written and video explanation, discussion and practice questions, see What rules govern the bankruptcy process?

Authority of Bankruptcy Court
  • Article I of the US Constitution
  • Approve a plan of liquidation of reorganization.
  • Settle disputes between debtor and creditor.
  • Administration of the bankruptcy estate

For further written and video explanation, discussion and practice questions, see What the authority of the bankruptcy court?

Authority of Trustee or Debtor in Possession
  • Affirming or disaffirm contracts
  • Setting aside fraudulent conveyances
  • Voiding certain transfers
  • Collect estate assets
  • Setting aside statutory liens

For further written and video explanation, discussion and practice questions, see What is the authority of the trustee (debtor in possession) in bankruptcy?

Assets included in “Bankruptcy Estate”
  • All legal and equitable interests
  • At commencement of the bankruptcy case.
  • Ability to make a valid demand or claim for ownership rights in property,
  • Certain exempt assets
  • State law is relevant

For further written and video explanation, discussion and practice questions, see What assets of the debtor are included in the "bankruptcy estate"?

“Automatic Stay” in Bankruptcy
  • Section 362
  • Prohibits

⁃ Collections

⁃ Starting legal actions

⁃ Enforcing judgments

⁃ Ceasing assets

⁃ Recording or enforcing liens

  • Does not stop most criminal actions or family support actions.

For further written and video explanation, discussion and practice questions, see What is the "automatic stay" in bankruptcy?

What is a “Claim” of Creditors?
  • Notice and request that the debtor owes a fixed amount to the claimant.
  • Proofs of Claim
  • Disputing Proofs of Claims
  • Secured and Unsecured Claims

For further written and video explanation, discussion and practice questions, see What is a claim by creditors of the bankruptcy estate?

“Voluntary” vs “Involuntary” Bankruptcy

Voluntary Bankruptcy

Involuntary Bankruptcy

  • The debtor is not paying its debts as the come due, or
  • Within 120 days prior to filing the action.

For further written and video explanation, discussion and practice questions, see What is voluntary and involuntary bankruptcy?

What is the “Chapter 7 Bankruptcy” Process?
  • Filing
  • Bankruptcy Estate
  • Proofs of Claim
  • Liquidation
  • Discharge

For further written and video explanation, discussion and practice questions, see What is the "Chapter 7" bankruptcy process?

What is the “Chapter 11” Bankruptcy Process?
  • Bankruptcy Estate - Remain with DIP
  • Proof of Claims
  • Plan of Reorganization
  • “cramdown”.

For further written and video explanation, discussion and practice questions, see What is the "Chapter 11" bankruptcy process?

What is the Authority to “Accept or Reject a Contract?”
  • Accept or Reject Contracts - The DIP may accept or reject contracts of the debtor that have not yet been performed or are on-going.
  • To retain or assume a contract, the DIP must provide adequate assurance of continued performance and must cure any defaults under the contract.

For further written and video explanation, discussion and practice questions, see Accept or reject contract?

What are “Avoiding Powers”?

Avoiding Powers - This is known as the “strong-arm” powers.

Avoid Preferential Conveyances

Exceptions:

Contemporaneous Exchanges of Value

Payment in the Ordinary Course of Business

Purchase Money for Collateral

Enabling Loans

Extending New Value

Floating Liens

Avoid Fraudulent Conveyances

For further written and video explanation, discussion and practice questions, see Avoiding powers?

What is a “Stay of Proceeding”?

No Equity in Property

For Cause - The court may relieve the stay of proceeding for cause, including the lack of adequate protection of an interest in property of such party in interest.

⁃ Applicability to Government Actions

Pecuniary Purpose Test

Public Policy Test - If the primary purpose of government action relates to stopping a continued threat to public safety or health, it should be excepted from stay as police or regulatory power.

For further written and video explanation, discussion and practice questions, see Stay of Proceeding?

What is the “Use of Business Assets?”

Use of Business Assets -

Payments

Second Lien

Other Relief

For further written and video explanation, discussion and practice questions, see Use of Business Assets?

What is “Post-Petition Financing”?
Post-Petition Financing

  • Super-priority Administrative Expense
  • Lien on Unencumbered Property of the Estate
  • Junior Lien on Encumbered Property of the Estate

For further written and video explanation, discussion and practice questions, see Post-Petition Financing?

Appointment of “Trustee” or “Examiner”

Trustee to supervise the actions or conduct of the DIP.

⁃ Must show “cause”

⁃ fraud, dishonesty, incompetence, or gross mismanagement of the affairs

⁃ “totality of the circumstances”

  • appointment of a “corporate examiner”.

For further written and video explanation, discussion and practice questions, see What is appointment of a "trustee" or "examiner" in business bankruptcies?

What is a “Plan of Reorganization”?

120-day period to file plan of reorganization.

⁃ Reduce exclusivity period “for cause”.

  • Contents of the plan:

Mandatory Provisions

Classes of Claims

Equal Treatment

Secured Claims

Unimpaired Classes

Plan of Implementation

Permissive Provisions

Impair a Class

Executory Contracts

Sale of Property

Handling Claims

Other Provisions

  • Notice of the Plan
  • Acceptance of the Plan

⁃ At least two-thirds (2/3) of the total claims and

⁃ one-half (1/2) of the total of allowed claims of the class.

⁃ “Unimpaired” classes

⁃ Other Requirements:

Best Interest

Administrative Priority

Priority Claims

Feasible

For further written and video explanation, discussion and practice questions, see What is a "plan of reorganization"?

What is a “Cramdown” of Reorganization Plan?
  • Plan approved by at least one class of impaired creditor
  • If any impaired class does not accept, court will affirm if “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class . . . that is impaired under, and has not accepted, the plan”.
  • Plan forced upon impaired creditors who voted against plan approval.

Secured Creditors

Unsecured Creditors

For further written and video explanation, discussion and practice questions, see What is "cramdown" of a reorganization plan?

Relief of Debts
  • Plan confirmation discharges the debtor

⁃ Only debts in estate

⁃ Not post-petition

  • Creditors must receive notice

For further written and video explanation, discussion and practice questions, see To what extent does the bankruptcy process relieve a debtors debts?


Flashcard - Study Quiz

Q1
An individual is considered bankrupt when she is ______________.

A1
insolvent or the value of her debts exceeds the value of her assets.

Resource Video: https://thebusinessprofessor.com/what-is-bankruptcy/

Q2
The bankruptcy system is a body of laws that allows for _____________.

A2
the elimination or restructuring of an individual’s debt.

Resource Video: https://thebusinessprofessor.com/what-is-bankruptcy/

Q3
___________ is the process by which the assets of an individual or business are liquidated or sold in an effort to generate funds to pay creditors.

A3
Liquidation bankruptcy

Q4
A _____________ is a process by which the individual or business establish a plan to pay all secured debts and as much of its unsecured debts as possible during a set period of time (usually 5 years).

A4
reorganization bankruptcy

Resource Video: https://thebusinessprofessor.com/types-of-bankruptcy/

Q5
The bankruptcy process begins either with either ___________.

A5
a debtor filing a voluntary petition or creditors of the debtor filing an involuntary petition.

Resource Video: https://thebusinessprofessor.com/types-of-bankruptcy/

Q6
The _____________ is the individual or business entity seeking or filing for bankruptcy protection.

Q7
A __________ is any individual owed a debt or obligation by the debtor.

A7
Creditor. Creditors may include individuals, businesses (or other entities), or holders of securities (debt or ownership interests) of a business debtor.

Resource Video: https://thebusinessprofessor.com/primary-participants-in-bankruptcy-process/

Q8
The ____________ is a representative elected (or appointed) to represent the interests of creditors of the bankrupt debtor.

Q9
In a Liquidation bankruptcy, the trustee does the following:

A9
automatically takes control over the debtor’s estate, liquidates the non-exempt assets, and distributes the proceeds to creditors. This process is the same in a personal and business liquidation.

Resource Video: https://thebusinessprofessor.com/primary-participants-in-bankruptcy-process/

Q10
In a Personal Reorganization Bankruptcy, the trustee undertakes the following functions:

A10
accounts for all of the assets of the debtor, assists in the development of a plan of reorganizations, and administers an approved plan for the reorganization of debts and payment of creditors.

Resource Video: https://thebusinessprofessor.com/primary-participants-in-bankruptcy-process/

Q11
In a Business Reorganization Bankruptcy, a business debtor remains in possession of the assets of the bankruptcy estate. The debtor is known as a ____________.

Q12
A “debtor-in-possession” (DIP) serve has the following bankruptcy duties.

A12
S/he serves the same function as the trustee but manages its assets and operations in accordance with the rules laid out by bankruptcy law.

Resource Video: https://thebusinessprofessor.com/primary-participants-in-bankruptcy-process/

Q13
____________ is a federal court charged with administering the bankruptcy process.

Q14
The role of the bankruptcy court is to: ___________.

A14
review and approve liquidations and plans of reorganization, grant discharges of indebtedness, and adjudicate disputes between or among debtors and creditors.

Resource Video: https://thebusinessprofessor.com/primary-participants-in-bankruptcy-process/

Q15
___________ means submitting a bankruptcy petition along with all supporting documents to the bankruptcy court.

Q16
Upon filing bankruptcy, the court will issue an ____________ . This order serves to form the bankruptcy estate.

Q17
The bankruptcy estate includes ______________.

A17
all non-exempt assets and debts of the debtor at the time of the bankruptcy filing.

Resource Video: https://thebusinessprofessor.com/key-concepts-to-understand-bankruptcy-process/

Q18
The _____________ is an important protection afforded a debtor and the bankruptcy estate. It protects a debtor from all collection efforts by creditors or their representatives during the pendency of the bankruptcy process.

Q19
__________ Is where creditors have the opportunity to meet to examine debtor records and discuss claims against the estate.

A19
Meeting of Creditors. This follows the issue of order for relief in business bankruptcies.

Resource Video: https://thebusinessprofessor.com/key-concepts-to-understand-bankruptcy-process/

Q20
___________ in bankruptcy refers to the order in which creditors of the debtor or bankruptcy estate are paid.

Q21
Generally, secured creditors must be paid in full from the liquidation or reorganization, or ____________.

A21
the asset(s) securing the secured creditors’ claims must be surrendered to them.

Resource Video: https://thebusinessprofessor.com/key-concepts-to-understand-bankruptcy-process/

Q22
Once secured creditors are paid, unsecured creditors are paid ____________.

A22
in their established order of priority.

Resource Video: https://thebusinessprofessor.com/key-concepts-to-understand-bankruptcy-process/

Q23
Unsecured debtors with similar priority are organized into a _______.

Q24
If each unsecured debtor in a class is not paid in full, each member of the class receives payment based upon _________.

A24
an equal percentage of her debt/claim against the estate.

Resource Video: https://thebusinessprofessor.com/key-concepts-to-understand-bankruptcy-process/

Q25
____________ means that, the debts of the debtor that are included in the bankruptcy estate are generally wiped out after the successful completion of the bankruptcy process.

Q26
The rules governing the bankruptcy process, known as the “Bankruptcy Code”, are contained in __________.

A26
Title 11 of the US Code of Statutes.

Resource Video: https://thebusinessprofessor.com/what-is-the-authority-of-the-bankruptcy-court/

Q27
Generally, the role of the court is simply to ___________.

A27
approve a plan of liquidation or reorganization; and adjudicate disputes between debtor and creditor.

Resource Video: https://thebusinessprofessor.com/what-is-the-authority-of-the-bankruptcy-court/

Q28
The general authority of the bankruptcy trustee includes:

A28
affirming or disaffirm contracts with the debtor which are yet to be performed; setting aside fraudulent conveyances from the bankruptcy estate; voiding certain preferential transfers of property by the debtor to creditors; suing those who owe the debtor an obligation that is not paid; and, setting aside statutory liens on property taking effect upon the filing of bankruptcy.

Resource Video: https://thebusinessprofessor.com/role-of-trustee-in-bankruptcy/

Q29
The assets of the bankruptcy estate include _____________.

A29
all legal and equitable interests of the debtor in property at the commencement of the bankruptcy case. (Note. A legal interest means any legal right to the exclusive use and enjoyment of the property. An equitable interest includes any rights or claims to the ownership of property based upon principles of fairness.

Resource Video: https://thebusinessprofessor.com/what-assets-or-included-in-the-bankruptcy-estate/

Q30
Property of the estate also includes property that the debtor acquired within ______ days of filing for bankruptcy, if acquired with proceeds or profits from property of the estate.

Q31
Property excluded from the estate includes any income derived from ____________.

A31
the services of the debtor performed after the filing for bankruptcy protection, equitable powers that the debtor may exercise for others, educational IRA plans, 529 plans, and certain ERISA qualified retirement plans.

Resource Video: https://thebusinessprofessor.com/what-assets-or-included-in-the-bankruptcy-estate/

Q32
The automatic stay under Section 362 of the Bankruptcy Code protects debtors from ______________.

A32
ongoing collection efforts (during the pendency of the bankruptcy case) against property included in the bankruptcy estate.

Resource Video: https://thebusinessprofessor.com/section-362-automatic-stay-in-bankruptcy/

Q33
Pursuant to Section 362 of the Bankruptcy Code, creditors are prohibited from the following conduct:

A33
efforts to collect, assess, setoff, or recover a claim against a debtor arising before the bankruptcy filing; commencing or continuing a judicial, administrative, or other action to collect the debt; enforcing a judgment against the debtor’s property; obtaining possession or control over assets included in the bankruptcy estate; or creating, recording, or enforcing a lien against the debtor’s property.

Resource Video: https://thebusinessprofessor.com/section-362-automatic-stay-in-bankruptcy/

Q34
Some limitations to the protections afforded under Section 362 of the Bankruptcy Code include:

A34
commencement or continuation of criminal actions and certain actions for domestic support; commencement or continuation of actions by governmental units pursuant to its regulatory power (such as tax liability); or creation or perfection of a statutory lien for certain types of real property are allowed.

Resource Video: https://thebusinessprofessor.com/section-362-automatic-stay-in-bankruptcy/

Q35
The stay of proceeding will continue until the case is closed, dismissed, or discharge is granted. The court may also relieve or modify a stay generally or for a specific creditor for ___________.

A35
cause, for lack of adequate protection of a secured creditor’s interest, or if the debtor has no equity in the subject property and it is not necessary for the reorganization of the debtor’s estate.

Resource Video: https://thebusinessprofessor.com/section-362-automatic-stay-in-bankruptcy/

Q36
A ___________ is a notice to the trustee of the debtor’s estate that the debtor owes a fixed amount to the claimant.

Q37
Claimants are creditors of the estate. For liquidation bankruptcies and personal reorganization bankruptcies, creditors of the estate must submit a ___________ within a specific period of receiving notice of the bankruptcy filing.

Q38
A creditor that fails to file a claim against the estate is barred from later collecting that debt if ___________.

A38
the bankruptcy filing proceeds to discharge of the debtor.

Resource Video: https://thebusinessprofessor.com/proof-of-claims-in-bankruptcy-case/

Q39
At the commencement of a bankruptcy case, the debtor is required to provide a list of _______________.

A39
all assets and debts to be included in the estate. This is known as ___________.

Resource Video: https://thebusinessprofessor.com/proof-of-claims-in-bankruptcy-case/

Q40
All creditor claims are generally allowed, unless __________________.

A40
the claim is challenged by the debtor, trustee, debtor-in-possession or by other creditors.

Resource Video: https://thebusinessprofessor.com/proof-of-claims-in-bankruptcy-case/

Q41
When a creditor submits a claim against the bankruptcy estate, other parties in interest (such as ______________) can file an objection to the claim, which the bankruptcy court will adjudicate.

A41
the debtor, trustee, DIP, or other creditors

Resource Video: https://thebusinessprofessor.com/proof-of-claims-in-bankruptcy-case/

Q42
A ____________ is the amount of a debt equal to the “value” of creditor’s interest in assets of the estate.

Q43
Any amount of the creditor’s claim that is not secured by collateral or is beyond the value of the collateral is classified as ___________.

Q44
Generally, Debts arising after the filing of bankruptcy are not included in the bankruptcy estate. True or False?

A44
True. Though administrative expenses of the estate may be included in the bankruptcy claim.

Resource Video: https://thebusinessprofessor.com/proof-of-claims-in-bankruptcy-case/

Q45
A bankruptcy case begins when either ______________.

A45
a debtor voluntarily files for bankruptcy or creditors petition to subject a business debtor to bankruptcy.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q46
Any business may voluntarily file for a liquidation or reorganization bankruptcy at any time. True of False.

Q47
For an individual to file for reorganization bankruptcy under Chapter 13, she must have regular income and have unsecured debts not exceeding _______ and secured debts of less than _________.

Q48
In a liquidation bankruptcy under Chapter 7, the primary limitation is that an individual (not a business) must meet a __________.

Q49
The means test limits the ability of individuals to file for bankruptcy if the individual has recurring revenue (income) above a certain amount. The amount is determined by ___________.

A49
the state’s median income for its citizens.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q50
One or more creditors of a business debtor may commence an involuntary bankruptcy action against a debtor by filing a chapter 7 or chapter 11 petition with the bankruptcy court. To commence this action, the following conditions must be present:

A50
three or more business creditors must have good faith, non-contingent claims against the debtor totaling $15,325 or more (beyond the amount of any secured debt), or if the debtor has fewer than 12 creditors, a single creditor holding a good faith, non-contingent claim against the debtor of $15,325 or more.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q51
If the debtor contests the involuntary filing, the court will only subject the debtor to bankruptcy if:

A51
The debtor is not paying its debts as they come due, or Within 120 days prior to filing the action, the court appoints a custodian over the assets of the debtor with the purpose of enforcing a lien.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q52
The Chapter 7 bankruptcy process is fairly straightforward. It involves the following steps:

A52
Filing; Bankruptcy Estate (managed by Trustee); Proofs of Claim (mandatory from creditors); Liquidation; Discharge of debts

Resource Video: https://thebusinessprofessor.com/chapter-7-bankruptcy-process/

Q53
Chapter 11 follows a similar process to that of Chapter 7, with the following notable differences:

A53
Bankruptcy Estate (managed by the Debtor in Possession); Proofs of Claim (are not mandatory from creditors); Plan of Reorganization (submitted by the debtor); Discharge (the remaining debts are discharged after the successful completion of the plan over several years).

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q54
The DIP must put forward a plan of reorganization. This plan must pay off _____________.

A54
all secured creditors within the term of the plan.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q55
The plan or reorganization must be voted upon and accepted by _____________.

A55
at least one class of “impaired” unsecured creditors under the plan that is not paid in full.

Resource Video: https://thebusinessprofessor.com/voluntary-and-involuntary-bankruptcy-requirements/

Q56
The bankruptcy court must approve the plan. True or False.

Q57
The authority of the debtor in possession (DIP) is similar to that of a bankruptcy trustee. The objective of the DIP is to _________________.

A57
guard the interests of creditors by reshaping the bankruptcy estate to allow the business to continue operations.

Resource Video: https://thebusinessprofessor.com/debtor-in-possession-authority-to-accept-or-reject-contracts/

Q58
The DIP may accept or reject contracts of the debtor that ______________.

A58

Q59
To retain or assume a contract, the DIP must ________________.

A59
provide adequate assurance of continued performance and must cure any defaults under the contract.

Resource Video: https://thebusinessprofessor.com/debtor-in-possession-authority-to-accept-or-reject-contracts/

Q60
The DIP exercises the avoiding powers of a bankruptcy trustee, also known as the “strong-arm” powers, which allow the DIP to:

A60
Avoid preferential or fraudulent conveyances.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q61
The DIP may seek to undo any preferential conveyances or payments made by the company and certain statutory liens placed on the debtor’s assets by creditors. Generally, a payment is considered preferential if ___________________.

A61
It is made while the debtor was insolvent; it enables the recipient creditor to receive more than such creditor would receive if the case were a case under Chapter 7; there is a transfer of interest in the debtor’s property; within 90 days of filing for bankruptcy (or one year if the transfer is to insiders of the business); to or for benefit of a creditor on account of an existing debt.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q62
For purposes of determining preferential conveyances, there is an assumption that a debtor is insolvent ______________ or _____________.

A62
in the 90-day period prior to the filing of bankruptcy; within one year if any payment benefits an insider of the business (such as an owner of the business, officer, director, third-party guarantor, etc.).

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q63
For purposes of determining preferential conveyances, the term “transfer” is broadly defined to include __________________.

A63
any payment, transfer of property, creation of a lien on property, or recording of a security interest.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q64
There are several exceptions or defenses that protect conveyances that may otherwise qualify as preferential, including:

A64
Contemporaneous Exchange of Value; Payment in the Ordinary Course of Business; Purchase Money for Collateral; Enabling Loans; Extending New Value; Floating Liens.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q65
The _________________ exception allows a debtor to make payment to a creditor who simultaneously provides value to the debtor.

A65
Contemporaneous Exchanges of Value

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q66
The ______________ exception applies if a payment is recurring or is part of the ordinary course of the employer’s business, it may not be deemed preferential.

Q67
The ______________ exception applies if a transaction that creates a security interest in property acquired by the debtor if done pursuant to a security agreement that describes the collateral and is given to allow the debtor to purchase the collateral.

A67
Purchase Money for Collateral (Note. Generally, the debtor must file the security interest within 20 days of taking receipt of the collateral or the security interest loses priority to other secured creditors.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q68
The _____________ exception allows a debtor receives an enabling loan to continue operations.Ppayments on that loan may not be considered preferential.

Q69
The ______________ exception allows a debtor to make payment to a creditor on account or existing debt, if the debtor later receives new value in a transaction (such as an extension of credit or purchasing goods on account). Any lien taken on goods or payment made toward those goods or services would not be preferential.

Q70
The _____________ exception, allows a debtor to acquire and finance new assets or remain subject to a prior lien specifically covering after-acquired collateral (such as inventory or receivables). The attachment of a floating lien will not be considered preferential.

A70
Floating Liens. An important limitation with this defense is that the creditor cannot materially improve her position as a result of any payment.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q71
The Bankruptcy Code allows for state fraudulent-transfer laws to remain in effect during a bankruptcy. The DIP may look back two years to challenge any fraudulent transfers that ______________________.

A71
Are made with the “intent to hinder, delay or defraud” creditors, or made without “reasonably equivalent value”.

Resource Video: https://thebusinessprofessor.com/avoiding-powers-of-debtor-in-possession/

Q72
The DIP may enforce or employ the Section 362 stay of proceeding provisions against existing debtors. Upon request of a party in interest and after notice and a hearing, the court may grant relief from the stay. The justifications for relieving the stay are as follows:

A72
The debtor does not have any equity in the property and it is not necessary for an effective reorganization; or “for cause”, including the lack of adequate protection of an interest in property.

Resource Video: https://thebusinessprofessor.com/automatic-stay-of-proceedings-in-bankruptcy/

Q73
The primary limitations of the automatic stay, known as the “Police and Regulatory Power” exceptions, are that it does not stop ____________.

A73
criminal actions, paternity suits, collection of domestic support obligations, or actions by a governmental unit exercising its police and regulatory power.

Resource Video: https://thebusinessprofessor.com/automatic-stay-of-proceedings-in-bankruptcy/

Q74
When the police or regulatory power exceptions result in financial penalty or forfeiture. Courts generally employ two tests to determine whether the stay should apply in these situations:

A74
Pecuniary Purpose Test; Public Policy Test

Resource Video: https://thebusinessprofessor.com/automatic-stay-of-proceedings-in-bankruptcy/

Q75
_____________- States that, if the primary purpose of the government unit’s action looks back and punishes for past conduct, it should not be excepted from the stay as an exercise of police or regulatory power.

Q76
_____________ - States that, if the primary purpose of government action relates to stopping a continued threat to public safety or health, it should be excepted from stay as police or regulatory power.

Q77
The DIP may use assets of the business in on-going operations. This includes the use of business cash in the “ordinary course of business”, such as ____________.

A77
selling, or leasing the business’s assets.

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-use-business-assets/

Q78
If an asset will be ___________ or ______________, the court must specifically approve its use.

A78
“permanently impaired”; the use of assets is challenged by a creditor of the estate

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-use-business-assets/

Q79
Physical assets of the business generally serve as collateral for one or more classes of secured creditor. In this situation, the secured creditors may demand _____________ of their interests from the DIP.

A79
adequate protection. This means the DIP may have to take measures to ensure that the bankruptcy estate’s use of the assets in on-going operations does not prejudice the secured status of the creditors.

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-use-business-assets/

Q80
Adequate protection of creditors with collateral securing their debts may be provided by:

A80
Payments - The DIP may make payments to the secured creditor for any decrease in the value of collateral securing the debt. Second Lien - The DIP may authorize an additional or replacement lien to the extent of any decrease in the value of collateral securing the debt. Other Relief - The DIP may provide other relief that provides the creditor with assurance of payment of the equivalent value of the collateral.

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-use-business-assets/

Q81
The DIP may establish unsecured credit (incur debts) in the ordinary course of business following the filing of bankruptcy. These debts must be ______________.

A81
These debts must be actual, necessary costs and expenses of preserving the estate.

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-secure-post-petition-financing/

Q82
If the DIP establishes new debts, it creates new obligations for the bankruptcy estate that are often superior or have priority over payment of the existing debts. This priority is known as ________________.

Q83
If the DIP is unable to obtain credit, even with the promise of administrative expense priority, the court may, after notice and hearing, order:

A83
Super-priority Administrative Expense - This provides the creditor with priority over any or all administrative expenses of the kind; Lien on Unencumbered Property of the Estate - This provides the creditor with a lien on property of the estate that is not otherwise subject to a lien; Junior Lien on Encumbered Property of the Estate - This provides the creditor with a junior lien on property of the estate that is subject to a lien.

Resource Video: https://thebusinessprofessor.com/authority-of-debtor-in-possession-to-secure-post-petition-financing/

Q84
In certain circumstances, the bankruptcy court will appoint a bankruptcy trustee to _______________.

A84
supervise the actions or conduct of the debtor in possession (DIP).

Resource Video: https://thebusinessprofessor.com/appointment-of-trustee-of-examiner-in-chapter-11-bankruptcy/

Q85
There is a strong presumption against appointment of a trustee to oversee the DIP. To overcome this presumption, creditors must show _____________.

A85
“cause” why the appointment is necessary.

Resource Video: https://thebusinessprofessor.com/appointment-of-trustee-of-examiner-in-chapter-11-bankruptcy/

Q86
Showing “Cause” why a Trustee is necessary might include situations involving _______________, and the bankruptcy court will look at the “totality of the circumstances” to determine the need for a trustee.

A86
fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case.

Resource Video: https://thebusinessprofessor.com/appointment-of-trustee-of-examiner-in-chapter-11-bankruptcy/

Q87
An alternative to appointing a trustee is the appointment of a _______________, who serves a role similar to special counsel to the DIP.

Q88
The DIB has an exclusive _________ period to file plan of reorganization. The court may enlarge or reduce the exclusivity period “for cause”.

Q89
The bankruptcy code provides guidelines for the contents of the plan of reorganization as follows:

A89
The mandatory provisions to include a plan are as follows: Classes of Claims - The plan must designate classes of claims; Equal Treatment - All members of a class must be treated the same; Secured Claims - Secured claims must be classified separately unless the creditors have common rights; Unimpaired Classes - The plan must designate any class that is not impaired, any class that is impaired; Plan of Implementation - The plan must provide adequate means for a plan’s implementation. The plan of reorganization may include any of the following provisions: Impair a Class - The plan may impair any class; Executory Contracts - The plan may provide for assumption or rejection of executory contracts; Sale of Property - The plan may provide for sale of estate assets; Handling Claims - The plan may provide for settlement or adjustment of claims belonging to the estate, such as turnover of property or avoidance claims; Other Provisions - The plan may contain any other provisions that do not conflict with the reorganization of the estate.

Resource Video: https://thebusinessprofessor.com/bankruptcy-plan-of-reorganization/

Q90
Before the plan can be distributed to creditors and interest holders, the court must approve a disclosure statement for distribution. The disclosure statement must contain adequate information about the debtor and the bankruptcy filing, including:

A90
description of debtor’s business; history of debtor’s business; current financial information, including the financial statements; description of plan and execution game plan; liquidation analysis; management retention and compensation; pro forma operations projections; summary of pending or planned litigation; transactions with insiders; and tax consequences if plan is confirmed.

Resource Video: https://thebusinessprofessor.com/bankruptcy-plan-of-reorganization/

Q91
Once the disclosure statement is approved by the court, the DIP may solicit acceptances from creditors and interest holders. To approve the plan, a ________________ must accept the plan and it must be approved by the court.

A91

Q92
A class of creditors accepts the plan if approved by ____________.

A92
at least two-thirds (2/3) of the total claims and one-half (1/2) of the total of allowed claims of the class.

Resource Video: https://thebusinessprofessor.com/bankruptcy-plan-of-reorganization/

Q93
“Unimpaired” classes of creditor are not entitled to vote on the plan. True of False.

Q94
The plan must meet the following elements for court approval:

A94
Best Interest - The plan must be in the best interest of creditors; Administrative Priority - Unless otherwise agreed, holders of administrative expense priority must be paid in cash on the effective date of the plan; Priority Claims - Holders of priority claims must be paid by the effective date unless such class has accepted the plan stating otherwise; Feasible - The plan must be “feasible”, such that it is not likely to be followed by liquidation or further reorganization unless such course of action is proposed as part of the plan.

Resource Video: https://thebusinessprofessor.com/bankruptcy-plan-of-reorganization/

Q95
Factors to determine whether a plan is feasible include:

A95
earning power of the business; adequacy of the capital structure; economic and market conditions; ability and retention of management; and ability to meet obligations as they become due.

Resource Video: https://thebusinessprofessor.com/bankruptcy-plan-of-reorganization/

Q96
In a “cramdown”, if any class of impaired creditor has not accepted the plan, the court, on request of the proponent of the plan, shall confirm the plan “if __________________________.

A96
“the plan does not discriminate unfairly, and is fair and equitable, with respect to each class . . . that is impaired under, and has not accepted, the plan”.

Resource Video: https://thebusinessprofessor.com/cramdown-of-chapter-11-bankruptcy-plan/

Q97
Even in a cramdown, the following attributes of the plan must be true:

A97
Secured Creditors – Secured creditors must retain a lien on collateral or proceeds and receive deferred cash payments equal to present value of the collateral or receive the indubitable equivalent of its claim. Unsecured Creditors – Unsecured creditors must be paid in full or no holders of junior claims may receive any payment.

Resource Video: https://thebusinessprofessor.com/cramdown-of-chapter-11-bankruptcy-plan/

Q98
Confirmation of the debtor in possession’s (DIP’s) plan of reorganization discharges the debtor from any debt that _________________.

A98
arose before the date of the plan’s final confirmation.

Resource Video: https://thebusinessprofessor.com/discharge-of-debtor-in-bankruptcy/

Q99
___________ of debtors, limit the ability of the court to discharge debts of claimants who did not receive notice of the bankruptcy filing.


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