1. Bankruptcy Law

Bankruptcy Law

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Topic Study Outline

Introduction to Bankruptcy Law
This chapter introduces the bankruptcy system — Chapters 7, 11, and 13.

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

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

An individual is considered bankrupt when she is ______________.

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

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

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

the elimination or restructuring of an individual’s debt.

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

___________ 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.

Liquidation bankruptcy

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).

reorganization bankruptcy

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

The bankruptcy process begins either with either ___________.

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

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

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

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

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/

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

In a Liquidation bankruptcy, the trustee does the following:

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/

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

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/

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

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

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/

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

The role of the bankruptcy court is to: ___________.

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/

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

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

The bankruptcy estate includes ______________.

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/

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.

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

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/

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

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

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

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

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

in their established order of priority.

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

Unsecured debtors with similar priority are organized into a _______.

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

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

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

____________ 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.

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

Title 11 of the US Code of Statutes.

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

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

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/

The general authority of the bankruptcy trustee includes:

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/

The assets of the bankruptcy estate include _____________.

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/

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.

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

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/

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

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/

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

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/

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

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/

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 ___________.

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/

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

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.

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

the bankruptcy filing proceeds to discharge of the debtor.

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

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

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/

All creditor claims are generally allowed, unless __________________.

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/

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.

the debtor, trustee, DIP, or other creditors

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

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

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

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

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/

A bankruptcy case begins when either ______________.

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/

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

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 _________.

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

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 ___________.

the state’s median income for its citizens.

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

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:

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/

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

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/

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

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/

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

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/

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

all secured creditors within the term of the plan.

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

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

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/

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

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

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/

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


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

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/

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

Avoid preferential or fraudulent conveyances.

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

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 ___________________.

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/

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

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/

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

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/

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

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/

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

Contemporaneous Exchanges of Value

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

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.

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.

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/

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

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.

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.

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/

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 ______________________.

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/

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:

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/

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

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/

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:

Pecuniary Purpose Test; Public Policy Test

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

_____________- 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.

_____________ - 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.

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 ____________.

selling, or leasing the business’s assets.

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

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

“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/

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.

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/

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

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/

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

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/

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 ________________.

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

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/

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

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/

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

“cause” why the appointment is necessary.

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

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.

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/

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

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

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

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/

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:

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/

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.


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

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/

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

The plan must meet the following elements for court approval:

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/

Factors to determine whether a plan is feasible include:

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/

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 __________________________.

“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/

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

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/

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

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

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

___________ 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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