Bankruptcy Study Guide

📖 Core Concepts Bankruptcy – A court‑ordered legal process that gives debtors relief from (some) debts; distinct from mere insolvency (inability to pay). Automatic Stay – Immediately halts lawsuits, foreclosures, repossessions, garnishments, and most collection activity once the petition is filed. 341 Meeting of Creditors – The “meeting of creditors” where the trustee and creditors can question the debtor about schedules and exemptions. Exemptions – Property the debtor may keep; amounts vary by state (or federal exemption if allowed). Chapters (U.S. Code) Chapter 7 – Straight liquidation; most debts wiped in 3‑4 months. Chapter 11 – Reorganization; debtor stays in control as Debtor in Possession (DIP) and proposes a plan. Chapter 13 – Wage‑earner repayment plan (3–5 years); debtor keeps assets. Means Test – Determines Chapter 7 eligibility by comparing 180‑day average monthly income to statutory expense allowances. Strategic Bankruptcy – Legitimate filing to achieve a genuine bankruptcy state; not criminal. Bankruptcy Fraud – Intentional concealment or falsification of assets/info; federal crime with possible perjury charges. --- 📌 Must Remember Bankruptcy ≠ insolvency; you can be insolvent without filing. Automatic stay starts at filing and lasts until discharge, dismissal, or court order. Chapter 7: Discharges most unsecured debts (credit‑cards, medical, payday). Does not discharge student loans, child support, most taxes, criminal fines. Available once every 8 years. Chapter 13: Requires regular income & debt limits. Plan length: 3 years if income < state median; 5 years if > median (max). Chapter 11: Primarily for businesses; DIP remains in control. Means Test – If disposable income > allowance, Chapter 7 is denied or converted to Chapter 13. Student‑loan discharge (U.S.) – Must satisfy the Brunner test (3 factors). Even then, discharge may be partial. Bankruptcy fraud → case can be reopened, assets seized, criminal prosecution. --- 🔄 Key Processes Filing Chapter 7 Petition & Schedules – Submit bankruptcy petition, list assets, liabilities, income, expenses. Automatic Stay triggers. Means Test – Calculate 180‑day average income vs. expense allowances. 341 Meeting – Trustee questions debtor; exemptions are reviewed. Asset Liquidation – Non‑exempt property surrendered to trustee, sold, proceeds distributed. Discharge – Remaining eligible debts wiped (≈3‑4 months after filing). Filing Chapter 13 Petition & Schedules – Same as Chapter 7, but no means test (income eligibility required). Propose Repayment Plan – Determine plan length (3 or 5 years) and monthly payment amount. Trustee Review – Trustee distributes plan to creditors for voting. Court Confirmation – Plan approved if meets statutory requirements. Payments – Debtor pays trustee monthly; trustee distributes to creditors. Discharge – After successful completion of all payments. Filing Chapter 11 (Business) Petition – File Chapter 11; automatic stay applies. Debtor in Possession (DIP) – Debtor continues operating assets. Plan Development – DIP, creditors, and counsel draft reorganization plan. Creditor Voting – Creditors vote; court may confirm plan over objections if requirements met. Implementation – Business operates under plan, repaying creditors per terms. Emergence – Business emerges with restructured debt (often recapitalized). --- 🔍 Key Comparisons Chapter 7 vs. Chapter 13 Asset outcome: 7 → surrender non‑exempt assets; 13 → keep all assets. Payment: 7 – no repayment; 13 – mandatory repayment plan. Eligibility: 7 – must pass means test; 13 – requires regular income, debt limits. Chapter 13 vs. Chapter 11 Who files: 13 – individuals; 11 – primarily businesses (but can be individuals with large debts). Plan length: 13 – fixed 3–5 years; 11 – flexible, based on restructuring needs. Bankruptcy vs. Insolvency Legal status: Bankruptcy is a court‑ordered status; insolvency is a financial condition. Strategic Bankruptcy vs. Bankruptcy Fraud Intent: Strategic – legitimate use of law; Fraud – intent to hide assets or deceive. U.S. vs. EU (Student Loan Discharge) U.S. – Very strict; must meet Brunner test; partial discharge possible. EU (UK model) – Fewer discharge conditions, more similar to U.S. system overall. --- ⚠️ Common Misunderstandings “Bankruptcy wipes out all debts.” Student loans, child support, many taxes, and criminal fines are generally non‑dischargeable. “Automatic stay stops every collection forever.” Stay is temporary; it ends on discharge, dismissal, or court order. “Chapter 7 is always the fastest option.” While liquidation is quick, filing may be denied by the means test, forcing conversion to Chapter 13. “If I have any assets, they will be taken.” Exemptions protect certain property (e.g., Social Security, modest vehicle, household goods). “Student loans can be discharged like credit‑card debt.” Only via the stringent Brunner test; most student loans survive bankruptcy. --- 🧠 Mental Models / Intuition “Reset vs. Re‑tool” – Chapter 7 = reset (clear slate); Chapter 11/13 = re‑tool (adjust the existing structure). “Stay‑Gate” – Imagine the automatic stay as a gate that closes on creditors the moment you file; the gate opens only when the case ends. “Means Test Scale” – Picture a balance scale: your income on one side, allowed living expenses on the other. If income ≤ expenses, you tip toward Chapter 7 eligibility. --- 🚩 Exceptions & Edge Cases Student‑Loan Discharge – Must satisfy all three Brunner factors; courts may grant only partial discharge. Mortgage Debt in Spain – Bankruptcy discharges interest but not the principal. Federal vs. State Exemptions – Some states allow opting for federal exemption scheme; others do not. Secured Creditors – Retain rights to repossess collateral even after discharge unless debtor surrenders or reaffirms the debt. Chapter 7 Frequency – Cannot be filed more than once in an 8‑year period. --- 📍 When to Use Which Choose Chapter 7 when: You have little or no non‑exempt equity. Your 180‑day average income is below the means‑test threshold. You seek a quick discharge of most unsecured debts. Choose Chapter 13 when: You have regular income and want to keep assets (e.g., home, car). Your debt limits are within statutory caps. You can afford a structured repayment plan (3–5 years). Choose Chapter 11 when: You are a business (or a high‑net‑worth individual) with substantial assets and complex debt structure. You need to reorganize operations while continuing business. Consider Bankruptcy Fraud Investigation if: Evidence of concealed assets, false statements, or multiple filings in different jurisdictions appears. --- 👀 Patterns to Recognize “Automatic stay” language → Indicates the filing stage and that collection actions are halted. “Means test” + “Disposable income” → Signals a Chapter 7 eligibility assessment. “Debtor in Possession (DIP)” → Points to a Chapter 11 case. “Repayment plan of X years” → Usually a Chapter 13 scenario. “Exempt property” list → Commonly appears in Chapter 7 discussions. --- 🗂️ Exam Traps Distractor: “All student loans are discharged in Chapter 7.” Why tempting: Student loans are common unsecured debt. Why wrong: Only discharged via the strict Brunner test; most survive. Distractor: “The automatic stay lasts forever.” Why tempting: “Stay” sounds permanent. Why wrong: It ends upon discharge, dismissal, or court order. Distractor: “Chapter 13 always lasts five years.” Why tempting: 5‑year maximum is memorable. Why wrong: If debtor’s income is below the state median, the plan is three years (unless extended). Distractor: “Filing Chapter 7 means you lose all property.” Why tempting: Liquidation suggests total loss. Why wrong: Exempt property is protected; many filers surrender nothing. Distractor: “Bankruptcy fraud is the same as strategic bankruptcy.” Why tempting: Both involve filing bankruptcy. Why wrong: Fraud requires intent to hide assets; strategic bankruptcy is lawful, though may have adverse consequences. ---