Bankruptcy and Debtor-Creditor

Bankruptcy and Debtor-Creditor on the CP Exam

Bankruptcy and Debtor-Creditor law accounts for 7% of the CP exam. This content area covers the major bankruptcy chapters, the automatic stay, exemptions, discharge, and creditor rights. Paralegals in bankruptcy practice prepare petitions, schedules, and assist with plan compliance.

Chapter 7: Liquidation

• Eligibility: Individuals must pass the means test (income below state median or allowable expenses reduce disposable income). Businesses can file without the means test.
• Process: Trustee is appointed, non-exempt assets are liquidated, proceeds distributed to creditors by priority, and remaining eligible debts are discharged.
• Exempt property: Debtors may keep certain property (homestead, personal property, retirement accounts). Federal exemptions or state exemptions apply depending on the state.
• Timeline: Typically completed in 3-6 months from filing to discharge.

Chapter 13: Wage Earner Reorganization

• Eligibility: Only individuals with regular income. Debt limits apply (secured and unsecured debt limits adjusted periodically).
• Repayment plan: 3 years (below median income) or 5 years (above median income). Must pay all disposable income to the plan.
• Advantages: Keep property (including home), cure mortgage arrears, strip off wholly unsecured junior liens in some circuits.

Chapter 11: Business Reorganization

• Debtor in possession: Business continues to operate while reorganizing. Has the powers and duties of a trustee.
• Plan of reorganization: Must be proposed within 120 days (exclusivity period). Must be approved by creditors and confirmed by the court.
• Creditor committees: Unsecured creditors form a committee to negotiate with the debtor and oversee the reorganization.

Key Bankruptcy Concepts

• Automatic stay (Section 362): Immediately halts all collection actions, lawsuits, garnishments, and foreclosures upon filing. Relief from stay requires a motion and court order.
• Discharge: Eliminates the debtor's personal liability for dischargeable debts. Non-dischargeable debts include most student loans, recent taxes, child support, alimony, and debts obtained through fraud.
• Priority of claims: Secured creditors (paid from collateral), priority unsecured (domestic support, administrative expenses, taxes), and general unsecured (pro rata distribution of remaining funds).
• Preference payments: Trustee can recover payments made to creditors within 90 days of filing (1 year for insiders) that give the creditor more than they would receive in Chapter 7 liquidation.
• Fraudulent transfers: Transfers made with intent to hinder creditors or for less than reasonably equivalent value within 2 years of filing can be avoided.

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