Business Law 101 / Bankruptcy Procedures

By Albert L. Kelley

Once a bankruptcy filing is made, the Court appoints a trustee over the debtor’s assets. The trustee takes control over everything the debtor owns. The trustee has a great deal of power over the estate. The trustee is authorized to reject any contract of the debtor. He is authorized to reverse any transaction that occurred in the three months prior to the filing. So if you get a great deal on a car from a debtor and he files for bankruptcy the next month, you may have to return the car to the trustee and get your money back. The trustee then can resell the car for a better price. The trustee must marshal all the assets of the debtor and evaluate all the claims of the creditors. If the debtor transfers assets to a friend to keep it from the trustee, that can be looked at as fraud on the court. Any transfer that occurred within 1 year of the filing can be reversed and the item added back to the debtor’s estate.

Generally, certain transactions cannot be reversed. These include a straight cash sale, a payment in the ordinary course of business, a consumer debt of less than $600, and child support or alimony payments.

The debtor must provide to the court a list of debtors who will then be notified about the filing. The creditors must then file a proof of claim with the Court, even if the claim is already known to the trustee. Once all the claims are in, the trustee must plan a payment schedule according to the priority of claims. The secured creditors get paid through their security. The unsecured creditors get paid according to their priority schedules. The priority is as follows:

(1)   Costs of administering the bankruptcy, including trustee’s fees and lawyer’s fees.

(2)   Claims for wages and salaries, including vacation, severance, and sick leave pay;

(3)   Taxes due to the United States or any state or subdivision;

(4)   Debts due the United States;

(5)   General creditors, and secured creditors (to the extent that the claims exceed the value of the security);

(6)   Shareholders to the extent of their respective uninsured;

There are additional categories based on the type of entity filing bankruptcy.

Each claim is paid in full for its priority. If you don’t have enough to pay the full priority level than all creditors in that level must be treated equally on a pro rata basis, such as giving each creditor in that level 30%.

The debtor is allowed to keep certain things out of the bankruptcy estate. First and foremost is the debtors homestead. This means the actual residence of the debtor. And it can be limited. There are size restrictions for residences based on whether the debtor lives in a city or in the country. You may also protect your car up to a certain value, household furnishings up to a certain value. You may also keep free and clear child support and alimony payments, life insurance policies and personal injury awards.

Once the bankruptcy has been concluded, the debts of the debtor are discharged. From that point on, the creditors cannot seek payment from the debtor. In fact if they do, there are several penalties that the debtor can seek against the creditor. Certain debts do not get discharged. Child support and alimony obligations cannot be wiped out in bankruptcy court, nor can taxes, loans to pay taxes or student loans received within 7 years of the bankruptcy. If a debt was not listed in the schedule of debts, it is not wiped out. Debts for fraudulent activity are not discharged nor to willful and malicious injury to property. DUI judgments are not dischargeable or certain consumer debts or cash advances.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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