Bankruptcy History Law

1. 1 Bankruptcy History & Law PAR 235 - Bankruptcy Law Mike Brigner, J.D.

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3. 3 Italian Bankruptcy History Early Italians “banka” = bench “rotta” = break “banka rotta” = break bench As a symbol of your financial failure, your creditors would break your bench, if you were a merchant who didn’t pay your debts

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5. 5 English Bankruptcy History Early English “banka rotta” = bankrupt English didn’t break anything, but they put you in debtor’s prison Into 1700’s, failure to pay debts was both immoral and illegal Debtor’s prison conditions varied from apartment-style to filthy wards

6. 6 English Bankruptcy History In London: 1829 -- 7,000 debtors imprisoned 1921 -- 400 debtors imprisoned Miserable conditions in many debtors prisons lead to reform Bankruptcy was a creditor’s remedy Criminal – put debtor in jail Civil – take all of debtor’s assets

7. 7 English Bankruptcy History 1705: First law that gave any rights to the debtor Right of discharge – Take all assets, but then legally forgive the rest of the existing debt Right of exemptions – Debtor can keep some modest assets to live on

8. 8 English Bankruptcy History 1849 law: Discharge based on fault 1st Class: Debtor is without fault 2nd Class: Some fault (carelessness) 3rd Class: At fault (dishonest)

9. 9 American Bankruptcy History Colonies had debtors prisons 60% owed $10 or less Not as common as in England Many prominent colonialists, including several signers of the Constitution had serious debt problems!

10. 10 American Bankruptcy History Creditors: this is unconstitutional!!! No, Article I, Section 8, Clause 4 gives Congress the power to enact uniform bankruptcy laws Constitution adopted in 1789 First bankruptcy law enacted in 1800, applied only to merchants repealed in 1803, then no law for 38 yrs

11. 11 American Bankruptcy History Bankruptcy Act of 1841 significant: Allowed the debtor to file bankruptcy Even the non-merchant debtor! Allowed exemptions of clothing, furniture, and “necessaries” up to $300 in value Act was repealed in 1843, then no law for 25 years

12. 12 American Bankruptcy History Bankruptcy Act of 1867 After Civil War, 3rd Act in response to an economic crisis This Act designed to be permanent Allowed voluntary and involuntary filing By merchants, individuals, & corp’ns Assignee elected by creditors replaced historical creditor-administered estate

13. 13 American Bankruptcy History Bankruptcy Act of 1867 Exemptions now $500, including wearing apparel for debtor, wife & kids This 3rd BR Act repealed in 1878, then no law for 20 years

14. 14 American Bankruptcy History Bankruptcy Act of 1898 Kept idea of voluntary filing by non-merchant debtor Also allowed involuntary filing Eliminated idea that creditor had to consent to discharge Allowed states to set exemptions

15. 15 American Bankruptcy History Bankruptcy Act of 1898 Created first bankruptcy courts, as part of U.S. District Courts Judges appointed bankruptcy referees Trustee now paid from the estate 1898 Act stayed in effect 81 years until replaced by Act of 1978

16. 16 American Bankruptcy History Bankruptcy Act of 1978 Called the Bankruptcy Code See Text pages 5-6 for 8 Chapters Amended in 1984, 1986, 1990, 1991, 1994 And in 2005

17. 17 American Bankruptcy History Effective 10/17/05, BAPCPA - Bankruptcy Abuse Prevention and Consumer Protection Act “. . .doing little more than imposing new costs and paperwork burdens on tens of thousands of already distressed Americans, the vast majority of whom are being forced into bankruptcy due to financial circumstances beyond their control” National Association of Consumer Bankruptcy Attorneys

18. 18 BAPCPA "I don’t know anybody who practices in the bankruptcy arena, creditor or debtor lawyer, who thinks this is a good law." Chair, ABA Bankruptcy Committee

19. 19 BAPCPA “The worst piece of national legislation since the Alien & Sedition Act” Federal Bankruptcy Judge “. . .consumer organizations overwhelmingly criticized the bill as unfair and harsh toward low-income families forced into bankruptcy by unplanned medical bills, job loss or divorce." Pittsburgh News Article

20. 20 BAPCPA Requires credit counseling for all debtors before filing bankruptcy, plus a personal financial management course after filing Makes it harder for debtors to keep cars & homes after filing bankruptcy Must wait 8 years (up from 7) to file again Automatic stay can no longer be used to stop or delay evictions, loss of driver's or professional licenses, divorce & domestic violence cases Increased paperwork burden (!)

21. 21 BAPCPA Imposes a “means test” to see if debtors are poor enough to file a Chapter 7; if not, they must file a Chapter 13 payment plan BUT two researchers from Creighton Law School conducted a case-by-case analysis to determine whether debtors currently in Chapter 7 could plausibly repay some portion of their debts They concluded that up to 3.6% of Chap 7 debtors would be candidates for any repayment in Chap 13 Fewer debts can be discharged Higher priority for child support & alimony (?)

22. 22 BAPCPA & Attorneys Lawyers must certifies the accuracy of debtor’s filings & can be held liable if information is wrong Requires attorneys to certify a debtor's ability to make payments under a reaffirmation (debt payment) agreement ALL lawyers who advise clients about bankruptcy (even business lawyers) must identify themselves as "debt relief agencies“

23. 23 Some Key Terms (page 7) Look up in Glossary Bankruptcy on demand Insolvent Voluntary petition Consumer debts Motion to dismiss Fresh start Estate for equitable distribution Exemptions Discharge Nondischargeable

24. 24 What Parties Want Debtor Discharge debts Preserve assets

25. 25 What Parties Want Creditor & Trustee Maximize distribution to creditors Keep debtor “honest” Discharge only dischargeable debts Keep no non-exempt assets

26. 26 What BR Court Wants “Fresh start” for honest debtors Return to productivity Free from unmanageable debt Promote best interests of creditors Equitable distribution of estate, from debtor’s non-exempt assets

27. 27 The Bankruptcy Code (p. 14-) Chapters 1, 3, 5: Universal chapters Chapter 7: Liquidation Chapter 9: Municipalities Chapter 11: Business reorganization Chapter 12: Farm debts Chapter 13: Personal debt adjustment

28. 28 Bankruptcy Procedure Federal Rules of Bankruptcy Procedure Official Forms Local Rules

29. 29 Bankruptcy Cases State courts can rule on BR issues Mostly federal court cases Bankruptcy reporters (p. 25) Various levels of appeal, + BAPs Each issue can have different law in different federal circuits Research tips (pp. 25-29)

30. 30 Bankruptcy History & Law Concluded Thank You Mike Brigner, J.D.