Bankruptcy law prevents economic enslavement and protects the rights that we, as a people, hold as self-evident, inalienable, and God-Given. Bankruptcy is a Federal Law and cases are administered by Federal Courts.
Individual debtors may file a chapter 7 bankruptcy to eliminate or reduce their nonpriority unsecured debt. However, a statutory “means test” applies.
Chapter 7
Chapter 7 of the Bankruptcy Code, entitled Liquidation, provides for liquidation bankruptcy for individuals. When an individual files for this type of relief, a court-appointed trustee takes and sells the property that can be sold, usually paying creditors who have valid claims on a priority basis. The debtor receives a discharge of personal liability for most debts.
Generally, the trustee in a chapter 7 case can only sell property that bankruptcy law won’t let the debtor keep (nonexempt property). These include vehicles, homes, jewelry, money in the bank and household furnishings. The trustee also pays off secured debts. There are exemptions for certain property, and the values of those exemptions vary by state.
A debtor must undergo credit counseling before filing for this form of bankruptcy. This is generally a requirement, and failure to comply can result in the dismissal or conversion of the case.
A bankruptcy case can be filed by a business entity, but it is more common for the court to grant relief to individuals. In addition to preventing collection efforts, this form of bankruptcy allows for the restructuring of crippling debt. This can be done by removing unsecured junior liens on real estate through lien stripping, or reducing the principal loan balance of secured debts through a loan cramdown. In addition, a Chapter 11 plan may allow for payments to be made through payroll deductions, increasing the likelihood that the repayment plan will be completed.
Chapter 11
The chapter 11 of the Bankruptcy Code is typically used by business entities that wish to continue operations while repaying creditors concurrently through a court approved plan of reorganization. It allows debtors to reduce or eliminate certain debts, discharge other debts, terminate burdensome contracts and leases, recover assets, and rescale operations in order to return to profitability. It also provides for the repayment of nondischargeable debts on a timeline that may extend up to five years.
The preparation, confirmation and implementation of a debtor’s plan is at the heart of every chapter 11 case. But there are other issues that must be addressed as well. One of those is the ability to use, sell or lease property of the estate unless expressly prohibited by the bankruptcy code. Section 363(c) of the Bankruptcy Code prevents a debtor in possession from selling or using property without permission from the court, unless it is in the ordinary course of business.
Another issue is professional fees. Generally, the bankruptcy court will allow professionals to submit applications for compensation and reimbursement at regular intervals throughout the case. This applies to attorneys, accountants and other professionals who are appointed by the court. However, under a special type of chapter 11 case called a small business case or a subchapter V bankruptcy, these payments to professionals can be limited.
Section 1112(c)
The Chapter 11 of the Bankruptcy Code is a process by which a debtor who is in business proposes a plan to keep the business alive and pay creditors over time. A chapter 11 case can involve a company or an individual. Any party in interest may file an objection to the plan, and the court must hold a hearing on it. Depending on the results of this hearing, the court may decide to confirm or dismiss the plan. If the plan is confirmed, it will bind the debtor and create new contractual rights that replace or supersede pre-bankruptcy contracts.
Section 1112(c) of the Bankruptcy Code authorizes bankruptcy courts to convert a chapter 11 reorganization case to a chapter 7 liquidation or to dismiss a chapter 11 case, whichever is in the best interests of creditors and the estate. To establish cause for conversion or dismissal, the movant must show a substantial or continuing loss to the estate and a lack of a reasonable likelihood of rehabilitation.
The court must also examine whether the petition was filed in bad faith. A finding of bad faith is based on a fact-intensive analysis. Courts have developed a series of factors to determine whether a petition was filed in bad faith, including:
Section 363
A 363 sale is a process in the US Bankruptcy Code that allows debtors to sell assets, from office furniture to substantially all of an organization’s business, to pay creditors and lenders. The process is typically a quick and efficient way for companies to find buyers for their assets and avoid asset devaluation. A successful section 363 sale can also provide a better alternative to a liquidation in bankruptcy.
The 363 sale process involves a short marketing and due diligence period, auction proceedings, and bankruptcy court approval. The auction procedure ensures that the sale price is fair and that the debtor-in-possession is able to maximize returns for its creditors. The process can move quickly from the filing of a bankruptcy petition to closing, particularly when the debtor has identified a stalking horse bidder and the sale is structured as a pre-plan sale.
In a 363 sale, the debtor must also segregate and account for cash collateral that it is using to fund the sale. This protects the interests of secured creditors, who are entitled to a priority in the use of their security interest. The debtor in possession may only use cash collateral with the consent of the secured creditor or a court order. The debtor may also institute lawsuits, known as adversary proceedings, to recover money or property for the estate. These may include lien avoidance actions, actions to avoid preferences, and actions to avoid fraudulent transfers.