Arizona Bankruptcy Lawyers
Arizona Bankruptcy Lawyers and Bankruptcy Resources
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Archive for January, 2009
Bankruptcy Basics by Jerome S. Cohen
Arizona Bankruptcy Lawyers and Bankruptcy Resources offers the following article about the major points of bankruptcy. Please remember that Arizona bankruptcy laws can differ from federal bankruptcy laws. Contact an Arizona-based bankruptcy lawyer for more information, and to discuss the specifics of your financial situation.
BANKRUPTCY BASICS
The Bankruptcy Code (Title 11 of the United States Code) gives the force of law to several national policies or values. First is the value of allowing a debtor a breathing spell and a fresh start, the chance for a productive future unburdened by past debts and mistakes. Second is the value of a fair distribution of a debtor’s property among creditors. The federal bankruptcy system is designed to achieve an orderly, equitable distribution of the debtor’s assets under court supervision and compulsion. By contrast, state law on creditors’ rights has been called "grab law." Each creditor grabs what it can, and the debtor is dismembered. The swift creditor is rewarded. The slow creditor gets nothing.TWO TYPES OF BANKRUPTCIES: CHAPTER 7 AND CHAPTER 11
Under Chapter 7, the debtor’s assets are simply liquidated. Upon filing a Chapter 7 petition, the debtor turns its keys over to a private trustee and walks out of business. The trustee is appointed by the Office of the U.S. Trustee (a part of the Justice Department that generally monitors bankruptcy proceedings). The filing of the Chapter 7 petition creates a "bankruptcy estate" that the trustee administers for the benefit of creditors. The trustee locates and liquidates everything of value that the debtor had.
Under Chapter 11, the debtor stays in possession of its assets. Its business continues. It proposes a plan of reorganization. The plan usually proposes a restructuring of debts and can affect equity. A committee of creditors may arise as a counterweight to the debtor, monitoring the debtor’s handling of the business, particularly the handling of cash and equivalents, called "cash collateral." The creditors’ committee may urge and participate in the debtors’ development of a plan. After 120 days, during which the debtor has the exclusive right to propose a plan, the creditors’ committee or an equity security holders’ committee may propose a plan. The creditors’ committee, viewed mainly as an interference by debtor, can nevertheless benefit the debtor. The tension created by the committee’s monitoring can help debtor obtain approval for rehabilitative steps if and when debtor can show the court that the committee approves. Ultimately, in a typical Chapter 11, debtor proposes a plan and a disclosure statement. Creditors may vote against the plan, but the court may approve a plan it deems fair ("cramdown"). Bankruptcy Code Section 1129(b). If debtor does not propose a plan, the case may be converted to a Chapter 7 liquidation or dismissed. An alternative to the plan process may be a sale of assets, then a liquidation.
Selecting Chapter 7 or Chapter 11- For a business contemplating bankruptcy, a key inquiry in deciding between Chapter 7 and Chapter 11 is whether the business can be rehabilitated. If the future can be better than the past, then the considerable requirements of Chapter 11 may be worthwhile. The requirements include substantial initial filings, regular reporting to U.S. Trustee, answering to creditors, and developing a plan, not to mention the expense. The demands of Chapter 11, for debtor as well as creditors, should not be underestimated. If hope for rehabilitation is gone, Chapter 7 is the option.
AUTOMATIC STAY
Creditors must stand still from the moment of filing, by virtue of the "automatic stay" (or injunction) on new lawsuits, continuation of old lawsuits, letters, and phone calls to the debtor. Bankruptcy Code Section 362(a). Relief from stay may be sought by motion. Bankruptcy Code Section 362(d). Grounds are "cause" (not defined) or, if creditor wants to act against property, the debtor has no equity in the property and the property is not necessary to an effective reorganization. Stay relief motions are expedited.
CREDITOR STATUS
Secured Creditors -The distribution scheme pays secured creditors first. Determination of secured status is important. Under Bankruptcy Code Section 506, a claim is secured to the extent of the value of the creditor’s interest in the estate’s interest in property. For example, the estate includes a 50 percent interest in a warehouse. The warehouse is worth a million dollars, so that the value of the estate’s interest is $500,000. A creditor has a claim in the amount of $600,000, secured by the estate’s interest in the warehouse. The creditor is secured to $500,000, and unsecured in the amount of $100,000.
Unsecured Creditors:
Priority Claims - Some unsecured claims have priority. Bankruptcy Code Section 507. Among these are: administrative expenses (including costs of preserving the estate and post-petition taxes on the estate, compensation of the trustee and his or her attorney, and compensation of a creditor that recovers concealed property of the estate); wages earned by an employee within 90 days before filing of the petition); and certain contributions owed to an employee benefit plan.
Other Unsecured Claims - Without priority, a claim is a general unsecured claim, vulnerable to impairment or extinguishment under Chapter 7 or Chapter 11.
INVOLUNTARY BANKRUPTCY
Most bankruptcies are voluntary, but involuntary bankruptcy may occur. Bankruptcy Code 303. For example, creditors see debtor selling off assets and distributing money to employees and shareholders to the detriment of creditors. Or creditors see debtor in a downward spiral so that creditor with a chance for 50 cents on the dollar in May will get 20 cents in September. Creditors may confer and file an involuntary petition, placing debtor in Chapter 7 or Chapter 11. If debtor has at least 12 creditors, at least three must sign the involuntary petition. Other creditors may join later. Creditors can make the petition stick if "the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute." Bankruptcy Code Section 303(h) (1).
THE DISCHARGE
A main goal of the voluntary bankruptcy debtor is the discharge or, for practical purposes, extinguishment of the debtor’s debts. Just as the automatic stay precludes pursuit of the debtor during the pendency of the bankruptcy case, the discharge precludes creditor’s recovery after the conclusion of the bankruptcy case. Judgments against the debtor are voided. The practitioner should note that a post-discharge complaint filed against debtor still must be answered; debtor pleads the discharge as an affirmative defense. During the pendency of the bankruptcy case, however, a creditor may file a complaint (a separate lawsuit under the umbrella of the main bankruptcy proceeding) to have that creditor’s debt excepted from a discharge because, for example, that particular debt was obtained by fraud or is a debt arising from a fiduciary duty. Bankruptcy Code Section 523. Also, a creditor may file a complaint urging that debtor be denied a discharge of all debts because, for example, debtor has concealed property, or destroyed records necessary to determine debts, or because debtor has otherwise been uncooperative with the Bankruptcy Court. Bankruptcy Code Section 727.
PREFERENCES AND FRAUDULENT TRANSFERS
Preferences - Anticipating disaster for the business, debtor may transfer title to the warehouse to an officer of the company who had lent the company a bundle. Or debtor may simply pay a supplier 100 percent of its balance due, and days later, in bankruptcy, leave other creditors only 20 cents on the dollar. In the name of equity, a transfer of the debtor’s interest in property may be avoided by the trustee or the debtor in possession as a "preference" among creditors. A preference is a transfer: (1) to or for the benefit of a creditor; (2) for an "antecedent debt" owed by the debtor before the transfer; (3) made while the debtor was insolvent; (4) made between 90 days and one year before the debtor filed bankruptcy, if the transfer is to an insider [defined in Bankruptcy Code Section 101(31)], and within 90 days before filing if the transfer was to a non-insider creditor; and (5) the creditor received more than under Chapter 7 liquidation. Bankruptcy Code Section 547(b). The transferee, receiving the bitter news that he must disgorge money fairly earned, may defend. Defenses include "a contemporaneous exchange for new value" and "ordinary course of business." Bankruptcy Code Section 547(c).Fraudulent Transfers - A fraudulent transfer, also avoidable, is a transfer made with actual intent to hinder, delay or defraud creditors, or, regardless of intent, made for less than reasonably equivalent value. For example, when the bank is about to foreclose, the debtor may not transfer the warehouse to the president’s aunt or uncle as a gift, or convey title in a "sale" for $1,000. Bankruptcy Code Section 548.
This has been a glimpse of a complex area. Subjects mentioned here, as well as others in the bankruptcy process, warrant close examination in addressing the client’s particular facts.
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Bankruptcy and You
Are you overwhelmed by your debt?
Do you have medical conditions that not only leave you feeling ill, tired, fatigued…but furthermore are also creating a real economic hardship in doctors bills, hospital bills, prescription costs and other medical expenses?
Have you recently divorced and struggling with one income?
Have you recently taken a pay cut or working fewer hours as your employer struggles to keep their doors open in a tough economy?
Are you a small business owner and employer finding you business struggling in this economy? Are you unable to keep your business open with the spiraling costs of your overhead versus your dropping sales and profit?
Have you recently lost your job and are blowing through your savings to support your home, your utilities, your car and your bills? Not to mention groceries, gas, and other day in and day out expenses?
Without a doubt, many consumers are simply in over their heads for a variety of reasons. The thought of filing bankruptcy for many of us may bring feelings of shame, inadequacy or even down right fear! Many people simply assume that bankruptcy is an option for the very rich trying to escape their mistakes, or for people who ran up their credit cards without regard for the future of the payments, or for people who are trying to somehow take advantage of the system.
Bankruptcy is rarely any of the above. You need not feel shame or inadequate. Most bankruptcy filings are the result of overwhelming and unforeseen medical expenses. Did you choose to get sick? Hardly. Furthermore, many bankruptcy cases come from a divorce or loss of a job. Did you ask to be laid off? Most likely not.
Bankruptcy may be an viable option for you, to assist you with managing your debt and obtaining a “fresh start” to battle your medical condition with less stress, to find a new job to get back on track with your career and income, and to get back on your feet after a devastating divorce and look to your future with a positive outlook. Bankruptcy can lift the load of worry, fear, and despair from your shoulders so you can focus on your health, your career potential, your family and your life.
There are many options to consider regarding bankruptcy:
Have you discussed this with your loved ones? Do you have a plan that will help you face this together, and with a support system?
Can you attempt to leverage any home equity for a debt consolidation loan? This would pay down your debt and leave you with one payment to make. However, with prices of homes in many markets still going down, many consumers are finding that they have little to no equity or ability to secure a debt consolidation loan.
Have you contacted a debt counseling service? There are non-profit organizations that may be able to assist you in negotiating your debt and/or your interest rates with your creditors to bring down your overall monthly debt payments. However, if you are currently unemployed, this may not be an option as you will need to be able to repay the debt under the new terms…without a steady, ongoing income you may not qualify.
Do you know if Chapter 7 Bankruptcy, Chapter 11 or Chapter 13 is better for you and your total financial picture?
What property and assets do you have that could be liquidated or that you want or need to keep? Have you created a spreadsheet of your debt, your monthly minimum payments, your assets?
Do you understand how to deal with a bankruptcy as a small business owner? How is your business structured and how will that impact the way you file?
Do you understand how bankruptcy impacts your business, whether you have to close your doors permanently or possibly stay open as debt is reorganized?
Do you understand how bankruptcy will impact your credit score?
Do you know that many future employers will pull your credit score as part of your background check and potentially weigh your credit rating as part of your employment potential?
Do you know how Arizona bankruptcy laws differ from federal bankruptcy laws?
Have you contacted a bankruptcy attorney in your area that can help you walk through the answers to these questions and many, many more?
This website is intended to assist you with the tough questions, as well as provide you with updates, tips, resources and information to assist you in making a sound decision regarding bankruptcy. This website offers broad and general information that may not always apply specifically to your situation, or the bankruptcy laws of Arizona. That is why it is always urged that you should contact an attorney in Arizona to discuss how Arizona laws may differ.
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