Disclaimer: This article includes a brief overview of Chapter 7 bankruptcies. The information is not, nor is it intended to be legal advice. It is imperative that any action you take to be done on the advice of competent legal counsel, and not based solely upon this article.

Understand the Steps Taken in a Chapter 7 Bankruptcy

In the course of business, some companies find themselves unable to pay their debts. For whatever reason this occurs, it threatens their continuance as a viable business entity. To assist corporations with these issues, most countries have in place some sort of process for liquidation and/or reorganization. In the United States, federal bankruptcy law (Title 11) governs both of these situations. In this article we’ll cover the steps in the liquidation process.

Chapter 7 of Title 11 governs corporate liquidation – termination of the business and sale of its assets to repay creditors at least some portion of the debt incurred. In recent years, business filings have hovered around 20,000 per year.

Steps in the Chapter 7 Bankruptcy Process

1. BANKRUPTCY FILING: Chapter 7 bankruptcy begins with the customer filing a petition with the bankruptcy court. The customer is also required to provide the court a number of other documents including a list of all creditors and the amount and nature of their claims. The commencement of bankruptcy creates an “estate” which becomes the temporary legal owner of all of the customer’s property.
2. APPOINTMENT OF TRUSTEE: Upon filing the bankruptcy petition, an impartial trustee is appointed by the court. The trustee will be responsible for administering the case and liquidating the customer’s nonexempt assets. In addition, the trustee may be authorized by the court to operate the customer’s business for a limited period of time, if such operation would benefit the creditors. The creditors do have the right to elect a successor trustee at the meeting of creditors.
3. NOTICE OF FILING: The court clerk sends a notice of filing of the petition to all creditors on the list (mentioned above). The filing of the petition prohibits creditors from initiating or continuing any lawsuits and/or collection activities against the customer. This “order” is automatically enforced regardless of whether the creditor receives notice of the bankruptcy filing from the court clerk.
4. MEETING OF CREDITORS: A meeting of creditors is usually held 20-40 days after the petition is filed. The customer must appear at this meeting. Creditors may appear and ask questions regarding the debtor’s financial affairs and property. The trustee will also attend this meeting and is required to examine the customer orally to ensure that he is aware of the potential consequences of seeking a discharge in bankruptcy. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.
5. FORMATION OF CREDITORS' COMMITTEE: A creditors’ committee may be formed at the meeting of creditors; however, this body’s role is very limited in comparison to a Chapter 11 creditors’ committee. The members may consult with the trustee in connection with the administration of the estate, make recommendations respecting the performance of the trustee’s duties, and submit questions to the court. They are not authorized to take any substantive action on their own or to be professionally represented.
6. BANKRUPTCY DISCHARGE: The discharge releases the customer from personal liability for discharged debts. It also prevents creditors owed those debts from taking any action against the customer or his property. In most cases, the discharge will be granted to the customer relatively early in the case; usually 60 to 90 days after the date first set for the meeting of the creditors. In certain jurisdictions, secured creditors may retain some rights to seize pledged property, even if the discharge is granted.
7. PROOF OF CLAIM: Chapter 7 bankruptcies are categorized as “no asset” or “asset” cases. In “no asset” bankruptcies, there is no need for creditors to file proofs of claim as there will be no distribution of moneys. If the trustee later recovers assets for distribution, creditors will receive notice of the fact and time to file proofs. In “asset” Chapter 7s, creditors are required to file their proofs of claim within 90 days after the first date set for the meeting of creditors.
8. LIQUIDATION OF ASSETS: The trustee sells off the nonexempt assets, generally for cash.
9. PAYMENT OF CLAIMS: Distribution of the property of the estate is governed by Section 726 of the code and defines classes of claims. Each class must be paid in full before the next lower class is paid anything.

The general rule is that creditors who take the least risk are paid first. Essentially, the priorities for payment are:

• Secured creditors. They are paid with funds generated by the liquidation of assets in which they have perfected liens. If the collateral is insufficient to pay the claim in full, the deficiency is usually treated as a general, unsecured claim.
• Debts incurred in the ordinary course of the liquidation, including administrative expenses arising in the bankruptcy.
• Pre-petition priority claims, such as debts incurred between the date of an involuntary petition and the date an order for relief is entered, certain wage and benefit claims, and certain tax claims.
• General unsecured creditors
• Shareholders

Disclaimer: This article provides an introduction to the Chapter 11 bankruptcy process. The information is not, nor is it intended to be legal advice. It is imperative that any action you take to be done on the advice of competent legal counsel, and not based solely upon this article.

Understand the Steps Taken in a Chapter 11 Bankruptcy

Businesses (and certain individuals) sometimes find it necessary to reorganize their debt load in order to emerge as a more viable and profitable entity. In the United States, federal bankruptcy law Title 11, Chapter 11 governs this restructuring process. Businesses eligible for reorganization under Chapter 11 include:

• CORPORATIONS: Under U.S. law, a corporation exists separate and apart from its owners. As a result, other than the value of their investment in the company’s stock, the personal assets of the owners and/or stockholders are not put at risk.
• PARTNERSHIPS: In general, personal assets of the partners are not at risk. However, in some cases, personal assets may be used to pay creditors, or the partners themselves may be required to file for bankruptcy protection.
• SOLE PROPRIETORSHIP: Sole proprietors do not have an identity separate and distinct from the owner. Therefore, bankruptcy involving a sole proprietorship includes both the business and personal assets of the owner-debtor.

Over the past few years, an average of 7,000 business Chapter 11’s have been filed per year in the United States.

Steps in the Chapter 11 Bankruptcy Process

The steps outlined below refer to a regular Chapter 11 business filing. It should be noted that companies falling under the definition of “small business debtor” under the bankruptcy code are put on a “fast track” and treated somewhat differently than in a regular Chapter 11.

1. BANKRUPTCY FILING. The process commences when a bankruptcy petition is filed with the bankruptcy court. The petition may be filed by the company (a voluntary petition) or by creditors of the company (an involuntary petition). At the time of filing, certain provisions automatically come into play:
   • Appointment of Trustee. In most Chapter 11 cases, whether voluntary or involuntary, the customer automatically assumes the identity of “debtor in possession” and will continue to operate the business and maintain control of its assets while undergoing the reorganization. In a small number of cases, a separate trustee may be appointed or elected.
   • Automatic Stay. A stay of creditor actions against the customer automatically goes into effect when the bankruptcy petition is filed. This automatic stay is a statutory “order” which protects the customer and property, and prohibits actions by creditors after the filing of a bankruptcy. In general, it applies to all creditors (both secured and unsecured).
   • Avoidable Transfers. The customer in possession or the trustee has “avoiding” powers that can be used to undo a transfer of money or property made during a specific time period prior to the filing of the bankruptcy petition. Generally, this power is effective only against transfers made within 90 days prior to the filing of the petition. Avoiding powers are used, for example, to prevent unfair payments to one creditor at the expense of other creditors.
2. DISCLOSURE STATEMENT. The customer files a written disclosure statement with the bankruptcy clerk. The statement must contain
   • List of creditors
   • Schedule of assets and liabilities, current income and expenditures
   • Statement of the debtor’s financial affairs
   • The information must be sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization.
3. NOTICE TO CREDITORS. The court clerk sends a notice of filing of the petition to all creditors on the list of creditors (mentioned above).
4. FILING PROOFS OF CLAIM. The Court will assign a date (the “General Bar Date”) by which the Proof of Claim must be filed. This date is usually listed on the Notice to Creditors. Creditors whose claims are listed on the schedules provided by the customer are not required to file proofs of claim, but can if they wish to do so. Proofs of claim must be filed on claims that are not listed on the customer’s schedules, or are listed as disputed, contingent or unliquidated. Proofs of claims must be filed with the bankruptcy clerk in the district where the case is pending. It is the responsibility of the creditor to determine whether its claims are accurately listed. As a general rule, a creditor should file a Proof of Claim as soon as (1) the Notice to Creditors is received, or (2) the creditor finds out from the debtor or a third party that the bankruptcy has been filed.
5. UNSECURED CREDITORS’ COMMITTEE. The United States Bankruptcy Trustee, a federal official, appoints a committee of unsecured creditors – usually the seven largest – to represent the interests of all unsecured creditors. This Committee can hire professionals, including lawyers and accountants, to monitor the company’s actions. The customer is responsible for paying the cost of retaining these professionals. (See our article “Unsecured Creditors’ Committee”)
6. PLAN OF REORGANIZATION. There is a 120-day period, from the time of filing the Chapter 11, during which the customer has the exclusive right to file a reorganization plan. Once this period has expired, a creditor or the case trustee may file a competing plan. The contents of the reorganization plan must include a classification of claims (debts) and must specify how each class of claim will be treated under the plan. Section 1123(a) of the Bankruptcy Code lists the mandatory and discretionary provisions of a Chapter 11 plan of reorganization. The customer in a Chapter 11 also has a one-time absolute right to convert the Chapter 11 case to a Chapter 7 liquidation if he/she is the customer in possession and if the bankruptcy is voluntary.
7. COURT APPROVAL OF DISCLOSURE STATEMENT. Before a plan of reorganization can be voted upon, the court must hold a hearing to determine whether the disclosure statement is approved.
8. VOTE ON REORGANIZATION PLAN. Once the court has approved the disclosure statement, the plan of reorganization is considered by the creditors. All creditors and equity security holders will be mailed:
   • The plan, or a court approved summary of the plan
   • The disclosure statement approved by the court
   • Notice of the time within which acceptances and rejections of the plan may be filed
   • Such other information as the court may direct
   • Notice of the time fixed for filing objections
   • Notice of the date and time for the hearing on confirmation
   • A ballot for accepting or rejecting the plan
   • The debtor in possession has 180 days after the filing of the petition to obtain acceptances of the plan. All creditors have the right to vote on the plan.
9. CONFIRMATION HEARING. The bankruptcy code requires the court to hold a hearing on confirmation of the plan after notice is given to all interested parties. If no objection to confirmation has been timely filed, the court must then determine if:
   • The plan is feasible;
   • It is proposed in good faith; and
   • The plan and the proponent of the plan are in compliance with the Bankruptcy Code.
   • Confirmation of the plan discharges the debtor from most debts existing on the date the petition was filed. This discharge is the law’s embodiment of what is probably the most important purpose of bankruptcy, giving the debtor a fresh start financially.
10. POST-CONFIRMATION ADMINISTRATION AND MODIFICATION. After the plan is confirmed the customer is required to make plan payments and is bound by the provisions of the plan of reorganization. Any time after confirmation, the plan can be modified, assuming any modifications are warranted by circumstances, meet certain Code requirements, and are approved by the court.
    • The order in which payments are made is fixed by Federal statute. The general rule is that those who take the least risk are paid first.
11. FINAL DECREE. A final decree closing the case must be entered after the estate has fully administered the plan of reorganization.

While the steps described here seem relatively straightforward, the U.S. Bankruptcy Code is quite complex and filled with exceptions and special rules under specific circumstances. It is possible for Chapter 11s of large companies with hundreds or thousands of creditors to take years to reach a final decree. If you have questions or concerns regarding a specific Chapter 11 filing, it is prudent to seek advice from a qualified bankruptcy attorney.

This article is a brief overview of filing a Proof of Claim in commercial bankruptcies. The information is not, nor is it intended to be legal advice. It is imperative that any action you take to be done on the advice of competent legal counsel, and not based solely upon this article.

Making Sense of Form 10 Filing Requirements

Filing a proof of claim is essential to the bankruptcy process. Mishandling this critical step can affect its acceptance by the Bankruptcy Court as well as limit, or even negate, your chances of receiving a payout. Fortunately, the requirements governing filing a proof of claim are some of the most straightforward sections of the U.S. Bankruptcy Code (Sections 501 and 502).

When are Proof of Claim forms (Form 10) required?

The only creditors entitled to a distribution in any bankruptcy case are those that have filed a timely and accurate Proof of Claim with the appropriate Bankruptcy Court. There are specific filing requirements, however, for each type of bankruptcy.

Proof of Claim Requirements for Chapter 7 and 13 Bankruptcies

Chapter 7 is typically a liquidation of assets and the resultant closing of the company.

Chapter 13 is a form of debt reorganization generally available only to individuals. However, if the individual is self-employed or operating an unincorporated business and has business-related debts for which they are personally liable, Chapter 13 can be filed subject to secured and unsecured dollar limits. (See United States Courts, Chapter 13)

If creditors wish to participate in any possible distribution of assets, they are required, by both Chapter 7 and 13, to file Proof of Claim forms within 90 days after the first scheduled creditors’ meeting.

Proof of Claim Requirements for Chapter 11 Bankruptcy

Chapter 11 is solely for companies that plan to reorganize and continue business at the conclusion of the bankruptcy.

Chapter 11 creditors are not required to file a Proof of Claim because the debtor is required to file a Schedule of Assets and Liabilities. If the customer’s Schedule of Liabilities lists the creditor’s claim in the correct amount and does not designate the claim as “disputed, unliquidated or contingent”, the creditor will be able to participate in any distributions for its category (secured, unsecured. priority, super priority).

If the creditor’s claim is listed incorrectly (by amount or category), or designated as disputed, unliquidated or contingent, a Proof of Claim should be filed. If it is not filed, the Bankruptcy Court will consider the customer’s Schedule of Liabilities as accurate and make any distributions accordingly.

Bar Date for Proofs of Claim

The Bar Date is the last date creditors may file Proofs of Claim against the customer.

Notice of the Bar Date is given in the formal Notice of Bankruptcy filing issued by the Bankruptcy Court clerk. The Notice will usually include the Proof of Claim form and instructions for completing it.

Proofs of Claim filed after the Bar Date are not generally given any consideration by the Bankruptcy Court. Some exceptions are allowed, however.

What if you miss the filing date?

If you fail to file a Proof of Claim by the Bar Date, and your relationship with the customer is still good, you can request that the customer file the claim for you. However, in most cases, the burden will fall on you to convince the Court that you had a legitimate reason for missing the deadline. Ignorance of the law or the excuse that The Bankruptcy Notice was never received is usually not considered adequate.

According to a Supreme Court decision in 1993, there are four factors that determine whether late filings are excusable: “(1) whether allowing the late claim will prejudice the debtor; (2) the length of the delay in filing the claim and the resulting potential impact on the judicial proceedings; (3) the reason for the delay, including whether the delay was within the reasonable control of the creditor filing the claim; and (4) whether the creditor that filed the claim acted in good faith.”

What if the debtor objects to your claim?

When the customer files an objection to a claim, the burden of proof is again on you to prove its validity. You will have to provide a written response. If it is not received in the allotted time, the court may grant the objection without receiving arguments or evidence. If the response is provided in a timely manner the court will schedule a hearing to determine if it requires further evidence and what form that evidence should take ” affidavit, declaration or oral testimony.

Here is a 9-point checklist to help you do just that:

1. Determine the Bankruptcy Court with jurisdiction and the Bar Date for the Proof of Claim.
2. Obtain the New Proof of Claim (Form 10); complete and sign the form.
3. Prepare redacted copies of all relevant documents proving your claim.
4. Double-check to ensure you have completely and accurately completed Form 10, included all relevant information and attached copies of all documentation proving your claim.
5. Make a copy for your records of Form 10 and all attached documents.
6. Mail the Proof of Claim with attachments by certified mail, return receipt requested. Do this well before the Bar Date.
7. Confirm your claim was received and filed by the Bankruptcy Court.
8. Keep an eye on correspondence to determine if an objection to your claim is filed.
9. If an objection is filed, take appropriate and immediate action

Conclusion

If your customer files bankruptcy and you hope to share in any possible distributions, you must file an accurate, complete and timely Proof of Claim.