The bankruptcy “fresh start” is intended to assist debtors who are honest or acting in good faith. The United States Bankruptcy Code has a priority payment scheme that requires payments to be made to particular types of creditors in a particular order. At the end of the line is the debtor. Whether the debtor is able to reorganize or restructure, or keep at least some valuable assets, or whether the creditor is able to receive as close to the amount of money it is owed, is the job of bankruptcy attorneys and creditor rights attorneys who regularly practice bankruptcy law.
Ongoing businesses facing a slowdown in income generation and increasing debts need time to determine the best way to move forward and stay profitable. Smart managers realize they should see a bankruptcy attorney before the storm clouds appear to ensure that their company is poised to survive a bankruptcy filing. Too often, people turn to bankruptcy counsel at the last minute. While bankruptcy attorneys may provide assistance at this point, it is much better for the business owners to see a bankruptcy attorney early in the process.
Bankruptcy cases generally move quickly. It is imperative that a creditor or other person interested in the bankruptcy case obtain knowledgeable counsel immediately after learning the case has been filed—and sometimes at the first hint of a filing—or that person’s rights and property interests could change rapidly—and not to the benefit of the creditor.
Chapter 11 bankruptcy is available to business entities and individuals. Businesses initiate the most filings under chapter 11. Filing under chapter 11 allows a debtor a lot of flexibility and creativity in how he, she, or it wants to pay the creditors and exit the bankruptcy proceeding. Chapter 11 is more expensive; however, it is the only way for a domestic business or entity to obtain a discharge and “fresh start.”
Business Restructuring and Reorganization
Because chapter 11 comes with added costs, businesses often prefer to avoid a chapter 11 bankruptcy filing. Our office can help your business employ strategies to produce win-win situations for the debtor business and its creditors.
In order to avoid a bankruptcy filing, business owners should employ a bankruptcy attorney at the first sign of future weakness. Bankruptcy attorneys prefer to have six months or more in order to recommend a workout strategy. The additional time allows the bankruptcy attorneys to creatively craft a reorganization strategy.
Even with less time, many businesses may benefit from a chapter 11 filing. Under chapter 11, the business becomes what is called a “debtor-in-possession” meaning that the business retains its assets and operations. A bankruptcy filing typically requires immediate activity, and the bankruptcy court must be presented with motions called “first day motions” so that the business may maintain the use of its cash to pay employees, and generally operate. Experienced bankruptcy lawyers assist in reaching compromises, or if a compromise cannot be reached, seeking an order on a contested basis for the business to continue to operate in bankruptcy.
All the activities of a debtor-in-possession are required to be approved by the bankruptcy court (except for activities that are in the “ordinary course of business”). Bankruptcy attorneys are also needed to help inform the representatives of a debtor-in-possession what activities are ordinary. For instance, a debtor that leases commercial real estate may believe that evicting or locking out a tenant is in the ordinary course of business, but that is not necessarily so. The answer may depend on the type of default, the lease particular terms, the percentage rent the tenant pays compared to other tenants, whether another tenant will occupy the space, and the potential liabilities of causing an eviction or lockout.
Debt Collection, Garnishment, and Attachment
As a business owner, you may experience the unfortunate situation of a customer, client, or other contractor failing to pay their bill. When you are not getting paid for your work, it cuts into your bottom line. An experience collection attorney can help you to recover as much as possible from the party avoiding payment. The collection attorneys and creditor rights attorneys at Ritter Spencer have experience in attaching assets, garnishment of bank accounts and other property, marshaling and sequestering assets, and seeking turnover and receivership.
Administrative Claims, Proofs of Claims and Objections
When a business or person receives notice that a bankruptcy case has been filed by a person or entity who owes them money, they generally have serious concerns about how they will be paid. In general, to be paid a distribution from a bankruptcy case the creditor will need to file a proof of claim. But what does that mean?
The word “claim” is defined in the Bankruptcy Code and means any
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.”
The Bankruptcy Code broadly defines claims to require creditors to appear and have all disputes with the debtor resolved in a single forum. Creditors are required to file their claims with the bankruptcy court by a deadline, called the bar date. Certain claims are entitled to priority. For instance, most people understand that bankruptcy professionals are among the first to be paid out of the proceeds of the estate. However, in individual cases, Congress made “domestic support obligations” (i.e., child support, spousal support and alimony) the first-priority claim. Other priority claims include rights to replevin of goods, wages, taxes, work-related termination claims, and certain other claims. It is very important that a creditor claim the highest priority possible as in some bankruptcy cases unsecured creditors receive a fraction of their claim.
Claims may be objected to by a trustee, a debtor-in-possession or even other creditors. Once an objection to a proof of claim is made, the creditor will be required to prove the basis of its claim.
Our bankruptcy attorneys routinely handle proofs of claim and claim objection proceedings for creditors and other parties.
Adversary Proceedings and Objection to the Discharge
Commercial bankruptcy cases can generate several lawsuits. Often, a debtor is sued prior to filing bankruptcy. These lawsuits are moved to the bankruptcy court by administrative order. As a result, the bankruptcy court handles the bankruptcy case as well as the adversary proceedings associated with the bankruptcy case.
Adversary proceedings range from collection matters, lien disputes, injunctive relief, and statutory voidable transfer proceedings. Personal injury suits where insurance is available to provide for the injured party are not prosecuted in the bankruptcy court.
Another type of adversary proceeding involving primarily individual debtors is the objection to the discharge or objection to the dischargeability of a particular debt. A creditor may want to file an objection to the dischargeability of a particular debt if the debt is based upon a certain category of claim. For instance, if the debt is based upon fraud, or a false financial statement, fraud while acting in a fiduciary capacity, larceny, embezzlement, or for willful or malicious injury, you may have a right to object to the dischargeability of such debt. If you are successful in such a suit, then such debt will not be discharged and you can continue to seek collection of the debt against the debtor after the bankruptcy filing.
Creditors may also file adversary proceedings objecting to the discharge of the debtor in general if the debtor has been dishonest in his statements to the bankruptcy court, including in his schedules and statements of financial affairs. The debtor is often given the presumption of acting in good faith, but facts may exist that cause this presumption to be overcome.
Voidable Transfers, Fraudulent Transfers, and Preferences
Have you received a letter or been sued by a trustee or a debtor to recover funds that you were rightly and justly paid? This letter was sent under preference law. Debtors and trustees often seek return of moneys that were paid before the bankruptcy was filed. The bankruptcy laws were designed to put everyone on the same playing field, so one creditor who receives payment for the goods or services provided, and later learns that the paying company filed bankruptcy, may expect to be sued in order to disperse the money or assets among debtors.
Lifting the Automatic Stay
One of the biggest benefits to filing a bankruptcy case is the automatic stay. Once a bankruptcy case is filed, either voluntarily or involuntarily, the automatic stay is imposed upon all acts to collect against the debtor. The automatic stay is designed to give the debtor a temporary respite from actions to collect or take the debtor’s property. Foreclosures are stopped and other actions against the debtor are stopped.
A creditor’s intentional or knowing violation of the automatic stay can result in fines, sanctions and attorney’s fees paid to the debtor. A knowing violation of the automatic stay can be prosecuted even if the debtor did not have a right in the property. All that is required to violate the automatic stay is to seek relief against the debtor when the debtor has an “arguable right” to the property. The reason for the breadth of the automatic stay is simple: the bankruptcy system would not function if the debtor, who is usually down on his luck when the bankruptcy case is filed, to be required to litigate whether the automatic stay was violated after the property is taken.
If the debtor is involved in a lawsuit with other parties, the other parties are often unable to prosecute actions without lifting the stay. Many personal injury lawsuits may be stayed by a bankruptcy filing, but in the event insurance is available to provide a remedy, then the prosecuting attorney can seek relief from the automatic stay to continue the case.