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In the United States, the bankruptcy code is spelled out in Title 11 US Code, as established by the Congress in 1978, as amended (Bankruptcy Reform Act of 1978; 11 U.S.C. § 101, et seq.). However, there are legal procedures at both the state and federal level. At the federal level, there are 21 regions / 90 districts that encompass all of the states while some of the larger states have more than one district. Each district has a bankruptcy court (in addition to a district court) that is responsible for hearing cases filed within its jurisdiction. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (often called the “Bankruptcy Rules”) and local rules of bankruptcy. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases.
U.S. Courts, Bankruptcy Forms Manual www.uscourts.gov/bkforms/bankruptcy_forms.html
Amended "Means Test" Forms / Amended Bankruptcy Official Forms www.uscourts.gov/bankform/index.html
A bankruptcy case is begun by the filing of a petition. The required forms are available from the bankruptcy court clerk's office. There is a range of filing fees for bankruptcy cases, depending on the chapter of the bankruptcy code under which the case is filed. In a commercial case, the company files on its own behalf in response to creditor claims. Creditors may also file an Involuntary Petition. Corporations and partnerships must have an attorney to file a bankruptcy case. In a consumer case the individual also files on their behalf in response to creditor claims. Individuals, however, may represent themselves in bankruptcy court. While individuals can file a bankruptcy case without an attorney or "pro se," it is extremely difficult to do it successfully. For consumers, local bar associations usually offer lawyer referral services, often without charge (however, there is a charge for attorney representation). The clerk's office in each district court usually is able to help find a referral service. Personnel in the clerk's office and other federal court employees are prohibited from providing legal advice to individual litigants.
The vast majority of bankruptcy cases are filed by consumers rather than businesses. Most consumer cases are filed under either Chapter 7 or Chapter 13 of the federal Bankruptcy Code. Approximately 70% of cases are Chapter 7 liquidations filed by consumers, and nearly 30% are Chapter 13 wage-earner repayment cases.
U.S. Courts Chapter 7 Bankruptcy Basics
Chapter 7 is available to individuals, partnerships and corporations and results in the complete liquidation of the (non-exempt) assets of the debtor and is only granted when it is obvious that there is insufficient assets or income generating capability in order to establish some time of orderly repayment of creditors. However, a complete discharge of debts is granted only to individuals, not to partnership or corporate petitioners. A Trustee is appointed by the court to identify, catalog and appraise the assets of the debtor to determine any secured claims and overall value of the estate (assets under the debtor's name). A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case.
Under the terms of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), consumers filing for bankruptcy protection must undergo a new “means test” to determine whether a debtor is eligible for chapter 7 (liquidation) or must file under chapter 13 (wage-earner repayment plan).
U.S. Courts Chapter 11 Bankruptcy Basics
Bankruptcy is caused by a lack of liquidity or excess debt, which are conditions that can be brought on by mismanagement, excessive growth, poor economic conditions or severe legal problems. In the United States, Chapter 11 filing, in order to seek immediate protection from creditors and determine if financial situations can be resolved by reorganization, is supposed to be voluntary by the subject company. However, in most cases it is either a "pre-packaged" filing, where the group of creditors and perhaps the bond holders (who are also unsecured creditors) have agreed already on how the company will be reorganized, or it is a forced filing situation in which the company feels it may have no other recourse.
The purpose of filing for bankruptcy is to to maximize the value of the "Estate" (the company's assets and operations) for the benefit of all of it's creditors. This may be done either by determining whether the company should continue to operate as a viable business or whether to liquidate all of the assets of the company in order to pay off all of the creditors. Once the company's legal representative has filed with the appropriate court for protection under Chapter 11 bankruptcy proceedings, there is a legal mechanism known as the "automatic stay", which stops creditors from taking action to collect monies or property they are owed (it also halts all lawsuits against the company).
It is usually customary for the company's legal representative to file “first day motions” with the court in order to commence the transition into Chapter 11 and to allow the company to continue operating its business without interruption. The first day motions request, among other things, provides the company with the authority to continue serving customers and honoring customer programs, paying critical suppliers and honoring employee obligations (wages, salaries and health care benefits).
On the date of the filing the company's common and preferred stock is usually scheduled to be delisted from any exchange that it is traded on. The ultimate value the company's equity stock, if any, will be determined through the outcome of the Chapter 11 process. Similarly, scheduled interest payments on outstanding bond issues are suspended immediately and throughout the Chapter 11 process. There have been instances where an interest payment is made on a specific bond issue just prior to a company filing for Chapter 11 protection in order to curry favor with a particular bond holder group in order to receive their cooperation in the forthcoming proceedings. The value of all of the outstanding bond issues and the amount of interest paid, if any, ultimately will be determined through the Chapter 11 process.
Under the terms of the Worker Adjustment and Retraining Notification Act (WARN Act; 29 USC §2101 et seq.; 20 CFR Part 639) companies with more than 100
employees must provide those employees with a minimum 6-day notice of an impending mass layoff or closing. However, there
are exceptions for companies that experience sudden, unforseen financial difficulties.
www.dol.gov/compliance/laws/comp-warn.htm
During the Chapter 11 process, a company is allowed to continue to conduct normal business if it is in a condition to be able to do so. The company is obligated to continue to provide existing employees with salaries and medical benefits. The company is also able to continue to do business with existing / new suppliers and customers in a routine manner.
After the filing date, the company usually commences active discussions with new or existing relationship financial institutions for obtaining debtor-in-possession (DIP) financing. DIP financing is new new funding for the company, is available immediately on an interim basis and is utilized to supplement the company's existing capital and help to fulfill obligations associated with operating its business, including its employee payroll and payments to vendors for goods and services.
The court appoints a person or company to have oversight of the subject company and this person / company answers only to the court. In addition, a government agency, the Office of the U.S. Trustee, appoints an official Creditors’ Committee, which usually includes the company’s largest unsecured creditors (trade creditors, banks, bondholders, etc.).
However, not all creditors (or groups of creditors) have the same interest and various creditor committees are formed in order to submit and protect their interests to the court and to coordinate a policy plan among their respective group. These groups must also retain their own legal representation.
The court usually sends out a Proof of Claim notice that the creditor must return to the court to verify every and each creditor's claim against the company. The creditor must return the Claim by the "bar date", after which the court will no longer allow any additional creditor claims.
Approximately 30 to 45 days after the initial filing, a 341 Meeting is scheduled (a notice of the 341 Meeting, along with the notice of the commencement of the case, will be mailed to all known creditors within the first few weeks of the filing). The 341 Meeting is named after section 341 of the U.S. Bankruptcy Code and requires the company representatives to meet with the initial group of known creditors.
The court is required to review all of the claims that were submitted as a result of the bar date notice and as many hearings as necessary are held to determine the value of any claims that are disputed by either the company, specific creditor or creditor groups.
In a bankruptcy proceeding, creditor claims are ranked by an established priority system of claims. All of these competing claims must be either satisfied or voided by the court in order to get a final plan. In this hierarchy of claims:
Under existing laws, a company may initiate a "preference action" against companies that were recently paid by the company that just filed for bankruptcy in the past 90 days to have that money returned regardless if it was for a bona fide transaction. The issue is that no creditor may be treated "preferentially" ahead of other creditors thus the company that has just been paid must return the money or demonstrate in court why it should retain its payment. Due to the Internet, and the ability it provides to scour records and locate companies, a single law firm can track down hundreds or thousands suppliers to a large corporation and first send out demand letters requesting return of the recent payment or it will commence an action against the recipient. If the payment to settle the claim is less than the anticipated cost to defend oneself in the bankruptcy court proceedings, quite likely out of state, then it is likely that the recent payment recipient will return the payment, become one of the many unsecured creditors and the attorney that got the payment back earns a contingency fee percentage of the amount.
There is usually a motion filed at the start of the Chapter 11 process to pay bonuses to key persons in order to retain their services or to pay bonuses to all employees if they agree to continue to work up until a certain date or event. However, if it is uncertain as to whether the company will survive or not there may be a less than enthusiastic effort from employees, employees may start to look for new employment and start to leave if able, and suppliers and customers may not conduct any new business with the company. The payment of bonuses to the existing management can be somewhat contentious at times as they are the group who is responsible for the predicament that the company is presently in. All of these payments to employees and suppliers must be approved by the court.
Third party appraisal companies may be brought in by the court and various creditor groups in order to value the assets of the company. A new, independent auditor for the company is also usually retained by the court.
The entire process can be further complicated by legal claims related to product or manufacturer's liability, for instance in the health claims of employees or purchasers of products that utilized asbestos in their manufacture and construction.
The company is required to develop a reorganization / business plan and commence negotiation with its creditors during the first 120 days. If it appears that all parties are negotiating in good faith and that progress is being made then the court may extend the 120 day reorganization period.
Once the company's plan of reorganization is formulated and documented it is filed with the Bankruptcy Court. A disclosure statement, which provides financial information and explains the company’s proposed plan for paying its creditors, is also filed with the court. The court reviews the disclosure statement to determine if it contains sufficient and accurate information for the creditors to decide whether to vote to accept or reject the plan of reorganization. If the disclosure statement is approved by the court then the company will then send it with the proposed plan of reorganization to all creditors and interest holders in the company for their review. Those parties can then vote to accept or reject the plan of reorganization. It is not uncommon for one group of creditors to accept the plan and for another group to reject it.
During this period, interested, prospective purchasers of the company may be able to sign a confidentiality agreement and come onto the premises of the company and review is accounting, operations and inventory. Sometimes the purchase of a company is one way to resolve the issue of its condition and the claims of creditors.
Thus, a company exits Chapter 11 proceeding when the court has "confirmed" (approved) the Plan of Reorganization, which can only be one of three solutions (again, any final plan is developed by the company in conjunction with the various creditor groups):
If a plan of reorganization cannot be agreed on then it may lead to the liquidation of the company.
Overall, it is a long, drawn out process that can last months or years, with ups and downs both financially and emotionally for the various parties involved. The most recent revisions to the code indicate that:
U.S. Courts Chapter 13 Bankruptcy Basics
Chapter 13 is available to individuals and the debts (both secured and unsecured) of the filer are not discharged but are restructured to allow the filer to pay over an extended period of time (approximately 3 to 5 years). The Bankruptcy Reorm Act of 1978 was revised in 2005 (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) and it is anticipated that it will be revised again to accommodate the substantial number of primary residential mortgage defaults and foreclosures of 2007 - under present guidelines a homeowner who files under chapter 13 may not renegotiate the terms of their primary residential mortgage in the court proceedings.
What changed in 2007? It is the actual terms (variable rate) and financial burden of the mortgage itself that is causing U.S. homeowners to seek bankruptcy protection as opposed to a generation ago when the loss of a job, an extended illness, a divorce or some sort of setback resulted in the homeowner's inabiality to service the mortgage.
A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the United States trustee. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.
All employee pension plans are terminated during the Chapter 7 liquidation process. It is not uncommon that an employee pension plan is terminated (known as abandonment; a buyer of the assets of the company does have the opportunity, but not the obligation, to assume the pension plan) during the Chapter 11 reorganization process. In the United States, all defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which is a federal insurance agency and will become involved in the proceedings in order to determine the status of the pension pland and how to best administer the plan benefits. Under provisions of the Pension Protection Act of 2006, the maximum guaranteed pension the PBGC can pay is determined by the legal limits in force on the date of the plan sponsor's bankruptcy.
PBGC pays participants the benefits they accrued under the terms of their plan, subject to certain constraints set by Title IV of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and by PBGC’s implementing regulations. When PBGC takes control of a terminated underfunded plan, it takes over responsibility for the plan’s assets and the payment of benefits to plan participants and their beneficiaries. PBGC determines, on a participant-byparticipant basis, the benefits to which each participant or beneficiary is entitled.
The maximum benefit guarantee is adjusted yearly but is fixed for any plan once that plan terminates. For a plan terminating in 2008, the maximum benefit guarantee is $4,312.50 per month, or $51,750 per year, for a straight-life annuity that PBGC begins paying at age 65.
U.S. Courts, Bankruptcy Forms Manual www.uscourts.gov/bkforms/bankruptcy_forms.html
Amended "Means Test" Forms / Amended Bankruptcy Official Forms www.uscourts.gov/bankform/index.html
United States Trustee Program, Department of Justice www.usdoj.gov/ust/
Public Access to Court Electronic Records (PACER) pacer.psc.uscourts.gov/
Pension Benefit Guaranty Corporation (PBGC) www.pbgc.gov/
