Bankruptcy

Question 1

What is Chapter 7 Liquidation?

Answer 1

A voluntary or an involuntary petition for liquidation may be filed in federal bankruptcy court under the terms of the Bankruptcy Reform Act of 1978

An involuntary petition must be joined by 3 or more creditors with unsecured claims totaling at least $11,625 if the debtor has 12 or more creditors. If there are fewer than 12, one creditor with a claim of at least $11,625 may file

A contested involuntary petition will be granted if the debtor is NOT paying its bills when due or if (within 120 days prior to filing) a custodian took possession of the debtor’s property to enforce a lien

Question 2

What is a Chapter 11 Reorganization?

Answer 2

Reorganization allows a distressed business enterprise to restructure it finances

The primary purpose of the restructuring is usually the continuation of the business. Reorganization is a process of negotiation whereby the debtor firm and its creditors develop a plan for the adjustment and discharge of debts

Partnerships, corporations and any person who may be a debtor under Chapter 7 (except stock and commodity brokers) are eligible debtors under Chapter 11

Such a plan may provide for a change of management or liquidation

Question 3

How is a case under Chapter 11 filed?

Answer 3

A case under Chapter 11 is commenced by the filing of a petition that may be either voluntary or involuntary

1. The petition may be filed by the debtor or by the creditors
2. Insolvency is NOT a condition precedent to a voluntary Chapter 11 petition
3. The debtor has the exclusive right to file a plan during the 120 days after the order for relief is issued by the court, unless a trustee has been appointed and may file a plan of reorganization at any time
4. A plan of reorganization must divide creditors’ claims and shareholders’ interests into classes and claims in each class must be treated equally

Note: The plan must specify which classes of creditors are impaired creditors and how they will be treated. A class is impaired if its rights are altered under the plan. At least 2/3rds of the impaired creditors or owners must accept the plan and be approved by the bankruptcy court