Bankruptcy: Pros in Filing Chapter 11

by Legal Author on September 2, 2019

When you’re debt went heavy and you can’t seem to resolve it, your first step is to file for a bankruptcy case. If you do so, especially if you own a partnership or corporation, you may want to check out Chapter 11 Bankruptcy.

What would you gain if you file for a Chapter 11 Bankruptcy case? It’s always best to talk to your expert bankruptcy lawyer about your decisions, but to learn about Chapter 11, please read more below.

According to Baxter Dunaway’s book on The Law of Distressed Real Estate: Foreclosure, Workouts, Procedures, which was published in a site in 2010, he stressed out that there are these powers that one who files for Chapter 11 Bankruptcy gains:

  1. Automatic Stay

The Bankruptcy Code assists the debtor in the reorganization process, by providing the debtor with many powers that do not exist under state law. For example, section 362(a) of the Bankruptcy Code, which provides for an automatic stay of litigation against the debtor and the imposition of liens against the assets of the survivor, allows the debtor time to reorganize assets and to renegotiate contracts. Under section 362(a) of the Bankruptcy Code, the following actions are stayed by a bankruptcy filing:

(1) The convocation of any proceeding (judicial or otherwise) to reclaim a claim against the debtor that arose before the opening of the case,

(2) The imposition, against the borrower or assets of the survivor, of a judgment has achieved before the start of the case,

(3) Any act to attain the custody of the asset of the estate,

(4) Any action to perfect, enforce or create against property of the debtor any lien against property of the estate,

(5) Any act to complete, enforce or create against the assets of the borrower to the point that such lien protected a claim that happen before the start of the case,

(6) Any act to collect, recover or assess an allegation contrary to the debtor that occurred before the start of the case, and

(7) The convocation of a hearing before the U.S. Tax Court which concerns the debtor.

  1. Preferential Transfers and Fraudulent Transfers

Section 547(b) of the Bankruptcy Code provides for the recovery of preferential transfers and fraudulent conveyances. When debtors know that their financial problems are worsening, they will often prefer one creditor over another to keep an essential service or to reduce a debt which is personally guaranteed by a partner or shareholder.

Therefore, the Bankruptcy Code tries to eliminate the potential for creditors to race to improve their positions shortly before a filing. As a result, under section 547(b) the debtor or a trustee may set aside any transfer to a creditor that was made within ninety days of the filing of the bankruptcy petition on account of an antecedent debt if the debtor was insolvent at the time of the transfer, and the transmission gives the creditor more than the creditor would obtain in a Chapter 7 liquidation.

A transfer would include a cash payment to the creditor as well as the perfection of a security interest or the securing of a lien. If the shipment is made to or benefits an insider, provided that the debtor was insolvent at the time of the transfer and that the transfer gives the creditor more than the creditor would obtain in a Chapter 7 liquidation absent the transfer, the debtor may set aside any such transfer that occurred within one year prior to the bankruptcy filing, subject to the 1994 Reform Act amendments regarding DePrizio payments to non-insider creditors.

Typically, only unsecured creditors receive preferential transfers because fully secured creditors would receive full payment in a Chapter 7 liquidation unless their security interests were granted during the preference period. If the transfer is set aside, the debtor and the creditor are put back in the positions that they held before the transfer.

  1. Subordination on Equitable Grounds

The Bankruptcy Code also permits the bankruptcy court to subordinate, on grounds that is equitable, all or part of a creditor’s permitted interest, to assign any lien which secures a claim that is subordinated to the bankruptcy of the estate, or to disallow the application or to disallow a transaction that would not constitute a fraudulent transfer under section 548 or a preferential transfer under section 547.

A request for subordination that is equitable must be brought by a proceeding that is adversary, and may generally be initiated only by a trustee or debtor in possession unless a bankruptcy court authorizes another party to start such a procedure.

  1. Fraudulent Transfers

A debtor may transfer assets before the bankruptcy filing, often to relatives or related entities, to protect these assets from the claims of creditors. Under section 548 of the Bankruptcy Code, any transfer by the debtor for inadequate consideration, made within one year (most state laws provide for a more extended period) of the bankruptcy filing date, while the debtor was insolvent, or which rendered the debtor bankrupt, may be set aside as a fraudulent transfer. The property would then be transferred back to the estate, subject to a lien for whatever price was paid for the asset. Inadequate consideration would not apply to sales at the market price that would generally benefit creditors and are not voidable.

The Bankruptcy Code fraudulent transfer provision applies not only to transfers made by the debtor within one year before the commencement of the bankruptcy case but also incorporates state law fraudulent conveyance statutes. In Illinois, for example, the period for setting aside a state fraudulent transfer is four years. Single asset real estate cases, fraudulent conveyance or fraudulent transfer statutes may be of particular use when the debtor, during the fraudulent transfer period, makes distributions to partners even though the debtor is otherwise insolvent.

  1. Rejection of Unexpired Leases and Executory Contracts

Under Chapter 11, the trustee may reject unexpired leases and executory contracts that are not economically favorable to the debtor. Generally, while the lease contract will no longer be enforceable, the non-debtor contracting party retains an unsecured claim for damages against the estate.

  1. Debtor Use of Assets—Adequate Protection

A Chapter 11 bankruptcy permits debtors to use, in the ordinary course of business, all of their assets, including the collateral of the secured lenders, even though the secured lenders are stayed from collecting their debts or enforcing their rights and remedies. However, a lender’s security interests in real estate, cash, and other assets must be adequately protected by the debtor against any decline in value during the bankruptcy case. In a multi-asset, going concern case, a Chapter 11 bankruptcy generally preserves the debtor’s assets as a group, allowing the debtor to maintain jobs for the debtor’s employees and enhancing the value of the debtor’s assets. Chapter 11 bankruptcy enables this type of preservation because of assets are generally worth more as part of a going concern.

Conclusion

There are more to know about Chapter 11, but those are the basics. If you want to learn more, be sure to consult your expert Bankruptcy lawyer for more legal help and information.

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