LAWDOG BANKRUPTCY

Involuntary Bankruptcy

Voluntary Bankruptcy

A voluntary bankruptcy case begins with the filing of a petition in the Bankruptcy Court. Bankruptcy Courts, a part of the federal court system, are established in every state. The proper location for the filing of the bankruptcy is generally determined by where a business debtor has its principal place of business or principal assets, or where an individual lives. The debtor is required to file schedules of assets and liabilities, current income and expenditures, statement of financial affairs, a schedule of executory contracts, and others, upon the filing of a voluntary petition.

Chapter 7

Generally, any person who resides or has a domicile, a place of business, or property in the United States, may file a bankruptcy. ''Person'' includes individual, partnership, and corporation, but not most governmental units. Any individual, partnership, or corporation, except railroads, domestic banks and insurance companies, and a few other exceptions, may qualify to file under Chapter 7 of the Bankruptcy Code. Chapter 7 is a "liquidation bankruptcy". In a Chapter 7 case, a trustee is appointed to liquidate all nonexempt assets. In cases where there are assets, the bankruptcy trustee may liquidate nonexempt assets and distribute the proceeds to creditors, following a set of rules. See Chapter 7, linked here. Link does not return to this page.

Chapter 11

Generally, any "person" who qualifies to file under Chapter 7, except for stock brokers and commodity brokers, may file for relief under Chapter 11 of the Bankruptcy Code. Under this Chapter, the debtor generally is allowed to remain in possession of his property, and to continue to operate a business. In this proceeding, a Chapter 11 plan of reorganization is proposed, generally by the "debtor- in- possession". Actions of the debtor-in-possession may be subject to oversight by a creditor's committee, the U.S. Trustee, and the approval of the Bankruptcy Court. See Chapter 11, linked here. Link does not return to this page.

Chapter 12

Only a family farmer with regular annual income may be a Chapter 12 debtor. See Chapter 12, linked here. Link does not return to this page. Also see Section 109, which describes who may be a debtor, reproduced here for illustration purposes only.

Chapter 13

A Chapter 13 petition may be filed only by an individual, with regular income, whose aggregate unsecured debts are less than $250,000, and secured debts are less than $750,000, on the date of the bankruptcy filing. In the case of a joint filing by an individual and such individual's spouse, the aggregate unsecured debt owed by them jointly, on the date of the filing of the petition, must be $250,000 or less and secured debts must be $750,000 or less. See Chapter 13, linked here. Link does not return to this page.

Automatic Stay Applies To All Chapters

An automatic stay is a statutory "order", effective upon the filing of a bankruptcy, which protects the debtor and prohibits actions by creditors. The "automatic stay" arises automatically, and does not require any specific order by a judge. Generally, all acts against the debtor or the property of the debtor MUST CEASE upon the filing of a bankruptcy. See Automatic Stay under each Chapter from LAWDOG Bankruptcy Center, or see Chapter 7 linked here. Link does not return to this page.

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Involuntary Bankruptcy

Creditors holding claims against a debtor may, under certain circumstances, initiate a Chapter 7 or Chapter 11 case by filing an involuntary petition against the debtor. Creditors, as a group, may sometimes gain by causing an involuntary filing. Where the debtor is dissipating assets, an involuntary bankruptcy may prevent further losses. In some situations, it may be possible for the trustee to recover "avoidable transfers" which occurred within 90 days prior to the filing of an involuntary petition. For "insiders" who receive preferential transfers, and for fraudulent conveyances, this period may be extended to one year. See Section 303 reproduced here for illustration purposes only.

Requires Creditors Which Hold Claims

Where a debtor has 12 or more creditors, an involuntary petition requires the participation of at least 3 creditors who hold unsecured claims which aggregate at least $10,000, and which are not subject to a bona fide dispute. In a case where the debtor has fewer than 12 creditors, one (1) creditor may initiate an involuntary petition, but the creditor must have an unsecured claim of at least $10,000, which is not subject to a bona fide dispute. A "bona fide dispute " may involve a reasonable issue of whether the debtor is liable on the debt, probably more than a subjective belief by the debtor. See Section 303 (b) reproduced here for illustration purposes only.

Hearing On Requested Relief

After a hearing, the court will enter an order that the debtor is subject to the rules and requirements of bankruptcy, provided that the number of petitioning creditors and amount of claims are satisfied, and if the court is also satisfied that the debtor is not generally paying its debts as they become due. In this determination, courts may consider factors such as the number of creditors and total debt, the amount and age of any delinquencies, and the way in which the debtor conducts its financial affairs.

The debtor may resist the involuntary petition by filing an opposition, and demonstrating that it is generally paying its debts as they become due. In a case where the court dismisses an involuntary petition, it may grant a judgment against the petitioning creditors for the costs and attorneys' fees incurred by the debtor, and for compensatory damages caused by the filing. If an involuntary bankruptcy was brought in bad faith, the Court may also assess punitive damages. Actual cases should be discussed with your actual legal advisor or legal department. See Section 303 (i) reproduced here for illustration purposes only.

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