In general the filing of a chapter 11 bankruptcy is complicated, time-consuming and expensive.
Complications of the Governing Provisions
The Chapter 11 bankruptcy process is complicated because the governing provisions for a Chapter 11 are found in section 1101 through 1146 of the bankruptcy code. With the overlay of what can and cannot be done set forth in section 101 through 112 [General Provisions], section 301 through 308 [Commencement of the Case], section 321 through section 333 [Officers], section 341 through section 351[Administration], section 361 through the section 366 [Administrative Powers], section 501 through section 511 [Creditors and Claims], section 521 through section 528 [Debtors, Duties and Benefits], section 541 through section 562 [Estate].
The filing of the Chapter 11 bankruptcy petition, by an entity or individual, is governed by section 301. Following the filing of a voluntary petition for Chapter 11 bankruptcy relief, there is normally set by the U.S. Trustee’s office a Section 341 first creditors meeting, scheduled to take place 4 to 5 weeks after the petition filing. In between the petition filing and the noticed section 341 first meeting of creditors, the initial debtor interview, is conducted at the bankruptcy court by US Trustee’s office.
Which is essentially an informal office interview where the debtor provides business records for his business and personal activities, bank statements 3 to 6 months previous to filing, evidence of insurance, available and most recent financial statements, and the last 2 to 3 years income tax returns. All of these business records are then reviewed by the bankruptcy analyst working for the U.S. Trustee’s office.
The initial debtor interview is usually attended by the debtor and the debtor’s attorney, and answers given at the IDI meeting are usually not under oath, and lead to further questioning by the US Trustee’s attorney representative at the section 341 first meeting of creditors.
After the section 341 first meeting of creditors is concluded by the US Trustee’s office representative, then creditors have an opportunity to ask factual questions about assets and liabilities for debtor’s business affairs. Following conclusion of the section 341 meeting, the debtor has the exclusive time period to file a plan or reorganization of 120 days, followed by another 60 day exclusive of time period to gain confirmation of the plan of reorganization that is timely filed by the debtor.
In the case of small businesses, under section 1121, the requirement is for the debtor to gain confirmation of plan within 300 days from the date of petition filing, unless extended by the court. Additionally, there may be a 90 day limitation to file a plan reasonably capable of being confirmed in the case of a single asset real estate case. See Section 362.
Filing of the Disclosure Statement in Chapter 11 Bankruptcy
After that debtor timely files its plan of reorganization, the debtor also files a companion pleading called a disclosure statement, which disclosure statement is noticed for hearing under section 1125 of the bankruptcy code, seeking a court order decreeing the existence of the adequacy of the information in the disclosure statement, which is a requirement before debtors are allowed to solicit their plan of reorganization.
Once the court enters its order approving of the adequacy of the information contained in the disclosure statement pursuant to section 1125, the debtor can proceed to notice a confirmation hearing under section 1129(a) and (b) of the bankruptcy code. The confirmation hearing is the ultimate goal for a debtor filing the Chapter 11 plan, for a confirmed plan dictates creditors repayment schedule, which payment obligations must be strictly adhered to by the debtor and accepted by a creditor on certain terms and conditions set forth in the confirmation plan.
Timing the Chapter 11 Bankruptcy Filing
Timing may be a critical element in bankruptcy filing for number reasons. Some reasons may affect your individual situation. Your attorney will be aware of the subtle details that might because you to delay the filing date. If these circumstances apply to you, talk with your attorney. Here are some of the important ones:
- If you have repaid debt to family members or insiders during the past year, you may want to wait for a year to pass so you protect them from having to repay money to the estate.
- If you expect to receive a large income tax refund or other payments, you might want to wait until you receive that money. If you file for bankruptcy before you receive the money, that money will become part of the bankruptcy estate and it will potentially go to the trustee not to you.
- If you have recently incurred debt, especially credit card debt, you may want to wait in till some time passes so that the creditor will not try to claim fraud. The creditor may want to try to stop you from including that debt in the bankruptcy and receiving a discharge.
- If you have recently lost your job or have a major reduction in your income, waiting a few months may make passing the means test much easier. The means test is based on your average income for the last six months before filing the petition, so if you have a few months of lower or no income, it will reduce your average monthly income for these 6 months.
- If you’re considering divorce, talk with your attorney to see when the most advantageous filing date would be appropriate.
- If you owe taxes that are more than three years old, it’s possible some of that tax burden may be dischargeable after a specific date also.
- In Nevada, there is a homestead exemption of $550,000 if you purchase the home more than 1215 days ago prior to the petition filing. If you purchased it less than 1215 days prior to the petition filing, the homestead exemption is then set at $155,675. So waiting past that 1215 day may be worth the difference in dollar savings to you.
- If you think you’ll have large medical bills due in the near future, it may pay to wait at until after those bills were incurred to include them in the bankruptcy. You won’t be able to file another bankruptcy for least eight years.
- Your debts will not be wiped out if you have filed a previous Chapter 7 case in the last eight years, or four years for chapter 13 case.
In many of these cases a few days, a week or a month mean the difference of thousands of dollars in assets that you may have to give up or may be able to keep.
I had a case where a husband and wife couple came in to consult with me that had over $2 million in their bank accounts, but were going to owe much more than the $2,000,000 in debts after 1 or 2 years when their creditors’ claims matured. They had transferred most of the $2,000,000 to potentially exempt assets beyond 2 years of their filing, therefore, they did not have to report on Question 10 of the statement of affairs that they transferred assets in the 2 year time frame before filing the petition.
If asked about the transfer in the 341 meeting, they would have to disclose the transfers because it happened within 4 years. As luck would have it, the bankruptcy trustee and creditors that did attend the section 341 first meeting of creditors did not know of the transfers beyond the 2 year period, having failed to request records of the debtors that reflected that the $2 million had been transferred to other asset forms many years before the bankruptcy filing.
If there is no questions asked about the time period after 2 years before filing the petition, and if there were no transfers within the two-year time frame of filing the petition that would be reportable under question number 10, there is no obligation on the part of the debtors to volunteer information relative to transfers that happened in year 3 and year 4 or other years beyond 4 years.
Therefore, in this instance, silence is golden. Had bankruptcy trustee or creditors asked about transfers in years 3 and 4 prior to petition filing, they would have found out about transfers to entities that were arguably exempt, or excluded assets, thereby triggering issues on the avoidance of these years 3 and 4 transfers under section 544, and the need applicable State of Nevada uniform transfer act.
The 9th Cir. previously held that transfers of nonexempt property to exempt property are not prohibited, so long as it is done not to defraud or hinder on delay creditors. If transferring non-exempt to exempt property within 6 months of filing is considered an act in furtherance of defrauding creditors, one must wait for 1 year, 2 years or more. The Ninth Circuit case site for transferring nonexempt and exempt is Sherwood. That case essentially held that transferring non-exempt assets to exempt assets status is legal, so long as it is done without the intent to defraud creditors.
All of the above examples perfectly illustrate why it is absolutely mandatory that you hire an experienced bankruptcy attorney to steer you through a chapter 11 bankruptcy case. I know there is a lot of information here so my advice is to call our office at (775) 786-7600 or (775) 690-2190 anytime to set up a complimentary and confidential consultation with me at your earliest convenience. You can also visit our new business Facebook Page for more information.
This post will primarily deal with Chapter 7 bankruptcy and 13 bankruptcies. Chapter 11 business reorganization bankruptcies are a different animal all to themselves. You will follow the steps below when you file for a personal or as it’s sometimes termed ‘consumer’ bankruptcy for debt relief.
STEP 1 – Assessing Your Case
In order for the attorney to be able to properly assess your case, an initial interview will gather the following information:
- Copies of three years of your most recent tax returns.
- The amount of income tax that you may owe.
- The amount of domestic support obligations in any arrears.
- What is your home worth and the balance owed on recorded mortgages and the amount of monthly installments that you are behind.
- How much are your cars worth and the amount that you owe on them.
- An approximate of balances that you owe on all your bills including credit cards.
- A copy of pay stubs for the last 60 days.
- Your home mortgage documents.
- The certificate of title on any motor vehicles you on.
- In court papers for lawsuits you are involved in.
- Divorce, domestic support orders or marital settlement agreements.
- Documents showing the amount of income from any sources.
STEP 2 – Finding Creditors
Begin finding your creditors. In most cases you know who you owe money to. Remember, you only receive a discharge for those creditors you list in your bankruptcy schedules, notwithstanding the correctness of the amounts owed. You have outstanding invoices and bills which detail the amount of money owed, the account numbers and their contact addresses. In a few instances, you may be unsure of any outstanding balances. You want to be sure that there are not any old or forgotten debts. Again, creditors you do not include on your bankruptcy documents will not be discharged.
Order credit reports from all three of the major credit reporting agencies. Some creditors may have not reported to all the agencies, and some are missed by others.
STEP 3 – Choosing an Experienced Attorney
Interview and decide on an experienced attorney. Now that you have all your information gathered, you can interview attorneys well-armed about your specific circumstances, and you will receive informed answers to your questions.
After deciding on an attorney, ask them for a worksheet of all information they are going to need. This will require you to gather as much information as possible. The answer to all these questions is going to wind up in the bankruptcy filing, so it is important to have accurate and timely information.
STEP 4 – Credit Counseling
Arrange for credit counseling. Ask your attorney for local recommendations. BARF or BAP requires you have a certificate from an approved credit counseling agency within 180 days of your petition filing for chapter 7 bankruptcy.
STEP 5 – The Questionnaire
Many law firms will give you a questionnaire to complete at home, click on the link for an example. Fortunately, you have already taken a big step toward completing this paperwork by gathering the data in Step One. It’s important to complete the questionnaire accurately. Remember this information is going to the bankruptcy court and it will be reviewed and even sometimes audited. Take your time.
Return your paperwork to your attorney and they will make up the official documents and pleadings from the questionnaires you have completed. When they give you the draft, take it home and review it thoroughly and make any corrections before you return it to the attorney.
STEP 6 – Filing the Petition
Once all the documents are complete, you and your attorney assess your situation and will decide on the actual date to file the petition and pleadings with the court. There are several considerations that may come into play as to the filing, or petition date. For example, you may have recently lost your job. You may want to delay the filing so your average income for the last six months would be lower, thereby making it easier to pass the Means test. Your attorney will guide you to this decision.
Once you do file, the section §362(a) automatic stay kicks in. The stay simply means that creditors are forbidden to take any action against you. Collection calls and actions will stop immediately. It usually takes about 7 to 10 days for the courts to notify your creditors. If you receive collection calls, simply tell them you have filed for bankruptcy and they will receive their notice in the mail in a few days.
TO BE CONTINUED: Next Blog Post – Information about the automatic stay provision.
Depending on your individual circumstances, choosing which kind of bankruptcy to file can be very difficult. Let’s look at some of the factors that may help you make the right decision.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows a person to keep all their exempt assets and discharge their debts. The trustee is appointed to gather all the nonexempt assets, sell those assets, and distribute them pro-rata to the creditors.
Chapter 7 bankruptcy may be your best choice under the following circumstances:
- If all the property you have is exempt under both state and federal bankruptcy laws. In other words, you do not have assets that you will have to give up. Over 90% of all bankruptcy cases are this variety.
- You are current on your home and automobile payments before filing for bankruptcy.
- You are willing to give up your house and automobile before filing bankruptcy.
- You do not have any extra funds left over each month after paying all your expenses. In other words, you don’t have money to reclaim assets like in a Chapter 13 bankruptcy case.
- You don’t have a previously discharge chapter 7 bankruptcy, or chapter 13 bankruptcy in the last eight years.
If you qualify for chapter 7 bankruptcy under the means test and Median test, you give up all your nonexempt assets, and keep those that the law allows. This option gives you a new and clean start without the pressures and anxiety hanging over your head.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows you to make partial payments to your creditors for 3 to 5 years and obtain a discharge of all your remaining debts. Chapter 13 in many instances will allow you to retain some or all your non-exempt assets, as long as you pay for the value of those nonexempt assets in your Chapter 13 repayment plan. Chapter 13 will also allow for liens and liens strip downs under certain circumstances. Chapter 13 allows “first aid” pursuant to section 362 of the bankruptcy code, in that any foreclosures at the time bankruptcy filing are stayed until future order of the bankruptcy court.
Chapter 13 bankruptcy is probably your best choice under the following circumstances:
if you need time and/or have adequate income to pay passed bills.
- You need time to catch up on back mortgage payments. Chapter 13 repayment plans give you 3 to 5 years to make up your arrears.
- You need time to pay off old tax debt without penalties in interest. This can be a huge savings under some circumstances.
- You need time to pay alimony and child support that is best due.
- You already received a discharge in a bankruptcy case within the last eight years.
- You may be able to reduce payments on unsecured loans to the value of the collateral, and not the full amount of the loan. For example, you may owe $15,000 on automobile, but is currently worth only $10,000. So, you might get relief of the $5,000 difference.
- You will get to keep the nonexempt property by making payments on it through your Chapter 13 repayment plan.
- Any cosigners of your debt would be spared the harassment of bill collectors by making payments through your plan.
- You may back of out of a chapter 13 plan and take another route without the court’s permission. A big part of choosing Chapter 13 depends on your income. Many Chapter 13 repayment plans are proposed with too much optimism. Only about two thirds of Chapter 13 plans are fulfilled. Most of those failed plans are forced into Chapter 7 or the bill collectors come back with a vengeance since you are no longer protected by the bankruptcy automatic stay provisions.
Chapter 11 Bankruptcy
Chapter 11 is your best choice if you have a business and/or substantial assets and want to continue in business. The Chapter 11 also gives you the most flexibility in negotiations. You can also withdraw from the Chapter 11, which would put you back to where you were with creditors before filing.
Chapter 11 filings allow individuals and business entities to file for reorganization, thereby allowing the petitioner to repay their general unsecured debt in their priority unsecured debt such as taxes, and their secured debts over a period, such as five years. Chapter 11 petitions also invoke the provision of 1129(b) Chapter 11 filings are known for “cram downs,” which allows a treatment term and for interest rates to imposed on a security and or unsecured creditors over their objection. Thus, cram down or forced acceptance under certain terms and conditions are set forth in section 1129(a)(b) of the Bankruptcy Code.
The provisions of the Bankruptcy Code governing Chapter 11 filings also allows for repayment of tax debt over a five-year period commencing on the date of assessment. Further, bankruptcy court has the authority under section 507 to determine the validity, extent and amount of tax claims. In the instance of an individual filing Chapter 11, relief or a partial discharge of debt is allowed if the individual debtor contributes to disposable income, over five-year plan.
The best next move is to call an experienced bankruptcy lawyer for a free and confidential consultation, such as Harris Law in Reno, Nevada at (775) 786-7600 or (775) 690-9120 anytime.
Helping Businesses Out of a Difficult Situation
Chapter 7 refers to the provision of the United States Bankruptcy Code that permits a business in financial distress to liquidate or sell its assets for the benefit of its creditors. When a business files a Chapter 7 petition it immediately ceases operations and a trustee is appointed to take control of its assets, sell those assets and distribute the proceeds to creditors. At the same time, creditors are automatically enjoined from starting or continuing any efforts to collect debts that are owed them.
The decision to file a Chapter 7 petition is usually the most difficult and painful decision a business ever has to make. This is particularly true for businesses with perhaps a single owner or a few owners who have invested years of their time, energy and resources in the business. However, it is often the only viable solution.
In the United States, bankruptcy is governed by federal law, commonly referred to as the “Bankruptcy Code” (“Code”). The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States”. Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
Some laws relevant to bankruptcy are found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes). Tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code (Judiciary and Judicial procedure).
Bankruptcy cases are filed in United States Bankruptcy Court (units of the United States District Courts), and federal law governs procedure in bankruptcy cases. However, state laws are often applied to determine how bankruptcy affects the property rights of debtors. For example, laws governing the validity of liens or rules protecting certain property from creditors (known as exemptions), may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.
When Should I File Chapter 7 Petition?
Chapter 7 liquidation is generally a last resort after all other efforts have failed. If there is a way to resolve your debt problems and avoid bankruptcy by negotiating modifications of existing obligations, I will help you do that. However, if your business does not have sufficient prospects to continue operating, filing a Chapter 7 petition wiIl enable your business to shut down in an orderly manner and ensure that creditors are treated fairly and equitably.
Am I Responsible for the Debts of My Business?
A Chapter 7 petition relieves a corporation or a limited liability company of its debt obligations but it does not necessarily protect a sole proprietor or partner in a partnership from creditor claims for collection of the debts of the business. Even in the case of corporations, the principals of the business may have continuing liability for personal guarantees for payment of certain debts required by a creditor as a condition to providing goods or services or providing financing. In some instances, shareholders and owners may also be liable for the unpaid tax obligations of the business. If you are personally responsible for business debts, I can provide advice on how best to minimize those obligations.
For more information or to schedule a consultation with our Law Firm, call 775-690-9120.
Bankruptcy is an invaluable tool for financially troubled companies and their creditors. Unfortunately, it is too often a costly, time-consuming and uncertain process. It doesn’t have to be. I am committed to finding a way to make that process as efficient and successful as possible for our clients. I am passionate about practicing law in a way that is designed to produce the best possible results for our clients.
Bankruptcy can pave the way for a more secure retirement for debt-ridden older adults. It is natural to have many questions about the decision to file, especially when it involves factors like your social security income and retirement accounts. Call the Harris Law office today at 775-786-7600 for a free consultation, also visit our new Facebook Page for more information.