English
 
Corporate Law
Bankruptcy. General Ideas.
 
By Arturo J. Bravo, Esq &
Thelmo Fernandez 
 
INTRODUCTION 
 
Bankruptcy, a “privilege” specifically referenced in Article I of the Constitution, has emerged as legislation with multi-faceted objectives.
 
Philosophically, Bankruptcy Code enables financially burdened individual debtors, as well as corporations and other entities, to respectively avail themselves of a “fresh start” or a reorganization. 
 
In tandem with debtors' rights, bankruptcy proceedings also provide much in the way of benefits to creditors through a cost-efficient procedure designed to generate the greatest possible financial return through an orderly liquidation or a court-approved plan of reorganization. Nonetheless, bankruptcy relief is perceived as a paradox. Creditors argue, on the one hand, about its mere prophylactic intent; whereas debtors—most of whom become burdened by circumstances beyond their control—need to earn their livelihood. Nonetheless, any attempt to achieve a common ground becomes more acute in 
a tenaciously paced business world, with the reverberating impact of having credit as its octane.
 
The Bankruptcy Code consists of eight chapters. However, three of those chapters are to take into account. Chapter 7 specifically relates to a liquidation or “straight bankruptcy” provisions. Chapter 11 concerns reorganization. Chapter 13 is designed for individuals with regular income who are able to make payments to creditors over a period of time from net disposable income. 
 
CHAPTER 7 (LIQUIDATION) 
 
Chapter 7 of the Bankruptcy Code provides for the orderly liquidation of a debtor's assets. Relief under Chapter 7 is available to individuals, partnerships and corporations. 
 
An individual who files for Chapter 7 is eligible for a discharge of his or her debts. A Chapter 7 filing signals that the debtor does not intend to reorganize its business, but rather intends to have its property liquidated under the jurisdiction of the bankruptcy court. However, in certain limited circumstances, the Chapter 7 trustee has the ability to operate a debtor's business for a limited period of time if doing so is in the best interest of the estate.
 
The debtor does not remain in control of its assets in a Chapter 7 case. Rather, the Trustee appoints a Chapter 7 trustee to administer the debtor's estate. The Chapter 7 trustee acts in the interests of the debtor's estate and its creditors but is not charged with representing the interests of the debtor. The Chapter 7 trustee's primary obligation is to collect a debtor's assets and reduce such assets to cash in an expeditious manner.
 
Distributions are then made to creditors according to the priority scheme set forth in the Bankruptcy Code. If any property remains after the payment of all claims, such money is paid to the debtor. The Chapter 7 trustee has exclusive standing to litigate any state law claims that the debtor possessed as of the bankruptcy filing. The Chapter 7 trustee will also investigate the debtor's financial affairs, and to the extent that the trustee discovers evidence of wrongdoing, the Chapter 7 trustee has authority to bring actions on behalf of the estate against the principals of the debtor and other parties. 
 
CHAPTER 11 (REORGANIZATION AVAILABLE FOR INDIVIDUALS AND BUSINES ASSOCIATIONS) 
 
Chapter 11 of the Bankruptcy Code is available to those persons who are eligible for relief under Chapter 7. Chapter 11 is primarily used by business entities, but individuals may also seek relief under Chapter 11. The purpose of Chapter 11 is to provide a means for a debtor to reorganize its affairs and emerge from the bankruptcy as an operating entity. However, it is not unusual for a Chapter 11 debtor to liquidate its business, whether under a Chapter 11 plan of liquidation or by converting the bankruptcy case to a Chapter 7.
 
In a Chapter 11 case, the debtor remains in control of its business and is authorized to operate in the ordinary course of business. The debtor has the exclusive right for a period of 120 days to propose a plan of reorganization by which to reorganize its business and emerge from bankruptcy. During the exclusivity period, the debtor continues to operate its business while preparing the plan by which the debtor proposes to reorganize.
 
The Bankruptcy Code offers important protections that enable the debtor to reorganize its operations. First and foremost is the automatic stay, which prevents anyone from taking action against the debtor or the debtor's property, including litigation, arbitration proceedings, contract termination, collection actions or property attachments. 
 
During this period when all actions are stalled, a debtor may evaluate its business operations and assets in an effort to determine how it will emerge from Chapter 11 as a functioning, financially feasible operation.
 
Another power which the Bankruptcy Code provides a debtor is the ability to restructure contractual relationships. A debtor may determine that consolidating its business locations is advisable. The Bankruptcy Code permits the debtor to reject a lease,and the claim of the landlord will be limited in accordance with the provisions of the Bankruptcy Code. By contrast, if the debtor tried to break a lease outside of bankruptcy, the resulting damages might be crippling. A debtor may also sell any assets it deemsunnecessary for the reorganization. The debtor may also reject other types of contracts to which it is a party, including construction contracts and supply contracts, and the damages of the other party to the agreement will become an unsecured claim against the debtor's estate.
 
Creditors also have certain rights under Chapter 11. Secured creditors may have a right to receive post-petition interest on their claims or adequate protection for their interests. Creditors have the right to receive certain information about the debtor's 
finances, and to vote for or against a plan of reorganization. A creditors' committee may be formed to represent the interests of creditors and investigate the debtor's affairs. 
 
CHAPTER 13 (REORGANIZATION ONLY AVAILABLE FOR INDIVIDUALS) 
 
Chapter 13 of the Bankruptcy Code provides for a reorganization of the financial affairs of an individual with a regular income. Partnerships and corporations are not eligible for relief under Chapter 13. Chapter 13 is a unique provision of the Bankruptcy Code that essentially permits a debtor to propose a payment plan to satisfy secured and priority claims and at least a percentage of its unsecured claims. A Chapter 13 trustee is appointed to administer the Chapter 13 case. The Chapter 13 trustee has many of the same duties as a Chapter 7 trustee, including the obligation to investigate the debtor's 
financial affairs, review claims and generally appear and be heard on matters impacting the debtor's plan. In a Chapter 13 case, the debtor alone may file a plan, albeit with the assistance of the Chapter 13 trustee. 
 
A Chapter 13 plan requires the debtor to allocate some part of his or her future earnings to repay creditors over time, usually three to five years. The Chapter 13 plan must provide that creditors shall not receive less than they would have received had the debtor filed a Chapter 7 case. Once the plan is confirmed, the debtor pays a certain sum to the Chapter 13 trustee each month, and the Chapter 13 trustee distributes the payments to creditors on a pro rata basis in accordance with the plan. Upon completion of the payments provided by the plan, the debtor receives a discharge of its debts that is broader in certain aspects than the discharge available to a Chapter 7 debtor.


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