Bankruptcy 101
Chapter 11 Bankruptcy

Chapter 7 Bankruptcy

In Chapter 7 bankruptcies, trustees are appointed to distribute the assets of the debtor. A US Trustee monitors the debtor’s compliance with statutory requirements. The Bankruptcy Court resolves disputes and issues orders. Creditors have claim(s) for a right to payment from the debtor.

The petition will reveal the entity that has filed as the debtor in the case and any other names the debtor has used in the last 8 years. Related entities such as affiliates and subsidiaries may also file separate cases. The related entities will file their own schedules, but commonly the Court will jointly administer the proceedings so that documents, including Adversary Proceeding complaints, can be commonly filed.

For a note on venue, click here.
Proper Venue: Any federal jurisdiction where the principal place of business or location of principal assets have been located for 180 days. Because corporations can satisfy the venue requirement in multiple places, they may choose where they file. Three big bankruptcy venues are New York, Delaware, and Texas.

Normally, a debtor will submit a ‘skeletal filing’ to get a bankruptcy started. This skeletal filing will include the bankruptcy petition, a filing fee, and a disclosure of the top twenty largest creditors. More detailed schedules of the debtor’s assets and liabilities, and a statement of financial affairs, will be filed within 14 days after the case is filed (though that period is often extended).

Upon filing for bankruptcy, an automatic stay is in effect. A consumer’s attorney must be aware that as soon as a debtor has filed a bankruptcy petition, the consumer and the consumer’s attorney are subject to the automatic stay. Some government enforcement is not subject to the stay. Unless private litigation is well underway, it will be challenging to obtain relief from the stay. For more information on navigating the stay, click here.

All of the property that the debtor has an interest in when the case is filed, including contingent and unliquidated interests, becomes property of the bankruptcy estate. 11 U.S.C. § 541. Any property of the estate that the trustee may use, sell, or lease must be delivered to the trustee. 11 U.S.C. § 542.

The trustee may seek to unwind certain transfers of the debtor’s property that occurred prior to the filing. For more information on fraudulent transfers, click here.

The Adversary Proceeding (AP) Process
In Chapter 7 bankruptcies, the Court will send a notice to creditors and other interested parties soon after the case is filed about the date set for the meeting of creditors and important deadlines. Fed. Rule Bankr. P. 2002. The Court is likely to use Official Form 309(c) to give notice if a claim deadline has not yet been set at the time the notice is sent, and Official Form 309(d) if a claims deadline is set. However, the Court may still make adjustments to these forms.

For notice for consumers, click here.
In a large corporate bankruptcy, courts will make an effort to ensure that consumers have notice that the corporation has gone bankrupt.

These forms include the following:

  • the date and location of the meeting of the creditors (generally 21-40 days after the petition was filed);
  • how creditors can file a proof of claim and the deadline for filing a claim;
  • the deadline and process for filing objections to discharge or any claimed exemptions by individual debtors.

Court may also order the publication of public notice that the case was filed and that a stay is in effect.

For a sample objection to public notice, click here.

The Claims Process
The meeting of creditors (click here)
The meeting of creditors is not the same as a creditors’ committee, but they also convene in a 341 sometimes referred to as a Section 341 meeting and occurs between 21 and 40 days after filing. 11 U.S.C. § 341. The meeting of creditors may be adjourned and then reconvened, potentially allowing the meeting to occur over longer periods of time. The meeting of creditors is public and any creditor may attend. During these meetings, the creditors may ask questions of the debtor related to the bankruptcy. Before the initial meeting of the creditors, trustee may require debtor to produce documents.

In Section 341 meetings, creditors can question the debtor under oath about the debtor’s assets, conduct, and operation of business, including whether the debtor fully disclosed all assets that could be liquidated. In practice, this process tends to be too cursory to be useful. If too many questions are asked of the debtor, the trustee or the US Trustee (who will preside at the meeting in a Chapter 11 case) will instruct parties to seek a separate discovery process via a Fed. Rule Bankr. P. § 2004 examination, which the parties must then move for. Under Bankruptcy Rule 2004, any interested party can move the Court to require the debtor to produce documentation or testify on matters related to the bankruptcy. This is commonly called a 2004 examination.

The trustee determines what, if any, property should be liquidated, and distributes the proceeds according to the priorities in the Bankruptcy Code. The trustee generally liquidates only assets that have sufficient value, after paying administrative costs, to make a meaningful distribution to creditors.

The trustee may use the avoidance provisions of the Bankruptcy Code to recover property that was transferred by the debtor before the bankruptcy filing. Any property recovered in this manner becomes an asset in the case that can be distributed to creditors. Click here for more information.

After the trustee has recovered and liquidated all of the debtor’s property, the funds are distributed to creditors who have filed a proof of claim that has not been disallowed by the Court. Allowed claims are paid in the order listed in 11 U.S.C. § 726. However, the Bankruptcy Code also sets certain priorities in the distribution scheme. The priorities are set out in 11 U.S.C. § 507. See the discussion of the claims process for more about prioritization. In general, unsecured creditors are not paid until all allowed secured claims have been satisfied, with secured creditors receiving either the value of their collateral or the collateral itself.