Bankruptcy Primer
| Publication year | 1995 |
| Pages | 1561 |
| Citation | Vol. 24 No. 7 Pg. 1561 |
1995, July, Pg. 1561. Bankruptcy Primer
Bankruptcy? Why would my divorce client's ex-spouse file bankruptcy? Will the property settlement be affected? What about alimony and child support?
Bankruptcy? My client's mechanical subcontractor just filed bankruptcy. Does this mean we can terminate his contract? Does it mean he is not going to finish the job? Can my client withhold future payments in anticipation of shoddy work?
Bankruptcy law crops up at the most unexpected times and places. The extent of its intrusion into so many other areas of the law demands that even the most seasoned general practitioner have some familiarity with its parameters. The purpose of this primer is to provide that familiarity and to acquaint the nonbankruptcy practitioner with the basic elements of, and policies behind, the Bankruptcy Code ("Code").(fn1)
Under the Code, two basic financial options are available. The first option is liquidation (commonly accomplished through Chapter 7). The second is reorganization (accomplished through Chapters 9 [municipalities], 11 [businesses], 12 [farmers] and 13 [wage earners]).
Twin policies support these two vastly different means of dealing with debtors. Fair and orderly administration for the benefit of creditors ("orderly administration") is the primary policy objective ("prime directive"): to provide a logical framework under which a debtor's estate can be divided up (liquidation) or redistributed (reorganization) among creditors with competing priorities. The second objective is to provide the honest debtor a fresh start: the ability to begin anew financially.(fn2) No longer believing in debtors' prisons, the Code adopts the position that a debtor should at one instant in time be able to forfeit all but his or her exempt assets to creditors in full satisfaction of any debts owed and start anew (liquidation) or develop a plan that uses the going-concern value of the estate (Chapter 11) or wage-earning ability of the debtor (Chapter 13) to pay the creditors over time more than they would have received in a liquidation.
A bankruptcy case is commenced by filing a petition.(fn3) Filing triggers the issuance of an "order of relief" which, inter alia, stays the actions of creditors who are attempting to collect or enforce a debt, or perfect a lien, against the debtor or property of the debtor.(fn4) Filing also divests the debtor of nearly all legal and equitable interests.(fn5) This property becomes property of the bankruptcy estate and is, from the petition forward, held by a trustee (Chapters 7 and 13) or debtor in possession (Chapter 11)(fn6) for the collective benefit of the creditors of the estate.(fn7)
Because the stay and estate creation are keyed to the petition date, and because nearly all of the rights and responsibilities of the debtor, and consequently the creditors, are tied to these legal constructs, the petition date is critical. For this reason, bankruptcy practitioners routinely separate occurrences and claims into two very different worlds: a prepetition world, where unsecured creditors may look only to the bankruptcy estate for satisfaction, and a postpetition world, where creditors' rights, vis-a-vis the estate, are enhanced.
The automatic stay is a peculiar aspect of bankruptcy law that needlessly unnerves most nonbankruptcy practitioners. It is powerful but focused. It applies to nearly all actions in pursuit of a debt or debt priority, but only as they relate to the debtor.(fn8) Its purpose is to effectuate the prime directive. Without it, creditors would pounce on the debtor and draw and quarter him or her. With it, the debtor is provided some breathing space to put his or her affairs in order. The stay allows creditors to avoid the last-minute race to execute on the debtor's assets by assuring creditors that property transfers occurring on the "eve" of bankruptcy may be avoided and brought back into the estate for the benefit of all creditors.
The stay, however, is not permanent or impregnable. It terminates: (1) when a plan is confirmed;(fn9) (2) when a case is closed or dismissed; (3) when the debtor is granted or denied a discharge;(fn10) (4) by order of the court on motion of a party in interest; and (5) by operation of law when a court fails to timely act on a "lift stay" motion.(fn11) Thus, to obtain relief, the Code
On a creditor's motion, courts routinely lift the stay or provide a procedure that automatically lifts the stay on future default and notice. The court can lift the stay for "cause" as to certain collateral if it finds that (1) the moving creditor is not "adequately protected," or (2) the debtor has no equity in the collateral and the collateral is not necessary to an effective reorganization, or (3) ninety days have elapsed without a "single asset real estate" debtor having filed a plan of reorganization or begun interest payments to its appropriately secured creditors.(fn12) In lieu of lifting the stay, an undersecured creditor may be able to force a debtor to provide adequate protection payments. In sum, in bankruptcy as in life, the vigilant get their due.
As mentioned above, the estate created at petition filing legally transfers ownership of the debtor's property to a trustee (Chapter 7 or 13) or a debtor in possession (Chapter 11), whose duties to the property and to the creditors are outlined in the Code.(fn13) The chapter of the Code under which a debtor decides to file also determines the contents of the bankruptcy estate. In Chapter 7 and 11 cases, the estate consists of all prepetition legal and equitable interests of the debtor.(fn14) Chapter 13 estates consist of all prepetition and postpetition legal and equitable interests of the debtor until the debtor has completed making plan payments under a confirmed plan.(fn15)
The Code excludes certain property from the estate. Special appointment powers, terminated leases, isolated funds from the sale of money orders and a trust beneficiary's interest, to the extent the trust's protective language is enforceable under nonbankruptcy law, do not enter the...
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