No person or organization wants to be unable to meet its financial obligations, but bankruptcy can sometimes be the best way to eliminate, minimize, or organize overwhelming debt while returning to financial stability or maintaining normal business operations. Liquidation through Chapter 7 or reorganization through Chapter 11 can offer an individual a “fresh start” or can give a going concern the breathing room it needs to gets its financial affairs in order. Our attorneys have a combined bankruptcy experience of over 75 years, and we can help you assess whether bankruptcy is your best option or whether some other form of debt reorganization or financial work-out would be preferable.
When bankruptcy appears to be the best course of action for you or your company, experienced legal representation is a must from the very beginning of the process. Marshack Hays takes a comprehensive approach to bankruptcy preparation, filing, and litigation, including assessing assets and liabilities, analyzing risks to discharge, determining the best type of bankruptcy proceedings for your situation, and strategizing and navigating the complex liquidation or reorganization process.
Bankruptcy provides a financial “fresh start” for individuals and businesses that are overwhelmed by debt or need refuge from their creditors while reorganizing operations. Individuals are able, after liquidation or reorganization, to “discharge” many kinds of debt so that they can move forward and seek to reestablish financial stability. Secured claims are not dischargeable, and some other kinds of debts are also automatically excluded from discharge or may be excluded by order of the bankruptcy court. Businesses, while not entitled to a discharge, may seek to wind down through liquidation or continue operations through reorganization. Creditors will often find that an individual or business’s bankruptcy is an opportunity to ensure payment or partial payment of existing claims while minimizing the expense and hassle of debt collection.
Debtors can lose their entitlement to a discharge by acting in bad faith, concealing assets, fraudulently transferring assets prior to bankruptcy, failing to keep financial records, or failing to cooperate with their trustee, among other reasons. It is important for debtors to consult with experienced bankruptcy counsel prior to filing a bankruptcy petition to ensure that the case goes smoothly, all appropriate disclosures are made, exemptions are maximized, all non-exempt assets are turned over, and no transfers or actions will prevent the debtor from getting his or her discharge. It is advisable for creditors to consult with experienced bankruptcy counsel when they receive notice of a debtor’s bankruptcy to ensure that their claim is timely filed, any special priorities or rights to which they are entitled are protected, and they do not run afoul of the federal injunctions that automatically arise when a bankruptcy is filed.
The attorneys of Marshack Hays LLP have a combined bankruptcy practice of more than 75 years, representing Chapter 7 and Chapter 11 Trustees, lenders and institutional creditors, individual creditors, and individual and corporate debtors in Chapters 7, 11, and 13.
Bankruptcy 101
There are several types, typically called “Chapters,” of bankruptcy. Which Chapter a debtor chooses will be dictated by his or her circumstances, and will significantly affect what rights a creditor has. What follows is a brief overview of the available Chapters. Bankruptcy is complex and holds pitfalls for the unwary: any decision you make about a bankruptcy – yours or someone else’s – should be made in consultation with an experienced bankruptcy attorney.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy – also referred to as “liquidation” – a trustee is appointed to marshal and liquidate available assets to pay a debtor’s creditors. Chapter 7 is available to individuals and businesses, and there are no applicable debt limits. However, most debtors must be able to pass the “means test” to be eligible for Chapter 7 bankruptcy: this is a formula which takes into account a debtor’s income to determine whether that debtor may file under Chapter 7 or is required to file under some other Chapter.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganizational proceeding rather than a liquidation. It offers individuals or sole proprietorships the ability to propose a plan to repay all or a portion of their debts over three to five years. The Chapter 13 trustee, appointed by the Office of the United States Trustee, a division of the Department of Justice, helps Chapter 13 debtors to organize their assets, communicate with creditors, and make payments. Debtors with a higher income – who are therefore not eligible for Chapter 7 – may choose Chapter 13 reorganization instead. Chapter 13 offers the additional benefit of allowing a debtor to retain their house and even modify certain kinds of secured claims. Debt limitations apply, and debtors with income too high for Chapter 7 and debts too substantial for Chapter 13 are restricted to filing under Chapter 11.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy, also called “reorganization,” is available for individuals and businesses who want to continue operations and retain assets rather than surrender assets for liquidation. As in Chapter 13, in Chapter 11 the debtor proposes a “plan of reorganization” that sets forth the means and procedure for payment of creditor claims. Creditors vote on the plan, which is subject to rigorous requirements set forth in the United States Bankruptcy Code, and the plan is subject to bankruptcy court approval and oversight. Ideally, a trustee is not appointed and the individual or business retains all assets and serves as the “debtor in possession.” In some cases, committees of creditors are organized to assist in the case, and those committees can wield significant power in negotiation and confirmation of a Chapter 11 plan. Chapter 11 reorganization plans involve restructuring, and range from relatively simple to incredibly complex.
Should I Declare Bankruptcy?
Bankruptcy is a complex legal process that almost always requires the assistance of an experienced attorney. Whether you are considering liquidation or reorganization, there are aspects of bankruptcy that may not be immediately evident and can substantially affect the outcome of the case. Your attorney can help you spot those issues. You will also want to consider the collateral effects of a bankruptcy: how long will it take your credit to recover? will the bankruptcy impact your business relationships? will it affect your spouse or your dependents? Bankruptcy is not a decision to be taken lightly or with imperfect understanding, and it is not a cure-all: but in the right circumstances it can provide the “fresh start” to honest but unfortunate debtors for whom the system was designed. If you have more questions, or would like to discuss your options, please contact us. We can help.
What is Bankruptcy Litigation?
As the name suggests, bankruptcy litigation encompasses disputes arising from, or connected with, a bankruptcy proceeding. Such disputes can involve businesses, individuals, government agencies, or organized groups. The attorneys at Marshack Hays represent clients in all aspects of bankruptcy litigation.
What Are Common Examples of Bankruptcy Litigation?
Common examples of bankruptcy litigation include:
- Preferential transfer lawsuits. When a bankruptcy case is filed, the trustee can recover all payments made by a debtor during the 90-day period leading up to the bankruptcy petition. Creditors have various defenses to these claims, the most common of which include an ordinary course of business defense, a new value defense, and a contemporaneous exchange for value defense.
- Fraudulent transfer lawsuits. A bankruptcy trustee can also recover a transfer made by a debtor during the four years before the bankruptcy case was filed if the transfer was made (i) with the intent to “hinder, delay, or defraud” any creditor or (ii) while the debtor was insolvent and the debtor did not receive reasonably equivalent value for the transfer. Creditors have various defenses to these claims, including good faith and the payment of fair value.
- Dischargeability lawsuits. Typically, a debtor is able to discharge debts through the bankruptcy process. There are, however, circumstances under which a debt cannot be discharged. For example, a debt resulting from fraud cannot be discharged as long as the creditor takes steps to have the bankruptcy court declare the debt to be non-dischargeable.
- Objections to plan. When a debtor is using a plan to reorganize, creditors can object to plan and argue that certain aspects should be changed. Some of the most common objections relate to the plan’s feasibility (the debtor’s ability to make the proposed payments), the amount offered to creditors (whether the debtor is using its “best efforts”), and whether the debtor is unfairly attempting to retain valuable assets without paying creditors in full (the absolute priority rule).
- Cash collateral disputes. After a bankruptcy case is filed, a debtor cannot use cash or cash equivalents that are subject to a lien without a court order authorizing the use. To obtain such an order, the debtor must “adequately protect” the creditor against the risk that the value of the collateral will be diminished by the use.
- Lien-priority disputes. When a debtor offers the same property to multiple creditors as collateral, disputes can arise with respect to the priority of the creditor’s liens. The senior position is the most valuable.
- Lien-stripping disputes. Under certain circumstances, a debtor can force a creditor to remove a lien from the debtor’s property if the property is over-encumbered (the value of the property is less than the value of the creditor’s lien plus senior liens). If a creditor can show that the property is not “under water,” then the lien cannot be stripped away.
- Proof of Claim/Objection to Claim. Creditors are entitled to file a proof of claim against the debtor, explaining the amount and basis for the debt owed. When a proof of claim is properly filed, the underlying debt is presumed to be valid. A proof of claim can be disputed if the challenger presents evidence regarding the validity of the debt. When a proof of claim is challenged, the ultimate burden of persuading the court that a debt is valid is on the claimant.
Although resolution of disagreements without legal action is always preferable, it is not always possible. Resolving disputes involving insolvency is challenging because finite resources mean that some parties will not be fully compensated. It is important to choose skilled attorneys capable of maximizing your recovery and protecting your right.
What is Chapter 7 – Bankruptcy Liquidation?
Chapter 7 of the Bankruptcy Code is generally known as a liquidation proceeding. For individuals, the concept is rather straightforward; in exchange for liquidating all of a debtor’s non-exempt assets, the debtor gets a discharge of all dischargeable debts.
Because California has very liberal (some would say too generous) exemption statutes, over 95% of individual debtors filing Chapter 7 get to keep all of their assets and get a discharge of their dischargeable debts. As stated above, a debtor who files Chapter 7 gets to keep “exempt assets” and must surrender “non-exempt assets.” The exemption statutes in California are very extensive. Some assets are protected in full and other assets are protected up to a dollar amount. For example, certain retirement accounts are fully exempt. On the other hand, equity in a residence is exempt either in the amount of $75,000, $100,000, or $175,000, depending on several factors.
Already, “dischargeable debts” have been referenced several times. In Chapter 7, most debts of are dischargeable, but some are not. The list of non-dischargeable debts can be found in Section 523 of the Bankruptcy Code. Debts that are non-dischargeable include certain types of tax debts, certain types of domestic support obligations, certain debts incurred through fraud or willful malicious behavior, and certain debts that arise from breach of fiduciary duty.
A debtor can also be denied a discharge of all debts for several reasons. The two most common reasons for a denial of discharge are (1) if a debtor makes a false oath, such as not disclosing an asset or a transfer, or (2) if a debtor transfers assets with intent to hinder, delay, or defraud creditors. These are common grounds for denial of discharge, but there are other grounds for denial.
One of the most important jobs of a bankruptcy attorney is to ethically and legally maximize a debtor’s right to claim exemptions. Another important job is to assess the facts and advise the client as to what debts are dischargeable.
Chapter 7 bankruptcy proceedings are complex, and a potential debtor should only retain counsel who has demonstrated expertise in the area.
The above discussion is primarily directed to individuals filing Chapter 7. Business entities are certainly permitted to file Chapter 7, but there are few major differences. One, business entities do not get discharges of their debts under Chapter 7. Two, business entities do not get to exempt any assets.
It is a frequent debate whether it makes any sense for business entity to file Chapter 7 seeing as they do not get discharges. There are pros and cons of filing Chapter 7 and there is no one right answer. It is always determined by the specific facts of each case.
Filing a Chapter 7 generally requires significant planning before filing the petition. Anyone considering filing a Chapter 7 petition should consult with an attorney long before there any significant deadlines.
What is Chapter 9 – Municipal Reorganization?
Chapter 9 is a specialized type of bankruptcy and reorganization that specifically applies to municipalities. Federal bankruptcy law allows a variety of municipalities that may take advantage of Chapter 9 proceedings, including cities, townships, counties, community college districts and school districts. The purpose of Chapter 9 is to establish a reorganization plan between a municipality and creditors for repayment of outstanding debt.
What Happens When a Municipality Files for Chapter 9 Bankruptcy?
Negotiated terms of Chapter 9 reorganization can offer a municipality many benefits including lowering interest rates and extending the debt terms to make repayment more attainable. In some cases, reduction of principal balances may also be proposed. Liquidation is rarely an option in municipal bankruptcies.
A Chapter 9 bankruptcy proceeding usually follows five main steps:
- The local municipality files for bankruptcy, resulting in an automatic stay against debt collectors
- The Court determines the municipality’s eligibility
- The local municipality develops a Plan of Adjustment
- The creditors approve the Plan of Adjustment
- The Court approves the Plan of Adjustment
Municipal bankruptcy was first established in 1934 during the Great Depression and has been revised many times since that time. Since its inception, only about 500 municipal bankruptcy petitions have been filed, making this one of the rarest types of bankruptcies to be seen in courtrooms today. Because it is not commonly practiced, it is important to find legal representation from a firm that is experienced in this type of reorganization and familiar with the specific laws governing Chapter 9 bankruptcy in the state where it is filed.
How Does a Municipality File for Chapter 9 Bankruptcy?
Many local governments across the country are facing steep budget deficits and high debt. As a last resort, some of these municipalities have filed for bankruptcy. In order to file Chapter 9, a municipality must meet four basic requirements:
- The municipality must be authorized to file Chapter 9 under the laws of the state
- The municipality must be insolvent (unable to pay debts when they are due)
- There must be a desire by the municipality to adjust its debts
- The majority of creditors must be in agreement with the Chapter 9 proceedings
In addition, proper legal representation is a must to protect the interests of the municipality for the benefit of all parties involved. In addition to the different way in which these bankruptcy cases are handled, the complexities are multiplied due to the size of the municipality and the number of parties involved.
Does Marshack Hays LLP Offer Chapter 9 Representation?
Finding a legal team with experience in Chapter 9 bankruptcies can be easier said than done, given their relatively rare occurrence. Fortunately, California municipalities can find experienced legal help for Chapter 9 proceedings from the professional legal team at Marshack Hays LLP. Our bankruptcy attorneys have the special skill and experience to navigate these complex legal matters for the benefit of their clients. Previous Chapter 9 bankruptcy clients include:
- County of Orange
- City of San Bernardino
- Vendor’s Committee – County of Orange (representation)
- San Bernardino City Professional Firefighters Local 891 – City of San Bernardino (representation)
Our firm understands the challenges financially stressed municipalities face in reorganization planning prior to filing a petition. However, early planning is essential to ensure leverage is maintained for the benefit of bondholders, key vendors and unions. We work with all aspects of Chapter 9 proceedings to ensure they progress a smoothly as possible for everyone involved. When Chapter 9 is the only option, the experienced bankruptcy attorneys at Marshack Hays LLP are ready to help municipalities complete the reorganization process successfully.
What is Chapter 11 - Bankruptcy Reorganization?
Chapter 11 of United States Bankruptcy Code is commonly referred to as “reorganization.”
The Chapter 11 bankruptcy petition can be filed either by a business entity or an individual. Typically, individuals only file Chapter 11 if they do not qualify to file Chapter 13.
Debtors frequently opt for Chapter 11 in lieu of liquidation because the objective in reorganization is to preserve the assets and the going concern and/or business. In exchange, the Court confirms a plan that provides for treatment of the creditor claims.
Chapter 11 statutes are very complex and the summary provided herein is a simple overview.
A Chapter 11 reorganization proceeding commences with the filing of a petition. Upon filing, the debtor is commonly referred to as “debtor-in-possession.” The debtor is responsible for preserving and managing all assets as a fiduciary and is subject to strict guidelines as set forth in the Bankruptcy Code in order to continue to operate the business. The debtor, absent a Court order to the contrary, has an exclusive right, within the first 120 days of filing the petition, to propose a plan of reorganization. Thereafter, any party in interest may file a plan. Contents of plans of reorganization vary significantly depending on the facts of each case.
Typically, a plan in a retail case would provide that the debtor would “reject” leases for stores that are not profitable, and thereafter would propose a plan that is based on the profits derived from the profitable locations.
Typically, a plan in a real estate case would provide that the mortgages would be rewritten within the confines set forth by the Bankruptcy Code, such that the debtor may service the debt under different terms and retain ownership of the property.
Typically, a plan in a manufacturing or operating company would provide that the debtor would have a period of time to restructure its operation and then, as a result of the restructuring, use future profits to pay past debts.
Again, what the plan will say is driven by the unique facts of each case. In some cases, the “reorganization” is really a controlled liquidation of some or all the debtor’s assets. In these instances, often the prevailing view is that a controlled liquidation will result in a greater pay off for creditors than a foreclosure sale or forced liquidation.
It is quite common that a case will include liquidation of some assets and restructuring of debts based on profits derived from the remaining assets.
The Court has the power to appoint a Trustee to oversee the business, if cause is shown as required under the Bankruptcy Code. If a Trustee is appointed, it will be the Trustee’s responsibility to manage the assets and to make a determination whether to file a plan of reorganization or to liquidate assets.
Before a plan can be confirmed by the Court, the debtor must file both a plan and disclosure statement describing the plan and the debtor’s financial status. If and only if the Court approves the disclosure statement, then the plan will be submitted to creditors for vote. The Bankruptcy Code has mandatory provisions for each plan of reorganization. For example, a plan must designate distinct classes of claims and interest for treatment under the plan of reorganization. Each claim within a class must be similar to the other claims in that class. For example, a first lienholder’s claim would be in a separate class from a junior lienholders’ claim. Further, general unsecured claims would be classified separately from secured claims.
In order to confirm a plan, a class of claimants has to accept the plan. A class is deemed to accept if the plan is accepted by creditors that hold at least two-thirds in amount and more than half in number of allowed claims in the class.
If there are impaired classes of claims, the Court cannot confirm a plan unless it has been accepted by at least one impaired class. If there is a consenting impaired class that accepts the plan but other impaired classes who do not, the Court can force acceptance upon those classes not consenting. This is commonly referred to as “cram down.” It is very difficult to obtain confirmation through “cram down” as the standards can, depending on the case, be very difficult to meet.
There are substantial issues and pitfalls relating to Chapter 11 cases. Before hiring an attorney, a prospective client should make sure that proposed counsel has substantial experience in confirming Chapter 11 plans. The client should ask the potential counsel for a copy of orders confirming plans in previous cases that they have handled.
As stated, Chapter 11 is very complex. One of the best summaries of Chapter 11 appears on the United States Courts website at www.uscourts.gov/service-forms/bankruptcy-basics/chapter-11-bankruptcy-basics.
