It's Only Money? How Your Clients Can Keep More of It When Customers File Bankruptcy

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Presentation at Ohio Society of Certified Public Accountants Fall CPE Day regarding overview of what happens in a bankruptcy proceeding. Introduction to types of bankruptcy and basic concepts. …

Presentation at Ohio Society of Certified Public Accountants Fall CPE Day regarding overview of what happens in a bankruptcy proceeding. Introduction to types of bankruptcy and basic concepts. Discussion of dealing with preference claims and Chapter 11 plan process

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  • 1. It’s Only Money? How Your Clients Can Get or Keep More of it When a Customer Files Bankruptcy Presented by Teri G. Rasmussen Plunkett Cooney
  • 2. Who is PLUNKETT COONEY ?
    • Established 1913
    • 325 Employees
    • 150 Attorneys
    • Nine Michigan Offices and one in Columbus Ohio
    • Full-service business and litigation firm
  • 3. Presentation Objectives
    • Clarify what a bankruptcy filing really means
    • Provide insights into creditor strategies
    • Give overview of major bankruptcy concepts
      • Automatic Stay
      • Proofs of Claim
      • Preferences
      • Chapter 11 Plans
  • 4. Purpose of Bankruptcy
    • To allow "honest" but insolvent debtors to obtain a "fresh start"
    • To ensure payment of creditors in an orderly fashion to extent debtor has assets
  • 5. Fresh Start Purpose
      • Providing some " breathing room " to allow restructuring of debt through additional repayment time and discounting of the amount to be repaid; and
      • Allowing individual debtors to receive a " discharge " from all or some of the debtor's debts when the debtor is an individual.
  • 6. Types of Bankruptcy
    • Chapter 7 Liquidation
    • Chapter 13 Wage Earner Plan
    • Chapter 11 Reorganization
    • Chapter 15 Cross-Border Insolvency
    • State Law Alternatives
      • Receiverships
      • Assignment for Benefit of Creditors
      • Composition Agreements
  • 7.
    • Takes a “snapshot” of the debtor’s financial situation on the day the petition is filed
      • The debtor’s assets are gathered and administered (i.e. sold/liquidated) by a panel Chapter 7 trustee.
      • Creditors are paid according to the priority of their claim. Continued
    Chapter 7 Liquidation
  • 8.
      • All claims of the same priority receive their pro rata share of any available liquidation proceeds.
      • Rarely receive more than a fraction of what owed
    Chapter 7 Liquidation
  • 9. Chapter 7 Liquidation
    • Voluntary or Involuntary : Chapter 7 may be voluntary or involuntary.
    • Type of Debtors: Chapter 7 is available to any type of debtor (i.e., individuals and business organizations).
    • Length: generally less than one year, but can be much longer depending on complexity and amount of assets involved Continued
  • 10. Chapter 7 Liquidation
    • Frequency : A discharge under Chapter 7 may be granted only to individual debtors and only once …
      • Every eight years after the petition date of a past Chapter 7 case
      • Every six years after a prior Chapter 13 filing , unless either the previous Chapter 13 plan was a 100 percent plan or paid at least 70 percent and was the debtor’s “best effort” “proposed in good faith”
  • 11. Chapter 13 Wage Earner Plan
    • Purpose: To provide individual debtors with “regular income” an alternative to …
      • Liquidation under Chapter 7
      • The complexities of Chapter 11
    • Type of Debtors : Chapter 13 is available only to individuals (including sole proprietors , but no other business organization).
  • 12.
    • Eligibility : Chapter 13 is available only to persons:
      • With “regular income”
      • Who have secured debts of less than $1,010,000 (amount is indexed), and unsecured debts of about $340,000 (amount is indexed)
      • Who have completed an approved complete credit counseling course in personal financial planning
    Chapter 13 Wage Earner Plan
  • 13.
    • Voluntary Only : Chapter 13 can only be used voluntarily.
    • Length: Typically 3-5 years
    • Frequency : A discharge under Chapter 13 can only be granted to individuals and only if the debtor has not received a discharge in
      • A Chapter 7, 11, or 12 case filed within four years; or
      • A Chapter 13 case filed within two years
    Chapter 13 Wage Earner Plan
  • 14. Chapter 13 Wage Earner Plan Procedure
    • Debtor proposes a repayment plan known as a Chapter 13 Plan which must meet certain requirements, including that creditors get at least as much as they would under a Chapter 7 liquidation .
    • Creditors have an opportunity to object and the Chapter 13 Plan must be “confirmed” by the bankruptcy court before it becomes effective. Continued
  • 15. Chapter 13 Wage Earner Plan Procedure
    • Following confirmation, the debtor submits all of the portion of his or her income specified in the “confirmed” Chapter 13 Plan to a Chapter 13 trustee who administers the implementation of the confirmed Chapter 13 plan.
  • 16. Chapter 11 Reorganization
    • Chapter 11 is an alternative …
      • to liquidation under Chapter 7 when permitting the debtor to continue to operate the business for the benefit of the creditors is better than simply liquidating the debtor’s assets
      • to Chapter 13 when the debtor exceeds the debt limitation for that sort of bankruptcy Continued
  • 17. Chapter 11 Reorganization
      • Chapter 11 can also be utilized for liquidation when a debtor wishes to retain control over the assets.
      • Generally very expensive due to length and required payments to professionals such as attorneys and accountants
  • 18.
    • Debtor in Possession : Typically the debtor’s management stays in control of the debtor (called the “debtor in possession” or “DIP”)
      • Role of the DIP : DIP must manage the debtor’s assets for the benefit, of the creditors. Continued
    Chapter 11 Reorganization - DIP
  • 19.
      • Fraud/Gross Mismanagement : The bankruptcy court will appoint a third party trustee or “examiner” if it is necessary to protect the creditors from fraud or gross mismanagement.
      • A third party trustee may perform additional services (i.e., legal or accounting) if the court approves .
    Chapter 11 Reorganization – Removal of DIP
  • 20. Chapter 11 Reorganization
    • Creditors’ Committee : The court will appoint a “creditors’ committee” from the unsecured creditors to represent the creditors, but is not required to do so if the total debts are less than $2 million .
    • Type of Debtors : Chapter 11 is available to any type of individual or business entity debtor .
    • Voluntary or Involuntary : Chapter 11 may be voluntary or involuntary.
  • 21.
    • Length: From the date the petition is filed until the plan is confirmed can take years
    • Implementation of the plan following confirmation is likely to take several more years.
    • Frequency : There is no statutory limit on how frequently a debtor may seek protection under Chapter 11.
    Chapter 11 Reorganization
  • 22. Chapter 15 Cross-Border Insolvency
    • Purpose - Provide effective mechanisms for dealing with insolvency cases involving debtors, assets, claimants and other parties in interest in more than one country.
    • General - Added to the Bankruptcy Code in 2005. Usually an ancillary proceeding to one initiated in another country when a full-blown U.S. bankruptcy case is not merited.
  • 23. Receiverships
    • Upon the petition of a creditor, the court appoints a third party receiver to take control of the debtor’s assets.
    • The receiver liquidates the debtor’s assets and distributes the proceeds pro-rata to the creditors in a fashion similar to a Chapter 7 Trustee.
    • Unless otherwise provided by court order, there is no discharge upon completion.
    • Often used in conjunction with commercial real estate. May be gaining in popularity.
  • 24. Assignment for Benefit of Creditors (a.k.a. ABC)
    • The debtor voluntarily assigns its assets to a third party custodian .
    • The custodian liquidates the debtor’s assets and distributes the proceeds pro rata to the creditors.
    • The debtor does not obtain a discharge upon completion.
    • Rarely used in Ohio, but more popular elsewhere
  • 25. Composition Agreements
    • A composition agreement is a contract between the debtor and one or more creditors whereby the creditors agree to accept less in full settlement of the debtor’s obligations.
    • Debtor is discharged with respect to the creditors that are a party to the contract and thereby have agreed to the discharge.
  • 26. Bankruptcy Petitions
    • Voluntary- If a business entity is filing, an appropriate corporate resolution or other requisite corporate action authorizing the filing is required.
    • Involuntary - In order to file an involuntary petition…
        • The debtor must owe at least $13,475 (amount is indexed) in unsecured debts Continued
  • 27. Bankruptcy Petitions
        • The debtor must either
          • Not be paying bona fide debts when due (called “ equity sense ” insolvency)
          • Have a custodian or receiver appointed under state law within the last 120 days
        • If there are more than 12 creditors, at least three unsecured creditors (owed at least $13,475) must join in the petition (one may file if it is owed $13,475).
  • 28.  
  • 29. Involuntary Petitions
    • If the court finds that the petition has merit, the debtor must prepare the Statement of Financial Affairs and Schedules of Assets and Liabilities.
    • Debtor may convert to a Chapter 11 or Chapter 13 if otherwise eligible.
  • 30.  
  • 31. Statement of Financial Affairs / Schedule of Assets & Liabilities
    • Both MUST be filed within 15 days after the petition is filed unless an extension is granted by the bankruptcy court.
    • The Statement of Financial Affairs is a series of questions focused on the debtor’s pre-filing behavior with respect to its assets, income, and liabilities. Continued
  • 32. Statement of Financial Affairs & Schedule of Assets &Liabilities
    • The Schedule of Assets and Liabilities is a balance sheet type document prepared on a “liquidation value” basis which
      • Lists the debtor’s assets and
      • Itemizes the amount of each and every debt owed, together with the name and address of the creditor and
      • Itemizes the estimated value of any collateral securing the obligation.
  • 33. Schedule of Assets & Liabilities
    • Schedule A Real Property
    • Schedule B Personal Property
    • Schedule C Property Claimed as Exempt
    • Schedule D Creditors Holding Secured Claims (includes both fully secured and only partially secured creditors)
    • Schedule E Creditors Holding Unsecured Priority Claims Continued
  • 34. Schedule of Assets & Liabilities
    • Schedule F Creditors Holding Unsecured Nonpriority Claims
    • Schedule G Executory Contracts and Unexpired Leases
    • Schedule H Codebtors
    • Schedule I Current Income of Individual Debtor(s)
    • Schedule J Current Expenditures of Individual Debtor(s)
  • 35.  
  • 36.  
  • 37.  
  • 38.  
  • 39.  
  • 40.  
  • 41.  
  • 42.  
  • 43.  
  • 44. Immediate Effect of Bankruptcy Filing
    • Creation of Bankruptcy Estate – Created immediately upon filing of petition or in an involuntary case when the “order for relief” is entered.
      • Appointment of Trustee : All of the debtor’s assets are no longer controlled by the debtor for his benefit. In a Chapter 7 or Chapter 13 case, the debtor’s assets are immediately transferred to the control of a trustee to manage and dispose of for the benefit of the debtor’s creditors. Continued
  • 45. Immediate Effect of Bankruptcy Filing
      • Chapter 11 DIP: In a Chapter 11, the debtor retains control of the assets as “debtor-in-possession” but must act as a trustee for the benefit of creditors.
  • 46. Automatic Stay
    • Automatic Stay : Upon filing of a petition the “automatic stay ” stops all collection actions by all creditors, including secured creditors .
      • Exception - alimony/child support
  • 47. Initial Questions
    • What kind of creditor is client?/ Who is the most important creditor? How connected to debtor?
      • Secured >>> what type of collateral
      • Unsecured
        • Trade creditor or supplier
        • Equipment lessor
        • Real Property Lessor
        • Taxing Authority
      • Economic Effect of Filing on creditor
      • Creditor’s Objectives
  • 48. Initial Questions
    • Who/ What is Debtor? What about codebtors?
      • Individual or Business
      • Industry Sector
      • Service, Manufacturing, Retail
    • TYPE of debt, i.e. business or personal
  • 49. Initial Questions
    • Why is Creditor Faced with Bankruptcy Filing?
      • Foreclosure sale/ repossesion of collateral
      • Client Collection Action
      • Other Creditors
      • Voluntary Decision of Debtor
  • 50. Initial Questions
    • Where was petition filed?
    • When did filing happen?
    • How did creditor client find out?
    • What is Case No.?
  • 51. Dealing with a Bankruptcy Filing
    • Understand structure of Bankruptcy Code. The Bankruptcy Code is found in Title 11 of the federal U.S. Code and consists of eight numbered chapters.
      • Chapters 1, 3, and 5 contain general rules applicable to all bankruptcy cases.
      • Chapters 7, 9 (municipal), 11, 12 (farmer), 13, and 15 have provisions which apply only to cases filed under those chapters.
  • 52. Dealing with a Bankruptcy Filing – Developing a Strategy
    • Catalog options and special considerations
      • Type of security held/Importance to Debtor
      • Significance/Substantiality of Claim Relative to claims held by others
      • Likely Participation of Other Players
        • Debtor
        • Trustee
        • Other Creditors
  • 53. Dealing with a Bankruptcy Filing – Developing a Strategy
    • Availability of Specialty Sections
      • Lessor Claims
      • Administrative Claims
    • Review Documentation
  • 54. Dealing with a Bankruptcy Filing – Developing a Strategy
    • Determination of Secured Status
      • Range of Value of Collateral
        • Appraisals
        • Effect of Other Liens
      • Compare to Amount of Debt
    • Assess Vulnerabilities
  • 55. Dealing with a Bankruptcy Filing
    • Review bankruptcy schedules
      • Make sure you or your client are properly listed.
      • Learn and understand about indebtedness to other creditors.
      • Determine likely level of repayment.
  • 56.
    • Attend “first meeting of creditors”
      • Meeting is led by the U.S. trustee and provides an opportunity for creditors to ask general questions about what precipitated the bankruptcy filing and what sort of treatment they might be able to expect for their claim.
      • Non-attorneys may attend and participate in the questioning so long as they are there on behalf of a particular creditor or other party in interest.
    Dealing with a Bankruptcy Filing
  • 57.
    • File appropriate proof of claim to evidence indebtedness owed to you or your client and reference any collateral securing repayment.
    • Creditor or creditor’s attorney may file proof of claim with bankruptcy court.
    Dealing with a Bankruptcy Filing
  • 58.  
  • 59. Types of Claims
    • Secured claim – if value of collateral is less than the amount of the debt, the difference is an unsecured claim.
    • Unsecured Priority Claim – (i.e., taxes, certain pre-petition wages)
    • Unsecured Non-priority Claim – (i.e., trade creditors, credit card debt) Continued
  • 60. Types of Claims
    • Executory Contract – (i.e., lease of equipment or business premises; other unexpired contract
    • Administrative Claims – for services provided after the filing of the bankruptcy
      • CANNOT use proof of claim form.
      • Instead must apply to bankruptcy court for payment pursuant to §503 of the Bankruptcy Code
  • 61. Priority of Claims
    • Exempt Assets belong to the debtor (only applies to inidividuals), then
    • Secured Creditors are paid in full; then
    • Priority and Preferred Unsecured Creditors
  • 62. Priority of Claims
    • 3. Priority and Preferred Unsecured Creditors
    • a. Administrative costs
    • Debts incurred after filing; then
    • Wages/employee benefits up to $11,000 (amount is indexed)
      • (1) Wages must be earned within 90 days prior to filing the petition, then
      • (2) Employee benefits must be earned within 180 days of filing the petition, then
  • 63. Priority of Claims
    • 3. Priority and Preferred Unsecured Creditors
      • d. Customer deposits up to $2,500 (amount is indexed) per customer; then
      • e. Alimony and child support; then
      • Taxes, then
    • 4. ALL OTHER UNSECURED CREDITORS
  • 64. Bankruptcy Preferences
    • A payment or grant of collateral/conveyance of assets that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets
      • Based upon extent secured
  • 65. Bankruptcy Preferences
    • Must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion.
    • This policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.
  • 66. Statutory Definition of Preference – Section 547
    • On an antecedent (i.e., past due) debt owed to a creditor
    • Made while the now bankrupt customer was "insolvent"
    • Within 90 days (or a year, if the creditor is an "insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed Continued
  • 67. Statutory Definition of Preference – Section 547
    • That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding
  • 68. Performing a “Preference Analysis”
    • Gather a full payment history for the period of at least the year before the payments in question were made.
    • All invoices showing both sales made and payments received during this period
    • Copies of any correspondence, including e-mail, contracts, checks, or other evidence of payments Continued
  • 69. Performing a “Preference Analysis”
    • Determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.
  • 70. Preference Exceptions
    • Contemporaneous Exchange - §547(c)(1)
    • Ordinary Course of Business - §547(c)(2)
      • Made in the " ordinary course of business or financial affairs " of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties.
      • Payment made "according to ordinary business terms" is also excepted. Continued
  • 71. Preference Exceptions
    • Subsequent New Value - §547(c)(4)
      • Extent to which creditor conveyed more value to debtor than it received
    • Payments to Fully Secured Creditors
  • 72. Dealing with a Chapter 11 Plan of Reorganization
    • Submission of plan
    • Contents of plan – 11 U.S.C. 1123
      • Classification of claims
      • Treatment of each class of claims
      • Means for implementation
    • Disclosure Statement – 11 U.S.C. §1125
  • 73. Chapter 11 Plan Voting
    • “ Impaired” creditors vote to ACCEPT or REJECT the plan. Acceptance occurs if
      • Two-thirds of the claims in amount voting in the class vote to accept; AND
      • One-half of the claims in number voting in the class vote to accept
    • At least one class of non-insider impaired creditors must vote to accept the plan.
  • 74. Confirmation of Plan
    • If an impaired class rejects the plan, the plan must provide for each creditor in that class to receive at least as much as they would have received in a Chapter 7 liquidation scenario. This is sometimes called a “cramdown.” 11 U.S.C. §1129. 
    • A proposed Plan of Reorganization may also be challenged on a number of other grounds such as feasibility by way of an objection to confirmation. Continued
  • 75. Confirmation of Plan
    • Once confirmed, the contents of the plan and the treatment provided for a particular claim become a new contract superseding the original terms of the transaction between the debtor and creditor. 11 U.S.C. §1141.
  • 76. Other Bankruptcy Concepts
    • Adequate Protection
      • Used to protect secured creditors by the diminution in the value of their collateral
      • Trustee may be required to make cash payments or provide additional collateral to secure creditor
      • Debtor failure to provide can be a grounds for relief from stay
  • 77. Other Bankruptcy Concepts
    • Cash Collateral
      • When debtor has granted a lender a security interest in substantially all assets, it is not permitted to use cash generated from receivables generation, disposition of assets, etc. without consent of the lender and/or approval of bankruptcy court. 11 U.S.C. §363.
  • 78. Other Bankruptcy Concepts
    • Relief from Stay – Creditors can petition bankruptcy court for “relief from stay to continue collection action when:
        • There is a lack of adequate protection
        • The debtor has no equity in the collateral, and it is not necessary for an “effective reorganization.”
        • For “cause” …11 U.S.C. §362(d)
  • 79. Other Bankruptcy Concepts
    • Executory Contracts
      • Trustee or DIP may choose to accept or reject executory contracts (i.e., lease agreements, unexpired contracts, union agreements)
      • In case of nonresidential real property leases, rental payments must be kept current until a decision as to what to do is made.
  • 80. Other Bankruptcy Concepts
    • Conversion
      • If debtor is not making acceptable progress toward confirmation of a plan in Chapter 13 or Chapter 11 case, creditors can ask bankruptcy court to convert case to Chapter 7 liquidation.
  • 81. For More Information…
    • Basic Overview
    • http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
  • 82. Teri G. Rasmussen
    • Creditors’ Rights and Debt Collection
      • Business Bankruptcy & Insolvency
      • UCC and Secured Transactions
      • Commercial Finance
      • Commercial Litigation
    • General Corporate and Business Law
      • Business Acquisitions and Sales
      • Joint Ventures and Strategic Alliances
      • Corporate Governance and Shareholder Disputes
      • Contracts and Loan/Lease Documentation
      • Business Formation and Financing
      • Business Planning
      • Real Estate
  • 83. Visit my legal blog: OHIO PRACTICAL BUSINESS LAW http:// www.ohiopracticalbusinesslaw.com
  • 84. of Plunkett Cooney
  • 85.
    • Attorney and Counselor at Law
    • Plunkett Cooney
    • 300 E. Broad Street, Suite 590
    • Columbus, OH 43215
    • Direct: (614) 629-3017
    • [email_address]
    Teri G. Rasmussen, J.D.