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.
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
Parties may file an adversary proceeding, which is basically a lawsuit filed within the bankruptcy case. The complaint in a AP can seek any relief against the debtor that is within the court’s jurisdiction, including requests for class action treatment and injunctive relief. APs are subject to procedural rules that are similar to the federal rules of civil procedure. See Fed. Rule Bankr. P. 7001 et seq. APs can be filed throughout the case.
Litigators seeking money damages may ask whether they should file a consumer claim as an AP, a claim, or both. Both processes provide a modified discovery/trial process. Because both procedural rules offer similar advantages, some courts prefer adjudicating affirmative claims through the claims process instead of the AP process and instead use APs for issues arising from the bankruptcy itself. The most common issues litigated as APs are fraudulent transfers and avoidance proceedings.
See a sample class claim here.
A debtor-in-possession or a trustee, if appointed, may seek to unwind transfers made prior to bankruptcy via the transfer avoidance process. The debtor-in-possession or trustee may set aside certain pre-petition transfers, including preferences, fraudulent conveyances, and transfers avoidable under the “strong-arm” powers. 11 U.S.C. § 1107(a).
If the debtor-in-possession in a Chapter 11 case fails to pursue meritorious transfer avoidance actions, a creditor can move the Court to appoint a trustee.
To learn more about fraudulent transfers and avoidance proceedings, 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
Filing a Proof of Claim
A creditor must file a proof of claim to participate in the distribution of the debtor’s assets or receive payment under the debtor’s plan. A proof of claim should be filed even if the consumer has no judgment against the debtor, has not begun litigation, or is not certain of the exact amount of the claim. If litigation has begun or a judgment has been obtained against the debtor before the bankruptcy case was filed, a proof of claim must still be filed in the bankruptcy case.
Advocates can file either a class claim or a claim on behalf of an individual. A claim must be filed using Official Form 410, available on United States Courts’ website. The form is relatively straightforward to complete. It requires the creditor to provide their contact information, the basis for their claim, the nature of their claim, the basis for any priority, and the amount sought. In Chapter 11 cases where it is expected that a large number of claims will be filed by individual creditors, the court may order that proofs of claim must be filed with a court approved claims agent, rather than with the court. Information about this requirement will be included in the notice of the bar date for filing claims.
Courts generally apply a two-step procedure in allowing a class proof of claim. This initial analysis focuses on three factors: (1) whether a class was certified pre-petition; (2) whether the members of the proposed class received notice of the claim bar date; and (3) whether class certification will adversely affect the administration of the bankruptcy estate. The final step involves the application of the factors under F.R.C.P. 23 for certifying a class. The bankruptcy court applies these standards as any federal court would in a non-bankruptcy context.
Litigators should draft a claim in the same manner that they would draft a complaint, because the debtor and trustee will have the opportunity to object to the claim, applying a FRCP 12(b)(6)-like standard. If a court action has been filed against the debtor before the bankruptcy is filed, the complaint in that case can be referenced in the proof of claim and attached as an exhibit.
Click here for a sample Class Proof of Claim.
The deadline to file a proof of claim in a Chapter 7 bankruptcy is 70 days after the petition is filed. The deadline to file in a Chapter 11 bankruptcy is established by the court based on the bar date approved by the court.
While a variety of parties will assert claims for payment in a bankruptcy, the likelihood they will recover depends upon how their claim is classified. The hierarchy of claims is: 1) Secured Claims, 2) Priority Unsecured Claims (including administrative expenses), 3) General Unsecured Claims, 4) Equity Security Interests. Each class of claims must be addressed before the next class of claims is entitled to a distribution of assets.
Not all unsecured creditors share equally in the funds that are left over after secured creditors are paid. Some are given favored treatment as “priority” claims. Under 11 U.S.C. § 507, unsecured creditors with a higher priority are paid in full before those with lower priorities receive payment. If there are not sufficient funds to pay all unsecured creditors within a priority level, those creditors receive a pro rata share of the remaining funds, and creditors with lower priority levels will not get paid.
Unsecured creditors that do not have priority, referred to as general unsecured creditors, often do not receive any distribution in either Chapter 11 or Chapter 7 cases. However, in cases in which the interests of consumers with legal claims against the debtor have been represented on the creditor’s committee (or through a special creditor committee), negotiations have resulted in the debtor proposing in the Chapter 11 plan to create a fund for the payment of unsecured consumer claims.
Administrative expenses are the first priority unsecured claims that must be paid in full when the plan takes effect, unless creditors with those claims waive the right to immediate payment. Administrative expenses include the post-petition wages of the debtor’s employees, court costs, and the fees for the attorneys, accountants and other professionals who worked on the case.
After the claims bar date has passed, the claims adjudication process will begin. The trustee and debtor in a chapter 7 case, and the debtor-in-possession in a Chapter 11 case, will review the filed claims to determine if an objection to the allowance of the claim should be filed. In cases in which a separate fund has been created to pay unsecured consumer claims, the court may appoint a party other than the debtor to review the claims and litigate objections. For example, in the Chapter 11 case of the large mortgage lender and servicer Ditech, a consumer representative was appointed to serve this role as the Consumer Claims Trustee on behalf of the Ditech Holding Corporation Consumer Creditor Recovery Trust.
If an objection to a proof of claim is filed and seeks only the disallowance of the claim and no other relief, it will be treated as a “contested matter.” Typically, the debtor or trustee is seeking simply disallowance of the claim and no other relief. If other relief is sought, the matter will be treated as an adversary proceeding, subject to Bankruptcy Rules 7001-7087. Contested matters are governed by Bankruptcy Rule 9014, which provides that some but not all of the adversary proceeding rules apply. In either case, the parties will be afforded the opportunity to conduct discovery. The party objecting to the claim may seek to have the claim disallowed based on the standards set out in Fed. R. Civ. P. 12(b)(6), that the proof of claim fails to assert a claim upon which relief may be granted. If a dispositive motion is not granted or settlement not reached, the claim may be adjudicated through a trial on the merits in the bankruptcy court.
The meeting of creditors is not the same as a creditors’ committee, but they also convene in a 341 meeting.is 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 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.
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