Frequently Asked Questions

 

frequently asked questions faqThe following Frequently Asked Questions have been prepared by Danowitz & Associates, P.C. for informational purposes only.  It is intended for the use of clients and prospective clients of Danowitz & Associates, P.C. and is by no means an exhaustive description of the bankruptcy process. The information below is not intended to serve as legal advice, and legal advice will be rendered to clients and prospective clients directly by attorneys associated with Danowitz & Associates, P.C.

All substantive bankruptcy law is found in Title 11 of the United States Code. Within Title 11 are various numbered chapters from which the kinds of bankruptcies derive their common names. Chapter 11 of the bankruptcy is designed for businesses and for individuals with substantial holdings who have the desire and resources to reorganize. In comparison to Chapter 7 bankruptcies, where the assets of the debtor are liquidated for distribution to creditors, a Chapter 11 Bankruptcy Case is a reorganization that frequently enables the business or individual to keep necessary assets while eliminating unnecessary or unprofitable assets for the purpose of reducing expenses, increasing revenues, or both, eventually leading to the submission of a Chapter 11 Plan to pay pre-petition creditors in a manner and amount authorized by law and approved by the court. The entity filing a voluntary bankruptcy petition is referred to as “the Debtor.” Even within Chapter 11 there are various types of Chapter 11 bankruptcy all of which are subject to essentially the same law, there are variations and restrictions for those debtors who fall under the definition of a “Small Business Debtor” or a “Single Asset Real Estate” case.

Prior to the filing of a bankruptcy case, certain disclosures must be prepared for filing with the court. The Debtor is required to make a full disclosure of identity, assets of every nature, and all liabilities, even if disputed or the amount is unknown. Put another way, a Debtor cannot pick and choose who they wish to “include” in the bankruptcy. The Debtor has a duty to keep the court informed of any changes in the Debtor’s status, of any claims, or of any assets. A checklist of documents and materials that your lawyer will need is found in Section 12 of this material.

Corporations, limited liability companies and partnerships must obtain approvals from their shareholders, members, and partners respectively. In cases of individuals filing bankruptcy laws enacted in 2005 require that the individual debtors complete an approved credit counseling course prior to filing the case, and also require completion of a financial management course after the filing of the case in order to be granted a discharge. Most debtors elect to take the credit counseling course on-line. The costs for taking the credit counseling and budget management courses vary. There are many approved credit counseling agencies. Some of the authorized non-profit credit counseling agencies can be found at:

www.CCCS-Express.org
www.PersonalFinanceEducation.com
www.CricketDebt.com
www.GetBankruptcyCertificate.com

The bankruptcy courts have a system for filing the petition and pleadings electronically, called the PACER system. If there is a need for immediate relief, your lawyer can file a case 24 hours a day and seven days a week. From the moment a bankruptcy case is filed, or commenced, creditors are forbidden to take any action to collect on any pre-filing (“pre-petition”) debt, other than through narrowly designated channels within the bankruptcy court. [See “Automatic Stay” in Glossary.] An action taken by a creditor against the Debtor or property of the estate after the commencement of the case is void and could result in sanctions against the offending creditors.

When immediate relief is required by a debtor, it may be possible to fashion a partial, or skeletal, petition which does not include all information that is required to be filed. If the initial disclosures were not made at the time of the filing of the case the complete disclosures must be made within 14 days after the filing, unless the court grants permission to extend the time upon a showing of cause why the deadline should be extended.

Also, at the moment the bankruptcy case is filed an “estate” springs into existence which includes all property, assets, rights, claims in which the debtor has an interest. The law allows individual debtors to claim exemptions on certain properties, such as not more than $20,000 in your principal residence, additional amounts for household goods, motor vehicles, jewelry, and many more. The effect of an exemption is to remove such property, or the value of the exempt property, from the estate. In Chapter 11 this may affect the debtor’s obligations to pay creditors under a Plan of Reorganization. Corporations and LLCs have no right to claim exemptions.

It will be necessary for the Debtor to meet with the United States Trustee, or an accountant with the U.S. Trustee’s office, approximately 7-10 days after filing. This initial debtor interview, or IDI, is a time where additional financial information, not included in the petition and schedules filed with the court, must be produced. It is also a time where the Trustee educates the Debtor on the reporting requirements and other expectations of the U.S. Trustee together with the remaining duties of the Debtor regarding compliance with bankruptcy rules and requirements.

Approximately one month after the case is filed the Debtor is required to attend a meeting, presided over by the Trustee, to be examined by the Trustee, creditors, and parties in interest. This is called the Meeting of Creditors. The Trustee typically examines the Debtor concerning the facts disclosed in the Petition, the Schedules, and the Statements filed by the Debtor. The Meeting of Creditors is typically not an in depth examination, but rather the opportunity for parties in interest to make a preliminary inquiry whether additional information will be required to be disclosed by the Debtor or by others.

If the Trustee, any creditor, or a party in interest desires additional examination of the Debtor, they may do so by means of a deposition format governed by Bankruptcy Rule 2004 and known in bankruptcy parlance as a “2004 Exam.” A 2004 Exam can be very broad in scope, and the Debtor may be required to produce financial and other documents. 2004 Exams are not limited to just the Debtor; anyone having knowledge concerning claims, liabilities, or information that might affect the administration of the case.

The Debtor, under the cloak of Debtor-in-Possession, owes a fiduciary duty to creditors. Conduct of the officers and agents of the Debtor must be in furtherance of the best interests of creditors and of the bankruptcy estate. Officers, owners, and relatives of individual debtors are considered insiders and transactions with insiders come under close scrutiny. Any dealings that favor the interests of insiders over the interests of creditors may result in harsh responses from the U.S. Trustee and the bankruptcy judge.

Immediately after filing, the Debtor must close out all of its pre-petition books and bank accounts, and open a new set of books, and special debtor-in-possession accounts (“DIP accounts”). DIP accounts must be at banking institutions approved by the U.S. Trustee. The Debtor may be required to open multiple DIP accounts, such as operating accounts, payroll accounts, tax accounts, etc. All payments should be through checks drawn on the DIP account. Cash payments should be few and should be meticulously documented.

The Debtor needs to remain current on all of its financial obligations while in a Chapter 11 bankruptcy. While there may be months where a negative cash flow is seen, recurring monthly losses are considered evidence that there can be no effective reorganization, resulting in motions by the U.S. Trustee or by creditors to either convert the case to a case under Chapter 7 or to simply dismiss the case and leave the Debtor to the mercy of creditors.

The Debtor must file a Monthly Operating Report, or MOR, each and every month by the 20th day of the next month. The MOR discloses every dollar of revenue, and an itemization of every payment made during the monthly period. The MOR is filed with the court and accessible to anyone wishing to view it on the PACER system. The MOR allows creditors and the court to monitor compliance with reporting requirements, is the yardstick for measuring U.S. Trustee fees, and is very useful as to measure progress for funding a Chapter 11 Plan of Reorganization.

There are many vehicles available to the Chapter 11 Debtor; some of which create valuable opportunities, and some of which appear oppressive or burdensome.

The Debtor is prohibited from making payments toward any pre-petition debt, unless the Debtor first gets permission from the court to do so. The most pressing pre-petition debts that a Debtor may want to pay are wages of employees, and payments to critical vendors who are needed for the successful operations of the business. A bankruptcy judge is usually available to hear these “first day” motions on an expedited basis. Other pre-petition payments may be required, after court approval, if you assume leases and were behind on lease payments at the time of the case filing.

The Debtor may lack the authority to spend any money without first getting approval if the Debtor pledged its accounts as collateral to secure financial obligations to creditors. The cash on hand, and receivables, at the commencement of the case, are considered “cash collateral” in which the creditor has a compelling interest. Therefore, consent of the creditor will be immediately sought. Frequently, the creditor will agree to allowing the Debtor to use cash collateral, but only upon the resumption of payments in some amount. These payments are called “adequate protection payments.” If the Debtor and creditor agree on the terms of adequate protection, the Debtor must still submit a detailed itemized budget to the court along with a consent order seeking the court’s approval to spend in the amounts designated and to pay the secured creditor a reasonable amount as adequate protection. If an order approving cash collateral is entered on an expedited basis, there will be a second hearing and second order after all creditors are given the chance to examine the circumstances and, perhaps, object to the terms agreed upon by the Debtor and creditor on an interim basis.

Secured creditors who contend their security is in jeopardy or the property pledged is not necessary for reorganization may ask the court to lift the automatic stay and allow them to foreclose on the collateral. The court will grant a creditor relief to do so if the creditor demonstrates that there is no equity in the property and that it is not needed for the Debtor to reorganize. A debtor who wishes to retain such collateral may agree to pay the creditor some reasonable amount to preserve the creditor’s equity or interest in the property. Such payments are designated as adequate protection payments, just as in the case of cash collateral orders.

The Debtor may carry out its ordinary business affairs without court approval. What is considered “ordinary” is decided on a case by case basis with counsel from your attorney. Purchasing supplies and inventory, payment of reasonable wages and salaries, payment of insurance premiums, payment of taxes, etc. fall within ordinary business practices. Purchase of significant equipment, entering into long-term leases, hiring professionals, settling disputes rarely are considered “ordinary business” and may require court approval.

Typically, the sale of property of the estate is not “ordinary business” and can be done only with court approval. The Debtor may seek permission to sell property outside of the ordinary business of the Debtor. The bankruptcy judge has the authority to allow property to be sold “free and clear of liens.” This is sometimes necessary if there is a dispute as to the amount owed to a secured creditor, or the respective priorities of multiple creditors claiming an interest in the property. If this kind of sale is approved the valid liens on the property being sold may attach to the proceeds of the sale, allowing disputes over amounts, priorities, etc. to be resolved at a later date.

Many debtors have obligations on leases when they enter bankruptcy. Sometimes the Debtor is a lessor of property or equipment, and sometimes the Debtor is the lessee of property or equipment. In either case, the Debtor is authorized (and also has a duty) to either assume or reject such leases. By rejecting unnecessary or unprofitable leases the Debtor may reduce expenses going forward. Likewise, by assuming certain essential or profitable leases, the Debtor may increase the likelihood of reorganization. The assumption or rejection of leases may occur at any time during the Chapter 11 case, including as a provision in the Debtor’s Chapter 11 Plan. The Bankruptcy Code places time constraints on the assumption or rejection of certain kinds of leases, so you should discuss such concerns with your bankruptcy attorney.

If the Debtor paid some, but not all, creditors shortly before filing the filing of the bankruptcy case, the Trustee is empowered to file pleadings with the court to seek an order forcing the creditors receiving such payments to pay the money over to the Trustee for later distribution to all creditors. [See “Preference” in Glossary.] The Chapter 11 Debtor-in possession acts in the capacity of a trustee and has the same avoiding powers as a trustee in Chapter 7 and 13. Generally, payments made within 90 days of the petition date may be subject to avoidance, while payments made to insiders within a year of filing may be recovered.

If the Debtor has given away property, or sold property for less than fair market value, before filing the case the Trustee/Debtor-in possession is also empowered to file pleadings with the court to seek an order requiring the recipient to turnover the property so that the Trustee may dispose of the property for fair market value. In much the same way that the Trustee can try to recover a preference, the Trustee can seek to recover these transfers. The title used to describe these transfers is “fraudulent conveyance,” which is somewhat of a misnomer insofar as a fraudulent conveyance does not require any intention by the Debtor or the receiving party to defraud anyone.

Chapter 11 only provides for temporary “protection.” There are times where the filing of Chapter 11 creates a conciliatory dialogue between the Debtor and creditors. If the Debtor and significant creditors come to terms that are agreeable, the Debtor may ask the court to dismiss the case. Of course, the material terms of settlement with creditors may need to be disclosed.

If the Debtor has been in Chapter 11 for an extended period and demonstrated little potential for reorganizing, the U.S. Trustee or creditors may ask that the case be dismissed. However, if the Debtor has any assets with equity the more common request is that the case be converted to a liquidation case under Chapter 7.

Successful Chapter 11 reorganizations result in the approval, or confirmation, of a Chapter 11 Plan of Reorganization. The process of Plan approval is not simple. First, a comprehensive disclosure statement must be submitted to creditors and the U.S. Trustee for approval. A disclosure statement is a detailed narrative the describes the history and management of the Debtor, the highlights (or lowlights) of the Chapter 11 case, and is intended to demonstrate that the Debtor is capable of performing under a Plan to be approved by the court.

The Chapter 11 Plan of Reorganization creates various classes into which each creditor will be categorized, and states specifically how and when each class of creditors will be paid. Typical classes include one or more of the following: secured, unsecured, priority taxes, administrative expenses, insiders. Some of the classes will be paid in full, while others may receive something less that payment in full.
Once the Disclosure Statement has been approved by the court, the Plan is sent to creditors along with the Disclosure Statement and creditors are asked to vote on the Plan. If enough creditors vote in favor of the Plan, the court will approve, or confirm, the Plan. Even if there are not substantial votes for the Plan there are instances where the court may nonetheless confirm the Plan, a process quaintly referred to as a “cram down.”

When a Plan of Reorganization is confirmed, it is the formal resolution that is binding upon the Debtor and upon all creditors of the Debtor. The Chapter 11 case will not be closed until after the Debtor has commenced payments on the Plan and the Plan has been “substantially consummated.” The case may be closed while there are still many years remaining on payouts to creditors.

While you can expect paying your Chapter 11 attorneys a pre-petition retainer, the retainer rarely covers the entire cost of administering a Chapter 11 case. Attorney’s fees may become a significant expense of the Debtor. As noted above, reporting requirements are time consuming and court approval is required for many activities which are often performed as a matter of practice outside of bankruptcy. Even the payment of the Debtor’s legal fees can be made only after a detailed application is filed with the court and approved by order of the court.

Debtors needing an accountant to assist with bankruptcy reports, tax returns, payroll, etc., must apply to the court and the accountant must be approved by motion to and order from the Court, and the accountant can only be paid periodically after fees are requested by motion and approved by order of the court.

Other professionals, such as appraisers, realtors, and business consultants must be approved to be employed and can only be paid after an order is entered by the court approving such compensation.

The Untied States Trustee is paid a fee every calendar quarter. The amount of the fee is determined on a sliding scale based upon the disbursements made by the Debtor during any particular quarter. Disbursements are determined according to Monthly Operating Reports filed during that period. U.S. Trustee fees continue after confirmation of a Plan until an order closing the case has been entered.

Except for a debtor who qualities as a “small business” debtor, unsecured creditors may form a committee or committees to monitor the case. Committees approved by the court, are allowed to engage legal counsel, and Debtor may be responsible for paying the attorney’s fees incurred by the creditor committees.

A. You will remain in control of your business and financial affairs, except in unusual situations. The Debtor as “debtor in possession” has the same powers as a Trustee in Chapter 7 or Chapter 12 and owes a fiduciary duty to creditors. Put another way, you may not place your interests ahead of the interests of those to whom money is owed.

B. You will have some breathing room from paying most of your debt. The Automatic Stay prevents creditors from trying to recover pre-petition obligations (except as specifically provided in the bankruptcy code or by order of the court.) The filing of the bankruptcy prevents you from making payments on pre-petition obligations unless allowed under exceptions or unless authorized by order of the court. In fact, you may be required to make payments to secured creditors if you intend to use the collateral pledged as security to such creditor(s) or remain current on leases that you intend to assume.

C. You must promptly open new bank accounts and close all pre-petition bank accounts.

D. You must provide the U.S. Trustee with your most recently filed income tax return.

E. In addition to attending the Meeting of Creditors, you will be required to meet with an accountant or analyst from the U.S. Trustee’s office. This normally takes place 10-14 days after filing, and you will be expected to show full compliance with the initial reporting requirements at that time.

F. You must file all tax returns; both pre-petition and post petition.

G. You will have to pay the U.S. Trustee fees on a quarterly basis. Fees are calculated from your quarterly expenditures.

H. Every month you must file a report showing the source of all income and a detailed itemization of all expenditures. You may have limitations on your use of post-petition income.

I. You may be required to pay security deposits to utility companies.

J. You will have to keep your property insured.

K. You must stay current on your post-petition obligations.

L. You may not pay any pre-petition obligations without first obtaining approval from the court.

M. You must obtain court approval before you hire or pay any professionals, including attorneys, accountants, and realtors.

N. You may be able to reject unnecessary or burdensome lease agreements;

O. Any leases that you plan to keep will need to be current on payments, or provisions will need to be made to bring the payments current.

P. You may be required to pay for your creditors to engage legal counsel.

Q. You may have the ability to propose a plan that modifies the terms of payment to secured creditors;

R. You will have the ability to propose a plan to repay some or all of your debt. The minimum amount that you will have to repay may be governed by statute.

A. Comprehensive list of all payables with names, addresses, account numbers, contact persons;

B. Claims of any person or entity to recover money or property that is not included in the list of payables;

C. Significant pleadings in any pending lawsuits;

D. Copies of all existing leases;

E. All security deeds showing the pledge of real property to creditors;

F. All promissory notes and security agreements showing the pledge of personal property to creditors;

G. Complete list of all accounts receivable, including aging report;

H. Current inventory;

I. Current balance sheet and profit & loss statement;

J. Most recently filed income tax returns;

K. Most recently filed quarterly or monthly tax returns.

L. Certificates showing that all equipment, vehicles, and property are covered by a comprehensive insurance policy;

M. Itemized list of all payment made during the 90 days immediately preceding the filing date.

N. A 6 month projected budget of post-petition expenses and income

Adversary Proceeding: An independent lawsuit within the case that is normally tried before the bankruptcy judge without a jury. There is a complaint filed, summons issued and served, discovery conducted, and (unless settled by agreement or resolved by motion) a trial in the bankruptcy court. Adversary proceedings are most common for determining issues of discharge, dischargeability, and the recovery of preferences or fraudulent conveyances.

Assumption: If there is a lease of any sort that the Debtor wishes to keep, the Debtor may be able to “assume” the lease and continue the lease as if the bankruptcy were never filed. Conversely, if there are leases that are not essential or are unaffordable, the Debtor may reject such leases.

Automatic Stay: An injunction that springs forward the instant a bankruptcy case is filed. The injunction exists, whether a creditor has actual knowledge of the filing or not. With few exceptions, any act by a creditor against the Debtor, or against property of the estate, is void and can be set aside by the bankruptcy court.

Credit Counseling: Any individual must take a credit counseling course from a non-profit credit counseling agency before filing a bankruptcy under any chapter of the bankruptcy code. Once in bankruptcy, the individual must take a Budget Management program through the credit counseling agency in order to be eligible for a discharge in bankruptcy.

The Debtor: The individual(s) or business entity that files a bankruptcy case and who is the subject of the bankruptcy.

Debtor-in Possession: The Debtor in a chapter 11 case, who assumes the duties and responsibilities of a Trustee in Chapter 7 or Chapter 13. Commonly referred to as “DIP.”

Discharge:  Essentially, a forgiveness of debt which prevents a creditor from collecting pre-petition obligations of the Debtor.

Examination of Debtor: The opportunity to question the Debtor, under oath, regarding assets, liabilities, payments, and other financial information.  This is typically accomplished at the Meeting of Creditors or through a 2004 Exam.

Exceptions to Discharge:  Certain claims cannot be discharged and are, therefore, excepted from discharge.  Most common are such debts as student loans, alimony, and certain tax liabilities.

2004 Exam: Named after Bankruptcy Rule 2004, this resembles a deposition in non-bankruptcy case, and is a wide open “fishing expedition” concerning any claims, liabilities, payments, transfers, or any matter that could affect the administration of the case or the granting/denial of a discharge.

Exemptions: The law permits individuals to “exempt out” certain assets.  Put another way, a Debtor can keep the proverbial shirt on his back, together with a modest equity in property.  Property that is exempted is not property of the estate.

Fraudulent Conveyance:  If the Debtor transferred assets for less than they are worth, or if the Debtor made gifts of property shortly before the filing of a bankruptcy case, a Trustee can ask the court to “unto” the transfer and take back the property to be sold and distributed to creditors.

Insider:  While the definition is very broad, an insider is typically an officer, director, or significant owner/member of a company, or a relative of a debtor.

Meeting of Creditors:  A required meeting between the Trustee, the Debtor, and occasionally creditors, which takes place approximately a month after the case is filed, and where the Debtor can be questioned by the a trustee and creditors regarding debt, property, payments, and other appropriate financial disclosures.

Petition:  The document identifying the Debtor which, when filed, begins the bankruptcy case.

Preference:  If a creditor has been paid shortly before the filing of a bankruptcy case, while other creditors were not paid, a Trustee can ask the court to “undo” the payment and require the creditor to pay back the amount it received.

Property of the Estate:  The moment a case is filed, and “estate” is created, consisting of all property, claims, and other assets in which the Debtor has any interest or rights of ownership. Under chapter 11 property of the estate continues to accrue after the filing of the case.

Relief from the Automatic Stay:  Under certain circumstances a creditor can ask the court to allow them to take certain measures that are otherwise forbidden by the automatic stay.

Schedules:  The documents filed with the court that disclose all assets of and claims against the Debtor.  The form of the Schedules is mandated by statute.

Statement of Financial Affairs:  The document filed with the court that discloses such things as income history, payment histories, litigation history, ownership interests.

Trustee

Chapter 11:  In a Chapter 11 case the Debtor, acting as a “debtor in-possession,” is responsible to administer the estate in much the same way as a Chapter 7 Trustee is responsible to administer a Chapter 7 case. If there is evidence of fraud or gross mismanagement, the court can appoint an independent person to act as Trustee.

United States:  An agent of the U.S. Department of Justice, the U.S. Trustee is responsible for overseeing all bankruptcy cases, investigating allegations of bankruptcy fraud or other bankruptcy crimes, and is instrumental in the administration of Chapter 11 cases.