My Debtor Filed for Bankruptcy – Now What?
If you’ve received a notice from the U.S. Bankruptcy Court indicating that one of your debtors has filed for bankruptcy, you may be confused about how to respond.
Well, it depends upon the type of bankruptcy filed.
People are often surprised to learn that there are actually six different types of bankruptcy under the U.S. Bankruptcy Code:
- Chapter 7 Liquidation for individuals and businesses
- Chapter 9 Reorganization for municipalities
- Chapter 11 Reorganization for corporations, partnerships or LLC’s (and individuals in rare instances)
- Chapter 12 Reorganization for family farmers and fishermen
- Chapter 13 Reorganization for individuals and sole proprietorship’s
- Chapter 15 Cross-Border Insolvency for foreign companies with U.S. debts
One thing all these bankruptcy types have in common: Once the petition is filed, you are prohibited from attempting to collect the debt.
For our purposes, we’ll focus on the three most common types of bankruptcy: Chapter 7, Chapter 11 and Chapter 13.
Chapter 7 Liquidation
In a Chapter 7 liquidation, the debtor’s financial obligations are virtually wiped clean (with a few exceptions). Both individuals and businesses are eligible to file Chapter 7.
If you received a Notice of Bankruptcy from the U.S. Bankruptcy Court, it includes information about a “341 Meeting,” also known as a “Meeting of Creditors.” In a Chapter 7, the purpose of this meeting with the bankruptcy trustee is to determine if the debtor owns any assets which can be liquidated and distributed to creditors.
After the 341 Meeting, you will receive a notice from the court, indicating whether the Chapter 7 case was deemed to be a “No Asset” or “Asset” bankruptcy. If the case is “No Asset,” and you are an unsecured creditor, you will not receive any payments.
However, if the case is deemed to be an “Asset” bankruptcy, unsecured creditors may submit a Proof of Claim in order to be included in the distribution of assets.
Chapter 11 Reorganization
Chapter 11 reorganization is designed for businesses that want to keep operating but need time to restructure their finances in order to pay the bills. Because of its complexity, Chapter 11 is typically used only by corporate entities.
Like the Chapter 7, there is a 341 Meeting in a Chapter 11 bankruptcy, also. However, the purpose is different. For a Chapter 11, the U.S. Trustee uses this meeting to gather information about the debtor’s business plan and determine its feasibility, explain the debtor’s obligations, and (if necessary) inspect the debtor’s books.
Once the Chapter 11 petition is filed, the debtor-business has four months to prepare a reorganization plan. After that, creditors can propose reorganization plans through a “creditors’ committee.” The primary purpose of the creditors’ committee is to ensure that unsecured creditors — who are often owed relatively small sums — are adequately represented in the proceedings.
The creditors’ committee must approve the debtor’s reorganization plan before it can be approved by the bankruptcy court. While there is no time limit on completing a Chapter 11 repayment plan, most take between six months and two years.
Proof of Claim in a Chapter 11
If you’re a creditor in a Chapter 11 case, you do not need to file a Proof of Claim if you agree with the amount due listed in the bankruptcy petition. However, if you believe you’re owed more money than indicated (or if the claim is listed as disputed, contingent or unliquidated), you should file a Proof of Claim for the full amount owed.
Chapter 13 Reorganization
Another type of reorganization is Chapter 13. It applies to individuals and sole proprietors of businesses.
As with the Chapter 7 and Chapter 11, all creditors in a Chapter 13 bankruptcy will receive a “Notice of Bankruptcy Case Filing” and 341 Meeting. In a Chapter 13, the purpose of the 341 Meeting is to determine if the debtor’s proposed repayment plan should be approved.
As part of a Chapter 13 three-to-five-year repayment plan, the debtor must include the proposed amount to be paid to unsecured creditors. This amount will depend on the disposable income available, but it cannot be less than what the creditor would have received in a Chapter 7 Asset bankruptcy.
What If the Debt Is Secured?
If your debtor has filed a Chapter 13 and the debt is secured, there are three options for treatment of those financial obligations:
- The secured property may be surrendered back to you.
- If your debtor is not behind on his payments, he may keep the secured property and continue to make payments to you “outside” of the Chapter 13 plan, just as before filing.
- If your debtor is behind on his payments, he may keep the property and pay for it through the Chapter 13 plan.
Once the Chapter 13 plan has been approved by the bankruptcy court, claims will be paid out based on priority. For instance, secured debts are paid first, then priority debts (such as taxes and domestic support obligations), and then general unsecured debts.