Prepared by www.DocBuilder.com, September, 2009.
Quick Guide to Bankruptcy
More individuals and businesses are filing for bankruptcy protection than at any time in recent history.
Unfortunately, most small businesses will encounter bankruptcy proceedings either for themselves, an
employee, a vendor or a customer. DocBuilder.com encourages anyone contemplating bankruptcy to
speak with a qualified attorney as soon as possible.
TYPES OF BANKRUPTCY CASES
Chapter 7 - Liquidation - Available to individuals and corporations. In a liquidation, a bankruptcy
Trustee gathers and distributes all the debtor's assets to creditors in order of priority. In rare cases a
business may be run and sold as a going concern in a Chapter 7 case, however more frequently that
takes place in a Chapter 11.
Chapter 11 - Reorganization - Generally for corporate debtors and high net worth or high income
individuals. Chapter 11 permits a company to reorganize its business operations and renegotiate its
contracts through a plan of reorganization while the automatic stay gives the debtor a temporary
breather from certain of its obligations.
Chapter 13 - Individual Debt Adjustment – Chapter 13 is most frequently utilized by a debtor with a
house. The Chapter 13 case, through a plan, permits a debtor to catch up on secured debt (i.e.
mortgage) payments while paying unsecured creditors some portion of their claims.
THE DEBTOR'S BEST FRIEND: AUTOMATIC STAY
An automatic stay prevents creditors from generally harrassing the borrower and stops the actions
against the debtor's assets. The automatic stay generally goes into effect immediately upon filing a
bankruptcy case. Violating the automatic stay can result in damages and attorneys' fees, so creditors are
very leery of violating the stay. Any assets obtained in violation of the stay can be recovered by the
bankruptcy trustee.
A SLIPPERY SLOPE: COLLECTING AFTER BANKRUPTCY FILING
Once a creditor is aware of a bankruptcy filing they should immediately stop all collection activities. All
collections should be handled by the bankruptcy court. This includes billing, collection calls - even the
sending of collection letters. The creditor also has a duty to immediately notify any attorney or
collection agency working on their behalf to collect from the debtor.
GARNISHING WAGES
Employers must stop all wage deductions outside of the typical employee deductions such as health
insurance, tax withholdings, employee benefits, and garnishments for alimony and child support. Almost
all other garnishments and wage deductions are prohibited by the automatic stay. This is a tough area as
there may be certain garnishments that are unclear, such as garnishments from government institutions
(department of motor vehicles, for instance). Employees may not be fired for filing for bankruptcy
protection.
DocBuilder.com does not provide legal advice. DocBuilder.com provides legal information and form documentation. Legal advice is provided by
attorneys and advises you of what course of action to take for your unique situation and circumstances. If you have a serious legal problem we
suggest that you consult an attorney. DocBuilder.com does not provide legal advice. The products offered DocBuilder.com are not a substitute
for the advice of an attorney. By ordering DocBuilder.com forms, you agree that the forms may only be used for your personal use or use for
your clients and may not be sold or redistributed without the written consent of DocBuilder.com.
Prepared by www.DocBuilder.com, September, 2009.
DOING BUSINESS WITH A DEBTOR
A bankruptcy filing does not automatically end a debtor's business. There are many situations in a
Chapter 11 case, and sometimes in Chapter 7, where a debtor or trustee is authorized to continue
conducting business. In a Chapter 13 case, the debtor generally carries on whatever business he or she
conducted prior to the petition.
ORDINARY COURSE OF BUSINESS TRANSACTIONS
There are certain post filing transactions that are not subject to court approval. These are “ordinary
course of business” transactions, for example routine purchases, sales, utility payments, normal wages,
etc. However, bonuses and other transactions such as consultant employment and property sales are
always deemed outside of the ordinary course of the debtor’s business and require court approval.
Payments from a debtor related to ongoing business relationships will depend upon the type of
relationship. Vendors without express contracts will usually be paid in full on post-petition obligations,
but pre-petition obligations will constitute unsecured claims. In other words, these claims will be paid
proportionately with all other unsecured claims at the end of the case. There are certain contracts
called “executory contracts” which entitle the non-debtor party to full payment for pre-petition charges
(in certain circumstances).
PREFERENTIAL AND FRAUDULENT TRANSFERS
Preferential Transfers are certain transfers of property of the debtor, made within the 90 days preceding
the petition date (1 year in the case of insiders), which may be reversed by the bankruptcy court.
A debtor or trustee can avoid preferential transfers unless:
a. The transfer was on account of a transaction in the ordinary course of business
b. The transfer was on account of a debt secured by property of the debtor;
c. The transfer was part of a cash transaction (i.e. no antecedent debt); or
d. The transferee provided new value to the debtor after receiving the transfer (e.g. shipment of
goods or provision of services), provided such new value remained unpaid on the petition date.
Preference avoidance action summonses are served by first class mail. The response timeframe is
usually very tight. Ordinarily, the trustee will send a demand letter before filing the action. Once a party
receives that letter, the potential defendant should retain an attorney to avoid defaulting.
Fraudulent Transfers are transfers of property of the debtor, made within two years preceding the
petition date, for less than adequate consideration, while the debtor was insolvent, for the purpose of
defrauding, hindering or delaying creditors.
DocBuilder.com does not provide legal advice. DocBuilder.com provides legal information and form documentation. Legal advice is provided by
attorneys and advises you of what course of action to take for your unique situation and circumstances. If you have a serious legal problem we
suggest that you consult an attorney. DocBuilder.com does not provide legal advice. The products offered DocBuilder.com are not a substitute
for the advice of an attorney. By ordering DocBuilder.com forms, you agree that the forms may only be used for your personal use or use for
your clients and may not be sold or redistributed without the written consent of DocBuilder.com.
Prepared by www.DocBuilder.com, September, 2009.
Common Terms in Bankruptcy
Administrative Claim – An administrative claim is a claim which relates to a benefit bestowed upon a
debtor after the bankruptcy filing.
Assets – Assets include tangible property like equipment, real property or inventory, and also includes
intangible property like money, stocks and claims against others (lawsuits, loans, etc.).
Debtor – The debtor is the entity (can be an individual or a business entity) whose name appears on the
bankruptcy filing.
Priority – Priority is the order in which different types of claims are paid.
Debtor in Possession or DIP – When a debtor files a Chapter 11 case and continues to operate its
business, it becomes a Debtor in Possession.
Executory Contract – An executory contract is a contract between a debtor and a third party where
neither party has fully performed its obligations.
General Unsecured Claim – A general unsecured claim is a claim against the debtor which arose
before the debtor’s bankruptcy filing, and is not secured by the debtor’s assets.
Plan – In a Chapter 11 or 13 case, the debtor’s objective is to ‘confirm’ (obtain court approval of) a plan.
Preference – A preference is a payment made by a debtor to a creditor within a certain period before
the debtor’s bankruptcy filing, 90 days in the case of third parties, and one year in the case of ‘insiders’
(i.e. owners and officers).
Secured Claim – A secured claim is a claim against the debtor which is also a lien on, or secured by,
certain of the debtor’s assets.
Security – Security means the assets to which a secured claim attaches, for example, security for a
mortgage is the real property to which it relates.
Trustee – Trustees are always appointed by the bankruptcy court in Chapter 7 and Chapter 13 cases,
and sometimes in Chapter 11 cases.
DocBuilder.com does not provide legal advice. DocBuilder.com provides legal information and form documentation. Legal advice is provided by
attorneys and advises you of what course of action to take for your unique situation and circumstances. If you have a serious legal problem we
suggest that you consult an attorney. DocBuilder.com does not provide legal advice. The products offered DocBuilder.com are not a substitute
for the advice of an attorney. By ordering DocBuilder.com forms, you agree that the forms may only be used for your personal use or use for
your clients and may not be sold or redistributed without the written consent of DocBuilder.com.