Archive for the ‘Bankruptcy’ Category

US Bankruptcy Code – Priority

In cases a business or a company files a case with the US bankruptcy court under US Bankruptcy Code chapter – 11, the chapter that provides the debtor wiht the option for reorganization of the company or the business in order to help repayment of the existing debts of the petitioner with the creditors, has an important feature, that is a worth to look at for both the debtor and the creditors of the company or business alike.

Chapter- 11 Priority

The chapter – 11 of the US Bankruptcy Code like the other chapters of the US Bankruptcy Code, has a provision to prioritize the creditors bases on some considerations. The chapter – 11, states that a debtor, when repaying the debt, under the guidance of a US bankruptcy court, must payout to each creditor maintaining a certain order of preference of priority, which is determined by the court itself.
The chapter – 11 dictates to the debtor that the creditor with the highest priority must be paid off in full first before switching on to the creditor who is next in the priority queue. As a rule of thumb, the creditors who have a security interest or are otherwise known as secured creditors will always recieve a higher priority than the other creditors also otherwise known as unsecured creditors.

US Bankruptcy Code – Executory Contracts

In case a business has or is planning to file a case with the US bankruptcy court under the chapter – 11 of US bankruptcy code, the management of the business or the company must be well aware of a feature of the chapter -11 bankruptcy case, that cancels Executory contracts. This feature of a chapter – 11 US bankruptcy case is detailed in the following section.

Chapter – 11 Executory Contracts

When a business files a case under the chapter – 11 of the US bankruptcy code, the US bankruptcy court that is preciding over the case may discontinue some of the contracts of the business or the company. These contracts known as the Executory contracts, will be rejected if it is felt by the court that cancelling those contracts will be financially favorable to both the company and it’s creditors.
Executory contracts may include anything from – supply, labor or land lease contracts. In an event such a Executory Contract is rejected, the other party to the contract becomes the unsecured creditor of the debtor.
The definition of contracts, that fall under the realm of executory contracts may be different from region to region viz. in some states, a contract for deed may be considered an Executory Contract, while the same may not be considered as an Executory Contract in some other states. A good bankruptcy lawyer who specializes, in the law of a particular state may tell beforehand, which contracts of the company under the current scenario may fall in the category of Executory Contracts and hence may get rejected, if the company files a chapter – 11 of the US bankruptcy court.

US Bankruptcy Code – Automatic Stay

The US bankruptcy law, chapter – 11 apart from devising a reorganization plan for the petitioner’s business also protects the debtor from the creditor’s attempt to collect their debt during the life time of the case. This feature of the US bankruptcy code chapter – 11 requires for Automatic Stay. The process and behavior of the Automatic Stay on the debtor’s business, is discussed in detail.

Chapter – 11, Automatic Stay

The chapter – 11 of the US bankruptcy code imposes a sort of automatic stay on the debtor’s business processes. The implementation of automatic stay on the business processes of the debtor, restricts or stops all attempts from the creditor’s side for the collection of their debts. The automatic stay feature of the chapter – 11 empowers the US bankruptcy court which is

presiding over the case, to make all post-petition attempts on the part of the creditors to reclaim their debt as void. Thus the debtor is saved from the immense pressure of imminent debt repayment and gets a chance to reorganize the business model, during the lifetime of the case.
The court as it seems perfect, may also appoint trustees to manage the debtor’s businesses. In certain cases, the creditors of the business or the United States Trustee, the one appointed by the court, may ask the court to liquidate the assets of the business, in order to flush out the debt. In that case, the court may convert the case to a liquidation case under the provisions made under chapter – 7, in case the liquidation under chapter – 7 is in the best interest of all the creditors.
In case it is imminent for the court the assets of the debtor’s business, the chapter – 11 of the US bankruptcy law provides the pre-existing management with the option to get help on the liquidation process, so that the business’ liquidation process may fetch higher prices for company’s assets or services, as compared to the price it would have fetched in a chapter – 7 liquidation process.