Chapters 7, 11, and 13
A Chapter 7 Bankruptcy is a liquidation bankruptcy where all non-exempt assets may be sold to pay creditors. An Interim Trustee is selected from a panel of private Trustees to serve as the Trustee until the Meeting of Creditors.
In a no asset proceeding, the Meeting of Creditors is normally the only appearance that a debtor is required to make. The Trustee and creditors may examine the debtor and the Trustee will ask questions based upon review of the Statement and Schedules. After the creditors’ meeting, the final event that occurs in a typical no asset Chapter 7 is that an individual debtor or joint debtors will receive a discharge. Receipt of a discharge will be automatic unless an objection is filed to the discharge. The discharge legally relieves a debtor of all dischargeable obligations, voids any existing judgments and permanently enjoins the collection of any debt subject to the discharge. Certain debts are specifically not dischargeable. In general, these include secured debts, alimony and support payments.
If a Chapter 7 is an asset case, it is the Trustee’s duty to liquidate and administer those assets. Often, if the cost of administration exceeds the benefit that will ultimately be given to creditors, an asset may be abandoned. It is the Trustee’s obligation to determine whether assets should be liquidated. The Trustee then submits a schedule of proposed distribution of assets to creditors that needs Court approval.
As with a Chapter 13, the goal of the Chapter 11 is for the Debtor to successfully reorganize its affairs so that it may repay debt, retain assets and remain in business. This is accomplished by a debtor-in-possession proposing a Plan of reorganization and obtaining its confirmation. The Chapter 11 Plan confirmation process is complex and lengthy. In a Chapter 11, the creditors are able to vote for or against the Plan. Chapter 11 may be filed by an individual who owes more than the debt limits in a Chapter 13 or by a business which wishes to continue operation. The debtor-in-possession is the functional equivalent of a Trustee as they are authorized to conduct ordinary business affairs without Court approval in most instances. The debtor’s financial affairs are subject to constant monitoring and the debtor is required to file operating reports on a monthly basis. This is a regular report of the debtor’s ongoing post-petition business operations and will advise the creditors and the Trustee if the debtor is generating profits or losses during the proceeding.
The Chapter 11 Plan must place all creditors within classes and all creditors in a given class must have claims that are substantially similar. The Plan must specify which of the classes reimpaired under the Plan and the treatment to be accorded to an impaired claim must be described. The Plan must advise all parties how the Plan will be performed.
When a Plan is filed, it is accompanied by a Disclosure Statement. Votes may not be solicited from creditors until the Court approves the Disclosure Statement. The Disclosure Statement must contain information sufficient to enable a creditor or party-in-interest to determine whether to vote for acceptance or rejection of the Plan. The Disclosure Statement normally summarizes the Debtor’s progress during the Chapter 11 proceeding, as well as disclosing all relative factors leading up to the Debtor’s need to file bankruptcy. The Disclosure Statement normally contains a summary of the Plan and describes the practical effect of the Plan rather than its technical terms. Once the Disclosure Statement has been approved by the Court, it is sent with the Plan to all of the creditors along with a ballot for voting. Impaired creditors with an allowed claim are entitled to vote for or against a Plan. If a majority of the creditors in number and two-thirds in dollar amount vote to accept the Plan, it will be confirmed. If less than a majority of creditors in numbers or less than two-thirds in dollar amount vote to accept the Plan, then a cramdown procedure will be necessary to confirm the Plan over the rejection.
A confirmed Chapter 11 Plan acts as a new contract between the debtor and all of its creditors. Confirmation re-vests the debtor will all property of the estate free and clear of all liens and interest except as provided for by the Plan. Confirmation also acts as a discharge to all debts that arose before the date of confirmation. A Chapter 11 discharge is virtually identical to a Chapter 7 discharge. A discharge will not be granted in a Chapter 11 where the debtor is liquidating its assets through the Plan, until such liquidation is completed.
Chapter 13 Bankruptcy is a reorganization proceeding where a debtor will attempt to repay a debt and retain non-exempt assets or continue to operate a business. Chapter 13 is a program for individuals with regular income who have unsecured debt of less than $307,675.00 and secured debt of $922,975.00. A debtor may attempt to repay debts over a period of time, not to exceed 60 months. If the Chapter 13 Plan is successfully performed, a Debtor will be able to retain non-exempt assets and will receive a discharge from many of the obligations that would not be dischargeable in a Chapter 7. A Chapter 13 is commenced by the filing of a Bankruptcy Petition. In a Chapter 13 the Automatic Stay is applicable to a co-debtor who is not in a bankruptcy proceeding. If a Chapter 13 debtor is engaged in business, the debtor is permitted to continue to operate the business. The debtor’s post-petition earnings from services are considered property of the estate.
The main component of a Chapter 13 proceeding is the Plan. The Plan is, in essence, a new contract between the debtor and all of the creditors. In order for a Chapter 13 Plan to be approved, it must be approved at a Confirmation Hearing. Once a Chapter 13 Plan has been confirmed, all creditors are bound by the terms of the Plan. Once performance of a Chapter 13 Plan has been completed, then the debtor is entitled to a discharge. A Chapter 13 debtor who has not fully completed a Plan may still apply for a hardship discharge if the Court finds that failure to complete the Plan is due to circumstances which the Debtor should not be held accountable for and if the unsecured creditors have received at least as much as they would have gotten in a Chapter 7 proceeding. A Chapter 13 discharge may be revoked if the Court finds that the discharge was fraudulently obtained. Revocation must be sought within one year of discharge.