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Business Bankruptcy

Lawyer Serving Cherry Hill, NJ

Business Bankruptcy

The general purpose of filing for bankruptcy is to preserve assets and eliminate debt, thereby getting a fresh start.
Chapter 7, Chapter 11 and Chapter 12 are available to businesses.

The Bankruptcy Estate

Regardless of the type of bankruptcy filed, or whether the debtor is an individual or a business, the commencement of a bankruptcy case creates an “estate” consisting of property of the debtor.

Generally speaking, the estate includes all of the debtor’s legal and equitable interests as of the petition date, as well as any “proceeds, product, offspring, rents, or profits” thereof, and any property that the debtor acquires or becomes entitled to acquire within 180 days after the petition date by way of inheritance, property settlement or divorce decree, or life insurance.

In certain instances, however, property of the estate is defined more broadly. For example, in individual Chapter 11 and Chapter 13 cases, as well as non-consensual subchapter 5 small business Chapter 11 cases, the estate also includes post-petition earnings and property acquired, until the case is dismissed, converted, or closed. And, for consensual subchapter 5 small business cases, the estate likewise includes post-petition earnings and property acquired, but is limited to that which existed as of the confirmation date.

The Automatic Stay

An automatic stay comes into effect the moment a bankruptcy is filed. The automatic stay applies to both individuals and businesses alike, as well as all types of bankruptcy cases.

The automatic stay acts as a temporary restraining order, protecting the debtor, the debtor’s property, and property of the estate from creditors. More specifically, the automatic stay stops, among other things, nearly all efforts to enforce or collect a debt against the debtor, property of the debtor, or property of the estate. The purpose of the automatic stay is to provide the debtor with breathing room, and to facilitate the equitable treatment of creditors through the bankruptcy process.

The scope of the automatic stay is broad, but not without limit. It will stop, among other things, foreclosures, repossessions, wage garnishments, collection lawsuits, lien attachments and creditor harassment. But, the automatic stay will not stop, among other things, criminal proceedings, driver’s license suspension, certain commercial real property evictions, the fixing of a lien for ad valorem property taxes, payroll withholdings for retirement savings, and most family court matters including divorce, child custody and paternity. Also, in Chapter 7 and Chapter 11, the automatic stay does not stop action against non-debtor parties. But, in Chapter 13 and Chapter 12, the automatic stay does extend to qualifying co-debtors and co-signers.

Also, the stay is limited for individual repeat/serial filers. Generally, if an individual had a prior bankruptcy case dismissed within a year of filing a second case, then the automatic stay of actions against the debtor only remains in effect for 30 days, unless the debtor successfully moves for an extension thereof. And, if an individual had two prior bankruptcy cases dismissed within a year of filing a third case, then there will be no automatic stay in the third case, unless the debtor successfully moves for one.

The automatic stay remains in place with respect to property of the estate until the property is no longer property of the estate. And, as to all other actions, the automatic stay remains in place until earliest of the time the case is closed, dismissed, or a discharge is granted or denied.

Also, the automatic stay can be terminated or modified in certain circumstances, through a successful stay relief motion.

The Trustee

A trustee is automatically appointed in all Chapter 7, Chapter 12, Chapter 13 and subchapter 5 cases. For all other Chapter 11 cases that are not subchapter 5, the appointment of a trustee is not automatic, but may be requested by a party in interest and ordered by the Court under certain circumstances.

The trustee has a fiduciary responsibility to the bankruptcy estate, and is charged with, among other things, investigating the debtor’s financial affairs. Other duties and powers of the trustee differ based upon the type of bankruptcy filed. For example, in voluntary Chapter 7 cases, the trustee has control of property of the estate, and his/her major responsibility is to “collect and reduce to money the property of the estate… and to close such estate as expeditiously as is compatible with the best interest of the parties.” In Chapter 12, Chapter 13, and subchapter 5 cases, even though a trustee is automatically appointed to the case, the trustee does not take possession or control over any property of the estate. Instead, the debtor remains a “debtor in possession,” in control of their own financial affairs, and the trustee’s major responsibilities are to facilitate plan confirmation and, under certain circumstances, to act as disbursing agent for the debtor’s plan payments. For non-subchapter 5 Chapter 11 cases, the debtor likewise remains a “debtor in possession.” But, if the court ends up appointing a trustee, the debtor will no longer be a “debtor in possession,” and the trustee will acquire control of the property of the estate, and with manage those assets, operate the business, and, if appropriate, file a plan.

The Meeting of Creditors

All debtors in bankruptcy must attend a meeting of creditors. The meeting of creditors is an examination of the debtor’s financial affairs and other matters that may affect case administration. In Chapter 7, Chapter 12 and Chapter 13 cases, the trustee assigned to the case conducts the meeting of creditors. In Chapter 11 cases, a representative of the United States Trustee conducts the meeting of creditors. In all cases, creditors are invited to attend the meeting of creditors and take part in the examination of the debtor. But, oftentimes, no creditors attend.

At the meeting of creditors, the debtor will be required to provide identification, and will be required to swear or affirm that their testimony will be truthful.

The Meeting of Creditors

All debtors in bankruptcy must attend a meeting of creditors. The meeting of creditors is an examination of the debtor’s financial affairs and other matters that may affect case administration. In Chapter 7, Chapter 12 and Chapter 13 cases, the trustee assigned to the case conducts the meeting of creditors. In Chapter 11 cases, a representative of the United States Trustee conducts the meeting of creditors. In all cases, creditors are invited to attend the meeting of creditors and take part in the examination of the debtor. But, oftentimes, no creditors attend.

At the meeting of creditors, the debtor will be required to provide identification, and will be required to swear or affirm that their testimony will be truthful.

Eligibility

Chapter 7 is available to both individuals and businesses. For individuals though, there are limitations on Chapter 7 eligibility based upon income. If, a person’s income is such that their Chapter 7 filing constitutes an abuse, then the bankruptcy court may dismiss or convert the case to a repayment plan under Chapter 13 or Chapter 11 of the Bankruptcy Code.

To determine an individual’s eligibility for Chapter 7, they must first pass a threshold test in which one’s current monthly income, as defined by the Bankruptcy Code, is compared to the average median income of a household of the same size, residng in the same state. If below-median, then the individual is automatically eligible to file for Chapter 7 bankruptcy. If above-median, however, the individual most complete the means test in order to determine eligibility.

The means test consists of an intricate formula of income minus expenses. If, after completing this formula, a person has too much monthly net disposable income left over, abuse is presumed; and, unless the person can rebut this presumption, they will be ineligible to file for Chapter 7. Notably though, some individuals are not subject to the Chapter 7 means test (e.g. individuals with primarily non-consumer debts, certain disabled veterans).

Chapter 13 is only available to individuals (including sole proprietors), and does not have any income based eligibility limitations. Rather, all individuals are generally eligible for Chapter 13 provided they earn regular income and have debts that do not exceed the debt limits set by the bankruptcy law. Specifically, to qualify as a Chapter 13 debtor, one must have less than $419,275.00 in unsecured debts and $1,257,850.00 in secured debts.

Chapter 12 is available to both individuals and businesses engaged in a farming or commercial fishing operation. To be eligible, the debtor must have regular annual income, as well as debts that do not exceed the debt limits set by the bankruptcy law. For farming operations, the aggregate debt limit is $10,000,000. And, for fishing operations, the aggregate debt limit is $2,044,225.

Moreover, for individual Chapter 12 cases, at least 50% of one’s income must come from the farming/fishing operation, and the debts must generally arise therefrom. Specifically, for individual farmers, more than 50% of their debt (excluding residential mortgages) must arise out of the farming operation. And, for individual fishermen, more than 80% of their debt (excluding residential mortgages) must arise out of the farming operation.

For business Chapter 12 cases, the business cannot be publically traded, must be at least 50% family owned and operated, and more than 80% of the business assets must relate to the farming/fishing operation.

Chapter 11 is available to both businesses and individuals. Importantly through there are few specific types of Chapter 11 debtors that get special treatment under the bankruptcy law, and the eligibility requirements vary for each. Specifically, a debtor whose primary business is the oeration of a single piece of income-producting property and who derives substantially all of its income from that property is a “single asset real estate” debtor (SARE).

To be a SARE debtor requires the operation of real property and the activities incidental thereto (other than residential real property with fewer than 4 residential units), and which generates substantially all of the gross income of a debtor who is not a family farmer.

Additionally, a Chapter 11 case is considered a “small business case” if it is filed by a “small business debtor” who has not elected subchapter 5. And, a Chapter 11 debtor is a “small business debtor” if they: (1) are engaged in commercial or business activities (excluding a single asset real estate business); and (2) have liquidated debts of not more than $2,725,625, of which at least 50% arose from the debtor’s business activities.

And finally, to be a debtor under subchapter 5 of the Small Business Reorganization Act (SBRA), one must: (1) make that election; (2) be engaged in commercial or business activities (excluding a single asset real estate business); and (3) have liquidated debts of not more than $7,500,000, of which at least 50% arose from the debtor’s business activities.

Discharge

A bankruptcy discharge releases the debtor from liability for certain specified types of debts.

Most types of pre-petition debts are capable of being discharge, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.

Other types of debts are automatically non-dischargeable, such as, recent income taxes, 941 employee withholdings trust fund taxes, sales taxes, student loans (with some exceptions), child support and alimony.

And, what’s more, a debtor does not always have an absolute right to discharge. For example, the Court may deny discharge as to a specific debt if a creditor, trustee or the United States Trustee timely files a non-dischargeability complaint within 60 days from the first scheduled meeting of creditors for debts incurred by fraud or other maliciousness. Moreover, the Court may deny a Chapter 7 discharge in its entirety, if the trustee or United States Trustee timely files a non-dischargeability complaint within 60 days from the first scheduled meeting of creditors for reasons such as providing false information, or transferring/concealing property with the intent to hinder, delay or defraud the trustee or creditors.

Also notably, a slightly broader discharge of debts is available to Chapter 13 debtors as opposed to Chapter 7 debtors. For example, debts for willful and malicious injury to property and debts arising from property settlements in divorce or separation proceedings are dischargeable in a Chapter 13 case, but not in a Chapter 7 case.

In Chapter 7, a discharge is only available to individual debtors, not to business debtors. And, in Chapter 11 and Chapter 12, a discharge is available to both individual and business debtors.

In Chapter 7, an individual debtor can expect to receive their discharge after the expiration of 60 days from the date first set for the meeting of creditors. In Chapter 12, Chapter 13 cases and non-consensual subchapter 5 cases, the debtor can expect to receive their discharge as soon as practicable after completing all payments under the plan. In consensual subchapter 5 cases, the debtor can expect to receive their discharge at confirmation. And, in non-subchapter 5 Chapter 11 cases, a business debtor can expect to receive their discharge upon confirmation, and an individual debtor after completing all payments under the plan.

Equity Committees

The attorneys at Kasen & Kasen, P.C. have experience representing ad hoc equity committees in large Chapter 11 bankruptcy cases pending before the United States Bankruptcy Court for the District of Delaware. Specifically, the attorneys at Kasen & Kasen, P.C. have experience prosecuting section 1102(a)(2) motions for the appointment of an official equity committee.

There are many benefits to having an official equity committee as opposed to an ad hoc committee. One of the biggest benefits is that the official committee’s counsel fees and expenses are paid for by the debtor estate. The stockholders will be able to hire seasoned bankruptcy professionals to represent their interests in the case.

If the U.S. trustee decides in his/her discretion not to appoint an official equity committee, a party in interest may request that the court order the appointment of an official equity committee, provided they can show that an official equity committee is necessary to assure “adequate representation” of equity security holders.

Although the Bankruptcy Code does not define what constitutes “adequate representation,” courts within the Third Circuit have held that an equity committee is necessary to assure adequate representation of equity security holders if: (1) there is a substantial likelihood that equity security holders will receive a meaningful distribution in the case under a strict application of the absolute priority rule, and (2) they are unable to represent their interests in the bankruptcy case without an official committee.

Involuntary Bankruptcy

Under certain circumstances, creditors can force an individual or business into a Chapter 7 or Chapter 11 bankruptcy.

An involuntary bankruptcy can be filed by creditors with unsecured claims that total at least $16,750, and that are not contingent or subject to bona fide dispute. Also, for debtors with 12 or more creditors, at least 3 qualifying creditors are needed to file an involuntary petition. And, for debtors with less than 12 creditors, only one qualifying creditor is needed to file an involuntary petition.

Once an involuntary petition has been filed, the debtor is given an opportunity to respond, and can challenge the creditor’s standing to bring the involuntary petition, deny insolvency or argue that the involuntary petition was filed in bad faith.
If the Court ends up dismissing the involuntary petition, the petitioning creditors can be liable for the debtor’s costs and attorney’s fees.

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