For many business owners bankruptcy seems scary but, sometimes, declaring bankruptcy is a worthwhile strategy. If you are considering the possibility of declaring bankrupting for your business, this article will review some key points you must know. Two of the most popular types of bankruptcy include Chapter 7 and Chapter 11.
Under a Chapter 7 bankruptcy, the judge gets rid of the business debts while under a Chapter 11 bankruptcy the owner must create a plan to repay debtors. While Chapter 11 bankruptcy allows the business to continue running, bankrupting under Chapter 7 forces the closing or selling of the business.
Although these laws may seem gloomy, occasionally they are the business owner's most practical choice. A Chapter 7 bankruptcy is worthwhile when the business has no chance of making a future profit. It also makes sense if the company has no assets and the debts are insurmountable. In these cases, undergoing a bankruptcy may be the best decision the business owner can make.
Although bankruptcy is an option, it also has some negative outcomes. A business owner should always consider the legal fees associated with filing bankruptcy. They are often high for both Chapter 7 and Chapter 11. Some companies find themselves filing for bankruptcy only to close their business anyway to pay the legal fees. Remember that lawyers do not work for free. Get an estimate before you decide to file.
Recovering From Bankrupting Your Small Business
Small businesses owners bankrupting their companies should know that recovering from a Chapter 11 filing is possible. The goal of Chapter 11 bankruptcy is to place the company on more stable financial ground. While the courts relieve the company's debts, they also help in reorganizing it. They hope is to make it more profitable in the future. While this outcome appeals to many small business owners, they must realize that bankruptcy puts them at the mercy of the United States Trustee. The Trustee now oversees all business transactions until the company emerges from bankruptcy. For many business owners this is troubling. They have lost the freedom associated with running their own business. Business owners who are not comfortable with this degree of oversight should not seek out a Chapter 11 bankruptcy to solve their financial problems.
Avoiding Bankrupting
There are many useful tips for avoiding the need for bankrupting but unfortunately even with the best of plans there is always the possibility that bankruptcy is necessary. In these cases, it is wise for the business owners to recognize the need for it early on. This helps them avoid compounding the company's financial problems. In general the methods owners use to prevent bankruptcy are associated with to good, general business practices.
http://www.add-articles.com/Article/When-Bankrupting-Is-Worthwhile/77349
Thursday, July 19, 2007
Bankruptcy LLC Explained
Since Limited Liability Corporations (LLC) are a relatively new type of business entity, LLC owners have some difficulty finding out how courts will treat their bankruptcy LLC cases. As an LLC declaring bankruptcy, the owner may get some liability protection since their business is a separate legal entity. However, this protection is not absolute. Why? B ecause as CEO of the legal entity, the owner has fiduciary duties that effectively give them the same liabilities as a sole proprietorship.
So some important questions remain. Will the judge treat them like an LLC, as a corporation or as a partnership? What will happen during a bankruptcy LLC when the company has only one owner? Currently, there is no code or law that directly addresses bankruptcy LLC proceedings.
Partnership Versus Corporation In Bankruptcy LLC
There are two different ways a bankruptcy court may handle the case of Limited Liability Corporation with a single owner. First, the judge may treat the bankruptcy LLC like a partnership. In this case the court would dissolve the LLC and deal out all remaining assets to creditors. Anything remaining goes to the owner. And as in most business bankruptcy cases, there isn't usually much left.
But the judge may decide the LLC is a corporation. Here the judge would not dissolve the owner from the bankruptcy LLC. The former owner could give over ownership interest to another party. If the former owner decided not to do this, the bankruptcy judge would treat the former owner like a corporate shareholder. The owner would not have to give up stockholdings, just as a shareholder wouldn't in a large corporation bankruptcy case. Usually under this scenrio, the owner ends up a little better off.
Legalities of a Bankruptcy LLC
One of the greatest drawbacks to filing bankruptcy as an LLC is that owner has no idea how the judge will treat them. Unfortunately, there are no specific rules for dealing with a Limited Liability Corporation in a business bankruptcy filing.
Because of this, there may be several different factors that a bankruptcy court considers when deciding what to do. The most important factor is the number of member owners in the corporation. That said bankruptcy laws do not define the number of individual owners a corporation must have, especially for an LLC.
Because the lines are so blurry here, it is hard to tell how the bankruptcy court will decide who needs to consent to the bankruptcy filing. All members of the LLC may have to consent to the bankruptcy LLC filing. On the contrary if the judge treats it like a corporation, then only one member must consent. Most often in LLC proceedings, the bankruptcy judge looks to state laws and codes to determine how to deal with the bankruptcy. Therefore these proceedings may vary from state to state.
Filing The Bankruptcy LLC
Before filing for bankruptcy as a corporation or partnership, schedule an appointment with a bankruptcy lawyer to discuss these issues. As an alternative, you can also talk to state or county bankruptcy officials who can clarify how they will determine the proper procedures for bankruptcy LLC. Make sure you interview several lawyers before you select one. They should specialize in bankruptcy and be well versed in the specific rules for your state. If possible, try to find an attorney who has experience filing bankruptcy cases for Limited Liability Corporations.
http://www.add-articles.com/Article/Bankruptcy-LLC-Explained/77357
So some important questions remain. Will the judge treat them like an LLC, as a corporation or as a partnership? What will happen during a bankruptcy LLC when the company has only one owner? Currently, there is no code or law that directly addresses bankruptcy LLC proceedings.
Partnership Versus Corporation In Bankruptcy LLC
There are two different ways a bankruptcy court may handle the case of Limited Liability Corporation with a single owner. First, the judge may treat the bankruptcy LLC like a partnership. In this case the court would dissolve the LLC and deal out all remaining assets to creditors. Anything remaining goes to the owner. And as in most business bankruptcy cases, there isn't usually much left.
But the judge may decide the LLC is a corporation. Here the judge would not dissolve the owner from the bankruptcy LLC. The former owner could give over ownership interest to another party. If the former owner decided not to do this, the bankruptcy judge would treat the former owner like a corporate shareholder. The owner would not have to give up stockholdings, just as a shareholder wouldn't in a large corporation bankruptcy case. Usually under this scenrio, the owner ends up a little better off.
Legalities of a Bankruptcy LLC
One of the greatest drawbacks to filing bankruptcy as an LLC is that owner has no idea how the judge will treat them. Unfortunately, there are no specific rules for dealing with a Limited Liability Corporation in a business bankruptcy filing.
Because of this, there may be several different factors that a bankruptcy court considers when deciding what to do. The most important factor is the number of member owners in the corporation. That said bankruptcy laws do not define the number of individual owners a corporation must have, especially for an LLC.
Because the lines are so blurry here, it is hard to tell how the bankruptcy court will decide who needs to consent to the bankruptcy filing. All members of the LLC may have to consent to the bankruptcy LLC filing. On the contrary if the judge treats it like a corporation, then only one member must consent. Most often in LLC proceedings, the bankruptcy judge looks to state laws and codes to determine how to deal with the bankruptcy. Therefore these proceedings may vary from state to state.
Filing The Bankruptcy LLC
Before filing for bankruptcy as a corporation or partnership, schedule an appointment with a bankruptcy lawyer to discuss these issues. As an alternative, you can also talk to state or county bankruptcy officials who can clarify how they will determine the proper procedures for bankruptcy LLC. Make sure you interview several lawyers before you select one. They should specialize in bankruptcy and be well versed in the specific rules for your state. If possible, try to find an attorney who has experience filing bankruptcy cases for Limited Liability Corporations.
http://www.add-articles.com/Article/Bankruptcy-LLC-Explained/77357
Wednesday, July 18, 2007
Business Bankruptcy Not Always Best Option
When a company is in dire straits, often a business bankruptcy seems enticing. Your debt will disappear, and, if the company has filed under Chapter 11 bankruptcy, the "fresh start" offered by the reorganization is hard to pass up. But it is not all it's cracked up to be.
Good Reasons Why Business Bankruptcy Not Always Best Solution
But doing a filing isn't always the best answer. For some companies, it could be the wrong answer, while for others, there might be better options. Here are some reasons why it isn't always the best choice.
1. You could lose much of the control over your company. Many executives believe the bankruptcy laws allow them to control their company's activities during a Chapter 11 bankruptcy. But this is misleading. Bankruptcy experts say business owners must understand that other individuals will oversee and direct their decisions during a business bankruptcy. Some of these people include debtors, shareholders, and the court trustees.
2. Business bankruptcy is expensive. Depending on the size of your debt, it might be more expensive to file than to continue to run your business and try to save it. If you choose to file business bankruptcy, you'll have to hire good counsel, and often other professionals who will charge a hefty fee for their services. These costs often surprise business owners so consider them before you decide to go down this path.
3. Business bankruptcy can take more time than you expect. This process isn't a quick fix. You don't file bankruptcy, see a quick turnaround of your fortune, complete the bankruptcy and return to business as usual. Depending on your jurisdiction, court may only hold hearings once a month. Sometimes, the court may delay these hearings that are essential to the day-to-day running of your business. This will slow down the whole course of the process. If you choose to file, understand that there will be numerous "sit down and wait" moments for you.
4. Your employees might flee during the process. Even if the you are filing a Chapter 11, or reorganization bankruptcy, many employees might mistakenly believe the company is in such dire straits as their job is in danger. Even if you reassure your employees, you are sure to lose a few or more as people seek more stable employment elsewhere. During this already difficult time, you'll have to hire more employees, or make do with fewer people if hiring new employees is not possible. If you do hire more people, consider the cost of hiring, training and "breaking in" new workers.
Before you decide to file, make sure you know all your options. If Chapter 11 still looks like a good choice, do your homework. Find out about the filing process and know what to expect. Also make sure you get a competent bankruptcy lawyer to represent you and your company. The future of your business depends on it.
http://www.bestnichearticles.com/Article/Business-Bankruptcy-Not-Always-Best-Option/64427
Good Reasons Why Business Bankruptcy Not Always Best Solution
But doing a filing isn't always the best answer. For some companies, it could be the wrong answer, while for others, there might be better options. Here are some reasons why it isn't always the best choice.
1. You could lose much of the control over your company. Many executives believe the bankruptcy laws allow them to control their company's activities during a Chapter 11 bankruptcy. But this is misleading. Bankruptcy experts say business owners must understand that other individuals will oversee and direct their decisions during a business bankruptcy. Some of these people include debtors, shareholders, and the court trustees.
2. Business bankruptcy is expensive. Depending on the size of your debt, it might be more expensive to file than to continue to run your business and try to save it. If you choose to file business bankruptcy, you'll have to hire good counsel, and often other professionals who will charge a hefty fee for their services. These costs often surprise business owners so consider them before you decide to go down this path.
3. Business bankruptcy can take more time than you expect. This process isn't a quick fix. You don't file bankruptcy, see a quick turnaround of your fortune, complete the bankruptcy and return to business as usual. Depending on your jurisdiction, court may only hold hearings once a month. Sometimes, the court may delay these hearings that are essential to the day-to-day running of your business. This will slow down the whole course of the process. If you choose to file, understand that there will be numerous "sit down and wait" moments for you.
4. Your employees might flee during the process. Even if the you are filing a Chapter 11, or reorganization bankruptcy, many employees might mistakenly believe the company is in such dire straits as their job is in danger. Even if you reassure your employees, you are sure to lose a few or more as people seek more stable employment elsewhere. During this already difficult time, you'll have to hire more employees, or make do with fewer people if hiring new employees is not possible. If you do hire more people, consider the cost of hiring, training and "breaking in" new workers.
Before you decide to file, make sure you know all your options. If Chapter 11 still looks like a good choice, do your homework. Find out about the filing process and know what to expect. Also make sure you get a competent bankruptcy lawyer to represent you and your company. The future of your business depends on it.
http://www.bestnichearticles.com/Article/Business-Bankruptcy-Not-Always-Best-Option/64427
Business Bankruptcy Not Always Best Option
When a company is in dire straits, often a business bankruptcy seems enticing. Your debt will disappear, and, if the company has filed under Chapter 11 bankruptcy, the "fresh start" offered by the reorganization is hard to pass up. But it is not all it's cracked up to be.
Good Reasons Why Business Bankruptcy Not Always Best Solution
But doing a filing isn't always the best answer. For some companies, it could be the wrong answer, while for others, there might be better options. Here are some reasons why it isn't always the best choice.
1. You could lose much of the control over your company. Many executives believe the bankruptcy laws allow them to control their company's activities during a Chapter 11 bankruptcy. But this is misleading. Bankruptcy experts say business owners must understand that other individuals will oversee and direct their decisions during a business bankruptcy. Some of these people include debtors, shareholders, and the court trustees.
2. Business bankruptcy is expensive. Depending on the size of your debt, it might be more expensive to file than to continue to run your business and try to save it. If you choose to file business bankruptcy, you'll have to hire good counsel, and often other professionals who will charge a hefty fee for their services. These costs often surprise business owners so consider them before you decide to go down this path.
3. Business bankruptcy can take more time than you expect. This process isn't a quick fix. You don't file bankruptcy, see a quick turnaround of your fortune, complete the bankruptcy and return to business as usual. Depending on your jurisdiction, court may only hold hearings once a month. Sometimes, the court may delay these hearings that are essential to the day-to-day running of your business. This will slow down the whole course of the process. If you choose to file, understand that there will be numerous "sit down and wait" moments for you.
4. Your employees might flee during the process. Even if the you are filing a Chapter 11, or reorganization bankruptcy, many employees might mistakenly believe the company is in such dire straits as their job is in danger. Even if you reassure your employees, you are sure to lose a few or more as people seek more stable employment elsewhere. During this already difficult time, you'll have to hire more employees, or make do with fewer people if hiring new employees is not possible. If you do hire more people, consider the cost of hiring, training and "breaking in" new workers.
Before you decide to file, make sure you know all your options. If Chapter 11 still looks like a good choice, do your homework. Find out about the filing process and know what to expect. Also make sure you get a competent bankruptcy lawyer to represent you and your company. The future of your business depends on it.
http://www.bestnichearticles.com/Article/Business-Bankruptcy-Not-Always-Best-Option/64427
Good Reasons Why Business Bankruptcy Not Always Best Solution
But doing a filing isn't always the best answer. For some companies, it could be the wrong answer, while for others, there might be better options. Here are some reasons why it isn't always the best choice.
1. You could lose much of the control over your company. Many executives believe the bankruptcy laws allow them to control their company's activities during a Chapter 11 bankruptcy. But this is misleading. Bankruptcy experts say business owners must understand that other individuals will oversee and direct their decisions during a business bankruptcy. Some of these people include debtors, shareholders, and the court trustees.
2. Business bankruptcy is expensive. Depending on the size of your debt, it might be more expensive to file than to continue to run your business and try to save it. If you choose to file business bankruptcy, you'll have to hire good counsel, and often other professionals who will charge a hefty fee for their services. These costs often surprise business owners so consider them before you decide to go down this path.
3. Business bankruptcy can take more time than you expect. This process isn't a quick fix. You don't file bankruptcy, see a quick turnaround of your fortune, complete the bankruptcy and return to business as usual. Depending on your jurisdiction, court may only hold hearings once a month. Sometimes, the court may delay these hearings that are essential to the day-to-day running of your business. This will slow down the whole course of the process. If you choose to file, understand that there will be numerous "sit down and wait" moments for you.
4. Your employees might flee during the process. Even if the you are filing a Chapter 11, or reorganization bankruptcy, many employees might mistakenly believe the company is in such dire straits as their job is in danger. Even if you reassure your employees, you are sure to lose a few or more as people seek more stable employment elsewhere. During this already difficult time, you'll have to hire more employees, or make do with fewer people if hiring new employees is not possible. If you do hire more people, consider the cost of hiring, training and "breaking in" new workers.
Before you decide to file, make sure you know all your options. If Chapter 11 still looks like a good choice, do your homework. Find out about the filing process and know what to expect. Also make sure you get a competent bankruptcy lawyer to represent you and your company. The future of your business depends on it.
http://www.bestnichearticles.com/Article/Business-Bankruptcy-Not-Always-Best-Option/64427
Chapters 7 and 13 Bankruptcy Laws
Some laws to filing chapter 7 or 13 bankruptcy are common knowledge, such as the requirement for all filers to undergo debt or credit counseling to help better educate them on their spending habits. There is also the law stating that debtors with higher incomes will have to repay a portion of their debt prior to being allowed to file for chapter 13 bankruptcy. However, there have been laws recently taken into effect that are little known and need to be observed.
Chapter 7 Bankruptcy Restrictions
The most common form of bankruptcy just got a little more exclusive. Under the old rules people could decide which chapter of bankruptcy was best for them- most choosing chapter 7. However, those with higher incomes must now be aware that they may not qualify to file for chapter 7 bankruptcy and will be forced to file under chapter 13. The gauge they use to decipher “high income families” is to compare your current monthly income with that of the median monthly income of a family of similar size in your state. Another factor to account for is how you current monthly income will be calculated. It is not what you are currently making at the time when you file for bankruptcy but rather an average of your income from the six months prior to making your claim. This poses a big problem for those who are filing bankruptcy after recently losing a job.
Restrictions on Lawyers
Among the new laws lawyers much personally vouch for the accuracy of the information provided. Thus, time spend on each bankruptcy case will increase, in turn driving up your lawyer bill.
Can You Live On Less?
Under the old rules, those who filed for chapter 13 did have to devote all disposable income to a payment plan. The new laws make this a little more challenging. In addition to handing over all disposable income, chapter 13 filers will have to calculate that amount from an expense amount allowed by the IRS- meaning they get to dictate what your living costs should be. Keeping in mind under chapter 13 you are still required to calculate disposable income according to an average of what you had made over the last six months.
Value Your Property at Replacement Cost
In the past heirlooms and other property that a debtor might want to keep were expected to be of little value- deeming them exempt. However, new laws force you to value all property at retail value taking into consideration age and condition- a requirement that, in most cases, will inflate the cost of your property leaving you at risk of losing it.
Don’t Count on State Exemptions
The new rules entail that a bankruptcy filer live in a sate for at least two years in order to gain from a state’s exemption laws otherwise they can only claim those exemptions of the previous state in which they lived. The same goes for homestead exemptions only this requires over 40 months of residency.
http://www.bestnichearticles.com/Article/Chapters-7-and-13-Bankruptcy-Laws/12279
Chapter 7 Bankruptcy Restrictions
The most common form of bankruptcy just got a little more exclusive. Under the old rules people could decide which chapter of bankruptcy was best for them- most choosing chapter 7. However, those with higher incomes must now be aware that they may not qualify to file for chapter 7 bankruptcy and will be forced to file under chapter 13. The gauge they use to decipher “high income families” is to compare your current monthly income with that of the median monthly income of a family of similar size in your state. Another factor to account for is how you current monthly income will be calculated. It is not what you are currently making at the time when you file for bankruptcy but rather an average of your income from the six months prior to making your claim. This poses a big problem for those who are filing bankruptcy after recently losing a job.
Restrictions on Lawyers
Among the new laws lawyers much personally vouch for the accuracy of the information provided. Thus, time spend on each bankruptcy case will increase, in turn driving up your lawyer bill.
Can You Live On Less?
Under the old rules, those who filed for chapter 13 did have to devote all disposable income to a payment plan. The new laws make this a little more challenging. In addition to handing over all disposable income, chapter 13 filers will have to calculate that amount from an expense amount allowed by the IRS- meaning they get to dictate what your living costs should be. Keeping in mind under chapter 13 you are still required to calculate disposable income according to an average of what you had made over the last six months.
Value Your Property at Replacement Cost
In the past heirlooms and other property that a debtor might want to keep were expected to be of little value- deeming them exempt. However, new laws force you to value all property at retail value taking into consideration age and condition- a requirement that, in most cases, will inflate the cost of your property leaving you at risk of losing it.
Don’t Count on State Exemptions
The new rules entail that a bankruptcy filer live in a sate for at least two years in order to gain from a state’s exemption laws otherwise they can only claim those exemptions of the previous state in which they lived. The same goes for homestead exemptions only this requires over 40 months of residency.
http://www.bestnichearticles.com/Article/Chapters-7-and-13-Bankruptcy-Laws/12279
Bankruptcy: Why the Different Chapters
Whether you hit a few to many “rainy days” in you past such as a job loss or a divorce, or you were simply a little too hap-hazard with credit cards in the past you may be in over your head and wondering which route to take to get out of the red and back on your feet. Between debt management, credit counseling, and the 13 dozen debt consolidation companies out there it can get really overwhelming really fast. Add the option of bankruptcy to the equation and even the most decisive and determined person will be thrown into overload. To ease the confusion, for those seriously considering a bankruptcy declaration, here are some factors to consider when looking into the different bankruptcy chapters.
Chapter 7 bankruptcy has always been the most common among individuals. When filing chapter 7 bankruptcy, as with all chapters, the declaration does stay on your credit report for ten years. During this time you will most likely only qualify for secured, high interest credit cards. Under chapter 7 you can expect all of your property to be liquidated except for some items which may fall into the “exempt” category including tools of one’s trade, a minimal amount of “personal effects”, and sometimes a small amount of home or car equity. Depending on which state you live in filing chapter 7 bankruptcy can often mean losing your home. Chapter 7 bankruptcy is also known as the “fresh start” as in most cases of chapter 7 the debtor is discharged of their liability.
Chapter 13 bankruptcy is often called “reorganizing” your debt. While in chapter 7 most of your property will be sold by your creditors to recuperate some of the cost of your debt, chapter 13 forces you to pay some or all of your debt, usually at better terms or. This type of bankruptcy is more of a form of rehabilitation though it does still appear on your credit report for ten years. Those with an income higher than the median income in your state may be forced to bypass chapter 7 and file for chapter 13 bankruptcy. During the “reorganization” phase, which generally last three the five years, you will be given an allowance by the IRS from your own paycheck. This allowance will have to cover housing, transportation, and some should be allocated to savings, while the rest of the your paycheck will go toward paying down your debt. In many cases a huge change in lifestyle is necessary to accommodate your assigned allowance.
Chapter 11 bankruptcy is more commonly a method reserved for businesses than individual consumers due to the complexity and high cost. Most often a business is still allowed to operate while in the process of filing though it will do so under close supervision. Chapter 11 bankruptcy gives businesses the opportunity to restructure and remove themselves from overly taxing contracts.
Hopefully a clear concise understanding of each bankruptcy chapter will help to put everything in perspective to help guide you on your way to recovery. Filing for bankruptcy, regardless of whether it is chapter 7, 11, or 13, is a huge undertaking. But rest assured, once the papers are signed it’s all about the recovery and in the end it may be the best thing you’ve ever done for yourself and your family.
http://www.bestnichearticles.com/Article/Bankruptcy--Why-the-Different-Chapters/12302
Chapter 7 bankruptcy has always been the most common among individuals. When filing chapter 7 bankruptcy, as with all chapters, the declaration does stay on your credit report for ten years. During this time you will most likely only qualify for secured, high interest credit cards. Under chapter 7 you can expect all of your property to be liquidated except for some items which may fall into the “exempt” category including tools of one’s trade, a minimal amount of “personal effects”, and sometimes a small amount of home or car equity. Depending on which state you live in filing chapter 7 bankruptcy can often mean losing your home. Chapter 7 bankruptcy is also known as the “fresh start” as in most cases of chapter 7 the debtor is discharged of their liability.
Chapter 13 bankruptcy is often called “reorganizing” your debt. While in chapter 7 most of your property will be sold by your creditors to recuperate some of the cost of your debt, chapter 13 forces you to pay some or all of your debt, usually at better terms or. This type of bankruptcy is more of a form of rehabilitation though it does still appear on your credit report for ten years. Those with an income higher than the median income in your state may be forced to bypass chapter 7 and file for chapter 13 bankruptcy. During the “reorganization” phase, which generally last three the five years, you will be given an allowance by the IRS from your own paycheck. This allowance will have to cover housing, transportation, and some should be allocated to savings, while the rest of the your paycheck will go toward paying down your debt. In many cases a huge change in lifestyle is necessary to accommodate your assigned allowance.
Chapter 11 bankruptcy is more commonly a method reserved for businesses than individual consumers due to the complexity and high cost. Most often a business is still allowed to operate while in the process of filing though it will do so under close supervision. Chapter 11 bankruptcy gives businesses the opportunity to restructure and remove themselves from overly taxing contracts.
Hopefully a clear concise understanding of each bankruptcy chapter will help to put everything in perspective to help guide you on your way to recovery. Filing for bankruptcy, regardless of whether it is chapter 7, 11, or 13, is a huge undertaking. But rest assured, once the papers are signed it’s all about the recovery and in the end it may be the best thing you’ve ever done for yourself and your family.
http://www.bestnichearticles.com/Article/Bankruptcy--Why-the-Different-Chapters/12302
You're Suing ME?! Adding Insult to Injury to Creditors of Bankrupt Debtors
In the course of managing a bankruptcy-centered law practice, one notices that certain themes tend to recur. One of the things that seems, repeatedly and quite understandably, to make the blood of credit managers in bankruptcy cases boil, is the prospect of being sued for a 'preference' while they are already stuck with a bad account receivable. This seems to many vendors to be the ultimate outrage. Having shipped goods, or rendered services on credit, in good faith, and in the expectation of being paid, and then, having already been burned (often for substantial sums) by the bankruptcy filing itself, they may find themselves pursued by a trustee or other estate representative, to give back the smaller amount they received on account of their claim within the 90-day period preceding the bankruptcy filing.
After 25-odd years of minor tinkering with the preference laws as drafted in the Bankruptcy Code, which came into effect in 1979, Congress has, for the first time, and in response to intense lobbying by creditor-based interest groups, made significant, and wide-ranging changes which will, in the view of this author, work a sea change in this area.
First of all, we need to understand what a preferential payment is, and why the bankruptcy laws allow for their recovery, before exploring, in very broad strokes, for purposes of this article, how and why the recent amendments to the Bankruptcy Code have helped 'level the playing field.'
The purpose of making preferential payments recoverable is to promote equality (or, more accurately, "equitable-ness") of distribution among creditors. In other words, the pain should be shared on a reasonably equitable basis by those who are on the receiving end of bad receivables. To that end, certain payments made by troubled debtors, during the 90-day window preceding the bankruptcy filing are subject to being brought back into the estate for redistribution, on an equitable basis, to the creditor body at large. There are a number of other technical requirements for a payment to be preferential, but these are beyond the scope of this article, and creditors are encouraged to seek appropriate legal counsel as needed.
On the surface, this seems reasonably fair. After all, why should creditors who have a closer relationship with the bankrupt company, or who just scream louder, be paid while the other guy gets left holding the bag. But, alas, here's the dirty little secret of preference claims. For the most part, though not exclusively, they are pursued, by trustees in liquidation cases, in which there will ultimately be little or no recovery for unsecured creditors. So who gets the money recovered in these preference litigations? Why, the trustees, their lawyers and accountants, of course, whose rights to payment come before everyone else. So rather than being a vehicle for equitable redistribution of limited funds of an insolvent debtor, the preference statute has been used as a tool for trustees and their professionals to build an estate as a source of trustee fees, and legal and accounting fees. In most such cases, the creditors end up with nothing at all, except the privilege of paying twice.
On the other hand, the drafters of prior legislation wanted to encourage vendors to continue selling goods to troubled companies so as not to exacerbate an already difficult situation and bring on unnecessary or premature bankruptcies. So various defenses to preference claims were introduced, to exempt certain payments made contemporaneously, or in the ordinary course of business and within invoice terms, from preference attack. These concepts, however, still left the burden on the creditor/defendant to prove these defenses, and they often found that it was easier and cheaper just to 'pay up' or settle the claims, however distasteful it seemed to them
So what has the new bankruptcy law done for these creditors? Well, it has, among other significant changes, substantially tightened up the 'ordinary course' defense, making it substantially easier for creditors to establish them, by creating both a 'subjective' and an 'objective test' (again, the details of this are too technical for the scope of this article). Perhaps even more importantly, Congress has now exempted smaller payments from the reach of preference attack and changed venue provisions for others, thus requiring trustees or other estate representatives to sue where the preference recipient is located, rather than in the 'home' bankruptcy court. Previously, the daunting prospect of defending on the other side of the country might well induce a creditor to settle a case even of dubious merit because of the expense involved of travel and the hiring of local counsel in a far-off district. Now, in many cases, the economics of this situation have been turned on their heads, and it might well be the trustee who will have to think twice, or three times, about bringing 'nuisance' preference cases when they have to be prosecuted in foreign jurisdictions.
Thus, although this legislation is very new, and largely untested, it seems that creditors in bankruptcy cases will, at least from their viewpoint, be getting a fairer shake, and will less often be having insult added to injury by having to enlarge the size of their already uncollectible receivables.
http://www.bestnichearticles.com/Article/You-re-Suing-ME---Adding-Insult-to-Injury-to-Creditors-of-Bankrupt-Debtors/14067
After 25-odd years of minor tinkering with the preference laws as drafted in the Bankruptcy Code, which came into effect in 1979, Congress has, for the first time, and in response to intense lobbying by creditor-based interest groups, made significant, and wide-ranging changes which will, in the view of this author, work a sea change in this area.
First of all, we need to understand what a preferential payment is, and why the bankruptcy laws allow for their recovery, before exploring, in very broad strokes, for purposes of this article, how and why the recent amendments to the Bankruptcy Code have helped 'level the playing field.'
The purpose of making preferential payments recoverable is to promote equality (or, more accurately, "equitable-ness") of distribution among creditors. In other words, the pain should be shared on a reasonably equitable basis by those who are on the receiving end of bad receivables. To that end, certain payments made by troubled debtors, during the 90-day window preceding the bankruptcy filing are subject to being brought back into the estate for redistribution, on an equitable basis, to the creditor body at large. There are a number of other technical requirements for a payment to be preferential, but these are beyond the scope of this article, and creditors are encouraged to seek appropriate legal counsel as needed.
On the surface, this seems reasonably fair. After all, why should creditors who have a closer relationship with the bankrupt company, or who just scream louder, be paid while the other guy gets left holding the bag. But, alas, here's the dirty little secret of preference claims. For the most part, though not exclusively, they are pursued, by trustees in liquidation cases, in which there will ultimately be little or no recovery for unsecured creditors. So who gets the money recovered in these preference litigations? Why, the trustees, their lawyers and accountants, of course, whose rights to payment come before everyone else. So rather than being a vehicle for equitable redistribution of limited funds of an insolvent debtor, the preference statute has been used as a tool for trustees and their professionals to build an estate as a source of trustee fees, and legal and accounting fees. In most such cases, the creditors end up with nothing at all, except the privilege of paying twice.
On the other hand, the drafters of prior legislation wanted to encourage vendors to continue selling goods to troubled companies so as not to exacerbate an already difficult situation and bring on unnecessary or premature bankruptcies. So various defenses to preference claims were introduced, to exempt certain payments made contemporaneously, or in the ordinary course of business and within invoice terms, from preference attack. These concepts, however, still left the burden on the creditor/defendant to prove these defenses, and they often found that it was easier and cheaper just to 'pay up' or settle the claims, however distasteful it seemed to them
So what has the new bankruptcy law done for these creditors? Well, it has, among other significant changes, substantially tightened up the 'ordinary course' defense, making it substantially easier for creditors to establish them, by creating both a 'subjective' and an 'objective test' (again, the details of this are too technical for the scope of this article). Perhaps even more importantly, Congress has now exempted smaller payments from the reach of preference attack and changed venue provisions for others, thus requiring trustees or other estate representatives to sue where the preference recipient is located, rather than in the 'home' bankruptcy court. Previously, the daunting prospect of defending on the other side of the country might well induce a creditor to settle a case even of dubious merit because of the expense involved of travel and the hiring of local counsel in a far-off district. Now, in many cases, the economics of this situation have been turned on their heads, and it might well be the trustee who will have to think twice, or three times, about bringing 'nuisance' preference cases when they have to be prosecuted in foreign jurisdictions.
Thus, although this legislation is very new, and largely untested, it seems that creditors in bankruptcy cases will, at least from their viewpoint, be getting a fairer shake, and will less often be having insult added to injury by having to enlarge the size of their already uncollectible receivables.
http://www.bestnichearticles.com/Article/You-re-Suing-ME---Adding-Insult-to-Injury-to-Creditors-of-Bankrupt-Debtors/14067
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