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Frequently Asked Questions
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- What does it mean when a company goes bankrupt?
A company usually files for protection under the Bankruptcy Act when
it can no longer pay its debts and its liabilities are greater than
its assets.
- What does it mean when a company is insolvent?
A
company is considered to be insolvent when its liabilities exceed its assets.
- Is
there more than one type of bankruptcy?
Yes. The most common types of bankruptcy allowed under the Bankruptcy Act
are Chapter 7, Chapter 11 and Chapter 13.
- What is a Chapter 7 bankruptcy?
A Chapter 7 bankruptcy is a liquidation proceeding. In a Chapter bankruptcy,
the court appoints a trustee to liquidate a company’s assets and to
pay creditors with the proceeds of the liquidation.
- What is a Chapter 11 bankruptcy?
A Chapter 11 bankruptcy allows a company to reorganize while continuing to
conduct business. When a company files Chapter 11 bankruptcy, all creditors
are stayed from collecting debts outstanding at the time of filing.
- What is
a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy allows individuals to reorganize their finances and
to pay off debts according to a schedule approved by the court. Chapter 13
cannot be used by a partnership or corporation, but may be used by a sole
proprietorship.
- What is a Debtor?
The term “debtor” is used to describe a company that has filed
for bankruptcy, or one that owes debts to creditors.
- What is a Creditor?
The term “creditor” is used to describe a company that has sold
its goods or services to another company on credit terms. It is also used
to describe a company or companies that are owed money by a company that files
bankruptcy.
- What is a Trustee?
A trustee is an agent of the Bankruptcy Court appointed to administer a bankruptcy
case. A trustee manages the property of the debtor for the benefit of creditors.
- What
is an automatic stay?
When a company files for bankruptcy protection, all debt collection actions
or foreclosures are suspended as of the date of filing. This action protects
the debtor from creditors seeking to seize its assets.
- When does a bankruptcy
take effect?
A bankruptcy becomes effective as of the date a petition is filed and recorded
with a bankruptcy clerk.
- What is an unsecured creditor?
An unsecured creditor is a company that has sold its goods and/or services
to another company on open credit terms without the backing of collateral.
Such creditors are generally trade suppliers.
- What is a secured creditor?
A secured creditor is one who has sold its goods and/or services, or loaned
money on the basis of collateral pledged to secure the debt or who has filed
a lien on property of the debtor.. Banks and other lending institutions are
generally secured creditors.
- What is a critical vendor?
Sometimes certain general unsecured creditors are thought to be absolutely
necessary to the reorganizing of the debtor’s business and, under what
is known as the “Necessity of Payment Doctrine,” have parlayed
that relationship into preferred payment on their claims. These creditors
are often referred to as “Critical Vendors.”
- What is a plan of
reorganization?
A plan or reorganization is the document setting forth how a bankrupt company
plans to satisfy its creditors. The plan of reorganization is the cornerstone
of a successful Chapter 11 bankruptcy. The bankrupt company generally has
120 days following the petition filing in which to present a plan of organization
to the court. Bankruptcy judges however, may extend the time in which a
plan can be submitted and approved.
- What is a “Debtor In Possession”?
A Debtor In Possession, commonly referred to as a DIP, is the debtor which
remains in control of the operations of a bankrupt company. Trustees however,
may in some cases operate a bankrupt company instead of the original management
that drove it into bankruptcy.
- What is a "creditors" committee?
A creditors’ committee is a committee of representatives of creditors
appointed by the U.S. Trustee. The committee acts on behalf of all creditors
of the bankrupt company in negotiating a plan of reorganization and other
major actions.
- What is a preference?
A preference is a payment made by a debtor during the 90 days prior to filing
a petition in bankruptcy (includes the date of filing) which favors one creditor
over another. If a preference payment was made to an insider, the preference
period is 1 year prior to the petition date. Preference payments are subject
to recovery and returned to the bankruptcy estate.
- What is a preference claim?
A preference claim is an adversary action initiated by a trustee in bankruptcy
or an unsecured creditors’ committee on behalf of the bankruptcy estate
for the recovery of a preference payment.
- What does “ordinary course
of business” mean?
Ordinary course of business refers to:
(A) payment of a debt incurred by the debtor in the ordinary course of business
or financial affairs of the debtor and the transferee;
(B) payment made in the ordinary course of business or financial affairs
of the debtor and the transferee; and
(C) payment made according to ordinary business terms.
- What is a prepackaged
bankruptcy?
The term “prepackaged bankruptcy” refers to a situation where
a company and its creditors agree to a plan of reorganization before the
company files a bankruptcy petition.
- What is a “cramdown?”
A cramdown refers to a plan of reorganization that has been confirmed over
the objections of one or more classes of creditors.
- What is a voluntary bankruptcy?
A voluntary bankruptcy is one in which the debtor files the petition on its
own volition.
- What is an involuntary bankruptcy?
An involuntary bankruptcy is one that is initiated by at least 3 creditors
holding unsecured claims aggregating at least $5,000 against the debtor.
- What
is a proof of claim?
A proof of claim is a form filed with the bankruptcy court by a creditor
setting out its claim against the bankruptcy debtor.
- What is a 341 meeting?
This is the first meeting of creditors scheduled by the trustee in bankruptcy
after a bankruptcy petition has been filed.
- What is a U. S. Trustee in
bankruptcy?
A U. S. Trustee is an agent of the U. S. Department of Justice appointed
to assist in the administration of bankruptcy cases. He or she appoints
committees, examiners and trustees. U. S. Trustees are not involved
in the daily activities
of bankruptcy cases.
- What is an Expert Witness?
An expert witness is an individual with experience credit, collections
and financial management who is retained to assist attorneys in the
defense of preference claims filed against creditors. See www.Witness4U.com
for
details
of services provided.
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