Frequently Asked Questions

• 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.