Business Law 101 / Bankruptcy

By Albert L. Kelley

Bankruptcy is a special procedure created by federal law to assist people and companies that are going through serious financial problems. Because it is a federal protection, a filing in one state affects all other states. In other words, a debtor who files bankruptcy proceedings in New Jersey can affect creditors in Florida.

There are three basic filings that we will discuss here. They are named after the section of the bankruptcy code that discusses them.   First is a Chapter 13 filing. These are filings for individuals. After filing, the debtor comes up with a planned payment schedule for all of their debts, setting up extended payments, even if the creditors haven’t agreed to accept a payment schedule. There is a hearing where the Court must approve the plan and the creditors have the opportunity to object. Generally, if the plan has been drafted in good faith, the Court will approve it. Once approved, the creditors must comply with the payment plan. If the debtor pays off the plan as scheduled, the bankruptcy is discharged.

When the debtor is a corporation or if the amount of debt is more than Chapter 13 allows we look to Chapter 11 for protection. When the debtor files for protection, the debtor or his trustee puts together a plan to pay back the debts, sort of like a Chapter 13, but they also may review contracts and determines if they should be accepted, rejected or assigned. If the trustee determines that a contract is not in the debtor’s interest, he may simply reject the contract and the creditor has little recourse for the now-legally-breached contract. Again, if the plan is filed in good faith, the Court will usually approve or confirm it. The creditors cannot change the terms once confirmed.

If the debt structure is even worse, the debtor may file for Chapter 7 bankruptcy. This is what is called liquidation. Here, the debtor files for protection and the Court appoints a trustee to take over the assets of the debtor. Chapter 7 bankruptcy may be filed either by the debtor, or by creditors. If the bankruptcy is filed by creditors, the debtor may challenge the filing. If the debtor succeeds in challenging the bankruptcy petition, the court can award him damages, including attorney fees and costs.

Once the bankruptcy petition is filed, the debtor must provide a schedule of income and expenses, a list of assets and liabilities, and a list of creditors. There will then be a meeting of the creditors where the debtor must appear and answer questions about their finances under oath.

The filing of the bankruptcy petition acts as an automatic stay of any litigation or action to collect debts.   Therefore if you have received a judgment against a debtor and the next day he files for bankruptcy, you will be precluded from enforcing the judgment. Indeed, I handled a case several where I obtained a judgment just after 11:00 a.m. and at noon the debtor filed for bankruptcy. If he had filed just an hour earlier, the Court would have to reverse my judgment because it would have been made after the bankruptcy filing. Since we beat the filing by an hour, the judgment stood, but we couldn’t enforce it until the bankruptcy was discharged.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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