Chapter 7, 11, 15 Bankruptcy

The US Bankruptcy law is divided into different “chapters” each dealing with a different type of bankruptcy. Of the six types of bankruptcy, only three are generally of importance in international technology law:

Chapter 7 is straight liquidation – that is to say that a company, if it exists, will be dissolved, its assets “marshaled” and sold, and after expenses, any remaining funds will be distributed to the creditors in order of priority.  If the bankrupt is an individual, that person will be allowed to retain certain assets (exemptions), typically the family home, a vehicle, work tools, clothing and personal jewelry (in each case up to either a state or federally set limit.)  If a creditor has security over certain assets, then they will be paid out of the proceeds of the sale of that asset first, provided the security was ‘perfected’ within a limitation period of typically 60-90 days before the bankruptcy (and provided it was not a related party transaction or preference) See UCC Filing.

Although the bankrupt is supposed to file a schedule of debts and liabilities with the court, as well as identifying any security interests that may exist in the assets, in the chaos of a bankruptcy these filings may be inaccurate. If owed money, It is important therefore to check the list of creditors on the bankruptcy court’s docket via PACER and determine if you are identified as a creditor and if the liability and any security interests are properly listed. If they are not, a creditor has a limited amount of time to file a claim and/or objections.

Chapter 11 is sometimes called reorganization [in bankruptcy.]  In principle it is supposed to be used for businesses that can be viable as a going concern if they can deal with immediate debt problems, either by delaying debt payments or reducing the principal amount (sometimes described as the creditors “taking a haircut.”) In Chapter 11 the management of the company, usually called the “debtor in possession” retains control of the company and will submit a business plan for the ongoing future of the company, including a schedule of how creditors will be compensated, which may include haircuts, debt-for-equity swaps and payment plans.

That plan will then be reviewed by the bankruptcy court, which may make changes.  If and once the bankruptcy court is satisfied with the plan it will then be confirmed, at which point it becomes difficult for a creditor to secure any changes. It is therefore important, if a substantial creditor of the business, to secure representation in the bankruptcy court.

Chapter 15 is a statutory provision that allows non-US bankruptcy courts to seek the assistance of US bankruptcy courts in cases where there are substantial assets in the United States. It allows the US courts to issue subpoenas in support of the non-US action, to stay pending US legal proceedings against the bankrupt, prevent fraudulent conveyances, turn over ownership of assets to the relevant foreign trustee (or a US delegate), etc.

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