If we desire respect for the law, we must first make the law respectable.
Bankruptcy (part B)
by
Charles Lamson
Reclamations
Frequently at the time the court discharges debts, the debtor has possession of property owned by others. This property takes the form of consigned or bailed goods, or property held as security for a loan. The true owner of the property is not technically a creditor of the debtor in bankruptcy. The owner should file a reclamation claim for the specific property so that it may be returned.
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A person in possession of a check drawn by the debtor may or may not be able to get it paid depending on the circumstances. If the check is an uncertified check, the holder is a mere creditor of the debtor and cannot have it cashed. This occurs because the check is not an assignment of the money on deposit, and the creditor merely holds the unpaid claim the debtor intended the check to discharge. If the check has been certified, the creditor has the obligation of the drawee bank on the check, which may be asserted in preference to proceeding upon the claim against the drawer of the check.
Types of Claims
Claims of a debtor in bankruptcy may be classified as fully secured claims, partially secured claims, and unsecured claims.
Fully secured creditors may have their claims satisfied in full from the proceeds of the assets that were used for security. If these assets sell for more than enough to satisfy the secured debt, the remainder of the proceeds must be surrendered to the trustee in bankruptcy of the debtor.
Partially secured creditors have a lien on some assets but not enough to satisfy the debts in full. The proceeds of the security held by a partially secured creditor are used to pay that claim and, to the extent any portion of a debt remains unpaid, the creditor has a claim as an unsecured creditor for the balance.
Unsecured claims are those for which creditors have no lien on specific assets.
Priority of Claims
The claim with the highest priority is that for the administrative expenses of the bankruptcy proceedings (such as filing fees paid by creditors and involuntary proceedings and expenses of creditors and recovering property transferred or concealed by the debtor). Additional priority claims include debts incurred after the filing of an involuntary petition and before an order of relief or appointment of a trustee; wage claims not exceeding $2,000 for anyone wage-earner, provided the wages where earned not more than three months prior to bankruptcy proceedings; fringe benefits for employees; claims by individuals who have deposited money with the debtor for undelivered personal, family, or household goods; and tax claims.
Discharge of Indebtedness
If the debtor cooperates fully with the court and the trustee in bankruptcy and meets all other requirements for discharge of indebtedness, the discharge will be granted. To be discharged, the debtor must not hide any assets or attempt to wrongfully transfer them out of the reach of creditors. A discharge voids any liability of the debtor on discharged debt and prevents any actions for collection of such debts.
Debts Not Discharged
Certain obligations cannot be avoided by bankruptcy. The most important of these claims include:
Under some circumstances, bankruptcy does not discharge certain debts, but the list above includes the most common ones.
Nonliquidation Plans
The bankruptcy laws provide special arrangements that do not result in liquidation and distribution of the debtor's assets. These are business reorganization and Chapter 13 plans.
Business Reorganization
Bankruptcy proceedings under Chapter 7 result in the liquidation and distribution of the assets of an enterprise. Under Chapter 11, the Bankruptcy Code provides a special rehabilitation system designed for businesses so that they may be reorganized rather than liquidated. Although designed for businesses the language of Chapter 11 allows individuals not engaged in business to request relief.
Reorganization proceedings may be voluntary or involuntary. Normally the debtor will be allowed to continue to run the business; however, a disinterested trustee may be appointed to run the business in cases of mismanagement or in the interest of creditors. The debtor running its business has the first right, for 120 days, to propose a rehabilitation plan indicating how much and how creditors will be paid. The court will confirm a plan that does not discriminate; is fair, equitable, and feasible; has been proposed and accepted in good faith; and all the payments made or proposed are found to be reasonable.
The court can impose a reorganization plan even if a class of creditors objects to the plan. This is called a cram down. A cram down cannot be imposed if dissenting unsecured creditors are not paid in full or the holder of a claim with less priority received some property on account of a claim or interest. If no acceptable plan of reorganization can be worked out, the business may have to be liquidated under Chapter 7.
Chapter 13 Plans
If the debtor is an individual, a Chapter 13 may be worked out. This chapter attempts to achieve for an individual the same advantages that Chapter 11 gives to businesses. An individual with a regular income, except a stock or commodity broker, who has unsecured debts of less than $100,000 and secured debts of less than $350,000 may in good faith file a petition under Chapter 13. This chapter is completely voluntary for the debtor. However, a majority of creditors can impose a settlement plan upon a dissenting minority. The debtor is as fully released from debts as under Chapter 7 of the Bankruptcy Code. These arrangements help prevent the hardship of an immediate liquidation of all the debtor's assets and give the debtor the opportunity to develop a plan for the full or partial payment of debts over an extended period. These plans benefit the creditors because they are likely, in the long run, to receive a greater percentage of the money owed them. The plan may not pay unsecured creditors less than the amount they would receive under a Chapter 7 liquidation.
 INTERNET RESOURCES FOR BUSINESS LAW *SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, PGS. 485-488, 491*
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