In a Chapter 13 bankruptcy, secured and unsecured loans are treated differently. In a Chapter 13 bankruptcy, secured debts (i.e., loans with a security interest, such as a loan on a house, car, boat, trailer, etc.) are treated in different ways.
Category Archives: Chapter 11 Bankruptcy in Kansas City
Converting A Chapter 11 Bankruptcy Case In Kansas City
Not every Chapter 11 case ends with completion of the Chapter 11 plan. Sometimes, cases are converted to a different chapter of the bankruptcy code. This can happen for a variety of reasons, but most often the issue hinges on what is in the best interests of the debtor. Sometimes the circumstances that existed at the initial filing or at confirmation no longer exist. In these situations, dismissal of the case or conversion to another chapter can be an appropriate remedy.
As a matter of right, a Chapter 11 debtor can convert his or her case to a case under Chapter 7 in many situations. For other situations, court permission must be sought. Court permission would be needed if: (1) The debtor is not a debtor in possession; (2) The case was originally an involuntary Chapter 11 case (this is rare); (3) The case was previously converted to Chapter 11 from another chapter at the debtor’s request.
As a case progresses, sometimes it becomes clear that conversion to another chapter of the bankruptcy code will be necessary. If a feasible plan can’t be proposed or implemented, administrative costs are not paid, the confirmation order is revoked, the plan is in default, or some other unforseen circumstances intervenes, it is good to know that conversion is an option. In some situations, a dismissal of a case followed by a refiling under another chapter is also an appropriate remedy. Everything depends on the circumstances.
Read More: Executory Contracts And Unexpired Leases In Chapter 11 Bankruptcy In Kansas City
Voluntary And Involuntary Chapter 11 And Chapter 7 Cases In Kansas City
The vast majority of Chapter 11 bankruptcies are voluntary, in the sense that the debtor, not the creditors, initiated the filing. However, there are instances where a Chapter 11 petition is filed not by the debtor, but by creditors. Good cause must exist for this to happen. While some creditors may use the threat of an involuntary filing as a collection device, a creditor who filed an involuntary petition against a debtor without meeting the mandatory requirements would be sternly rebuked.
The only chapters under which an involuntary petition may be filed are Chapter 7 and Chapter 11. In a Chapter 7 case, relief comes in the form of a liquidation. In a Chapter 11, relief can be had in the form of a reorganization or a liquidation. Various factors are analyzed to determine which chapter is most suitable to file under.
Regarding grounds for filing, an involuntary petition should allege either one of the following grounds for relief: (1) the debtor is not paying its debts as they come due, unless they are the subject of a good faith dispute; OR (2) that within the previous 120 days before the bankruptcy petition was filed, a custodian was appointed or took possession of the debtor’s property (this is not common).
The first “ground” cited above is the most commonly alleged. It is vague enough that is has been the subject of dispute in various cases, and there is no clear-cut rule as to what constitutes “not paying debts as they come due.” Involuntary petitions are, usually, hotly contested by debtors. A variety of defenses and counterclaims can be alleged by a debtor who finds himself or herself the subject of an involuntary petition. They are quite complicated, and it is important to consult with an attorney to see just what your options are.
Read More: The “New Value Exception” To The Absolute Priority Rule In Chapter 11 In Kansas City
Tax Debts In A Chapter 7 Bankruptcy Case In Kansas City
A Chapter 7 bankruptcy can be filed either by individuals or corporations. One of the issues that debtors in a Chapter 7 case often face is the problem of owing large amounts income taxes. These income taxes can be either federal, state, or local. To complicate matters further, we often have situations where people have not filed their tax returns for several years. Sometimes the tax authorities will have put liens on properties or have begun to garnish wages of debtors. Trying to figure out the treatment of tax debts in bankruptcy is basically impossible with the help of an experienced attorney. Here’s the IRS’s information page on Chapter 7 bankruptcy, which is so arcane as to be nearly hopeless to decipher:
Luckily, there are better ways of approaching the problem. First, it is important to understand that the IRS (as well as state and local tax authorities) are subject to the automatic stay of bankruptcy, just like any other creditor. When a case is filed, they can’t continue their collection efforts against a debtor. They must stop garnishments and other debt collection activity.
Income tax debts (not sales taxes, withholding taxes, customs duties, property taxes, or other types of taxes) can be discharged in a Chapter 7 bankruptcy if these conditions are met:
- (1) The most recent due date for filing of your tax return for the tax in question must be more than 3 years old;
- (2) You must also have filed a tax return for each tax year which you have back income taxes, at least more than 2 years prior to filing your bankruptcy case;
- (3) The IRS or state taxing authority must also have “assessed” the tax at least 240 days prior to the date you file your bankruptcy case. Assessment generally refers to when you are told you owe the income tax.
- (4) You cannot have filed fraudulent returns, or have willfully evaded the tax. (This is very rare. Most people do not get accused of fraud or evasion by the tax authorities).
Although these requirements are easy to list, in practice they are extremely complicated to analyze. This is something you should do with the guidance of an experienced bankruptcy attorney. For example, regarding requirements (1) and (2) above, the “date” requirements can be complicated to determine, because often people get extensions on their due date for filing a return. And, in some cases, people have unfiled or amended returns. For requirement (3), it is often not an easy matter to know when the taxes were actually assessed.
Section 523(a)(1)(B)(i) of the Bankruptcy Code provides that tax debts with respect to which a tax return or equivalent report or notice was not filed or given are nondischargeable regardless of when the taxes or the return was due. This is what it is so important for a debtor to simply file his or her tax return, even if the tax cannot be paid. Failing to file a return is s commonly encountered problem, but one that should be within the means of debtors. Disputes can arise on occasion as to what constitutes the filing of a tax return for the purposes of Section 523(a)(1)(B)(i). For a document to qualify as a “return”, generally:
- It must purport to be a return
- It must be executed under penalty of perjury
- It must contain sufficient information to permit calculation of a tax
- It must be an honest and reasonable attempt to comply with the tax laws.
See In Re Wagoman, 475 B.R. 239 (B.A.P. 10th Cir., 2012). In general, documents are deemed to be “filed” when they are delivered to and received by the IRS. In addition, the return should be filed by the taxpayer and not by the taxing authority. There are times when the IRS or some other taxing authority will file its own substitute “return” (which generally is completely inaccurate) if the taxpayer has not filed it himself or herself. It appears that the burden is on the debtor to make sure that returns are promptly and accurately filed.
Finally, things can get even more complicated if there are tax liens that have been filed either pre-petition or post-petition. Then we get in to the nuances between in personam liability and in rem liability.
The bottom line here is that income taxes can be, and are, discharged in a Chapter 7 bankruptcy all the time. But analyzing the factors discussed in this article is not as simple as it seems. You need an experienced bankruptcy attorney to help you resolve these issues. Even if the taxes don’t meet the requirements for dischargeability, there are often other avenues that can be used to reduce or lower the tax burden.
The Order Of Priority Of Claims And Interests In A Chapter 11 Case In Kansas City
When a Chapter 11 case is filed (business or personal), the debtor’s schedules will list all of the debts and assets. Debts are categorized by priority, in the sense that some debts are accorded more favorable treatment than others. When the debtor’s plan of reorganization is filed, the plan will describe the proposed treatment of the different categories of debt. In a Chapter 11 disclosure statement and Chapter 11 plan, the different categories of debt will be specified with some particularity.
The two main objectives of the Bankruptcy Code are to give the debtor a fresh start and to distribute equally to unsecured creditors what is available of the debtor’s property in a liquidation, or to pay each creditor a pro rata share of their debt according to a payment plan under Chapter 11, 12, or 13. Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than their claim, then the claim is bifurcated into a secured claim covered by the collateral and an unsecured claim for the remaining portion. The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.
We have found that creditors often do not properly understand the nature of their debt and their treatment in the plan of reorganization, and this can on occasion lead to unnecessary disputes over plan confirmation. The priority of claims and interests carries importance if a “cramdown” type of plan is being proposed. A debtor must be mindful of the absolute priority rule in these situations.
Under the Bankruptcy Code, claims and interests are entitled to payment in the following ranking of priority:
1. Secured Claims. These are claims where the creditor has a lien on some collateral.
2. Priority Unsecured Claims. These are given explicit rankings in detail in the Bankruptcy Code (11 U.S.C. 507(a)). Basically we have here: expenses of administration, maintenance and support claims, unsecured tax claims of the government, and some other uncommon categories.
3. Nonpriority Unsecured Claims. These are general unsecured claims, such as medical bills, deficiencies on repossessions or foreclosures, unsecured lines of credit, payday loans, credit card debts, and private loans. They are often grouped into subcategories in a plan of reorganization.
4. Interests of Equity Security Holders. These are not often encountered, and comprise the interests of shareholders or stockholders. Examples would be holders of preferred stock or common stock.
There are some claims that have priorities above the priority claims listed above that mostly apply to business debtors. Some higher priorities, called super priorities, are listed elsewhere in the Code. For instance, Section 507(b) gives a higher priority to a secured claimant for any lack of adequate protection given by the trustee or the court so that the debtor or trustee could use the creditor’s property contingent on the promise by the trustee or the court that the creditor will not lose any value from its use. If the adequate protection turns out to inadequate, then the difference will be paid as a super priority claim.
A proper understanding of these categories and their priority is important for both debtors and creditors in a Chapter 11 case. Each of these categories will have a hierarchy of rights and privileges in a Chapter 11 plan, and voting rights associated with their position. Not understanding the nature of these rights can lead to unnecessary confusion, and may even impact the ability of a creditor to receive any distribution in a plan of reorganization.
Read More: The Appointment Of A Trustee In A Chapter 11 Case in Kansas City
Appointment Of A Trustee In A Chapter 11 Bankruptcy In Kansas City
In the vast majority of Chapter 11 bankruptcy cases, there is no Trustee as in a Chapter 7 or Chapter 13 case. The debtor is called a “debtor in possession” because he in effect acts as his own “trustee”, to state it one way. He retains control of the assets and business operations during the course of the case. However, there are some situations (described in 11 U.S.C. 1104(a)) where a trustee can actually be appointed after a case is filed:
1. For good cause, such as seriously derelict management of assets before or during the pendency of a case, or
2. If the appointment of a trustee is in the best interests of the estate.
Of course, these situations are not often encountered. In deciding whether to appoint a trustee under the “best interests” rule, the court would have to weigh a number of factors. The final analysis would have to balance the expense of appointing a trustee against the possible savings of the assets of the estate. As a practical matter, the appointment of a trustee in a Chapter 11 bankruptcy case is only going to happen in unusual circumstances. But it does happen, and it is interesting to note the legal effect of such a development:
1. The trustee can now have an active role in running the company, if this is a corporate Chapter 11 case.
2. The debtor’s exclusive right to file a plan is now replaced by the possibility of a proposing his own plan of reorganization.
3. The trustee is vested with the authority to bring actions (adversary proceedings) against other parties on behalf of the business.
4. The debtor loses his exclusive right to convert to a Chapter 7 case (11 U.S.C. 1112(a)).
Because the incidence of a trustee being appointed in a Chapter 11 case is rare, this is not the type of issue that is commonly encountered. However, it is important to be mindful that it does exist. A party seeking such an outcome would have to make a strong showing that a trustee appointment would be to the estate’s benefit, and this is normally an uphill battle.
Property Of The Chapter 11 Bankruptcy Estate In Kansas City
When we speak of the “property of the estate” in a Chapter 11 case, we are speaking of all the legal and equitable interests of the debtor in possession. A Chapter 11 bankruptcy filing is a very powerful tool, and in some ways the property of a Chapter 11 estate is broader and more far-reaching than the estates for other chapters of the Bankruptcy Code, such as Chapters 7 and 13. This can can be a valuable tool for the debtor to use as part of his or her reorganization. In general, the property of the Chapter 11 estate will include the following:
1. All legal and equitable interests of the debtor in property as of the commencement of the case, with some exceptions.
2. All interests of the debtor in community property as of the filing of the case that is under control of the debtor.
3. Any interests in property recovered under certain provisions of the Bankruptcy Code (this is not common)
4. Any interests in property preserved for the benefit of the estate or, in certain situations, transferred to the estate.
5. Property that the debtor may become eligible to receive from an inheritance or bequest within 180 days after filing of the case.
6. Proceeds, rents, or profits from property of the estate.
7. An interest in property that the estate may acquire after the filing of the case. The conditions on this provision can be complicated, and will vary from debtor to debtor.
Although bankruptcy law determines what property of the debtor becomes part of the bankruptcy estate, non-bankruptcy law determines whether the debtor owns or has an interest in property. However, any ipso facto clauses in contracts that deprive the debtor of property because of insolvency or bankruptcy are void—if the debtor would have been entitled to the property except for the bankruptcy, then the property is included in the bankruptcy estate regardless of contract provisions or state law to the contrary.
It may also include post-petition property, depending on the chapter of the bankruptcy. Only property and income included in the bankruptcy estate is available to pay creditors. The bankruptcy estate is a new legal entity that is administered by the trustee or the debtor in possession for the equitable benefit of unsecured creditors of the debtor as of the filing date. Most of the property included in the estate is listed in the bankruptcy petition itself. What is and what is not estate property matters when it comes time to filing the plan of reorganization. The gist of of most Chapter 11 plans is to extend the time for the payment of debts, to effect a percentage reduction in the amount of of unsecured debts (which often receive some sort of fixed “pool” amount, or nothing), or both.
In a future post, we’ll talk about things that are not property of the bankruptcy estate. As with so many things, these rules can be nuanced and complicated, so it is critical to speak to your attorney about questions that may arise.
Read More: Interest Rates In Chapter 11 And Chapter 13 Cramdowns
Executory Contracts And Unexpired Leases In Chapter 11 Bankruptcy Cases In Kansas City
A Chapter 11 debtor is usually is ensnared in one (or more) unmanageable contract or lease that will need to be either redrawn or rejected if the debtor is to get things back to a profitable situation. Leases for use of equipment or services are common, as well as all types of contractual obligations, employment contracts, collective bargaining agreements, and franchise agreements. Of course, there are also all types of real estate leases. As part of a comprehensive plan of reorganization, a debtor can and should consider renegotiating or rejecting such leases as the situation may dictate.
How Chapter 11 Bankruptcy Financing Rules Can Help Your Business In Kansas City
One of the most powerful features of a Chapter 11 bankruptcy is the ability of the “debtor in possession” to use the bankruptcy rules to access financing. Very often, distressed businesses need to find a way to inject capital into their business as part of a comprehensive reorganization plan.
Debtors are often faced with a situation where lenders are unwilling to extend credit, due to fears concerning the ability to repay. The Bankruptcy Code offers a way to make both lender and debtor satisfied. “Debtor in possession” financing (DIP financing) is one method that has worked for many troubled businesses and individuals. Essentially, the debtor will request permission of the Bankruptcy Court for approval of the DIP financing. The loan would normally be characterized as a priority security interest. Existing creditors or lienholders will want adequate assurances that their interests will be protected.
The bottom line is that the DIP financing procedures can enable a debtor to obtain the kind of financing that it would not normally be able to obtain outside of bankruptcy. Because the DIP loan is not subject to a legal challenge, a lender is going to have a higher level of comfort participating in the transaction. Frequently in Chapter 11 cases there are situations where assets are being sold. The Chapter 11 protections mean frequently that assets can be bought or sold under more favorable conditions than if there were no bankruptcy, and the ability to get DIP financing can also help expedite the process.
The end result is a greater flexibility given to the debtor, and a greater ability for the debtor to plan a Chapter 11 plan of reorganization that meets the specific needs of the case.
The “New Value Exception” To The Absolute Priority Rule In Chapter 11 In Kansas City
How does the absolute priority rule of Chapter 11 play in the confirmation process? Are there any exceptions to it? Can the owners of a company retain their equity interests in a Chapter 11 plan? The Tenth Circuit (Kansas) adheres to the doctrine that the absolute priority rule of Chapter 11 applies in individual cases.
The absolute priority rule comes into play during the Chapter 11 plan confirmation process. Under Bankruptcy Code § 1129(b)(1), a creditor’s plan objection will be upheld if the plan: (1) discriminates unfairly; or (2) is not fair and equitable with respect to each non-accepting class of claims or interests that is impaired under the plan. In this context, “impaired” means that the plan alters the rights of a class of creditors compared to the contractual rights prior to bankruptcy.
For a dissenting class of impaired unsecured creditors, a plan is “fair and equitable” only if the allowed value of the claim is to be paid in full, or if the holder of any claim or interest that is junior to the dissenting creditors will not receive or retain any property under the plan on account of such junior claim or interest. See 11 U.S.C. § 1129(b)(2)(B)(ii). This condition is generally referred to as the absolute priority rule.
The new value exception solves the problems created by the absolute priority rule. The new value doctrine opens the door for plan proponents to overcome the absolute priority rule by requiring equity holders to make a substantial and essential contribution in exchange for their continued ownership of the debtor. To be substantial, most courts require that the contribution (i.e., new value) be: (1) a present contribution; (2) freely tradable in the market; and (3) money or money’s worth. To be essential, the case law generally mandates that this new contribution be directly related to the success of the reorganization plan.
The absolute priority rule was originally a judicially created concept; that is, it was created by case law. In practice, it provides a much needed way to resolve the problems created by the artificially strict barriers created by the absolute priority rule. Anyone considering filing a Chapter 11 bankruptcy case, or any type of bankruptcy case in general, should contact Phillips & Thomas LLC for a free consultation of their options.
Read More: Voluntary And Involuntary Chapter 7 And Chapter 11 Bankruptcies In Kansas City
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