Last week, we discussed some of the key Chapter 11 bankruptcy terms. We continue our discussion this week, defining some of the main actions you may see in a Chapter 11 bankruptcy.
Automatic stay: Bankruptcy triggers an automatic stay. The “automatic stay” stops all judgments and collection activities (including foreclosures) for a period of time. This means that creditors cannot take action to collect on a debt, giving the debtor time to negotiate a Chapter 11 bankruptcy plan to pay back his or her debts. The automatic stay does not apply to certain actions, such as actions to withhold in repayment a pension, stock bonus, etc.
Relief from the automatic stay: Some creditors can ask the court for relief from the automatic stay. If, for example, a creditor would like to foreclose on a property in which the debtor has no equity and the equity is not vital for reorganization, then it may ask the court for an order to foreclose.
Adversary proceedings: The debtor in possession or, in some cases, a creditors’ committee, may bring an adversary proceeding (a type of lawsuit) to recover property or money. Examples of adversary proceedings are actions to avoid preferences, fraudulent transfers or post-petition transfers.
Creditors may also start an adversary proceeding to revoke a bankruptcy plan, determine whether a debt is dischargeable, subordinate another creditor’s claim, determine the priority of a lien or request an injunction.
Avoidable transfers: The debtor in possession or trustee may decide to stop a transfer of money or property that was done before the bankruptcy was filed, which can force the return of payments or properties and use of those payments / properties to pay creditors.
Bankruptcy discharge: Once a plan is confirmed, the debtor will receive a discharge of most of the debts that arose prior to the plan’s confirmation, though the debtor must continue to make payments according to the Chapter 11 plan.
There are, of course, many other Chapter 11 bankruptcy terms. Chapter 11 is complex, but it can bring the relief that your business needs to remain viable.
Source: United States Courts, “Reorganization under the bankruptcy code“