Small Business Bankruptcy

Christmas presents under the treeIn this Christmas season children are eagerly awaiting prepackaged presents.  That’s an odd locution, isn’t it?  We usually refer to the gifts as wrapped rather than prepackaged.  I chose the word “prepackaged” because when something is prepackaged it’s all wrapped up.  What does this have to do with Chapter 11 bankruptcy?  A little background will help to put the answer in perspective.

I.  Chapter 11 Bankruptcy

The Bankruptcy Code (title 11 of the United States Code) is divided up into chapters.  The first three chapters (1, 3, and 5) are foundational chapters.  Their content comes along for the ride no matter which chapter under which the case is ultimately filed.  The remaining chapters (7, 9, 11, 12, 13, and 15) are the chapters under which bankruptcy cases are actually filed.

Side Note:  Why The Shortage Of Even-Numbered Chapters?

You may wonder why almost all of the chapters have odd numbers.  The answer lies with Congress.  Congress has been wrestling with budgetary problems for some time, and has been unable to afford even numbers, which are more expensive than odd numbers.  As a special treat it got one even number, 12, but for now that’ll have to do.  And if you believe that, I have some real estate on the moon I would like to sell you.

The real reason has to do with the passage of the Bankruptcy Reform Act of 1978.  Prior to that, the bankruptcy statute had even-numbered chapters.  However, Congress felt that some of them had been abused (i.e., sections of the Uniform Bankruptcy Act of 1898, not members of Congress), in some cases by creditors, in others by debtors.  Therefore, it jettisoned the offending sections, which turned out to comprise all of the even-numbered chapters.  In the 1980s the need of family farmers for bankruptcy relief was not being satisfactorily addressed with the remaining chapters, so Chapter 12 was temporarily added.  But it had to be reauthorized every two years.  Then in 2005 the entire Code underwent revision.  As part of that revision, Chapter 12 was made permanent, and its ambit was expanded to include, not only family farmers, but also family fishing operations.

Back To Chapter 11:

Chapter 11 was originally envisioned as a corporate restructuring provision, though it is now available, not only to businesses, but also to individuals and married couples.

The big picture goal in a Chapter 11 is to deal with debt in a way that allows the debtor to reorganize so that is can continue to participate in the economy.  Some debt may be wiped out, some may be reduced to pennies on the dollar, some assets may be liquidated, and the debtor reorganizes its financial affairs.  The main vehicle for Chapter 11 restructuring is the Chapter 11 plan.  (I am ignoring the idea of a total liquidation Chapter 11 plan.)
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The short answer to this is, yes.  But as you may suspect from the fact that this post is considerably longer than one sentence, there is a good deal more to a thorough answer than that monosyllabic response.  There are two possibilities regarding your previous bankruptcy:  (1) you received a discharge, and (2) your case was dismissed. Today’s post deals with the first situation.  The next post will deal with the second situation.

I.          Your Received A Discharge In Your Previous Case

The big picture goal in personal bankruptcy is to receive a discharge of your debts.  This affords you the fresh financial start that is the raison d’être of a personal bankruptcy.  From a debtor’s perspective this is marvelously liberating.  However, from the creditors’ perspective it can be a hard hit.  As a result, Congress has put some time limitations in the Bankruptcy Code, meaning that you must wait a while between bankruptcy filings if you want to receive a discharge in the future bankruptcy case.  How much time?  That depends on which chapter you plan on using in your future bankruptcy case, and under which chapter you received your previous discharge.
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A fellow attorney, but not a bankruptcy attorney, recently asked me this question because he had a business client who wanted to use an involuntary bankruptcy filing to collect money from a judgment debtor.  To answer my colleague’s question we need a little background.  Let’s start with the concept of a voluntary bankruptcy.

I.          Voluntary Bankruptcy

Almost all bankruptcies filed today are voluntary bankruptcies.  Regardless of the underlying chapter at the heart of the bankruptcy, a voluntary bankruptcy is filed either under 11 U.S.C. § 301(a), or § 302(a).  § 301(a) provides (with emphasis added):

A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.

The phrase, “by an entity that may be a debtor under such chapter,” appears because a business can file under § 301(a).  However, if the debtor is not a business, then the entity in question is one individual.  Section 301(a) cannot be used by a married couple.  Why?  The answer is found in § 302(a) (with emphasis added):

A joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual’s spouse.

Notice the common thread in these two sections:  it is the debtor who files the bankruptcy petition.  The reason such bankruptcies are called voluntary bankruptcies is that the debtor voluntarily enters into bankruptcy.  Contrast this with the statutory language authorizing involuntary bankruptcies.
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Kindergarteners have one answer to the question in our title.  Bankruptcy attorneys have another.  An ABC is an “Assignment for the Benefit of Creditors,” and it provides an alternative to Chapter 7 liquidation for a small business that is shutting down.  Let’s compare the two approaches to resolving business debts.

I.          Business Bankruptcy

The Bankruptcy