Small Business Chapter 7

Subscribe to Small Business Chapter 7

I am regularly asked what happens when a Chapter 7 Trustee sells a debtor’s asset in a bankruptcy.  This post answers that question.

I.      Business Chapter 7

If a business files for Chapter 7 bankruptcy protection, the Chapter 7 Trustee assigned to the case seizes all of the business’s assets and liquidates them.  As part of the liquidation the Trustee pays off all encumbrances against the assets — e.g., mortgages against real property — pays the cost of selling the assets, takes the statutory cut found in 11 U.S.C. § 326(a), and distributes the remaining proceeds to the creditors according to the priority rules found in 11 U.S.C. §§ 507(a) and 726(a).

When the smoke all clears the debtor ceases to exist, which is why a business is ineligible for a Chapter 7 discharge pursuant to 11 U.S.C. § 727(a)(1).

II.     Personal Chapter 7

I am pleased to report that although the title of Chapter 7 in the Bankruptcy Code is “Liquidation,” no individual debtors are liquidated in a Chapter 7 bankruptcy.  However, there can be a liquidation component to the case.

A.  Exempting Assets

I have already written about exempting assets many times — see, e.g., the September 16, 2011 post.  Therefore, I won’t discuss that topic here; other than to say that in a personal Chapter 7 bankruptcy the debtor keeps the exempt assets, while the Chapter 7 Trustee seizes and liquidates the nonexempt assets for the benefit of creditors.

B.  The Liquidation

When faced with a nonexempt asset, a Trustee must answer a question:  Is it worth the time, effort, and expense to do the liquidation?  Here is the analysis the Trustee will do:

1.  How much is the asset worth?

Although the debtor provides an estimated value in the bankruptcy papers, this estimate does not bind the Trustee — even if the estimate was a professional appraisal of the property.  The only way to really determine the value of the asset is to put it on the market because an asset is only worth what the market will pay for it.  Of course, a professional appraisal may dissuade the Trustee from taking further action because the appraisal may indicate the futility of selling the asset due to the required payout discussed below.…
Continue Reading

I’m back.  I have been busy writing a book on Chapter 13 bankruptcy — I was asked to do so by a publisher.  I should have it completed in a few months, so watch for it.  In any event, I am ready to start posting again.

Some time ago I posted on preferential transfers (a.k.a. preferences).  Since I will be speaking on preferential transfers (and on fraudulent transfers) in May these topics have been on my mind.  Today’s post will look at the statutory definition of a preference.  It’s complicated, which is why the post a bit long.  However, it’s worth the read.  Subsequent posts will look at preference avoidance and defenses to preference avoidance.

I.          Introduction

There are two main goals of bankruptcy.

The first goal is to give the debtor a fresh financial start .  This goal has a laudable pedigree that has its origins in the Bible, ancient Roman law, and the U.S. Constitution .

The second goal is to ensure that all creditors who are similarly situated are treated equally and fairly.  There are two ways in which debtors sometimes violate this second big goal:  (1) They don’t list all of their creditors in their bankruptcy papers, and (2) They make preferential payments to certain creditors in anticipation of bankruptcy.

If a debtor omits a creditor from the list, then the debt to that creditor will not be discharged at the conclusion of the case.  (See 11 U.S.C. §§ 523(a)(3) and 1328(a)(2). But see In re Beezley, 994 F. 2d 1433 (9th Cir. 1993) (Unscheduled debt is discharged in a no-asset Chapter 7 case if the debt would have been discharged if it had been listed).)  If the debtor purposely omitted the creditor, and thus “made a false oath,” i.e., committed perjury, the debtor may either be denied a discharge, or have a discharge revoked.  (See 11 U.S.C. §§ 727(a)(4)(A), 1144, 1230, and 1328(e)(1).)  However, there can be a bright side to this scenario:  the debtor may end up receiving free room and board at government expense, which could greatly reduce any stress over finances .

The focus of these posts is on the other way debtors violate the second big goal:  preferential transfers.  We begin with the definition.…
Continue Reading

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.…
Continue Reading

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.…
Continue Reading