FAQ

Q. What is a Chapter 11 bankruptcy case?

A. A Chapter 11 bankruptcy case is a reorganization. Both businesses and individuals are eligible for Chapter 11. In a Chapter 11 case, the debtor remains in possession and control of its assets. The debtor proposes a chapter 11 reorganization plan. If the plan is confirmed by the court, it becomes the new agreement between the debtor and all creditors, including dissenting creditors. An individual may be required to file a chapter 11 case if his or her income and level of debt is higher than certain thresholds.

Q. What is a Chapter 7 bankruptcy case?

A. A Chapter 7 bankruptcy case is a liquidation. Both business and individuals can file a Chapter 7 case. In a Chapter 7 case, the debtor and its assets are protected by the automatic stay, which prohibits creditors from taking action to collect or enforce claims. Certain individuals may not be eligible for Chapter 7 because of his or her level of income; however, individuals whose debts are primarily business debts are eligible regardless of their income.

Q. What is a Chapter 13 bankruptcy case?

A. A Chapter 13 bankruptcy case is a personal reorganization. Business entities are not eligible for Chapter 13. As in Chapter 11, the debtor retains possession and control of its assets and proposes a reorganization plan, but not voted upon by creditors. Instead, a Chapter 13 trustee will review the plan and may request changes. The discharge in a Chapter 13 case is broader than a Chapter 7 discharge in some situations, and individuals may be required to file Chapter 13 (as opposed to Chapter 7) because of the individual's level of income.

Q. What is a receivership?

A. A receiver may be appointed in state court to take possession of an asset. Generally, a creditor may move for the appointment of a receiver as a preliminary remedy early on in a case, although a receiver may also be available to aid in the enforcement of a judgment. The receiver may collect rents and profits, conduct sales and otherwise administer assets. A bankruptcy case may displace the receiver under certain circumstances.

Q. What is an assignment for the benefit of creditors (ABC)?

A. An assignment for the benefit of creditors (ABC) is a state-law process that a debtor (generally a business) conducts out of court. Specifically, the debtor selects a general assignee, assigns substantially all of its assets to the assignee and instructs the assignee to proceed to liquidate the assets, review claims and make distributions.

Q. What is an adversary proceeding?

A. An adversary proceeding is a lawsuit in bankruptcy court. An adversary proceeding may be brought for many purposes, including avoiding liens, determining the dischargeability of debt and recovering against third parties.

Q. What is a preference action?

A. Bankruptcy Code Section 547 generally provides that a trustee or debtor-in-possession (a Chapter 11 debtor) may recover transfers to a creditor that enabled the creditor to receive more than it would in a liquidation and was made when the debtor was insolvent. A creditor has several defenses, including that the transfers were made in the ordinary course of business or according to ordinary business terms or that the creditor provided subsequent new value (later unpaid good or services) to the debtor. A preference is unique to bankruptcy; preferences are generally permissible under state law.

Q. What is a fraudulent transfer action?

A. An action for fraudulent transfer is available under Bankruptcy Code Section 548 as well as most state laws, including California. Generally, a constructive fraudulent transfer is one in which the debtor transferred something of value to a third party and received less than adequate consideration (less than reasonably equivalent value) for the transfer when the debtor was insolvent. An intentional fraudulent transfer is one in which the debtor made a transfer with the actual intent to hinder, delay or defraud creditors.

Q. What is a Chapter 7 trustee?

A. In a Chapter 7 case (both business and individual cases), a Chapter 7 trustee is appointed to administer the estate. The trustee is appointed from a rotating panel of professional trustees. The trustee will review the debtor's assets and claims, can sell or abandon assets and may object to disputed claims.

Q. What is a discharge of debts?

A. A discharge in bankruptcy generally eliminates all pre-bankruptcy unsecured debts. Business entities may obtain a discharge in a Chapter 11 case. Individuals may obtain a discharge in Chapter 7, Chapter 11 and Chapter 13 cases. A creditor may sue to eliminate a debtor's discharge in general or as to a specific debt.

Q. What is an exemption?

A. Exemptions are laws that prevent creditors from collecting from certain assets. Exemptions can be used only by individuals, not business entities. Although the Bankruptcy Code provides a set of exemptions, it allows states to opt-out. California has opted out but created two parallel exemption schemes – one that mirrors the bankruptcy code and one that provides for California's ordinary non-bankruptcy exemptions – and debtors are entitled to elect which one will apply.

Q. What is the difference between a secured and an unsecured claim?

A. An unsecured claim is generally any debt that is not backed (or "secured") by a lien against specific collateral. For example, trade debt, professional fees, operating lines of credit and credit cards all generally represent unsecured debt. By contrast, a mortgage, deed of trust, automobile loan, business loan or factoring agreement are all generally secured by a lien. Although it is common to say that a debt is "secured" by a guarantee, in fact a personal guarantee does not create a security interest unless it is independently secured by a lien.

Q. What is a priority claim?

A. A priority claim is an unsecured claim that is entitled to priority by statute under the Bankruptcy Code. Unpaid wages and benefits, post-petition professional fees and certain taxes are examples of priority claims. There are several categories of priority claims, including administrative priority claims, superpriority claims and many sub-categories.

Q. What is the difference between an individual and a business?

A. For most purposes the Bankruptcy Code treats individuals (human beings) differently from separately organized entities (generally, corporations, limited liability companies and similar organizations). If you are an individual doing business in your own name or under a fictitious business name or "DBA" (which stands for "doing business as"), the law will treat you as an individual; however, it is very important to carefully prepare and actively manage the case of a person in business in order to keep the business operating.

Q. Do you represent debtors and creditors out of state?

A. Yes. Although we are admitted only to the California bar, we are able to appear pro hac vice in virtually every federal jurisdiction throughout the country. This generally requires the payment of a small administrative fee (e.g. $25.00 for New York) or the retention of local counsel to review and sign off on pleadings. For example, we represent local creditors in defending preference, fraudulent transfer and other actions arising out of Delaware, New York and other states. We also represent debtors and creditors throughout California and out of state.

Q. Do you handle matters outside of bankruptcy court?

A. Yes. We can handle lawsuits and other matters that involve the competing rights of creditors and debtors outside of bankruptcy court throughout California. Among other things, we can handle assignments for the benefit of creditors (ABC's), represent general assignees, obtain the appointment of or represent receivers, enforce the claims of creditors and minority shareholders, prosecute and defend fraudulent transfer actions and other matters.