What is a Proof of Claim?

A proof of claim is a document that a creditor prepares and files with the Bankruptcy Court that sets forth the creditor’s claim and right to receive a distribution in a bankruptcy case. To be effective, the proof of claim must be properly prepared, conform to the Court’s official form, and as necessary, contain adequate supporting information. The purpose is to provide notice of a creditor’s claim to parties in the case. In many bankruptcy proceedings, a creditor will not receive a distribution without having properly and timely filed claim.

Consequences of Not Filing a Proof of Claim

A creditor is not required to file a proof of claim, but in choosing not to do so, may give-up substantial rights. By not filing a claim, a creditor may lose its right to vote for or against a bankruptcy plan and its ability to collect anything in the bankruptcy case. Moreover, even if a creditor does not file a proof of claim, its claim against the debtor generally is discharged and may not be pursued.

Late-Filed Proof of Claim

Deadlines for filing claims vary by the type of bankruptcy proceeding but are generally set by notice or a court order. Bankruptcy Courts strictly enforce the proofs of claim filing deadline (known as the claims bar date) and will only extend the deadline under special circumstances. Accordingly, the claims bar date is one of the most important deadlines in a bankruptcy case.

When Not to File a Proof of Claim

There are often strategic considerations in deciding whether or not to file a claim in a bankruptcy case. By filing a claim, the creditor is subjecting itself to the Bankruptcy Court’s jurisdiction and parties may conduct discovery regarding the claim. Moreover, while jurisdictional issues are a hot topic in bankruptcy courts, a debtor may attempt to assert its counterclaims against a creditor in the Bankruptcy Court or remove any pending litigation to the Bankruptcy Court to be tried before a judge, not a jury.

These are only the initial issues relating to filing a proof of claim that a creditor should consider. In conducting a analysis regarding how best to pursue its claim in a bankruptcy case, a creditor should work with an attorney that focuses their practice on bankruptcy law.

The post Filing a proof of claim in a bankruptcy case appeared first on Phoenix Bankruptcy Attorney.

In Arizona, a creditor can seek a receivership to “protect and preserve property or the rights of parties therein” usually in relation to an operating business that is having financial difficulties, where assets are being wasted, and/or where there are concerns regarding fraud. Ariz. Rev. Stat. Ann. § 12-1241.  A receiver is appointed by a court to temporarily possess property belonging to a creditor (e.g. accounts receivable).  Typically, a receiver will secure control of the business’s premises, inventory assets, recover property, and collect accounts receivable and rents.

Pursuing a Receivership

A single creditor can seek a receivership, rather than the three typically required to initiate an involuntary bankruptcy proceeding.  Moreover, the petitioning creditor can recommend an appropriate candidate to serve as the receiver.  And, the rules governing receiverships are fewer and less rigid than the bankruptcy rules.  Yet, the threat of a receivership will often cause a business to seek a voluntary bankruptcy filing to retain control of the business.

A creditor pursuing a receivership must file a motion requesting that a court appoint the receiver.  Typically, receivership is a contested issue and may require an evidentiary hearing where the creditor will be required to show the basis for appointing a receiver.

Receivership and Bankruptcy

As a general rule, a state court’s appointment of a receiver will not disrupt the ability of a debtor, acting with the appropriate corporate consent, to file a voluntary bankruptcy petition.  See In re Corporate & Leisure Event Prods., 351 B.R. 724, 733 (Bankr. D. Ariz. 2006).  Yet, litigation often arises from a somewhat contradictory rule from the Supreme Court’s decision in Price v. Gurney that a corporate debtor’s authority to act is determined by state law.  324 U.S. 100, 106 (1945).  This issue arises because once a receiver is appointed, the directors and officers often no longer have the ability to authorize a business’s actions like initiating a bankruptcy filing.  This issue was left unaddressed by the Supreme Court in Price, and a debtor filing for bankruptcy where a receiver is in place should expect to litigate whether it had appropriate corporate authority to file a bankruptcy petition.

The post Creditor receivership in Arizona appeared first on Phoenix Bankruptcy Attorney.

Chapter 11 bankruptcy enables businesses and individuals to reorganize or liquidate their assets in a way that is more flexible than in Chapter 7 or 13 bankruptcy proceedings.  There are numerous tools at the disposal of a Chapter 11 bankruptcy filer; however, the most significant is the ability to restructure debts through a plan of reorganization.  Through a Chapter 11 bankruptcy proceeding, a Chapter 11 plan can cure loan defaults, significantly modify secured debts and payment terms, modify interest rates, strip liens from property, and pay taxes over time and without default interest and penalties.

Unless otherwise ordered, a bankruptcy filer acts a debtor-in-possession.  Unlike Chapter 7 or 13 bankruptcy proceedings, a debtor-in-possession fills the role as the trustee in a Chapter 11 bankruptcy case.  In this role, the debtor-in-possession has an exclusive time-period to file a plan of reorganization and must pursue actions in the best interest of the bankruptcy estate.

To confirm a Chapter 11 plan of reorganization, a debtor must show that the plan complies with the applicable elements of the Bankruptcy Code.  Specifically, the plan must be feasible, proposed in good faith, must have the support of at least one class of impaired creditors, and must be shown to be in the best interest of creditors.  Where a creditor objects to confirmation of the plan, the debtor can confirm the plan over the creditor’s objection; however, this will often require a trial.  Because resources are typically limited in a bankruptcy case, often parties reach a resolution before trial is necessary.

The post What is Chapter 11 bankruptcy? appeared first on Phoenix Bankruptcy Attorney.

Bankruptcy can be the end of a creditor’s attempts to collect a debt.  Yet, often a bankruptcy creditor will work to take possession of collateral or to receive a distribution through the bankruptcy case.  Since a bankruptcy filing triggers an automatic stay that requires strict adherence, it is important that a creditor work with a lawyer if it intends to pursue a claim in the bankruptcy case.  Among the numerous options available to them, a bankruptcy creditor will often pursue the following:

Questioning a Debtor at the 341 Meeting of Creditors

The 341 meeting of creditors is usually scheduled about 30 days after the bankruptcy filing.  While time is typically short for creditors to question the debtor, the 341 meeting of creditors is an opportunity for creditors to question the debtor under oath (or the debtor’s principal in a business case).  The 341 meeting of creditors can be useful for a creditor to obtain time-critical information or to alert a bankruptcy trustee to issues in the case.

Conducting a 2004 Examination

Examining the debtor or a third-party related to a bankruptcy case is often best accomplished pursuant to Rule 2004 of the Federal Bankruptcy Rules of Procedure.  Through a 2004 examination, a creditor can obtain documents or require that a party submit to a deposition-style examination.  Requests under 2004 examinations can be very broad and are permissible even as “fishing expeditions.”

Filing a Proof of Claim

Where a party holds any right to payment, it may file a proof of claim in the bankruptcy case.  In fact, in some chapters of bankruptcy, it is required that creditors file a proof of claim to be entitled to a distribution.  Yet, a bankruptcy creditor should discuss filing a proof of claim with a lawyer.  Proofs of claim require adherence to procedural rules.  And, filing a proof of claim may submit a creditor to the Bankruptcy Court’s jurisdiction and cause the creditor to waive its right to a jury trial.

Denial of Discharge for a Bankruptcy Creditor’s Debt

Certain debts are non-dischargeable under the Bankruptcy Code.  Generally, where a debtor has committed a fraudulent act or caused a willful and malicious injury, the Bankruptcy Court may determine that these claims are not discharged in the bankruptcy case.  While are exceptions in certain circumstances, other types of typically non-dischargeable debts include specific types of tax debt, domestic support and child support claims, student loans, fines, penalties, and forfeitures.

Lifting the Bankruptcy Automatic Stay

A creditor can request that the Bankruptcy Court lift the automatic stay to, among other things, allow the bankruptcy creditor to continue pursuing litigation against a debtor or foreclose on collateral.  In general, the automatic stay can be lifted for “cause”, or where the debtor does not have equity in certain property and it is not necessary to an effective reorganization.  The Bankruptcy Court’s decision to lift the automatic stay is typically factually driven.

Of course, there are many other opportunities for a bankruptcy creditor to pursue its claim against a debtor.  Creditors should consult with a lawyer regarding this issue to determine how best to proceed on a case-by-case basis.

The post Rights that a bankruptcy creditor can pursue appeared first on Phoenix Bankruptcy Attorney.

Individuals filing a chapter 7 bankruptcy petition are subject to the bankruptcy means test to determine whether an individuals’ income is sufficiently low enough to qualify for chapter 7 bankruptcy relief.  Where an individual’s income is deemed too high under the means test, a chapter 7 bankruptcy filing may not be an option, and the individual may need to consider a repayment plan chapter of bankruptcy (e.g. chapters 13 or 11).

Options beyond the bankruptcy means test

Yet, even when an individual does not qualify under the means test, a chapter 7 bankruptcy may still be an option if there are special circumstances in the case such as a significant medical condition, or where the bankruptcy filer’s debts are primarily non-consumer in nature (with a business venture or profit motive).  Thus, it is critical that an attorney analyzes the nature of an individual’s debts, and where the debts are primarily non-consumer debts, chapter 7 bankruptcy may still be an option for an individual with higher income.

Cherrett case

In the Ninth Circuit Bankruptcy Appellate Panel’s recent Cherrett case, the Court determined that an individual’s housing loan was a non-consumer debt.  Aspen Skiing Co. v. Cherrett (In re Cherrett), 2014 Bankr. LEXIS 4704 (B.A.P. 9th Cir. Nov. 7, 2014).  In reaching its decision, the Court looked to the primary purpose of the home loan and determined that the loan was related to the individual’s employment.  Specifically, the Court noted that the individual hoped to realize a profit from the house and that the home loan was an integral part of his employment compensation package.

While most individuals considering a chapter 7 bankruptcy filing have not received a home loan from their employer, the Cherrett case provides good analysis regarding the type of facts necessary for a typical consumer debt, like a home loan, to be considered as non-consumer in nature.  In accordance with the Cherrett case, attorneys should carefully consider whether a client’s debt was incurred with some profit or business motive before advising the client regarding bankruptcy means test qualifications.

The post Recent Cherrett case and bankruptcy means test requirements appeared first on Phoenix Bankruptcy Attorney.

As with most things in life, when hiring a lawyer, you typically get what you pay for.  Hiring a Chapter 7 bankruptcy lawyer that provides discount fees can often be the most expensive mistake that an individual can make in the bankruptcy process.  Discount fees are often provided by lawyers that have not received training, lack meaningful experience, do not have the time or desire to devote time to your case, or that practice bankruptcy law only part-time.  Bankruptcy law is full of complexities that, if not properly foreseen and planned for, can have devastating results.

What could go wrong?

In my experience in cases where I have represented bankruptcy trustees or creditors, I have seen attorneys’ poor legal representation of bankruptcy filers lead to people being forced to turnover their homes, cars, businesses, tax refunds, life insurance policies, retirement account funds, and family heirlooms.  I have also been involved in many cases representing bankruptcy trustees or creditors where an individual’s poor bankruptcy preparation led to a bankruptcy trustee or creditor initiating a lawsuit against the bankruptcy filer to prevent or revoke their bankruptcy discharge, or initiating a lawsuit against a bankruptcy filer’s family or friends to undo transfers or force asset turnovers.

Filing for bankruptcy is a serious matter that should not be taken lightly.  A poorly prepared bankruptcy filing can cause significant problems that can last for years.  On many occasions, I have been retained to help individuals fix problems that arose in the midst of their bankruptcy cases.  Almost always, these problems were avoidable had the individuals worked with me at the outset of their case.  It is significantly less costly to work with a Chapter 7 bankruptcy lawyer to foresee and prevent problems than to wait for problems and then pay an attorney to try to fix them.

The post In choosing a Chapter 7 bankruptcy lawyer, avoid this expensive mistake appeared first on Phoenix Bankruptcy Attorney.

As a general rule, managers and directors of a financially troubled business should manage the business in good faith and work to maximize the business’s value for all of its constituents. In an effort to maximize the business’s value, managers and directors should closely review the financial condition of the business before taking any action that may adversely affect owners or creditors.

Anticipating enhanced scrutiny when a business is facing financial difficulty, managers and directors should take extra steps to ensure that they follow procedures to make informed decisions that serve a proper purpose for the business. To avoid potential pitfalls, it is important to work with an attorney that has experience successfully working with distressed businesses.

Bankruptcy/Balance Sheet Insolvency

Under the bankruptcy test, a business is insolvent when its liabilities exceed the fair value of its assets.  The Bankruptcy Code provides an insolvency test for entities: an entity is insolvent where the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and

(ii) property that may be exempted from property of the estate under section 522 of this title.”

11 U.S.C. § 101(32).

In applying the bankruptcy test, debts are broadly defined to include contingent, unliquidated, and disputed debts that may not be reflected on a balance sheet.  See 11 U.S.C. § 101(5) and (12).

Equitable Insolvency Test

Under the equitable insolvency test, a business is insolvent where it lacks sufficient assets to pay its debts as they become due.  See Odyssey Partners, L.P. v. Fleming Cos., 735 A.2d 386, 417 (Del. Ch. 1999).

The post Determination of business insolvency appeared first on Phoenix Bankruptcy Attorney.

Where a business is acting as a debtor-in-possession (debtor) in a Chapter 11 bankruptcy case, to confirm a plan of reorganization, the debtor must provide a method for creditors to capture any value from the debtor’s pre-bankruptcy transfers that may be avoidable under the Bankruptcy Code.

Val-Mid Associates, LLC’s Unsuccessful Reorganization

Prior to its bankruptcy filing, Val-Mid operated two gas station/convenience stores in Arizona. On June 14, 2013, Judge Hollowell, with the United States Bankruptcy Court for the District of Arizona, denied Val-Mid’s Chapter 11 plan of reorganization and converted the case to a Chapter 7 to be liquidated.  In re Val-Mid Assocs., L.L.C., 2013 Bankr. LEXIS 2521 (Bankr. D. Ariz. June 14, 2013).

In the Val-Mid case, the Court noted that Val-Mid had made pre-bankruptcy transfers to its insiders of $98,000 and that these transfers were potentially avoidable for the benefit of creditors.  The Court reasoned that Val-Mid had “knowingly sacrific[ed] prospectively significant value” by not providing a mechanism for pursuing avoidance of the transfers in its plan of reorganization.  Thus, the Court concluded that Val-Mid’s plan lacked good faith and converted the case to a Chapter 7 proceeding.

Why it Matters

The Val-Mid case is a good reminder that a debtor must pay special attention to its pre-bankruptcy transfers to ensure that its insiders will not be subject to avoidance lawsuits during and after the debtor’s bankruptcy case.  And, to confirm a Chapter 11 plan of reorganization, a debtor must provide a method for creditors to capture value from any of the debtor’s potentially avoidable transfers.  Accordingly, it is important for businesses to consult with an attorney who can provide meaningful advice regarding pre-bankruptcy transfers and how those transfers should be analyzed and incorporated into a Chapter 11 plan of reorganization.

The post Pre-bankruptcy transfers can cause a business’s reorganization to fail appeared first on Phoenix Bankruptcy Attorney.

When a business is facing financial difficulties, rather than allowing the business to shutdown, business managers often determine that it is in the business’s best interest to seek protection with the Arizona Bankruptcy Court under Chapter 11 of the U.S. Bankruptcy Code.  A Chapter 11 business bankruptcy filing will temporarily stay creditors’ enforcement actions against the business (debtor) and may allow the debtor to reorganize its debts in a way that will allow continued operations.

Chapter 11 Business Bankruptcy Filing

The typical goal of a Chapter 11 business bankruptcy is a “fresh start” through the Bankruptcy Court confirming the debtor’s plan of reorganization.  For the Court to confirm a Chapter 11 plan of reorganization, the debtor must satisfy requirements set forth in the Bankruptcy Code and the Bankruptcy Rules of Procedure.  Since there are relatively few requirements regarding the specific terms of a plan of reorganization, there is ample opportunity for creativity in crafting a plan that will satisfy creditors and maximize the reorganized debtor’s ability to succeed.  While many Chapter 11 debtors are able to confirm a plan of reorganization with the negotiated consent of their creditors, there are Chapter 11 cases where a plan cannot be confirmed without conducting a plan confirmation trial.

The Bankruptcy Code establishes requirements to test the feasibility of the debtor’s plan and fairness of the plan to creditors and other parties in interest.  Often, creditors or other parties in interest will assert that the debtor has not met the requirements for the Court to confirm the debtor’s plan.  Fortunately, debtors have many tools at their disposal to help them through the process toward confirming a plan, including the ability to: seek new financing, bring in new equity holders, sell assets, reject leases, cramdown the amount and interest rate on certain debts, and strip liens that encumber the Debtor’s assets.

Having represented numerous debtors and creditors in Chapter 11 business bankruptcy cases, there is something that a debtor can do to greatly increase its chances of success: as soon as possible (and preferably before initiating the bankruptcy case), formulate a strategy for how the debtor will exit bankruptcy.  Often, bankruptcy filings are caused by a sudden event that makes pre-bankruptcy strategy difficult, however, as soon as possible, a debtor should focus on how it will confirm a plan and close its bankruptcy case.

The post Succeeding with a Chapter 11 business bankruptcy appeared first on Phoenix Bankruptcy Attorney.

With each Chapter 7 bankruptcy filing in Arizona, a Chapter 7 bankruptcy trustee is appointed from a panel to administer the case. Among other things, the trustee’s job is maximize the value of assets available for distribution to creditors, and investigate fraud, assets, and transfer issues.  The 341 meeting of creditors is the trustee’s opportunity to ask the bankruptcy filer questions under oath regarding the documents filed in the case and case issues.

341 Meeting of Creditors

Despite its name, creditors rarely show-up to the 341 meeting of creditors, and the meeting usually lasts about five minutes.  Typically, a Chapter 7 bankruptcy trustee will ask some variation of these standard questions at the 341 meeting of creditors:

Do you solemnly swear or affirm to tell the truth, the whole truth and nothing but the truth?

Have you read the bankruptcy information that I sent to you in the mail?

How long have you lived in Arizona?

Have you previously filed for bankruptcy in the last eight years?

Have you read the bankruptcy schedules filed in your case?

Did you sign your bankruptcy schedules?

Is the information listed in your bankruptcy schedules true and accurate?

Did you list everything that you own in your bankruptcy schedules?

Did you list all of your creditors in your bankruptcy schedules?

Are you expecting to receive any money by an inheritance?

Do you hold any litigation or personal injury claims?

Do you owe any child support or domestic support obligations?

Are there any creditors present?

Usually after asking these basic questions, a trustee will ask questions specific to the bankruptcy filer’s case. And, to the extent that any creditors are present, creditors are permitted to ask questions as time permits (usually less than ten minutes). In Phoenix, 341 meetings of creditors are conducted in the U.S. Trustee meeting room, Suite 102.

A bankruptcy filer’s attorney should attend the meeting and help to ensure that the 341 meeting of creditors goes smoothly. Accordingly, it is important to hire an experienced Phoenix bankruptcy attorney that has a good working relationship with the bankruptcy trustees.

The post What happens at a 341 meeting of creditors? appeared first on Phoenix Bankruptcy Attorney.