Out of Court Settlements

Review the Learning Objectives with the class
Prompt action must be taken if a distressed debtor is to be restored to solvency and maintained as a customer. The astute credit professional learns to recognize symptoms of approaching business difficulties. Warning Signs The credit professional must learn to be alert to changes in a customer’s business behavior that may signal financial distress. On Page 424 of the text a list of debtor warning signals can be found. Review these with the class. Public Information In most metropolitan centers, Legal or business newspapers list new actions brought and liens filed. Credit professionals may subscribe to such newspapers or instruct their counsel to check these listings daily, to ascertain whether lawsuits are being instituted or tax liens are being filed against the debtor. Reports of credit agencies and trade associations should also be consulted regularly. Insolvency and Non-liquidity A debtor may be insolvent or may be solvent but not liquid. A debtor with liabilities exceeding assets is deemed insolvent . A debtor who cannot pay debts as they become due is not liquid . Credit professionals should learn to distinguish between a business that can be salvaged and rehabilitated financially and one that should be liquidated for the benefit of creditors, in or out of bankruptcy. Credit managers should also learn to recognize the dishonest debtor that could be rehabilitated but should instead be liquidated and prosecuted.
A voluntary settlement is a contract between the debtor and its creditors that settles their claims for the most the debtor can pay and the most the creditors can get. It keeps the debtor in business and avoids court costs. Advantages and Complications The principal advantage of a voluntary settlement is its simplicity. There are no cumbersome court proceedings. The voluntary settlement is not always the best method. They can be difficult to arrange when there are secured claims such as bank loans. Voluntary settlements between debtors and creditors are the preferred answer to a bankruptcy filing. Initiating the Voluntary Settlement Voluntary settlements may be initiated by either the debtor or the creditors. Most frequently, a debtor in financial difficulty goes to an attorney for advice. The attorney may consult with a few of the largest creditors and arrange a meeting attended by the debtor, a limited number of the largest creditors, and representatives of both sides. Secured Claims Secured Claims may consist of mortgages on the debtor’s real property, other secured assets, or an perfected security interests in property subject to the Uniform Commercial Code. Priority Claims Priority Claims may consist of taxes, wages, unpaid rent which under federal or state laws are entitled to priority payment over unsecured claims.
Settlement Plan Working out a settlement plan is largely a matter of bargaining. Voluntary settlements usually take one of three forms; extensions, pro rata cash settlements or combination settlements. Which plan is chosen depends in a large part upon the negotiating ability of the creditors’ committee. Importance of Unity in Voluntary Settlements The success of a voluntary settlement depends upon the full cooperation of all creditors as well as the debtor. Preferential treatment of one creditor can lead that creditor to rescind the settlement for fraud. Creditors’ Committee At the first meeting, a creditors’ committee generally consist of five or seven of the largest unsecured creditors and perhaps one or two representative of the larger body of smaller creditors. The people serving on the committee must be knowledgeable in this type of work and have the time to serve and work in the best interest of all creditors. There must be complete disclosure by all members of the committee. The committee selects a chairman, secretary, and counsel. In order to assess any settlement plan the debtor proposes, the creditors need their own evaluation of the debtor’s business and financial situation. Review the list of critical items for the Creditors’ Committee on Page 428 in the text. Extension Agreement Under an extension plan, the debtor proposes to pay creditors in full over a period of time, in effect, a deferral of payment of debts. On pages 429-430 is a list of key success factors of an extension agreement.
Alternative Dispute Resolution There are two types of alternative dispute resolution, or methods of resolving conflicts between parties without litigation: Mediation: is the non-binding attempt by parties to solve a dispute using an independent mediator or facilitator in order to allow the parties to reach a common ground. Arbitration: is where the parties use an independent arbitrator to act in lieu of a judge and/or jury in resolving a dispute. The arbitrator announces the ruling and an award. Composition Agreement This is a pro rata settlement in which the debtor proposes to settle with creditors for less than the full amount owned. A composition agreement is the quickest of all voluntary settlements. Combination Settlement Most voluntary settlements combine both a pro rata cash payment and an extension of time. Since this method involves a time settlement, careful control over the debtor’s business and security for creditors during the extension period should be carefully provided. Administration Costs Over and above the settlement amount to creditors, the plan must provide for payment of all administration costs. The costs of administration for voluntary settlements are usually lower than for formal proceedings. Execution of Settlement When the creditors’ committee has approved a plan, it should, with the aid of counsel, prepare a letter to all creditors explaining what has happened and recommending that creditors accept the settlement plan. A form of acceptance should accompany the letter for signature by creditors and for return to the committee.
While creditors’ efforts are ordinarily directed toward rehabilitating the distressed debtor, some debtors are so hopelessly insolvent and lacking in prospects that they cannot be rehabilitated. In those cases, the debtor may be asked to execute a general assignment for the benefit of creditors, a liquidation technique by which the debtor goes out of business. There are two types of assignments : common law assignment and statutory assignment. Common Law Assignment The common law assignment is a device whereby a debtor transfers title to all assets to a third party, designated as assignee or trustee, with instructions to liquidate the assets and distribute the proceeds among creditors on a pro rata basis. The assignment may be made by a debtor without prior consultation with creditors, or it may be executed after meetings with creditors or a creditors committee, when it becomes obvious that a voluntary settlement cannot be made. This is a four step process : Sale of assets Distribution of proceeds Acceptance Discharge from obligations. Review these steps found on page 434 of text. Statutory Assignment Most states regulate assignment for the benefit of creditors. Some statutes are simple; others provide machinery for administration as complicated as that found in the Bankruptcy Reform Act. A statutory assignment accomplished much the same results as a common law assignment but requires more formalities. Receivership Proceedings These are rarely voluntary. In most states, receivership proceedings can only be instituted by the commencement of any adversary-type proceeding. Each state can have different rules governing receivership administration, therefore careful attention should be paid by creditors to all communications received. It is possible that filing an involuntary bankruptcy case against the debtor to control the situation in either a Chapter 7 or 11, would be more beneficial to the creditors.
Traditionally, these offers are made and considered with little attention given to the time value of funds involved. Thus, 100 percent settlement over two years, or even over five years, is usually deemed full recovery of a claim. In order to choose effectively, the credit executive should be familiar with the cost of capital and time value of funds concepts. One-Time Partial Payment The simplest offer would be for the debtor to pay a percentage of the outstanding debt and have the creditor agree to forgive the rest. For example, the agreement may be for 20 percent payment and the balance to be written off. Present Value of Serial Payments When a schedule of serial payments is offered, a new set of variables must be considered. Since a dollar collected today is worth more than a dollar collected some time in the future, the creditor should consider more than the face the amount of any extended offer. The offer should be regarded as a stream of future payments to be discounted back to the present. The full offer is equal to the sum of the present values of all the payments. Methodology Most financial textbooks and references contain tables for calculating the present value of cash flows. Possible scenarios include Two-year Payout, Ten Equal Payments, and Increasing Payments. Review page 438 for various examples of recovery methods and timeframes for repayment Summary These analyses are based purely on an application of present value concepts to repayment schedules offered to a creditor. They seek to identify the financial implications of alternative plans. They do not take into account, nonfinancial factors, such as the desire to rehabilitate a particular customer or the need to make a vital penetration into a desirable market area.
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The Code consists of nine chapters. The first three chapters, Chapters 1, 3, and 5 , contain administrative provisions that apply in all cases under the Code. The remaining six chapters, Chapters 7, 9, 11, 12, 13 and 15 are the operative chapters for filing different types of bankruptcies. Chapter 7 is a liquidation bankruptcy, sometimes called a straight bankruptcy, in which a trustee is appointed by the United States Trustee in every case to liquidate nonexempt assets. Chapter 9 pertains to municipalities and governmental units. A Chapter 9 bankruptcy can only be filed on a voluntary basis. Chapter 11 is the business reorganization chapter. Most Chapter 11’s involve a debtor in possession of assets who is attempting to rehabilitate a business. Chapter 12 is commenced only by a voluntary petition by family farmers who have debt up to $3,544,525 and family fishermen who have debts up to $1,642,500. Chapter 13 is sometimes called the wage earner’s plan. Any individual with regular wages or income is eligible to file under Chapter 13, including certain professionals or business owners. The current law establishes a threshold limit which is periodically adjusted for inflation, for a debtor to be eligible to file. Chapter 15 provides mechanisms to deal with multi-national insolvencies. It is intended to establish cooperation between United States’ courts, trustees and debtors and their foreign counterparts. One of the most important things to know about the Bankruptcy Code is that adherence to deadlines is critical; noncompliance can affect one’s rights under the law.
Automatic Stay The filing of a bankruptcy petition imposes an automatic stay (holds in abeyance) on various forms of creditor action against a debtor or his property. The actions include: Actions to begin or continue judicial proceedings against the debtor Actions to obtain possession of the debtor’s property Actions to create, perfect or enforce a lien against the debtor’s property Actions to set off indebtedness owed to the debtor that arose prior to the bankruptcy proceeding The purpose of an automatic stay is to insure a fair distribution of the debtor’s nonexempt, unencumbered assets among creditors. A creditor may seek permission of the court to lift, terminate or modify the automatic stay if that creditor can show cause (e.g., lack of adequate protection of an interest in property) and must show that the debtor does not have any equity in such property and such property is not necessary for a successful reorganization.
Chapter 7 Bankruptcy is the most common type of bankruptcy filing in the United States. It is also called straight bankruptcy or liquidation . Most Chapter 7 filings are consumer cases. In all Chapter 7 cases, a trustee is appointed to take possession of nonexempt assets and sell them for the benefit of creditors. Once the case is filed, the United States Trustee appoints an interim trustee, usually an attorney or an accountant with experience in bankruptcy. The trustee has several legal responsibilities. He must sell any assets of the estate that are not encumbered or exempt for the benefit of the creditors. Also, he investigates the financial affairs, examines proofs of claims, and takes possession of assets and prepares to liquidate them. Trustee’s Compensation Chapter 7 trustees are paid $60.00 per case plus a percentage of the assets distributed to creditors. Distribution of Assets To close a case, the trustee files a final report with the court and with the approval of the United States Trustee when all the issues of the case have been settled and the trustee is prepared to distribute the funds. The trustees are required to satisfy claims in a particular order. The priorities are clearly established. Review the sequence of priorities for distribution listed on Page 445-446 in the text. Trustees cannot give creditors legal advice about the case. Discharge Litigation Only debtors who meet all of the criteria and adhere to all of the rules of the Bankruptcy Code are granted a discharge through the Bankruptcy Code. Filing a Proof of Claim A creditor must file a proof of claim to participate in the distribution of estate assets. It is prudent to discuss the filing of a claim with counsel unless there is no doubt that the debtor has no potential claim for fraudulent or preferential transfer or otherwise against the creditor.
Chapter 11 Reorganization is one of the most important provisions of the Bankruptcy Code. It was designed to be a single, unified way of dealing with reorganization of most businesses. The objective of Chapter 11 is to reorganize a troubled debtor while maximizing the return to creditors. Key players in a Chapter 11 case are the judge, the U.S. Trustee, the secured creditors, equity security holders, the debtor, and the creditor’s committee. The case starts with the filing of a voluntary or involuntary bankruptcy petition. (Most bankruptcy petitions are initiated by the debtor.) The Creditors’ Committee The committee plays a critical role. It has the responsibility to protect unsecured creditors’ interest, and it oversees the debtor’s operations until, and sometimes after, confirmation of the Plan. Congress intended that the committee be a key player in a Chapter 11 case. The financial stake of committee members, along with their expertise in the industry, gives them tremendous influence in the case. Assumption of Rejection of Executory Contracts With court approval, the debtor has up to the earlier of confirmation of a Chapter 11 Plan or 120 days after the bankruptcy filing to assume or reject unexpired leases of nonresidential real property. The criteria used by the debtor are whether it will be financially more advantageous to reject the contracts or leases or assume them and sublease or sell them. Plan of Reorganization A minority of all Chapter 11 cases result in a reorganization plan. Most filings are either converted to Chapter 7 or dismissed. The classification and treatment of claims is the heart of any reorganization plan. Underlying any plan of reorganization is the method for classifying claims and the proposed treatment for each class. The Bankruptcy Code requires that at least one class must accept the plan before the court will consider it. Definitions : found on pages 450-451 of text. Small business – a person engaged in commercial or business activities, excluding real estate, whose aggregate noncontingent liquidated and unsecured debts as of the date of the petition do not exceed $2,190,000. Single asset real estate debtor – real property constituting a single property or project with less than four residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto. Claim – a right to payment or a right to some equitable remedy such as injunctive relief in the event of a breach of contract. Undersecured claims – those where the value of the collateral is less than the amount of the claim held by the creditor; they are partially secured and partially unsecured. Secured Creditors Usually the courts require each secured creditor to be placed in a separate class. If two ore more secured creditors have equal claims against the same collateral, they all may be placed in one class. The creditors’ committee or an individual creditor should review the validity of secured creditors’ security interests to see if they have cause to object if one or more of them adversely affects the payment to unsecured creditors. Unsecured Creditors Courts will generally approve a plan that puts all unsecured creditors in a single class, but this may cause problems when the unsecured creditors have to vote on a plan if there is great disparity among the claims. Plans must be approved by a minimum of one-half the number and two-thirds the amount of the claims in any one class. Creditors should examine plans to see how the classification process affects their interests. See page 451 for a list of specific things to watch for.
Interest Classification and Treatment Whether the business is a sole proprietorship, a partnership, or a corporation, the plan must classify the ownership interest and propose treatment. Equity holders are normally the last to receive payment, and a plan must be accepted by creditors or pay them in full before equity holders may receive any payment. Provision for Execution of Plan A reorganization plan should spell out how the assets, the claims, and the interests will be treated, as well as give specifics and a time schedule for any sale, liquidation, or restructuring of the business, including deadlines for the distribution of any payments. Voting Process For a plan to be accepted, a majority in each class must vote to accept it. Ballots are sent to the creditors with the proposed plan. The Confirmation Process The procedure for confirming a plan follows a protocol that has been partly described. The first step is to file the reorganization plan and the disclosure statement. Next, creditors receive notices of confirmation hearings as well as a copy of the reorganization plan and disclosure statement. Creditor’s examine the reorganization plan and return the ballot with their vote. The ballots are tallied and reported to the court. The court is likely to confirm the plan if all classes of creditors and interest holders have accepted it by the necessary majorities, and the unsecured creditors will get a distribution that equals or exceeds what they would receive in a liquidation. The Absolute Priority Rule The rule prevents confirmation of a reorganization plan without the consent of the necessary classes of creditors if the plan provides that the shareholders in the corporation or the individual debtor in an individual case will retain an interest in assets after confirmation. Post Confirmation Problems The Bankruptcy Code permits the proponent of the plan to make post confirmation modifications only if a substantial transfer of assets as outlined in the plan has not already taken place. Only the plan proponents can request a modification. On the whole, post confirmation modifications tend to be for the purpose of correcting technical errors and are not significant changes in the plan.
Chapter 12 Bankruptcy of the Bankruptcy Code was adopted by Congress in 1986. It can be used only by farmers, ranchers and fishermen. Only debtors who qualify as family farmers (includes individuals and spouses, corporations and partnerships) with regular income can file under Chapter 12. Total liabilities of a family farmer debtor must be $3,544,525 or less, 50 percent of which must be from farming operations. Total liabilities for a family fisherman cannot exceed $1,642,500, 80 percent of which must be from a commercial fishing operation. Confirmation Chapter 12 eliminates the absolute priority rule, which means the farmer may retain the family farm and make minimal payments to unsecured creditors. Plans must satisfy two conditions: Creditors are to receive what they would receive under liquidation, All debtor’s disposable income for at least three years must be paid to creditors. Basically, Chapter 12 lets a debtor keep the farm, revalue secured creditors over time on the current market value of the land, treat the balance of the debt as an unsecured claim, and discharge all unsecured claims with nominal payments. Trade Creditors’ Primary Concerns A creditors’ concern in a Chapter 12 case is to protect its secured position. The trustee usually checks the debtor’s income and expenses and claims the difference for distribution to creditors.
Chapter 13 Bankruptcy is a way for people with regular incomes to reorganize their debts. There are three criteria for filing under Chapter 13. The debtor must be an individual. The individual must have regular income. The debt’s limits are $336,900 in unsecured debt and $1,010,650 in secured debt. Summary of a Typical Case The debtor files a petition and a plan for handling the debts with the bankruptcy court in the district where the debtor resides. A plan must be filed within 15 days of filing the petition if it is not filed with the petition. The plan must classify creditors and propose treatment for their claims. Creditors must file claims in order to receive any distributions under the plan. Plans tend to be either extension plans or composition plans. Extension plans pay all creditors in full over the duration of the plan. There are two types of composition plans . Both make only partial repayments of the total debt to creditors, and both must continue for not more than five years. The Chapter 20 Maneuver This refers to serial bankruptcy filings where, because of the size of the debt, a debtor files a Chapter 7 petition to discharge the unsecured claims and, as soon as the discharge is granted, files a Chapter 13 petition to deal with the secured claims. The name Chapter 20 refers to the combination of 7 plus 13. This is expected to occur less frequently as Congress raised the debt limits and imposed a means test for Chapter 7 debtors.
Creditors must establish an efficient internal system of routing bankruptcy notices so that information gets to the proper individuals. This is facilitated by the change under the BAPCPA that requires a debtor to send notices to an address specified by the creditor in notices sent to the debtor within 90 days of the bankruptcy filing. The credit professional needs to know about deadlines for meetings of creditors, filings of proofs of claim or objections to the sale of assets, etc. A separate system should be established to deal with adversary proceedings in which the company is sued by the debtor or some other party in the bankruptcy case. A company’s staff should be educated about the importance of being alert to the bankruptcy danger signs and what actions to take upon learning of a bankruptcy filing. Filing a Proof of Claim In cases under Chapters 7, 12, and 13, the filing of a proof of claim is required to participate in any distribution of the bankruptcy estate assets to unsecured creditors. A proof of claim must be received by the appropriate bankruptcy court on or before the last day for filing claims. The Official Proof of Claim Not all claims need to be on official forms. Virtually any writing that sets out an enforceable claim against the debtor that is served on the trustee or filed with the court may be deemed an informal claim. The creditor must complete the following sections of the form: • Identity of the bankruptcy court • Name of the debtor • Bankruptcy case number • Creditor information • Claim information Section 1—Basis of the claim: goods sold; services performed; money loaned; personal injury or wrongful death; taxes; retired benefits; wage, salary and compensation; or other. - Section 2—Date the debt was incurred. - Section 3—Date of a judgment against the filer if that is the basis of the claim. - Section 4—Classification of claim as secured, unsecured priority, or unsecured non-priority. Claims are secured only to the value of the collateral pledged. Partially or totally unsecured claims are non-priority claims. Unsecured priority claims are those only for wages, salary, commissions, contributions to employee benefit plans and taxes. - Section 5—Statement of the unsecured, secured and priority portions of the claim and the total of these numbers as the full amount of the claim. • Certification of the information given • Copies of supporting documentation • Required number of copies plus one to be returned
Objections to Proofs of Claims The trustee in bankruptcy in Chapter 7, 11, and 13, and the debtor in possession under Chapter 11 are statutorily responsible for reviewing claims filed, or listed in a Chapter 11 schedule, to determine whether the claims are proper claims against the estate. Objections to claims can range from inadequate documentation to lender liability lawsuits to the inclusion of precomputed interest . Routine objections often result from communication problems and can usually be resolved without much difficulty. Remember the trustee will charge the estate for all legal expenses relating to claim objections. Procedures for objecting to claims and resolving those objections vary from court to court. It is wise to use legal counsel in dealing with objections.
The concept of reclamation is to protect a creditor who delivers goods to a debtor while the debtor is insolvent. The law provides for return of the goods. The BAPCPA substantially changed the laws governing the treatment of reclamation claims. One of the flaws in reclamation is that the rights of a reclaiming creditor still remain subject to the rights of a prior secured creditor with a lien in the same collateral sought to be reclaimed.
The “20 Day” Administrative Claim A new right granted by the BAPCPA is referred to as a “20 day” administrative claim. For goods sold to a debtor in the ordinary course of business , and delivered within 20 days prior to the bankruptcy filing , that creditor is granted new protection, separate and apart from its reclamation rights. The creditor can assert an administrative expense claim for the value of the goods. The creditor is not required to send written notice, or prove that the goods are still in the debtor’s possession, or satisfy any of the other requirements mandated for a successful reclamation claim. The creditor must, however, prove that the goods were received by the debtor within 20 days before the onset of the case . The claim is not automatic and will be granted only upon notice and a hearing. The creditor will have to make an application in the bankruptcy court for allowance and payment of an administrative expense claim for the value of the goods. Administrative expenses are paid before most of the other creditors’ claims, and are frequently, but not always, paid in full. Alternatively, a debtor may request court approval of procedures for handling reclamation and administrative claims. If a court order is entered providing such procedures, it is the creditor’s responsibility to follow the procedures to obtain more favorable treatment of its claim.
The goal of virtually any bankruptcy proceeding is the discharge of some or all of the debtor’s debts and obligations. The Bankruptcy Code allows for a debtor to be denied a discharge completely in Chapter 7 for reasons of fraud, perjury, concealment of assets, or destruction of relevant records. The Bankruptcy Code allows for a debtor to be denied a discharge completely in Chapter 7 for reasons of fraud, perjury, concealment of assets, or destruction of relevant records. Review the reasons for denial of discharge in Chapter 7 cases listed on Page 460 of the text. For excepted debts see page 460 of text.
Basic Recovery Procedure For both Chapter 7 and 11 filings, the procedures for recovering preferential and fraudulent transfers and setting aside improperly perfected security interest requires the filing of an adversary proceeding under Rule 7001 of the Federal Rules of Bankruptcy Procedure. Once the adversary proceeding is filed, the trustee or debtor in possession can obtain nationwide service of the summons and complaint pursuant to the Federal Rules of Bankruptcy Procedure. Settlement Considerations As in any litigation, you should always keep your eye on the bottom line: What will the action by the debtor or the committee bring into the bankruptcy estate for distribution to unsecured creditors? The Trustee’s Strong Arm Powers (Bankruptcy Code § 544) empowers a trustee or a debtor-in-possession to avoid any lien or security interest in personal property or any lien or mortgage on real estate which is not properly perfected as of the date of the bankruptcy petition. This bankruptcy code grants to the trustee the rights of three different hypothetical types of creditors or purchasers: Hypothetical Judicial Lien Holder This allows the trustee or debtor in possession to set aside any security interest or mortgage of creditors for the benefit of all creditors. Any security interest or lien not properly perfected as of the date of the bankruptcy filing is subject to attack under Bankruptcy Code § 544(a)(1). Bona Fide Purchaser This gives the trustee priority over the holder of an inaccurate or unrecorded deed or mortgage. Legal Audit Persons dealing with security interests and mortgages in personal and real property will want to be sufficiently familiar with the law governing the creation and perfection of security interests and mortgages to perform a legal audit or review of either their own documentation or documentation of lending creditors in a case. A legal audit is a review of all documentation to determine whether all security interests were properly perfected and all mortgages were correct and properly recorded, paying special attention to legal descriptions of the covered real estate.
To prove a preference, the trustee or the debtor in possession must prove that a transfer of the debtor’s assets was made • To or for the benefit of a creditor • For or on account of an antecedent debt • While the debtor was insolvent • Within 90 days of the petition for relief, or within one year if the transfer is to an insider • The effect of the transfer was to give the creditor more than the creditor would otherwise receive in a Chapter 7 liquidation Exceptions to the Preference Rules • A transfer to a creditor that is contemporaneous with the extension of credit or the delivery of goods by the creditor • Subsequent new value is given to the debtor after receipt of payment • Payment in the ordinary course of business or financial affairs of the debtor and the creditor; or, made according to ordinary business terms. (For cases commenced prior to October 17, 2005, this exception must show payment in the ordinary course of business or financial affairs of the debtor and the creditor; and made according to ordinary business terms) • Preference actions for recovery of less than $5,475 cannot be pursued • Preference actions to recover less than $10,950 can be commenced only in the district court for the district where the trade creditor is located
Fraudulent Transfers Two types of fraudulent transfers made within on year of filing for bankruptcy can be set aside under Bankruptcy Code § 548 (a) and (b): a) The transfer of the debtor’s property made with the actual intent to hinder, delay, or defraud creditors, b) The transfer of property for less than market value at a time when the debtor was insolvent or undercapitalized. Involuntary Bankruptcy The filing of an involuntary bankruptcy is used by creditors to force the debtor to provide full financial disclosure or to force recovery of fraudulent and preferential transfers. The filing of an involuntary bankruptcy may be the only way of stopping and recovering these types of transfers. An involuntary petition may be filed by creditors only under Chapter 7 or Chapter 11. To do so, three creditors must have non-contingent, undisputed claims. The BAPCPA has emphasized that a petitioning creditor’s claim must not be subject to a bona fide dispute in either liability or amount. Three creditors are generally necessary to file an involuntary petition. For debtors with 12 or more unsecured creditors, the three creditors’ claims must aggregate $13,475 in order to force an involuntary bankruptcy. The involuntary petition is served upon the debtor together with a Summons in the same manner in which an adversary proceeding would be commenced. Normally, a debtor has 20 days to contest an involuntary petition. Tactics Creditors that are offered payment by a debtor in financial difficulty should accept the payment. The worst that can happen is the creditor may have to return the money if it is later deemed to be preferential. Master Checklist Review the detailed checklist on pages 464-465 of the text, which will help those outside of the legal profession make an initial evaluation of a bankruptcy case. Items to consider: Routing System Bankruptcy Checklist Documentation/Data Goods in Transit Deadline for Filing Claims Deadlines for Objections to Discharge Motions for Trustee or Examiner in Chapter 11 Consult Counsel to File a Motion

Out of Court Settlements

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