Bankruptcy Basics

*All cases are different.  Cases have been concluded in as little as 75 days and have extended for more than 10 years.  Contact us to discuss the particulars of the case you are involved in.

 

Concepts and Terms You Should Be Familiar With

§363 Sale  The sale of assets of the estate outside of the normal course of business. It is executed by the debtor and its professionals under supervision of the court. The assets sold can be anything from excess equipment to all operating assets of the business and are free and clear of liens or encumbrances.  Any liens typically attach to the cash proceeds coming from the sale.

503(b)(9)  Claims for goods delivered within 20 days of the Petition Date are covered under section 503(b)(9) of the bankruptcy code and are considered administrative claims as defined below.

Absolute Priority Rule  A fundamental concept underlying the Bankruptcy Code, creditors of lower priority must not get paid anything if higher priority creditors are not paid in full (impaired).

Administrative Claims  Any liability arising after the Petition Date is considered an administrative claim and is given a higher priority.  In order to emerge from bankruptcy, all administrative claims must be satisfied as part of the Plan of Reorganization.  To the extent that the estate cannot pay off its administrative claims, it is considered administratively insolvent and can be forced into a Chapter 7 liquidation.

Bankruptcy Claim  A creditor's legal right to payment of what it was owed by the debtor at the time the debtor filed for bankruptcy protection.

Bankruptcy Estate  The estate as a whole includes all assets and liabilities of the debtor, and the estate's managers have an obligation to maximize value for all constituents, including employees and trade creditors versus a focus on maximizing value for equity holders prior to becoming insolvent.

Chapter 11  Protection under the bankruptcy code with the intention to restructure and emerge.

Chapter 7  Protection under the bankruptcy code with the intention to liquidate and remit the proceeds to creditors.

Claims Bar Date  The date by which all Proofs of Claim must be filed with the court.  This date is approximately 90 days after the meeting of the unsecured creditors, which occurs within the first 30 days after the Petition Date.  If the claim does not appear on the schedules and no Proof of Claim is filed by the Claims Bar Date, the claim is deemed discharged by the court and will not receive any proceeds from the estate.

Critical Vendor  Depending on the venue, the Critical Vendor motion may be more or less expansive.  The motion that is meant to allow for payment to vendors that could literally shut the operation down or otherwise significantly harm the estate.  Requirements include a lack of feasible substitute at any price in the near or mid term and the willingness of the supplier (or necessity in the case of a large impact to supplier liquidity) to cut off products or services.  While it is advantageous to be considered a critical vendor, the long term relationship must be considered when leveling threats of this magnitude.

Disclosure Statement  A summary of the Plan of Reorganization plus additional information to allow creditors to vote on the Plan in an informed manner.

Enterprise Value  The value of the restructured company excluding debt and excess cash. Along with excess cash and assets that are liquidated in the reorganization, enterprise value is distributed to creditors upon successful emergence often in the form of stock in the reorganized company. Alternatively, the enterprise value is turned into cash for distribution via a §363 sale within bankruptcy.

First Day Motions  There are usually a number of legal motions filed on the first day of a case asking the court permission to perform certain actions related to the continuance of operations that may be limited by the Bankruptcy code.  The debtor in most cases will ask the court to allow access to its cash collateral so it can pay post-petition bills in the normal course.  Additionally, the debtor will often ask for permission to pay a number of pre-petition invoices without which, the estate would be severely harmed.  Categories covered by these motions that may qualify for immediate payment, further defined elsewhere on this page, often include Critical Vendor, Lienholder, and Utilities.

Lienholder (Shippers) Motion  When goods are being transported, or while toll services are being provided, the service provider has a possessory lien and has the right to maintain possession until the debtor has satisfied its obligations.  As a practical matter debtors often ask for, and bankruptcy courts often allow, the payment of prepetition debt in order to release goods which likely have far more value than the prepetition amount owed.

Liquidity  Above almost all else, a debtor must protect its liquidity (cash plus revolver availability) within a bankruptcy filing.  While the debtor may have raised money through a DIP Loan or it may have a significant cash stockpile, liquidity provides the debtor with time to restructure both operationally and financially.  On the flip side, suppliers may be struggling with a liquidity problem themselves if a sizable amount of receivables is tied up in prepetition debt.  One solution is to require accelerated terms on current orders (delivered after the filing date) to fill the cash flow gap for the suppliers who may be asked to wait months or even years before its prepetition invoices are even addressed.  Accelerated payments, in combination with the sale of prepetition claims, should mitigate the impact on suppliers.

Petition Date The date on which the debtor filed for protection under the bankruptcy code.  Debtors will often file immediately after midnight, thus creating a clean break for accounting purposes and making all transactions occurring on the petition date post petition.

Plan of Reorganization  The POR defines payments by class in satisfaction of prepetition debt.  It is voted on by creditors and approved by the bankruptcy court prior to emergence.

Preference Transfers  Payments by a Debtor made within 90 days of the Petition Date (one year in the case of insiders) that favor one creditor over others.  Preference payments can usually be recovered and returned to the Debtor’s Estate.

Proof of Claim  A simple form with documentation to substantiate the claim existence and amount filed by the creditor.  While it is not necessary to file a Proof of Claim if a creditor agrees with the amount listed by the debtor on Schedule E/F, it is usually best to file one since schedules can be amended by the debtor throughout the pendency of the case.  The official form, ready to be filled in, can be found here.

Unsecured Creditors Committee  The UCC is appointed under §1102 of the bankruptcy code.  It is typically comprised of several of the largest general unsecured creditors to represent the interests of the group.  The UCC has the right to hire both legal counsel and financial advisors to assist in its role, the cost of which is paid for by the estate.  The UCC is often an advocate of a restructuring versus a liquidation for multiple reasons.  First, its members are behind all secured and priority unsecured debt, and second, its members typically benefit through an ongoing business relationship with the debtor.

Unsecured Debt  Debt having no specific collateral.  Typical unsecured debt in a bankruptcy are trade payables, employee claims over the statutory limit of $12,500, unsecured bonds, and underfunded pension liabilities.

 

For further information, you can also review our FAQ section of the website, or contact us with questions.