Archive for year: 2024

When you file Chapter 7 bankruptcy, there are many protections that you get as soon as you file. Certain creditors are not allowed to pursue you for debts, and some — if not all — of your debts can be discharged through the process.

One question that many people have about Chapter 7 bankruptcy is how utility bills are handled. Let’s dive deeper into this topic below.

Understanding Bankruptcy and Utilities

Just like other outstanding debts that you may have, overdue utility bills can be discharged through Chapter 7 bankruptcy. That’s because most unsecured debts can be completely wiped out through this bankruptcy process.

Handling Utility Bills in Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy laws, utility bills are clumped under the unsecured debt umbrella. This puts them in the same category as credit cards and personal loans. As such, they can be discharged through the process of bankruptcy.

Chapter 7 Impact on Utility Bills

While Chapter 7 bankruptcy is proceeding, you will still incur normal charges on your utility bills. Those bills can also be discharged if they are incurred before the bankruptcy closes.

Outcome of Overdue Utility Bills Post-Bankruptcy

The bankruptcy process will discharge overdue utility bills that you have incurred and included in the filing. Once the bankruptcy process is over, though, you must resume your payments of utilities. Bankruptcy doesn’t do anything to discharge future payments. 

 

Immediate Effects of Bankruptcy Filing

There are federal protections in place for people who file Chapter 7 bankruptcy. Utility companies are not able to change, refuse or disconnect service once you’ve filed bankruptcy. They also can’t refuse to provide you services or shut you off just because you filed for bankruptcy.

You may need to file an emergency petition to ensure that your utility services remain connected as you file bankruptcy, though. This will allow you to start the petition process so utility shut-offs can be prevented, and then proceed with filing the remainder of the necessary documents at a later time.

Bankruptcy’s 20-Day Utility Shut-Off Protection

After the bankruptcy filing has been completed, you will have 20 days to make a security deposit with your utility company. If that deposit isn’t paid within that time, then the utility company can shut off your service. In many cases, though, the utility company could extend that deadline.

Post-Bankruptcy Utility Service Continuation

Once the bankruptcy process has ended, the utility company will use your security deposit to open a new account for you. You will then pay under this new account and will have to abide by all the rules for paying to avoid having your service shut off.

Deadline for Utility Disconnection After Bankruptcy

Once bankruptcy has ended, your relationship with utility companies will revert to how it was before. You will pay for your service on a monthly or quarterly basis — depending on the company — and will need to do so to avoid your service being cut off.

 

Navigating Post-Filing Requirements

Filing bankruptcy doesn’t fully protect you from utility bills, in and of itself. There are some other steps you must take to ensure that your services aren’t shut off.

How to pay past due utility bills in bankruptcy

Past due utility bills can get discharged through bankruptcy, but only if you listed them as debits in the bankruptcy schedules. By doing so, you’ll be ensuring that the court notifies the utility company that you’ve filed bankruptcy, which ensures your services aren’t shut off. 

Ensuring Utility Payment in Bankruptcy

In bankruptcy, you will still have to pay for any current or future utility bills you incur. Bankruptcy can only discharge any previous past due bills you have. 

As mentioned before, you will have 20 days from filing to prove to the utility company that you can pay future bills, by providing them with “adequate assurance.” If you don’t provide this, then the utility company could disconnect your service, even if all your past due payments are discharged by bankruptcy.

Handling Inadequate Assurance for Utilities

When you provide documents to the utility company, it’s still possible they may not believe that your assurance is adequate enough. If you can’t come to an agreement on this with the utility company, you can file to ask the bankruptcy judge to force the utility company to accept the payment assurance you provided.

It’s possible for the judge to order that the deposit amount be modified as a result of findings.

How to Pay Future Utility Bills in Bankruptcy

All future utility bills must be paid as normal during and after bankruptcy. That’s because bankruptcy can only discharge past overdue bills.

 

Legal Representation and Bankruptcy

If you are considering filing bankruptcy, it’s essential that you hire an experienced law firm to help guide you through the process. Trying to navigate bankruptcy on your own is generally not a good idea, as you may not be overlooking some aspects of the process that would work to your disadvantage.

Advantages of a Bankruptcy Lawyer

One of the biggest advantages a bankruptcy lawyer can provide is defending your petition. While you will gain protection from debt collectors and creditors by filing bankruptcy, they can challenge your petition or the payment plan you have proposed. 

Bankruptcy attorneys can also bring you peace of mind as you go through what can be a complicated process. Most people who aren’t educated on how bankruptcy works could easily become confused and may miss important deadlines or steps.

Importance of Legal Assistance in Bankruptcy

Having an experienced attorney on your side, like the ones at Babi Legal, is essential when you file bankruptcy. Having legal assistance is so important as there are many intricacies of the bankruptcy system that would be tough for the everyday person to understand.

An experienced bankruptcy lawyer can help you file all the appropriate paperwork on time, and help you minimize mistakes, which could be extremely costly.

 

Rights and Protections Under Bankruptcy

When you file Chapter 7 bankruptcy, a utility company is prohibited from refusing, disconnecting or changing your service. They also can’t shut off your service or refuse

to provide service to you simply because you filed bankruptcy.

Utility Access During Bankruptcy

To continue to gain access to utilities during bankruptcy, you will have to provide adequate assurance to the company that you can pay future bills. This may involve you submitting documentation as well as a security deposit.

The federal government passed several emergency aid bills during the COVID-19 pandemic that were meant to help people survive during what was one of the most challenging times in U.S. history.

The first of these aid bills was called the CARES Act. Passed in March 2020, there were many aspects to the multi-trillion-dollar package. Multiple forgivable loans were created specifically for use by small businesses, while other forgivable programs were created for individuals.

Below is a description of some of the most popular of these new programs under the CARES Act.

Disaster loans

The CARES Act created a COVID-19 Economic Injury Disaster Loan, more commonly known as the EIDL. There were two types of EIDL programs created by the bill.

The first was a loan program through which small businesses could use funds to pay for working capital and other normal operating expenses. These loans aren’t forgivable and had to be repaid.

There were different requirements for this EIDL loan, depending on how large the loan amount was. Loan increases were also available until all the funds were exhausted.

The second type is the EIDL Advance funds. They were awarded to existing EIDL applicants who met additional criteria. The Advances are treated like grants without the typical requirements the federal government places on such programs.

Because of their grant-like nature, EIDL Advance funds were forgivable and didn’t need to be repaid.

Public Service Loan Forgiveness (PSLF)

The CARES Act also included programs for loan forgiveness and a break in repayments for borrowers of federal student loans. 

The Public Service Loan Forgiveness program, or PSLF, applied to borrowers who had federal direct loans. These borrowers could qualify for loan forgiveness after they made 12o monthly payments while they were working for an eligible employer on a full-time basis. 

Payments made as part of an income-driven repayment plan also qualify as payments toward the PSLF. 

The CARES Act automatically suspended student loan repayments for federal loans from March 13, 2020 through September 30, 2020, and that pause was extended multiple times. 

Paycheck Protection Program (PPP) vs. CARES Act

Perhaps the most popular program created by the CARES Act was known as the Paycheck Protection Program, or PPP. It is essentially a new loan backed by the Small Business Administration aimed at helping small businesses continue employing their workers during the pandemic.

The money handed out under the program was a loan that could turn into a forgivable grant if the recipient met certain qualifications. 

Loans of as much as $10 million were available to small businesses to use for as much as six months of their average monthly payroll costs from the previous year. Businesses that received the loans could use as much as 40% of the total on non-payroll costs, including utilities, rent and mortgage interest.

All loans were for five years with a fixed interest rate of 1%. If the loans were used for the purposes described above, they could qualify for full forgiveness. The amount to be forgiven would be reduced, though, depending on how the funds were allocated.

Small business debt relief program

The SBA also offered other small business debt relief programs through the CARES Act. The SBA would pay six months of principal, interest and all associated fees for borrowers who have an SBA Microloan, 504 or 7(a) loan. 

The debt relief depended on when the loans were taken out and didn’t apply to the EIDL program.

Can a small business get an EIDL and a PPP loan?

Small businesses were eligible to receive both an EIDL and a PPP loan under the CARES Act. However, the funds from these two separate loan programs could not be used to cover the same expenses. 

Direct forgiveness through SBA

The SBA was the agency tasked with handling the loan forgiveness programs created through the CARES Act. This made sense, as the agency already offered many loan programs with favorable rates for small businesses.

SBA’s new loan program for small businesses

The PPP was the most popular new loan program created for small businesses under the CARES Act. 

Those that were eligible to apply must have 500 employees or less. Each business could apply for a loan worth as much as 250% of its average monthly payroll costs — with a maximum of $10 million — and it was meant to cover up to eight weeks of payroll, and help with the other expenses mentioned above.

Those who are self-employed, an independent contractor or sole proprietor were also eligible to apply for a PPP loan. Any portion of the PPP loan that wasn’t forgiven was subject to a loan term of 10 years, with a maximum rate of 4%. 

Conditions for loan forgiveness

In order for small businesses to receive loan forgiveness under the PPP program, there were a number of requirements they had to meet. Only 40% of the funds could be used for non-payroll expenses, while the rest had to be used to maintain payroll.

Businesses that received these loans had to compile proper documentation, fill out a forgiveness form and submit the documentation to the lender. Those files would all be reviewed, with a decision sent back to the small business.

Loan Payments

Small businesses that received a PPP loan before June 5, 2020, had to repay their loans fully in two years, or within five years if they were approved after that time. Payments could also be deferred for as much as 10 months after the disbursement date of the loan. 

Updates for eligible borrowers

Most of the forgivable loans created by the CARES Act have expired. That being said, there is still time to apply for forgiveness if you haven’t already.

The SBA also offers many other loan programs for small businesses that are much more favorable than traditional loans from private financial institutions. Terms of those loans depend on which loan you’re applying for and what you want to use the money for.

Chapter 11 bankruptcy is commonly known as a “reorganization” bankruptcy. It’s a tool that any individual that meets the requirements, or business, no matter what type of organization it is, can use if they are having trouble meeting their debt obligations.

While individuals can use Chapter 11 bankruptcy, it’s typically used by corporate entities that want to reorganize and continue operating afterward, rather than liquidating their assets and shutting down. 

Chapter 11 bankruptcy can be overly expensive and cumbersome, though, which provides challenges to small business owners. A few years ago, Congress passed a new bill that streamlines the Chapter 11 bankruptcy process, making it more affordable in the process.

Below, we’ll give a quick overview of Chapter 11 Sub Chapter V Bankruptcy for small businesses.

Types of business bankruptcy

There are four types of business bankruptcy, each of which is designed for a different purpose.

The most common type is Chapter 11, as it allows businesses to continue operating after the bankruptcy proceedings. Chapter 7 bankruptcy, by contrast, is a full liquidation and will result in the business immediately dissolving upon the bankruptcy filing.

Chapter 13 bankruptcy is similar to Chapter 11 in many ways, though it’s only a fit really for certain sole proprietors. Chapter 12 bankruptcy is one option that small fishing and farming operations have. It provides a framework for restructuring that family businesses can use so they don’t have to liquidate.

Chapter 11 for business

The reason why Chapter 11 is so popular for businesses is that it allows them to continue operating after the bankruptcy restructuring. Through the process, business owners will enter into repayment plans with their creditors so that they can pay them back over time — as opposed to the previous repayment arrangement.

The restructuring plan is created and then presented to the court, which must approve it before it goes into practice. The creditors will be part of the process as well.

Secured and unsecured debts in Chapter 11

During the Chapter 11 bankruptcy proceedings, most debtors enjoy a moratorium on repayment of general unsecured debts that will last anywhere from about six to 12 months. 

In the same period, though, debtors may still need to pay their secured debts, if the services, goods and/or property is needed to continue operating the business.

The Chapter 11 debtor in possession

The debtor in possession (DIP) is a term that refers to the debtor who will be the one to operate the business after the Chapter 11 bankruptcy petition is filed. The person is a fiduciary and basically has the powers and rights of a trustee in the bankruptcy proceedings.

The DIP can hire outside professionals such as accountants, appraisers and attorneys, as long as the court approves.

Subchapter 5 bankruptcy

Subchapter 5 bankruptcy is made available to certain small businesses that need to file bankruptcy. There are certain limits that apply for business owners to qualify, though.

Non-contingent debt limit

To qualify for Subchapter 5 bankruptcy, debtors must engage in commercial activity and have debt that totals less than $7.5 million total — both unsecured and secured combined.

In addition, at least half of that non-contingent debt must come from activities related to the business. When filing, the debtor has to specify that they want to file under Subchapter 5.

The Small Business Reorganization Act

The Small Business Reorganization Act of 2019 was enacted in August 2019, and became effective in February 2020. The original debt limit was set at $2.75 million, though that was increased to $7.5 million temporarily after the outbreak of the COVID-19 pandemic.

That $7.5 million limit is effective for any Subchapter 5 bankruptcy filed between March 27, 2022, and June 21, 2024. After that date, the limit will revert to the original $2.75 million, unless Congress acts to extend and/or change the limit.

Small business debtors

Subchapter 5 is available only to small business debtors. These organizations are determined based on the size of their debt, not the size of the company itself.

Protection for creditors

The debtor will come up with a repayment plan that will be presented to each class of creditors through the court. Assuming the plan meets all the requirements of the bankruptcy court, the plan will be approved if at least half of the creditors in the class approves it.

Equity security holders

Unlike typical Chapter 11 bankruptcy, Subchapter 5 allows all equity security holders to retain interests they have in a debtor over the objection of non-consenting creditors, and they don’t have to pay all other claims that are higher priority in full.

Subchapter V for individuals

Individuals can also qualify for Subchapter V, just as they can through traditional Chapter 11 bankruptcy. They must meet the same debt limits as outlined above, and must be engaged in business activities.

Single asset real estate debtor

People whose primary business activity is owning a single asset real estate is typically excluded from Subchapter V. There are some exceptions to this rule, including if a debtor’s multiple parcels of property are not considered a single property or project.

A bankruptcy attorney can help

While Subchapter V provides a streamlined approach to Chapter 11 bankruptcy, it’s still a complex and complicated process. Making a mistake can be extremely costly for small business owners.

That’s why it’s always important to hire an experienced bankruptcy attorney who can help guide you through the process. The professionals at Babi Legal have years of experience in business bankruptcy cases, and can help you get through the process in the best situation possible.

Bankruptcy court and the U.S. Trustee or Bankruptcy Administrator

Once a bankruptcy case is filed, a U.S. trustee or bankruptcy administrator is assigned to monitor the case, and all actions that are taken by the parties involved. 

In North Carolina and Alabama, a bankruptcy administrator is the person who will oversee all bankruptcy cases. In every other state, a U.S. bankruptcy trustee will be assigned to monitor bankruptcy cases.

Creditors’ committees

A creditors’ committee is a group that represents all creditors in bankruptcy proceedings. This committee is given broad responsibilities and rights, which includes coming up with a reorganization plan for companies that file bankruptcy, and ultimately deciding whether liquidation would be the best path forward.

Appointment of a case trustee according to the bankruptcy code

The U.S. trustee will appoint a bankruptcy case trustee, after consulting with all parties who have an interest in the case. Once selected, this case trustee must be approved by the bankruptcy court.

The plan of reorganization

The plan of reorganization is a comprehensive and complex document that will be prepared by a business debtor that will detail their plans for how they will repay their creditors over time, and how they will operate once the bankruptcy proceeding ends.

It’ll categorize creditor claims into different classes and describe how each class will be treated. Creditors will receive the plan and vote on it to approve it. Then, the bankruptcy court must give final approval.

Acceptance of the plan of reorganization

Each creditor class must vote on the reorganization plan. Under Subchapter V, at least half of the creditors in each class must approve the plan of reorganization for it to be approved. If not, the bankruptcy court will chime in on the process.

Post confirmation modification of the plan

After the plan is confirmed, it’s still possible to modify it, as long as the details of the modification meet certain requirements under federal bankruptcy code. The court also must determine that there are circumstances that warrant the original plan to be modified.

Post confirmation administration

A court order will initiate the post-confirmation administration of a reorganization plan. Some legal actions will be taken by a creditors’ committee or bankruptcy trustee if the debtor objects to certain claims or if they need to recover funds.

Student loan forgiveness has been a highly-debated topic for the last few years, as the federal government under both former President Donald Trump and current President Joe Biden has initiated various programs to delay repayments or forgive outstanding debt altogether.

Since the onset of the COVID-19 pandemic four years ago, there have been many twists and turns in the student loan forgiveness saga, leaving many borrowers unsure of what the future will hold.

Even still, millions of student loan borrowers have been able to benefit from different executive actions that relaxed rules for eligibility, modified programs in existence and streamlined all application processes. Some modifications to repayment systems have allowed some student loan borrowers to save as well.

Borrowers struggling with student loan debt may be able to qualify for forgiveness through various federal programs. Those who don’t qualify may not have many options, as we’ll dive into further below.

Federal student loans

Last June, the Supreme Court struck down a plan by Biden that would’ve canceled billions of dollars of student loan debt. In the time since, the White House has been working hard to find new ways to bring borrowers relief.

In mid-February, the latest plan was announced that would do just that. The latest update on student loan forgiveness will see more than 150,000 borrowers qualify for the cancellation of nearly $1.2 billion in total student loan debt.

Those who qualify are eligible under the SAVE plan, which is a repayment program for federal student loan debt based around income. Borrowers who have lower balances — $12,000 or less — and also have made repayments for at least 10 years qualify to have the remaining debt wiped away.

In total, the Biden administration has now canceled almost $138 billion in federal student loan debt, benefitting nearly 3.9 million borrowers in the process.

 

Student loan borrowers seeking discharge

While this latest announcement is surely a welcome one for many borrowers, it still leaves many students without any relief at all. Those who don’t qualify for the loan forgiveness through the SAVE program don’t have nearly as many options for automatic and immediate relief.

It’s possible to seek discharge of student loan debt, but that’s a more complicated and complex process, as we’ll dive into further. There are other options to lower payments, though.

 

Student loan debt relief

Even if you aren’t eligible for complete forgiveness of your student loan debt, you can still take advantage of other plans to lower your monthly repayments.

The SAVE plan, as mentioned above, offers some borrowers the ability to lower their monthly payments based on their income — even if they don’t qualify for full forgiveness. This can provide some significant relief to those who need it.

It’s also possible to refinance student loans in much of the same way that other loans are refinanced. In this option, you would be replacing your old loan with a new one that has more favorable terms.

If you’re able to lower your interest rate, it could help to reduce your monthly payments. At the same time, if you refinance to a private loan servicer, you would lose any benefits that the federal government provides or may provide in the future.

It also may be possible to seek temporary deferment of repayment depending on your situation. If this is something you’d like to look into, it’s best to reach out to your loan servicer directly.

 

Student loans and bankruptcy

Until recently, getting student loans discharged through bankruptcy was a very difficult process. That’s because student loan debt is treated differently than other types of debt in bankruptcy proceedings.

In the 1970s, Congress passed legislation that put protections in place, because they were afraid that wealthy people would eventually abuse the system to get their student loan debt discharged. 

This meant that in order to get student loans discharged through bankruptcy, a person had to sue the federal government and try to prove that the loan was causing them “undue hardship.”

That was a significant hurdle to overcome, not only because it was hard to prove the “undue hardship” but also because it was expensive to do so. 

A law professor at Villanova University actually conducted a study in 2020 that found that only a little more than one in 1,000 people who declared bankruptcy and had student loans were able to get that debt discharged.

 

Approval for student loan discharges in bankruptcy

In November 2022, the Department of Education updated rules to make it easier for student loan debt to be discharged through bankruptcy. Now, borrowers who wish to have their student loan debt discharged through bankruptcy have to fill out a form that’s 15 pages long. Then, attorneys working for the government will use new guidelines on exactly what would qualify as “undue hardship.”

This has made the process simpler and more effective for borrowers. In fact, in November 2023, the DOE reported that 99% of people who used this new process were successful in getting their student loan debt discharged through bankruptcy.

While that only included a little more than 600 people total, the department believes an increasing number of these filings will be made in the future.

 

Final extension of the student loan repayment pause

During the COVID-19 pandemic, the federal government instituted a pause on all federal student loan repayments. That stood in place for more than three years, but came to an end in September 2023. 

Interest began accruing again on September 1, while repayments resumed on October 1.

When the payments were put on pause, interest rates were dropped to 0% as well, so that debt wouldn’t continue to rack up as borrowers didn’t make payments. Once those payments resumed, the interest rates returned to whatever their fixed rate was.

There is a 12-month “on-ramp” as part of this resumption of payments, though. Through September 30, 2024, borrowers who aren’t able to make repayments won’t default on their loans. However, interest still accrues if payments aren’t made, adding to the total outstanding debt.

This has caused many borrowers to be faced with the daunting challenge of fitting student loan repayments back onto their already tight budgets.

Challenges for borrowers seeking loan forgiveness through bankruptcy

While the Department of Education has made it easier for borrowers to seek loan forgiveness through bankruptcy, it’s still not as straightforward as having credit card debt discharged. It’s not an automatic that this debt will be forgiven. The federal government still needs to agree that the loan is causing “undue hardship,” even if the guidelines by which they make that decision have been relaxed.

That’s why it’s important to work with an experienced bankruptcy law firm if you have student loan debt that you wish to discharge. Babi Legal has a team of experienced professionals who can help you navigate the complicated web of student loan debt forgiveness, giving you a better chance of having it discharged through bankruptcy.

 

Further student loan forgiveness reading

Babi Legal has provided additional reading on student loan forgiveness for you to review, including the impact of bankruptcy on student loans, and the pros and cons of student loan forbearance.

Embarking on the intricate landscape of bankruptcy involves unraveling the complex web of claims and their prioritization. In this comprehensive guide, we’ll explore the nuances of the priority of claims in bankruptcy proceedings, shedding light on how creditors are categorized and paid. From secured debts to unsecured priority claims, join us on this journey through the bankruptcy code, navigating the hierarchy that dictates how creditors receive their share.

Whether you’re a debtor seeking to understand the implications or a creditor aiming to comprehend your position, this exploration of priority claims will provide valuable insights into the dynamics of the bankruptcy process.

Priority claims

Priority claims occupy a unique position in the bankruptcy hierarchy, enjoying preferential treatment over other unsecured claims. These claims, outlined in the bankruptcy code, cover specific obligations that hold a higher priority for repayment.

Examples of priority claims include domestic support obligations, unpaid wages, and certain taxes. The concept of priority aims to ensure that essential debts are satisfied before other creditors receive their share of the debtor’s remaining assets.

As we delve deeper, we’ll dissect the various priority claims and their implications within the bankruptcy process.

Unsecured priority claims

Among the different types of priority claims, unsecured priority claims play a distinctive role. These are obligations without collateral but hold a higher priority than general unsecured claims. Examples include certain tax claims and unpaid wages.

In the intricate landscape of bankruptcy proceedings, understanding the nuances of unsecured priority claims is crucial. We’ll explore their significance, treatment, and impact on the distribution of assets to creditors, shedding light on how they navigate the bankruptcy process.

Unsecured creditors

Unsecured creditors constitute a diverse group of claimants in bankruptcy, holding debts not backed by collateral. Unlike secured creditors, who have specific assets securing their claims, unsecured creditors lack such security. This category encompasses various obligations, including credit card debt, medical bills, and personal loans.

Priority Unsecured Debts?

Priority unsecured debts are obligations that, despite being unsecured, receive preferential treatment in bankruptcy proceedings. They are granted a higher priority for payment compared to general unsecured claims when it comes to distributing the debtor’s assets. Some key examples of priority unsecured debts include certain tax claims, unpaid wages, and domestic support obligations such as child support or alimony.

The prioritization of these debts is governed by specific rules outlined in the bankruptcy code. These rules establish the order in which different types of debts must be satisfied from the available assets. By placing priority unsecured debts ahead of general unsecured claims, the legal system aims to address the importance of certain obligations that society considers crucial.

In practical terms, when a debtor files for bankruptcy, available funds or assets are distributed among creditors. Priority unsecured debts are paid in a specific order, ensuring that certain essential obligations receive satisfaction before other unsecured claims. This prioritization recognizes the significance of fulfilling obligations related to taxes, employee wages, and family support.

Creditors holding priority unsecured claims have a higher chance of receiving payment compared to those with general unsecured debts. Understanding these distinctions is vital for both debtors and creditors navigating the bankruptcy process, as it influences the outcome of asset distribution and the resolution of financial obligations.

Are the Rules Really “Absolute?”

While the term “absolute priority rule” is commonly used, it doesn’t imply an unyielding or inflexible standard in all situations. The concept of absolute priority is a foundational principle in bankruptcy law, emphasizing the hierarchical payment structure among different classes of creditors. However, there are instances where deviations or exceptions to the absolute priority rule may apply.

Bankruptcy courts have some flexibility to confirm reorganization plans that deviate from the absolute priority rule under certain conditions. For example, if all impaired classes consent to the plan, a court might approve it even if it doesn’t strictly adhere to the absolute priority rule. This flexibility is exercised to facilitate the acceptance of viable reorganization plans that promote the debtor’s successful emergence from bankruptcy.

The idea behind the term “absolute priority” is to underscore the general importance of respecting the established priority structure. It serves as a guide for equitable distribution of assets among creditors. Still, the practical application of the rule can involve considerations of fairness and the specific circumstances of each case.

The Code’s Order of Priority

The Bankruptcy Code establishes a priority order for distributing funds among creditors. Secured creditors, with collateral-backed claims, take the top spot, followed by priority unsecured creditors, including specific claims like domestic support obligations and employee wages. General unsecured creditors, without collateral or statutory priority, come next and receive a pro-rata share after secured and priority claims.

Equity holders, like shareholders, are at the bottom and only receive payment if assets remain after higher-priority claims are satisfied. This structured approach ensures a fair allocation of resources in bankruptcy proceedings.

Most Priority Debts are Nondischargeable

Many priority debts are nondischargeable, meaning they survive the bankruptcy process and the debtor remains obligated to pay them. Many of the debts mentioned earlier, such as domestic support obligations, certain tax claims, and debts for death or personal injury caused by the debtor’s intoxicated driving are examples of nondischargeable priority debts.

The nondischargeable nature emphasizes the importance of addressing these obligations even in bankruptcy.

The Supreme Court, Jevic and the Order of Claims in Bankruptcy

The Supreme Court’s decision in the Jevic case significantly impacted the traditional order of claims in bankruptcy. In the Jevic case, the Court addressed structured dismissals and the distribution of assets in a way that deviated from the usual priority rules. The decision introduced flexibility in certain situations, allowing for deviations from the absolute priority rule under specific circumstances. This landmark ruling reshaped how bankruptcy courts approach the prioritization of claims and highlighted the need for careful consideration of the unique aspects of each case.

How Does Priority Debt Affect a Bankruptcy Filing?

Priority debt plays a crucial role in the bankruptcy filing process, influencing the distribution of assets and the satisfaction of creditors. In a bankruptcy case, certain debts are designated as priority claims, and they are entitled to be paid before other claims.

The order in which these priority claims are settled can significantly impact the outcome for both debtors and creditors. For instance, certain tax debts may take precedence over other unsecured claims, influencing the distribution of available funds. The intricate nature of these priorities reflects the legal framework’s attempt to ensure fair treatment among creditors while considering the distinctive characteristics of each debt category.

Absolute Priority Rule (APR) in Bankruptcy Code

The Absolute Priority Rule (APR) is a fundamental concept embedded in the Bankruptcy Code, dictating the order in which creditors are repaid during bankruptcy proceedings. This rule establishes a hierarchy, ensuring that certain creditors receive payment before others. The key principle behind the APR is that creditors with higher priority must be satisfied in full before those with lower priority receive any payment.

Under the APR, secured creditors are generally the first to be repaid, followed by priority unsecured creditors, and finally, general unsecured creditors. This rigid structure aims to maintain fairness in the distribution of assets and provides a framework for determining the order of claims. However, exceptions and complexities exist, and navigating the nuances of the APR requires a comprehensive understanding of bankruptcy laws and procedures.

Secured Claims (1st or 2nd Lien)

Secured claims, whether first or second lien, play a pivotal role in the bankruptcy process, guided by the Absolute Priority Rule (APR). When a debtor files for bankruptcy, secured creditors holding collateral – such as a mortgage lender with a property lien – are typically positioned at the top of the priority hierarchy. In the event of liquidation or asset distribution, secured creditors receive payment from the sale of the collateral before other creditors.

The APR dictates that secured claims must be satisfied in full before unsecured creditors receive any payment. While first and second lienholders share this fundamental priority, nuances may arise based on the value of the collateral and the specific terms outlined in the bankruptcy proceedings. 

Finding the Right Debt Relief Option for You

Navigating the myriad of debt relief options requires careful consideration of various options to find the right solution for your unique financial situation. From debt consolidation and credit counseling to bankruptcy and negotiation with creditors, each avenue comes with its own set of implications. Analyzing factors such as the amount and type of debt, income, and long-term financial goals is crucial in determining the most suitable course of action.

Debt consolidation involves combining multiple debts into a single monthly payment, potentially with a lower interest rate. Credit counseling provides guidance on budgeting and debt management plans. Bankruptcy, while carrying significant consequences, may offer a fresh start for those facing overwhelming debt. Negotiating with creditors can lead to modified repayment terms.

Choosing the appropriate debt relief option requires a comprehensive understanding of your financial circumstances and the potential impact on your credit score. Seeking professional advice from financial experts or bankruptcy attorneys can provide valuable insights and help pave the way to a more stable financial future.

Babi Legal’s experienced team is dedicated to assisting individuals in finding the most effective debt relief solution tailored to their specific needs, offering guidance through every step of the process to achieve a more secure financial future.

Chapter 11 and Chapter 7 Creditor Recoveries Claims

Chapter 11 and Chapter 7 bankruptcies present distinct scenarios for creditors seeking recoveries.

In Chapter 11, a reorganization process, creditors may have the opportunity to influence the debtor’s restructuring plan, potentially leading to better recoveries. On the other hand, Chapter 7 involves liquidation, where a trustee sells the debtor’s assets to repay creditors.

The hierarchy of creditor claims, secured or unsecured, significantly impacts the recovery amounts. Navigating these complexities requires a keen understanding of bankruptcy laws and strategic decision-making. Creditors need to assess their positions, evaluate potential outcomes, and make informed choices to maximize their recoveries in either Chapter 11 or Chapter 7 proceedings.

General Unsecured Claims (“GUCs”)

General Unsecured Claims (GUCs) represent debts without any collateral or specific priority. In bankruptcy proceedings, these claims are lower in the hierarchy, and their treatment depends on the available funds after higher-priority claims have been satisfied.

In both Chapter 7 and Chapter 11 bankruptcies, GUCs often receive repayment only if there are remaining assets after satisfying secured and priority claims. Creditors holding GUCs face a higher risk of partial or no repayment compared to those with secured or priority claims.

Preferred and Common Equity Holders

Preferred and common equity holders are distinct classes of shareholders in a company, each with its own set of rights and preferences. Preferred equity holders have a higher claim on a company’s assets and earnings than common equity holders. They typically receive dividends before common shareholders and have a preference in the distribution of assets in the event of liquidation.

On the other hand, common equity holders have residual rights in a company, meaning they are entitled to the remaining assets and earnings after all other obligations have been satisfied. While common equity holders have voting rights and potential for higher returns, they stand lower in the hierarchy of claims compared to preferred equity holders.

Understanding the differences between preferred and common equity is crucial for investors, as it influences their potential returns, voting power, and overall position in the company’s capital structure.

Waterfall Payment

A “waterfall payment” refers to the systematic order in which creditors are repaid from the available assets of a debtor. The term “waterfall” is used to illustrate the cascading flow of funds down the hierarchy.

In a bankruptcy proceeding, the waterfall payment typically starts with priority claims being satisfied first. Once these priority claims are addressed, the remaining funds, if any, move down to the next tier of creditors, such as secured creditors. The process continues until all claims in the established hierarchy have been addressed or until the available assets are exhausted.

Common Complications of the Payment Process

Navigating the payment process in bankruptcy can be fraught with complexities, and several common complications may arise. One challenge involves the prioritization of claims, where creditors vie for repayment based on their claim status. Secured creditors may face difficulties if the value of collateral falls short of the debt owed. Additionally, disputes may arise over the classification of certain claims, impacting their position in the payment hierarchy.

Another complication stems from the potential insufficiency of available assets to meet all creditor demands. In such cases, the waterfall payment system becomes critical, determining the order in which creditors receive satisfaction. Furthermore, disputes may emerge among creditors, particularly if there’s uncertainty or disagreement regarding the validity or priority of claims.

How Do Creditors Get Paid?

Creditors receive payment in a structured manner through a process governed by bankruptcy rules. The payment hierarchy, or “waterfall,” outlines the order in which creditors receive satisfaction from the available assets.

Secured creditors, holding liens on specific assets, are typically the first to be paid. They receive satisfaction from the sale or use of the collateral securing their debt. Following secured creditors, priority claims are addressed. Unsecured creditors, including general unsecured claims and credit card debt, come next in line.

The specific order of payment can vary, and the bankruptcy code provides guidance on the classification of claims and the treatment of different creditor classes.

Understand the Restructuring and Bankruptcy Process

The restructuring and bankruptcy process involves several key steps. It begins with a financial assessment, exploring alternatives like debt restructuring or bankruptcy. If bankruptcy is chosen, a petition is filed, triggering an automatic stay on creditor actions. A creditors meeting is held for transparency.

In Chapters 11 and 13, debtors propose a repayment plan, while Chapter 7 involves asset liquidation. Once a plan is confirmed, debtors work to implement it. Successful completion leads to a discharge of eligible debts. Babi Legal’s experienced professionals can guide you through this process, providing essential expertise to ensure a smooth resolution tailored to your specific situation.