Bankruptcy is a complex subject. There are five primary aspects of the U.S. Bankruptcy Code to keep in mind once you learn an entity you are involved with has filed a bankruptcy petition. In chronological order, they are, the:
- Automatic stay
- Filing, allowance and priority of claims
- Use of avoidance actions to reverse prepetition payments
- Bar on “discriminatory treatment” of the debtor
- Discharge of debts and related exceptions
Attorneys can improve the odds of a favorable result in bankruptcy if they keep the possibility of a filing in mind while investigating, settling, or litigating a case.
- To make a judgment meaningful, the government will often have to act as both a creditor and a regulator.
- A state that does not have a well thought out plan to deal with bankruptcy will likely lose large amounts of revenue.
- Structuring a settlement agreement or judgment correctly can greatly increase the chances that the government will be able to enforce that agreement in a bankruptcy and collect the amounts that are owed to its citizens or to itself.
The three most relevant bankruptcy chapters for attorneys general are:
- Chapter 7 – Liquidation: This chapter concerns companies shutting down and individuals looking to use existing assets to pay creditors. About 63% of all cases are filed in Chapter 7.
- Chapter 11– Reorganization: This chapter is mostly for companies, but can be for individuals. Less than 10,000 cases are filed annually, but they result in the bulk of all claims and assets.
- Chapter 13–Reorganization for wage earners.