No one ever expects to be bankrupt. However, when the situation calls, you might be forced to file for bankruptcy. Filing for bankruptcy can be a stressful procedure, especially with the legal actions that one has to consider and possible litigations. Thus, it is recommended to seek professional legal services to help you go through the process. That is why we at the Los Angeles Bankruptcy Attorney are here to offer you the best possible services in your bankruptcy process to make it less stressful for you.
Types of Bankruptcy
Bankruptcy is a legal process that helps people and businesses with debt issues. Eligible parties that file for bankruptcy can repay their debts within their comfortable times or the provisions of the court.
The bankruptcy concept is provided in the American constitution, and most states follow its provision. The provisions of the United States Bankruptcy codes are quite complex, hence the need to hire an attorney if you intend to file bankruptcy. The different types of bankruptcy are as follows:
Chapter 7 Bankruptcy
Under Chapter 7, the borrower can have all the debts wiped out and have a fresh start. In this case, all the borrower’s assets are liquidated and sold, except exempt assets. The trustee usually sells all the assets and distributes the net income to all creditors. The trustee earns a commission out of the sale.
Under this law, certain debts cannot be discharged. These debts include child support, alimony, fraudulent debts, student loans, and certain items. Most of the cases related to this law consist of large credit card debts and a few unsecured bills and few assets. Therefore, a majority of debts that fall under this law are capable of being eliminated.
Borrowers have the opportunity to keep some of their secured debts, such as furniture and cars, if they reaffirm them. The borrower is expected to sign a Reaffirmation Agreement as a result. The reaffirmation comes with some conditions, which include:
- Payment of the loan under obligation
- Repay all the previous loans that could have left behind
- Inability to file for bankruptcy within eight years after signing the reaffirmation agreement
The opportunity to reaffirm your debts comes with the leeway to keep some of the properties you would like to keep and have others sent back to the creditors as a way to reduce the debt.
Chapter 9 Bankruptcy
Chapter 9 works as a reorganization plan, similar to chapter 11. It is limited to municipalities such as counties, villages, towns, cities, school districts, and municipal utilities.
Chapter 11 Bankruptcy
Chapter 11 is a reorganization procedure for businesses that intend to continue with their operation and repay their creditors using a court-approved procedure. Anyone who intends to use chapter 11 bankruptcy must provide sufficient information that will convince the debtors about the plan.
The court can approve or disapprove of the plan based on how convincing the plan is. If it confirms, the debtor will reduce the debt to a repayable portion and discharge the rest. Debtors can also recover assets, cancel existing leases and contracts, and reorganize operations to ensure that the returns are profitable. Typically, the debtor will go through a time of consolidation and end up with reduced debt and well-organized business.
Chapter 12 Bankruptcy
This kind of bankruptcy is specific for industry specifics such as fishermen and farmers. Its operations are quite similar to chapter 13 repayment plans.
Chapter 13 Bankruptcy
Under Chapter 13 of bankruptcy law, debtors can propose a repayment plan to their debtors for three to five years and pay all future incomes that the debtor should earn. This is an excellent option to prevent processes such as house foreclosure, pay back the taxes, stop the accumulation of your tax debt, and keep your valuable non-exempt properties.
Once a borrower keeps all the terms provided in the repayment agreement, the remaining debts can be released at the end of the timeline as long as they are dischargeable. The procedure that is used to agree on the repayment amount depends on several factors. One of these factors is the California Means Test.
A total repayment can also be agreed upon based on the amount that one could have at least repaid to the creditor under Chapter 7. Therefore, you must prove that you have a regular source of income, which shows your capacity to honor the payment plan that has been set forth.
This law works for debtors who intend to keep their secured assets, such as cars and homes, and have more equity on them. Therefore, this makes the law necessary for reorganizing yourself rather than liquidating your property to cater for your debts as in Chapter 7 bankruptcy.
Chapter 15 Bankruptcy
This type of bankruptcy operates within cross-borders, and the debtors or the property in question is subject to the United States laws and foreign countries.
Types of Bankruptcy Litigations in California
Many people assume that bankruptcy is an automatic and straightforward process. However, it can involve other legal actions based on the parties that are involved in this process. Therefore, with the interest that each party poses, a couple of full-blown litigations might arise. Here are some of the bankruptcy litigations that can occur.
Lender Liability Claim
A lender liability claim arises when banks and other lenders are sued by the other parties for various aspects such as:
- Breach of contract
- Breach of an implied duty of good conduct
- Aiding fraud
- Breach of fiduciary duty and
- Aiding in the breach of fiduciary duty
This kind of litigation is usually filed by the creditors’ committee, debtors-in-possession, and receivers. Before these proponents proceed with the litigation, they must prove that the lender or bank committed the offense that they are putting into consideration.
Debtor-in-Possession Financing Litigation
Debtor-In-Possession financing, otherwise known as DIP financing, is a special type of financing that is meant for companies that are facing bankruptcy. This kind of financing is only available for companies that want to file bankruptcy under Chapter 11 and usually happens before the financing.
DIP financing is used to facilitate a company in its financial status that has led to its bankruptcy. This financing is different from others since it has priority over equity, existing debts, and other claims. Debtors can push for a DIP financing litigation over its effect in prioritizing secured loans and other debts more than the debt that the borrower owes them.
Preferential Transfer Action
In a bankruptcy system, balance and fairness are highly esteemed. This means that there can be preferential transfer actions to one creditor while the other one is left out. The creditors who are left out can file separate litigation on the following basis:
- If the transferred interest were supposed to be of their benefit
- If they were in an account of a precursor debt
- If the transfer action was made while the debtor was bankrupt
- If the transfer action was made within ninety days of the debtor’s bankruptcy petition
- If the transfer action would allow the other creditors to receive a lot of more compared to what they would have earned through a Chapter 7 liquidation
For the litigation to be successful, the claiming creditor’s strength is usually examined. This is done through an evaluation of the creditor’s claim to be insolvent based on the results acquired through the Balance Sheet Test, Cash Flow Test, or the Capital Adequacy Test.
Fraudulent Conveyance Actions
Fraudulent transfers or conveyance is an attempt to debtors use to avoid repaying debts by transferring money to another company or person. This kind of litigation is usually brought forward by trustees, creditors, and banks.
Under the Bankruptcy Code Section 548(a)(1)(A), a bankruptcy trustee can avoid any actual intent by the debtor to defraud the creditors, hinder, or delay payment. Direct proof of the actions is not necessary and can be proven through circumstantial evidence, which is referred to as the badges of fraud. This includes:
- Retaining control of a property after the fraudulent transfer
- Having the debtor’s relative as the transferee
- Having the transfer made in an unfair consideration
- Concealing the transfer
- Having the debtor rendering to be insolvent as a result of the transfer
Under the Bankruptcy Code Section 548(a)(1)(B), a transfer can be considered as constructively fraudulent if the debtor receives a less or equivalent value as a result of the transfer. This should be considered in addition to:
- Becoming insolvent due to the transfer
- The debtor remained with the property that is unreasonably small in value
- The debtor had the intention of incurring debts that are beyond his or her capacity to pay once the mature
In bankruptcy litigations involving fraudulent transfer, close friends or relatives of the debtors are usually scrutinized. Their bank records are analyzed, wire transfers are checked, and their cash withdrawals are also assessed. This is to confirm whether there is any unordinary business that could have transpired and does not properly tie to the actual goods or services that were provided in return. Also, the assessment is meant to check whether the transfer was grossly made in excess compared with the services or goods received by the debtor.
Debtor Securities Violation
Any debtor is expected to file security to the credit about to take. However, some debtors can go to the extent of deceiving their financial statement users a way to gain an advantage over their creditors. This is usually achieved through financial fraud and involves specific actions such as:
- Manipulation of accounts records
- Intentional omission of important information
- Intentional misapplication of accounting principles
- Disclosure of sensitive financial information
Financial fraud can also be achieved through revenue manipulation. This can be done through actions such as:
- Failure to disclose or record liabilities
- Recording shipments as sales
- Showing non-existing sales
- Selling goods before the end of the year, and taking them back as returns
Creditors can file a legal action against the officers and directors of the company that is filing bankruptcy based on the financial manipulation actions. The debtor can also file a legal action against the directors and officers or third-party professionals such as attorneys if they can prove instances of financial manipulations.
Challenges with the Attorney’s Fee
Lawyers have the freedom to be paid through a post-petition agreement if they are representing unsecured creditors and have a pre-petition contract with the debtor. Such claims are allowable as long as they are valid claims according to California laws.
Even if such claims are allowed, bankruptcy litigation can be considered as long as there are challenges related to such fees if they were excessive, unwarranted, and unreasonable. These kinds of claims should be considered if they are approved by the Bankruptcy Court.
Most people usually have several liens on their properties. During a bankruptcy filing, the market value of the house can go down, making the junior mortgages or subsequent mortgages unsecured.
People under such situations can opt for a lien stripping whereby they eliminate the junior liens if they are filing a Chapter 13 bankruptcy. This allows someone who is upside down to wipe out liens on real properties that are wholly unsecured. A debtor is considered to be upside down if the mortgage is greater than the fair market value of the property in question.
If you own a property worth $ 450,000 and owe a first house mortgage worth $ 350,000, a second one worth $ 100,000 and a third one worth $ 10,000, the third one is usually stripped since the previous ones can be serviced by the property.
To get a lien strip, the objective valuation of your property must be evaluated by a real estate appraisal or utilize the property tax bill listing. The valuation procedure might incur contention between you and the creditor since they expect to have the highest valuation possible while you are contesting for the lowest value.
Claim Avoidance and Subordination Actions
The bankruptcy code allows debtors-in-possession to have avoidance power as provided under Bankruptcy Code 544 to 549. These statutes allow the debtor-in-possession to file lawsuits in a bankruptcy court to recover properties that they could have transferred, avoid liens that were not properly considered, among other aspects.
Avoidance claims might be brought in connection with exempt properties if:
- The trustee does not choose to avoid the transfer
- The debtor can exempt the property
- The debtor did not hide the property
- The property is avoidable as provided under Section 544 and 548
For a debtor-in-possession to successfully avoid a claim and get a subordinate action on a secured claim, he or she must demonstrate to the court that the line of payment will be done through inequitable conduct.
Motion for Relief from Automatic Stay
An automatic stay is a form of relief that a debtor files to stop collection efforts by the creditor before filing bankruptcy. The stay is not absolute but allows the debtor to reorganize his or her finances and allow creditors from grabbing all the assets and allow a fair share among the rest of the creditors.
However, the creditors might ask for a lift of the automatic stay under various circumstances. A secured creditor can seek a lift if you are not making any payment, and your property has no equity to cover the loan. This kind of application is only allowed for a Chapter 7 bankruptcy.
On the other hand, an unsecured creditor can file a motion to lift the automatic stay, although it is quite rare. The creditor can wait until a Chapter 7 case ends since most of them take months to complete. For a Chapter 13 case, the debtor is expected to repay some of the nondischargeable debts within three to five years; hence no need to file for the lift.
Sale of Properties that are Owned Jointly by the Debtors
Trustees have the mandate of selling non-exempt properties for the benefits of the creditors. However, if the property is owned jointly between the debtor and someone else, this will bring some issues with the sale. This might force a case in the court to force the co-owner to sell the property, which counts as bankruptcy litigation.
There are quite several other types of bankruptcy litigation that one should learn about. These litigations are as follows:
- Successor Liability
- Objection to Reorganization Bankruptcy Plans
- Claim prosecution and objection
- Dischargeability challenges
- Corporate governance claims
- Officer or director negligence
Exemptions in Bankruptcy Litigation
Please note, all the above-stated bankruptcy litigations are handled in a bankruptcy court. However, particular matters can occur before bankruptcy but are not handled in the bankruptcy court. These matters are as follows:
- Personal injury cases
- Probate cases
- Child custody or divorce cases
Find a Los Angeles Bankruptcy Attorney Near Me
Filing bankruptcy in California is quite complicated. It is hard to achieve your goals without legal aid; especially various litigations arise from the case. For that reason, you should hire a professional bankruptcy attorney who has both experience and reputation in this legal field. We at the Los Angeles Bankruptcy Attorney can offer the services you need while in such a situation. Contact us today at 424-285-5525 and let us handle your case.