Just like restructuring a company due to the risk of going bankrupt, as mentioned earlier by Suzzanne Uhland, bankruptcy litigation is also a very challenging and complex endeavor. It requires a sheer array of tactics as well as some other mechanisms. For both parties, financial expectations can differ from the reality of the situation, which makes things worse taking into account that commitment and compromise is no less than vital. As seen in the past months, several developments have emerged, and new precedents have also been settled around this topic. Thus, bankruptcy litigation will likely remain as one of the most popular tools for creditors in really tough bankruptcy cases—where many things are actually at stake. It is also likely to remain as the most used process to come up with workable solutions for creditors, stakeholder and, of course, debtors alike.
That being said, it is pertinent to provide a general overview of some trends that have been arising in bankruptcy litigation in the recent months. There have been several developments around this topic for quite some time. There continues to be a considerable amount of litigation involving Stern litigation, in regards to the extent of both jurisdiction and power of a particular bankruptcy court. Complex bankruptcies have resulted in the emergence of other, and different, litigation tactics. For instance, the Detroit bankruptcy always involved an extensive mediation team composed of six mediators and five bankruptcy judges. After assessing the success of the Detroit mediation process, Atlantic City chose a mediator to assist in other restructuring negotiations (out of court). In light of these tactics, litigation has become a more popular way for creditors involved in really tough bankruptcy cases, and many tactics actually motivate individuals to pursue litigation specially tailored to slow down and even derail restructuring efforts.
But where does all this come from? Bankruptcy, as mentioned in previous articles, is simply a legally declared state of insolvency—or the incapability of paying bills. The primary purpose of filing for Chapter 11 is to overcome such situation, as it helps both companies and individuals get out of such dreary situation. In such sense, bankruptcy litigation commonly refers to the legal process that seeks to provide companies and individuals with debt relief via a bankruptcy court. In the United States, this process can be initiated on the behalf of all parties involved: Article 1 Section 8 of the American Constitution directed Congress to come up with regulations governing the process of bankruptcy. As a consequence, all cases are handled in different federal courts and not at other levels such as the state level. As stated in other articles, filing for bankruptcy can be both an involuntary or voluntary act. In involuntary cases, it is forced via the creditor; in voluntary cases, it is filed by the debtor.
However, there are three main types of bankruptcy named after several sections of the American code: Chapter 7 and Chapter 13 were commonly conceived to be used by individuals, whereas Chapter 11 has traditionally been used by companies and businesses. In regards to litigation, Chapter 7 is also called liquidation: a process that seeks to sell all the debtor’s non-exempt assets, thusly distributing the resulting amount to creditors. In several cases, the debtor manages to keep the vast majority of their assets while relieving some of their debts.
Litigation in light of Chapter 13 requires the debtor to come up with, and subsequently submit, a three to five-year plan for repaying the debt. This way, the debtor manages to keep their home and their assets, and forces creditors to reduce, or even eliminate, interest on the debt. Chapter 11, on the other hand, is perhaps the most used way to overcome difficult financial situations. As per discussed in other articles, filing for Chapter 11 involves many things such as restructuring in order for the company to stay operational, so that it manages to ultimately pay off debts via future income and earnings. There are several types of debts, however, that cannot be relieved via bankruptcy such as federal taxes, child support and alimony, practically all kinds of student loans, amongst others.
Bankruptcy varies from country to country, and the consequences often affect companies differently. In Canada, for instance, bankruptcy litigation is only available to partnerships and individuals, and it basically consists mainly of liquidation. In the United Kingdom, debt relief via bankruptcy is somewhat easy to do; however, some consequences seem to linger afterwards.
In short, bankruptcy litigation is the perfect opportunity for individuals and companies to overcome the daunting challenge of facing a staggering debt and start all over again. This, however, is only advisable after having assessed and pursued other alternative due to the, sometimes permanent, consequences. It is also advisable to always seek financial counseling prior to recklessly rushing into conclusions.
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