Los Angeles has recently seen a spate of involuntary bankruptcies. What is an involuntary bankruptcy? An involuntary bankruptcy is a bankruptcy filed not by the debtor, but by the debtor’s creditors. Thus the “involuntary” bankruptcy.
When a bankruptcy is filed, whether it is Chapter 11 or Chapter 7, a number of different things occur. Probably the most important is that an “automatic stay” is implemented. What is the automatic stay?
Given that it seems like almost every company is a possible bankruptcy debtor these days, it is important to recognize that money paid by a company that ends up in bankruptcy might be subject to disgorgement. In other words, if you are the recipient of such a payment, you might have to give the money (or part of the money) back.
Chapter 7 of the Bankruptcy Code is often a last resort for individuals or companies with financial problems that they cannot solve. Under Chapter 7, a Trustee is appointed to administer the assets of the debtor. The Trustee sells the assets in order to pay creditors. For individuals, some assets are exempt, and those are retained by the debtor.
Often times when a tenant files for bankruptcy, the trustee not only rejects the lease but also abandons any personal property left over by the tenant pursuant to 11 U.S.C. 554(a). The California landlord who expects to use the value of the abandoned property to offset amounts owed by the bankrupt tenant will be sorely mistaken.
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Chapter 11 allows companies to reorganize their financial affairs and emerge from bankruptcy with an improved balance sheet. Most large bankruptcies that make the news are Chapter 11 filings. For example, EZ Lube, which filed bankruptcy in December, is in Chapter 11, as is Circuit City, which filed in November. Most Chapter 11s are filed by companies, but individuals can also file Chapter 11. However, individual Chapter 11s are rare because there are other bankruptcy Chapters which are usually more appropriate for individuals.
Seemingly every day, the news is filled with another story about a bankruptcy filing, or a development in a major bankruptcy case. Just in the last 4 months of 2008, companies such as Lehman Brothers and Tribune Company have filed Chapter 11 bankruptcies. Not to mention Merrill Lynch and AIG, each of which presumably would have filed but for government bailouts. The jury is still out for the Big 3 auto makers but the only question appears to be whether there will be bankruptcies or a large loan from taxpayers.
In addition, retailers, manufacturers, and service companies of all shapes and sizes have entered Chapter 11. The ripple effect leads to more filings. Other notable bankruptcies filed during the past 6 months include:
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