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What is a Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy case, the debtor’s assets are liquidated. When the petition is filed all of the debtor’s assets become property of the bankruptcy estate, are administrated by the chapter 7 trustee. They are used to offset the liabilities that the debtor had incurred as of the filing date.

Most chapter 7 cases are “no asset” cases. If there are assets, then the creditors receive a prorated percentage of the amount that they are owed, and the debtor is then discharged.

Generally, the appointed chapter 7 trustee collects and reduces the estate property to money, investigates the debtor’s financial affairs, examines proofs of claim, and files a final account of the estate’s administration with the court and the United States trustee.

In chapter 7 cases, the debtor is discharged from all debts which arose prior to the date of the order for relief and from any liability on a claim that is determined by the court as if such claim had arisen before the case’s commencement.

Some debts are not discharged such as certain taxes or customs duties, court ordered alimony and certain student loans.

What Is A Chapter 11 Bankruptcy?

A Chapter 11 reorganization is usually associated with a commercial or business bankruptcy and is one in which the debtor intends to continue its business operations once there has been some restructuring of its financial obligations. If the debtor’s chapter 11 reorganization plan is approved, the debtor operates pursuant to the plan and is discharged of all debts that arose prior to the plan’s confirmation date. If reorganization is not feasible, the case may be converted from Chapter 11 to Chapter 7.

What Is A Chapter 13 Bankruptcy?

Chapter 13 provides a reorganization remedy as in a Chapter 11 case, but for individual consumer debtors and proprietors with relatively small debts. The Chapter 13 trustee assists the debtor in affecting plan-related performance and ensures that the debtor commences timely plan payments. Except as provided in a confirmed plan or order of confirmation, the debtor remains in possession of all estate property.

What Is A Bankruptcy Claim?

Under the Code, there is a special set of procedures which must be followed to assert a claim against the bankrupt individual or entity. The goal of this process is to ensure that all involved are made aware of creditors’ claims and are afforded an opportunity to contest them.

A “Proof of Claim” (“Claim”) is a written statement which lists the amounts of money alleged to be due from the debtor. The Claim is filed by, or on behalf of the “creditor” or “claimant”, the person or entity who is owed a sum of money.

The time parameters for filing a Claim depends on the type of bankruptcy case that is pending.

The deadline imposed by the court for filing a Claim is called a “bar date.” This time parameter is strictly construed, and operates as a statute of limitations. It can only be enlarged as provided by the Bankruptcy Rules.

Is There An Automatic Stay Upon A Bankruptcy Filing?

With limited exceptions, upon the filing of a bankruptcy petition, a statutory injunction or “automatic stay” precludes the landlord from taking any steps to enforce the terms of any residential lease or unexpired commercial lease, whether by way of summary proceedings or otherwise.

The stay enjoins virtually all actions and proceedings which are pending against the debtor at the time of the bankruptcy case’s commencement and stays the institution of new actions and proceedings, including commencing or continuing a judicial, administrative or other action or proceeding against the debtor that were or could have been commenced prior to the initiation of the bankruptcy case, enforcing a judgment obtained prior to the bankruptcy case’s commencement, and engaging in any act to secure possession of property of the estate or to obtain estate property or to otherwise exercise control over such property.

The stay is effective upon the filing of the tenant’s bankruptcy petition regardless of whether the landlord has notice of the filing. Unless the bankruptcy court grants relief from the stay, a landlord may not serve a predicate notice (for nonpayment of rent or other breach of the lease) and may not commence or maintain eviction proceedings against the tenant.

The tenant’s security deposit may not be withdrawn or applied during the pendency of the bankruptcy stay to offset past due rent. But the landlord does not have to surrender the security deposit to the tenant or the Court, pending a bankruptcy court determination. A right of setoff, such as the right to apply the security deposit, may be asserted in a proof of claim, or the landlord may vacate the stay or obtain an order allowing setoff.

There is no stay against the landlord’s obtaining possession of the subject premises once a commercial lease expires by its own terms, whether such expiration occurs before or after commencement of the bankruptcy proceedings. Nevertheless, since they are subject to sanction for any stay-related violation, New York City marshals and New York State and local sheriffs are reluctant to proceed with a debtor’s eviction without a specific order of the bankruptcy court. There is no comparable Code provision which relates to an expired residential lease. Consequently, with limited exception, the automatic stay is effective as against a landlord’s acts to recover possession of the premises held under a residential lease, whether expired or not.

The landlord may move to vacate the stay to continue with or commence state court eviction proceedings.

What Happens To The Lease In A Bankruptcy Case?

Generally, the debtor may assume or reject any executory contract or unexpired lease. The rules governing assumption and rejection depend on the nature of the lease and the particular Code chapter.

For a contract to be deemed executory there must be significant performance remaining on both sides. The debtor’s right to assume or reject an unexpired lease is discretionary. The landlord cannot compel assumption.

When considering a debtor’s request to assume or reject an unexpired lease, courts generally apply the business judgment rule, which only requires that the assumption or rejection prove beneficial to the estate’s unsecured creditors.

At the time of assumption, the debtor must “cure” or provide “adequate assurance” of a “prompt cure” of any default. An “adequate assurance of prompt cure” requires that there be a firm commitment to make all payments and at least a reasonably demonstrable capability to do so. The court will generally permit a Chapter 13 debtor to cure pre-petition arrearages over the life of the reorganization plan. The Bankruptcy Code sets forth the time periods within which a residential or commercial lease must be assumed.