Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

Chapter 2 – Petitioning for BankruptcyChapter 7 LiquidationAuthored by: Philip V. Martino and Sarah K. Baker, Quarles & Brady LLPThe current Bankruptcy Code, codified at 11 U.S.C. section 101 et seq. (the "Code"), was enactedin 1978 and is divided into nine Chapters, eight odd-numbered and one even-numbered. Whilethe provisions of Chapters 1, 3 and 5 apply to all bankruptcy cases, they do not offer a Debtorany form of substantive bankruptcy relief. Only Chapters 7, 9 (for municipalities), 11, 12 (familyfarmers), 13 (wage earners), and 15 (international ancillary proceedings) offer substantivebankruptcy relief to a Debtor. As the parentheticals in the prior sentence show, many of thoseChapters are wholly irrelevant to nonprofit entities.This part of the Guide will discuss Chapter 7, which is a liquidation proceeding available tobusiness entities as well as individuals. In a Chapter 7 proceeding, all of the Debtor's nonexemptassets are accumulated by the bankruptcy trustee and sold or otherwise reduced tocash. In simple terms, exempt assets are assets that an individual Debtor is allowed to retain,free from the claims of creditors who do not have liens on the property.For instance, the Bankruptcy Code allows an individual Debtor to exempt up to $3,675 in thevalue of a motor vehicle. Assume that a Debtor owns a car free and clear of any liens ofcreditors. If the Debtor's car is worth less than $3,675, the Chapter 7 trustee may not sell the car.If the car is worth more than $3,675, the trustee may sell it, but would have to pay the Debtorthe value of his $3,675 exemption from the sale proceeds. Exemptions generally are irrelevantto nonprofit bankruptcies, as they apply only in bankruptcy cases filed by individuals.The Debtor's assets are liquidated, with the net proceeds (that is, after satisfying secured claims,paying the costs of administration, and recognizing statutory exemptions afforded individuals)distributed among the Debtor's creditors that filed proofs of claim. Chapter 7 relief is availableto any: (i) individual; (ii) partnership; or (iii) corporation, except for railroads, insurancecompanies, banks, savings and loan associations, credit unions, or other similar institutionswhich are insured under the Federal Deposit Insurance Act.Commencement of the Bankruptcy CaseA bankruptcy case is commenced by the filing of a petition with the Bankruptcy Court. Thepetition must clearly indicate under which Chapter of the Code the case is to proceed. If theDebtor files the petition, the case is considered "voluntary" and the filing of the petition servesas the "order for relief." Section 303 permits creditors to file an "involuntary" bankruptcyproceeding against certain entities. An involuntary bankruptcy is a bankruptcy case that is filedby creditors, and not by the person or business who owes the debts to those creditors.Involuntary bankruptcies are rare. They are usually filed against businesses. Bankruptcy CodeSection 303(a) expressly prohibits the filing of an involuntary bankruptcy proceeding against anonprofit corporation. Additionally, Section 1112(c) provides that in the event a nonprofitcorporation files a Chapter 11 bankruptcy petition, the bankruptcy case cannot be converted toa Chapter 7 liquidation case unless the nonprofit corporation debtor requests such conversion.26