Bankruptcy, Insolvency, and Creditors' Rights
Bankruptcy, Insolvency, and Creditors' Rights tests the automatic stay, claims priority, avoidance actions, and reorganization.
Core rules
- Chapter 7: liquidation; exempt property; discharge of most debts. Chapter 11: reorganization; debtor in possession; plan of reorganization. Chapter 13: individual wage-earner repayment plan.
- Automatic stay §362 halts collection, foreclosure, and litigation against the debtor. It does not eliminate liens or co-debtor liability automatically.
- Priority §507: administrative expenses, wages (limited), taxes, secured claims. Secured creditors are paid from collateral.
- Avoidance: preference §547 requires a transfer to a creditor for antecedent debt, while insolvent, within 90 days (one year for insiders), enabling more than in Chapter 7. Defenses include contemporaneous exchange, ordinary course, and new value.
- Fraudulent transfer §548: actual intent or constructive fraud.
Worked example
Ninety days before filing, a debtor pays a supplier $25,000 on an old unsecured invoice. The debtor was insolvent and the payment let the supplier recover more than it would in Chapter 7. The trustee may avoid the preference unless the supplier proves an ordinary-course defense.
Traps
The stay is not a discharge. Guaranties may survive. Preferences require an otherwise valid transfer. The insider lookback is one year. DIP financing and cash collateral need court approval.