With the increasing numbers of companies which were once thought to be giants of industry filing for bankruptcy, more opportunities to purchase major assets are becoming available to savvy buyers looking to expand their business or asset base. The Bankruptcy Code provides debtors with the ability to liquidate all or a part of their assets through court-supervised sales and buyers with the ability to obtain those assets at more favorable prices than they would pay if the sale were consummated outside of a bankruptcy.
One of the most advantageous provisions of the Bankruptcy Code is that a deal can be approved and consummated relatively quickly, providing for approval on as little as 40 days notice (or less in exigent circumstances). For example, in the Chrysler case, the sale of substantially all of Chrysler's assets to New CarCo (and Fiat) was approved and closed within approximately 40 days after the bankruptcy filing, while in the Lehman case, the time frame was even more expedited – with entry of an order approving the sale to Barclays only 3 days after the filing of the sale motion.
Basic Procedures for Purchasing Assets From a Debtor
The purchase and sale of assets in a bankruptcy case often begins with a "stalking horse" bidder who has agreed to buy the target assets pursuant to a negotiated asset purchase agreement. The stalking horse bidder is often the bidder who, after some general solicitation of bids outside of bankruptcy, makes the highest bid for the most assets and is the most able to complete the purchase and/or requires the least amount of time, if any, to undertake a due diligence review.
Once an agreement has been reached and finalized with the stalking horse bidder, the debtor will begin the process of seeking bankruptcy court approval of the asset sale. Section 363 of the Bankruptcy Code provides debtors with two options for asset sales: private sales or public auctions. In both private sales and public auctions, a debtor seeking to sell property will be required to provide public notice of the sale and time for parties to object.
In a private sale, the debtor will make a motion to the bankruptcy court for approval of the sale transaction, setting forth the basis for the sale, the terms of the sale, a proposed hearing date for approval of the sale and a deadline by which any objections to the sale must be filed. Although no auction process is contemplated in a private sale, interested parties may submit competing bids for the target assets by "objecting" or otherwise responding to the sale by the objection deadline creating, in essence, in a de facto auction for the assets. Typically, however, debtors and bankruptcy courts prefer public auctions to private sales because, among other things, public auctions provide better protection against subsequent claims that the debtor failed to maximize value for the benefit of its creditors.
The sale of Lehman's assets to Barclay's provides a good example of how private sales are utilized in certain circumstances, but are not necessarily favored by the courts. In that case, although the sale was not actually called a private sale, the sale of Lehman's assets to Barclays was undertaken without an auction process being proposed by the debtors or implemented by the court. In approving the sale on an extremely expedited time frame without any competitive bidding procedure, the bankruptcy court noted that the sale had been approved under a unique set of extraordinary circumstances, in an emergency situation, and because it was clear that Barclays was the only interested buyer. Accordingly, the court made clear that the process implemented in that case would not have precedential value.
In a public auction, a debtor will make a motion or motions to the bankruptcy court describing the basis for the sale, the terms of the sale, the procedures for accepting "higher and better" offers and a proposed time and place for the auction of the assets, requiring two separate orders from the bankruptcy court. The first order will be a "procedures order" approving the form of the purchase agreement and the procedures for competing offers and the auction, including break-up fees, bid increments, competitive bid qualification requirements, the auction date and the sale approval hearing date. The second order will be the "sale approval order", which will be entered after the auction has been conducted, and will authorize the sale of the assets to the bidder making the "highest and best offer" for the assets. Each order will be subject to separate objection deadlines and hearing dates.
In the context of a public auction, it is generally advantageous to be the stalking horse bidder, as opposed to a subsequent competing bidder. The stalking horse bidder will have some control over the terms of the auction and will negotiate the form of the purchase agreement upon which any future bidders will be required to base their bids. However, competing bidders who are able to work within the terms of the stalking horse's agreement can end up as the successful buyer of the assets at the auction, thereby reaping the rewards of a stalking horse bidder's labors. To offset the risk to the stalking horse bidder that another bidder may win the assets at the auction, and to induce a stalking horse bidder to negotiate and create a competitive market for the debtor's assets despite the potential "loss" of the assets in an auction, the stalking horse bidder's purchase agreement often includes "break-up" fee and/or expense reimbursement provisions, which are intended to cover the stalking horse bidder's costs and, in order to be approved, must be reasonable. In most cases, courts have agreed to approve break-up fees equal to anywhere from 2% to 4% of the overall purchase price, or which are based on the actual, reasonable expenses incurred by the stalking horse bidder.
In some cases, bidding at an auction can be very lively, often taking hours and, in rare cases, days, and increasing the price ultimately paid for the assets by millions of dollars over the original price proposed by the stalking horse bidder. For example, in the case of Riverstone Networks, two bidders emerged – Lucent Technologies and Ericsson. At the auction, held over two days and through numerous rounds of bidding, the purchase price for the assets was increased by $47 million, with Lucent, the stalking horse bidder, ultimately winning the assets with a final bid of $217 million in cash and cash equivalents. In others, there may be no bidding at all, with the auction, if not canceled, lasting no more than 10 minutes so as to create a complete record stating that no competing bidders came forward, and that the stalking horse bidder is the winning bidder. Accordingly, each auction is different depending on the type of assets and the market for the assets – no two are exactly the same.
The Purchase Agreements in the Bankruptcy Context
In addition to providing for a break-up fee and/or expense reimbursement, a purchase agreement in a bankruptcy case differs in certain material respects from a purchase agreement outside of the bankruptcy context. First, a bankruptcy purchase agreement will provide that its effectiveness is conditioned upon the entry of the sale approval order. In addition, the sale of a debtor's assets is usually made on an "as is, where is" basis, with the representations and warranties that a debtor is willing or able to provide being fairly limited and surviving only until closing of the sale. Indemnification by a debtor is rare. The principal reasons for these differences are that: (1) the debtor is generally not an economically viable entity and its representations and warranties are of limited value; (2) the debtor will ultimately be discharged from most of its liabilities as part of the bankruptcy case, including claims under the purchase agreement; and (3) the creditors of the debtor desire finality and do not wish to have ongoing exposure that may diminish the assets of the debtor available for distribution.
A potential buyer of assets should not, however, let these differences and limitations deter it. The fact is that a properly drafted sale order will provide a buyer of distressed assets with essentially the same or better protection as a buyer outside of bankruptcy, by providing that the assets are being sold free and clear of any liens, claims, encumbrances or other interests therein (resulting in what is referred to as a "cleansing" of the assets) and that the buyer is a "good faith" purchaser. This language alone generally protects a buyer from, and is generally enforceable against, any claims of a third party or the debtor in or to the assets and releases any liens or other encumbrances on the assets, with such liens, claims, interests or other encumbrances attaching to the proceeds from the sale of that asset.
Closing Thoughts
Each sale of assets by a debtor in bankruptcy is unique. The fundamental principle in all sales is that the sale be conducted in a manner that is reasonably calculated to maximize value for the debtor's creditors and estate, and that each sale be negotiated and conducted on an arms' length basis in "good faith" by the debtor and purchaser. These general rules apply equally to all bidders providing all potential buyers with the same protections, but also submitting all buyers to the jurisdiction of the bankruptcy court.
In addition, the scope of the assets that can be sold through these section 363 sales is extremely broad – the assets can be in the U.S. or outside the U.S., and they can be tangible assets like inventory, equipment, real property, fixtures etc. and they can also include intangibles such as stock, leases, mortgages, loan portfolios and intellectual property. Consequently, they can be an effective tool to expanding a company's business and, in many cases, represent tremendous opportunities to a savvy purchaser.
As a general rule debtors who file Chapter 13 bankruptcy must pay in full during their bankruptcy plan all of their "priority debts." Priority debts include among other things federal income taxes. Many people file Chapter 13 in order to pay without further interest a federal income tax liability over the course of a five-year bankruptcy plan.
A couple retained me to file Chapter 13 bankruptcy in order to deal primarily with an income tax debt. When we received their income and expense information and prepared a draft bankruptcy plan we found that they did not make enough money to pay all of their priority tax debt in their five-year Chapter 13 plan. We checked with the Chapter 13 trustee’s office to see if there was any way that Chapter 13 could help our clients, and the trustee’s staff said that, in fact, there was an alternative.
The Chapter 13 trustee explained that our bankruptcy judges in Orlando had approved Chapter 13 plans that did not fully pay all priority tax debt when the debtors were paying all of their disposable income into their plan for five years. The court may require also a reasonable payment to unsecured creditors. Taxes not fully paid in the Chapter 13 plan are not discharged by bankruptcy and remain owed and payable to the IRS after the court enters a discharge order at the end of the plan. The exception to the general rule of fully-paid priority claims in found in Section 1322 (a)(4).
I had never encountered a client with this issue. The Chapter 13 trustee office was helpful to me and to my client in this instance. In the Orlando jurisdiction the trustee’s office is the attorney’s best resource to deal solve your clients’ problems in Chapter 13 cases. The Chapter 13 trustee will not prepare your clients’ bankruptcy plans for you or otherwise do the attorney’s job, but they are willing source of assistance if you are unsure about how to handle an issue in a Chapter 13 case.
A Chapter 7 trustee can reverse and bring back into the bankruptcy estate any payments the debtor makes to an unsecured creditor within 90 days of filing bankruptcy; such payments are considered preferential to one creditor at the expense of all other creditors.
A prospective Chapter 7 client told me today that his employer fired him in October, 2009, and gave him a $15,000 severance payment. The severance had one condition: if the employee was recalled to work and accepted a position with the same employer within a year then the severance payment was owed back to the employer. The client never spent the severance. He held it in a separate bank account. This past month he received an offer to return to his old job which he accepted. As a condition of re-employment, he owes the full $15,000 to the employer.
Here his the man’s dilemma. He as accumulated too much unsecured debt to repay and needs to file bankruptcy to have enough money to save his house. Unsecured creditors have already filed lawsuits. If he files without repaying his employer the bankruptcy trustee will claim the $15,000 sitting in his bank account. His employer may fire him again because he did not repay the money. If he now pays the employer the $15,000 owed the bankruptcy trustee could claim the money from the employer as a bankruptcy preference. Same problem; if the employer does not keep the repayment he may try to file the debtor for breach of their agreement.
If he can wait 90 days to file bankruptcy he may be in the clear. If he cannot wait 90 days II advised the man to repay the employer now. I think he has good arguments that the $15,000 payment to his employer is not a preference. He could argue either that the money is not an existing debt until he starts work, or that repayment is in the nature of a cost of obtaining his job, or that he never had unconditional ownership of the money until a year after he was fired. . Most importantly, he is receiving new consideration (his job back) in exchange for this repayment.
Regardless of the legal reason, I don’t see his repayment at time he gets a job as the type of "preference" bankruptcy law is trying to prevent. Waiting 90 days is best, but alternatively, repaying the employer is better than keeping the severance until the bankruptcy filing date.
The recession has affected us all, but who's been hit the hardest?
Last year there were nearly 1.5 million bankruptcy filings--learn about the people behind those numbers. Check out our latest You Tube video and please share it with your friends.
The Washington Post reported recently that the community organization ACORN (Association of Community Organizers for Reform Now) may be on the verge of filing for bankruptcy.
The group has, since its founding in 1970, devoted itself to helping low-income Americans find housing and to bringing voters from under-represented groups to the polls. Last fall, though, things took a turn for the worse for the group. Here’s what happened:
Rising criticism: In the months after President Obama’s election, critics of ACORN apparently accused the group of fraudulent registration of voters and even internal embezzlement. And the bad press got worse once Obama took office.
Video embarrassment: Last fall, two conservative activists posed as a pimp and prostitute and got advice from an ACORN counselor about how to hide their line of work from the government so they could buy a house for business purposes. They recorded the incident with hidden cameras and released them to news outlets, which caused serious controversy over ACORN’s aims and methods.
Dried-up funding: After the video’s release, many of ACORN’s donors (including larger organizations and the government) reportedly withdrew much of their financial support, leaving ACORN underfunded.
Withdrawal of state chapters: The Post notes that some of the bigger state chapters of ACORN (notably New York and California) have broken off from the parent organization and formed individual community support groups without the ACORN name.
Though representatives of ACORN itself have apparently not made any public comment about bankruptcy plans, a glance at the events of the past few months leaves little doubt that such a step would not be entirely surprising.
Effect on Consumers
Sources indicate that ACORN plans to continue dedicating itself to aiding and advocating for low-income Americans; however, they may do so under a new name and organization, both of which could be established during the bankruptcy process.
And if you’re worried about finding guidance through the home buying process, there’s no need to panic: the reorganization of ACORN leaves plenty of other groups and organizations available.
If you’re interested in becoming a homeowner but aren’t sure how to begin the process, visit the government’s Department of Housing and Urban Development (HUD) page for links to helpful resources and information on how to get moving toward your goal.
On Wednesday, March 24, 2010, Carmen Dellutri was asked to sit on a panel put together by the American Bankruptcy Institute with several bankruptcy experts and discuss the Supreme Court's Espinosa opinion. The Espinosa case dealt with the discharge of student loans in bankruptcy.
The panelists were led in a very lively discussion of the opinion written by Justice Thomas.
On Wednesday, March 24, 2010, Carmen Dellutri was asked to sit on a panel put together by the American Bankruptcy Institute with several bankruptcy experts and discuss the Supreme Court's Espinosa opinion. The Espinosa case dealt with the discharge of student loans in bankruptcy.
The panelists were led in a very lively discussion of the opinion written by Justice Thomas.
The healthcare bill is now signed into law; but what does it mean for you?
We sifted through the press and propaganda to uncover how the new healthcare bill may affect you.
How the Healthcare Bill Will Affect…
The Uninsured
$5 billion immediately goes to provide temporary coverage to the uninsured living with preexisting conditions. This measure is intended to bridge the divide until all the healthcare changes go into effect in 2014.
By 2014, more people will qualify for Medicaid coverage, such as people who are low-income and have no children.
By 2014, small businesses, the self-employed and the uninsured will be able to join together to buy less-expensive policies.
By 2014, Americans who don’t qualify under a hardship plan must have healthcare insurance or face fines. Those who qualify under the hardship plan will be low-income individuals and families of four making less than $88,000.*
By 2014, the uninsured will face fines of $95 (or 1% of the uninsured’s income). By 2015, the fines increase to $325 or (or 2% of their income). By 2016, the fines increase to $695 (or 2.5% of their income).*
The Insured
If you buy a policy, insurance companies can’t limit your lifetime coverage anymore. This means your insurance money shouldn’t “run out” if you’re diagnosed with a serious illness.
Insurance companies can no longer deny your child coverage because of a preexisting condition.
By 2014, the same preexisting condition protections will arrive for adults.
Adult children can now stay on family insurance plans until they’re 26 years old.
By 2011, prescription drug costs are expected to drop by 50% as manufacturers drastically discount brand-name drugs. By 2020, it’ll drop by 75%.
Those on Medicare Part D will soon receive $250 for prescription help.
By 2014, families will receive tax breaks to help cover healthcare premiums. The amount will depend on household income.
Six months from now, insurers must provide some specific preventive healthcare (such as immunizations) for infants, children and teens with no cost to the insured.
* Based upon House changes to the bill, which must still be approved by the Senate.
Quick Healthcare Facts
The Bill Aims to Cover 32 Million People.
That’s the combined populations of Alabama, Colorado, Illinois, New Mexico and Wisconsin, according to the Census Bureau.
Healthcare Spending = 16% of the U.S. Total GDP.
That’s $8,000 per person ($2.5 trillion), according to the Organisation for Economic Co-Operation and Development.
Medical Bills Are a Main Reason Behind Most Bankruptcy Filings
A 2009 Harvard study published in the American Journal of Medicine found that 60% of filers cited heath problems/medical bills as the main reason they filed bankruptcy.
Check Out These Illustrations of Medical Bankruptcy:
In order to get enough votes to pass this bill last night, the House had to make certain changes to the bill and create a reconciliation bill. The Senate still has to vote on this reconciliation bill, so there may be some bill tweaking.
Stay tuned to Total Bankruptcy for more healthcare and medical bankruptcy news.
What Do You Think: Is the Healthcare Bill a Good Deal for Americans?
Tired of politicians and reporters telling you what’s best for you? Post a comment and share your thoughts.
Sources:
Organisation for Economic Co-Operation and Development
The U.S. Census Bureau, U.S. Population Projections
TheWhiteHouse.Gov: Health Reform by the Numbers.
Harvard Study: The American Journal of Medicine, August 2009 issue
BBC News: Obama Healthcare Reforms May Pay Off for Drug Firms, March 22, 2010
Reuters U.S. Edition: Factbox: Winners, losers in House Healthcare Bill, March 22, 2010
Associated Press: House Sends Health Care Overhaul Bill to Obama, March 22, 2010
CNN Health: How the Health Care Bill Could Affect You, March 22, 2010
The Christian Science Monitor: Health Care Reform Bill 101: What Does it Mean for Kids and Families? March 22, 2010.
This weekend, the U.S. House of Representatives passed a healthcare bill that could lead to substantial changes in the nation’s healthcare system. In an email to supporters sent Sunday evening (via Organizing for America), President Obama noted that the new regulations could prevent "families and businesses from plunging into bankruptcy."
So how is healthcare reform linked to personal bankruptcy filings?
The Tipping Point
Many Americans who file for bankruptcy don’t decide to do so over night; for many, it’s a drawn out and even painful process. Often, people wait until they have no choice but to file for bankruptcy, meaning that their savings and retirement funds are depleted and they have few other options.
Consider this:
In 2001, a study found that medical costs contributed to 42.6 percent of all bankruptcy filings in the U.S.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the requirements for those wishing to file for bankruptcy.
In 2007, a new study showed the number of "medical bankruptcies" rose to a startling 62.1 percent.
Understanding "Medical Bankruptcy"
High medical bills alone may not force otherwise financially healthy individuals to file for bankruptcy. But, as the 2007 study points out, medical problems and expenses can harm individuals and families in a number of ways:
Income loss: Injuries and illnesses that cause people to take significant time off work often mean significant pay loss as well, which can lead to unpaid bills of all stripes.
High bills: The 2007 study indicates that, of those who were pushed into bankruptcy for medical reasons, a whopping 92 percent had bills that totaled more than $5,000 or 10 percent of their family’s pretax income.
Loss of safety net: Even those who have enough money to cover medical bills are at risk: expensive procedures that drain savings accounts can set you up for financial disaster if any other financial roadblocks spring up.
Limited future: Some injuries and illnesses leave permanent damage and can affect a person’s ability to find and keep work in the future, meaning that options for getting out of debt can be severely limited.
As the Obama Administration has pointed out, the introduction of more comprehensive healthcare coverage could eliminate or correct many of the problems currently linking medical expenses to bankruptcy filing.
To better understand how the healthcare reform might affect you and your family, check out this post.
Debt management companies can offer an excellent service for large amounts of out of control debt. If you are having difficulties keeping up with any repayments, then do seek advice from a debt counsellor. They are professionals and know how the creditors work.
If you have your debt management plan accepted, a singular monthly payment is made to the debt management company, who in turn pay your respective creditors with monthly payments.
The monthly payments that the debt management company pays to the creditors, is negotiated on your behalf by the debt management counsellor. Negotiations are all to do with the amount of debt you are in, amounts you can afford and the term you have left. Most creditors have different policies for handling situations like this. Depending on the creditors terms and conditions and the counsellors negotiation skills, some credit agencies reduce and even freeze interest rates for the term of your loan, some companies extend the term interest free with a lower monthly payment. It really does depend on the creditors and there policies as to what deal you will receive.
A debt management programme can take a long time to clear any outstanding debt. However programs like this are often an excellent solution. Your debt is handled by professionals, this relives the stress of debt and gives you piece of mind knowing you have a professional taking care over your debt.
There are a couple of things you need to be wary of. Some debt management companies require a monthly fee which can be quite costly. Others require a one off start up fee. It is best to look into debt management company’s policies before committing to a debt management plan. Charity based companies are usually the best http://www.cccs.co.uk offer a service for free. CCCS only use the interest from your monthly payment to your creditors as payment.
Bankruptcy
When an individual is deemed bankrupt, it means the individual has become insolvent. Personal insolvencies in England and Wales are dealt with usually under the Insolvency Act 1986. When the court is satisfied that there is absolutely no hope of the debt being paid, a bankruptcy order is issued on the petition of the debtor (which is you) or one or more of your creditors who are owed £750 or more.
The official receiver investigates the financial affairs of the debtor for the period before bankruptcy and is appointed to act as trustee from the date of the bankruptcy order until a trustee takes control.
Bankruptcy is by no means the best way of dealing with your debts. When an individual becomes bankrupt there are severe restrictions placed against a bankrupt person, for instance:
• Acting as a director of a company, starting, managing or promoting a company without the consent of the court’s
• Continuing to run a business in a different name from that for which the bankruptcy was made without informing all associates doing business with you
• Obtaining credit of £250 or more without disclosing to the creditor, your bankruptcy
Upon bankruptcy all banks will be informed of your insolvency, bank accounts will be closed, all future assets lost, and all hire purchase items will be returned. In effect you will be left with nothing but the home you live in. However you will be debt free. Only as a last resort should you opt for bankruptcy. The ability to obtain a new bank account or any future credit will be considerably harder to achieve for a term of around 7 years.
Individual Voluntary Arrangements (IVA)
An Individual Voluntary Arrangement (IVA) is a legal process for UK residents with major debt problems. An IVA can be arranged with the help of professional insolvency practitioners.
An IVA can be effective at curing debt problems without many of the negative aspects that can be produced by bankruptcy. An IVA is an especially viable solution for those with equity to protect.
Depending on your circumstances, IVA’s can write off a high percentage of your debt. If you keep up the arranged monthly payments, you can be debt free in as little as five years.
You the client agree to the details of an IVA with your creditors at a creditors’ meeting. A 75% majority vote, in favour of an IVA is needed for an agreement.
With an IVA you can avoid any legal actions, freeze all interest charges, remove CCJ’s and design a programme of manageable monthly payments based around what you can afford.
You also avoid the penalties associated with bankruptcy as mention earlier:
• Acting as a director of a company, starting, managing or promoting a company without the consent of the court’s
• Continuing to run a business in a different name from that for which the bankruptcy was made without informing all associates doing business with you
• Obtaining credit of £250 or more without disclosing to the creditor, your bankruptcy
However, IVAs are usually only suitable for those with unsecured debts of at least £20,000.
Although an IVA protects you from the stigma of bankruptcy, where all details are advertised publicly. If your application for IVA fails, you could still be made bankrupt. You will also be charged for the cost of the IVA; however this would be added to the debts.
