Bankruptcy v. Litigation: What You Need to Consider

Bankruptcy v. Litigation:…

Over the past several years, the number of bankruptcy filings has fluctuated substantially, peaking significantly in 2005 when the Bankruptcy Code was revised and again in 2010 with the recession. With the recovery of the economy, there has been a downward fluctuation in bankruptcy filings. Typically, we find that when bankruptcy filings are down, litigation in state or federal court is up. Despite this unpredictable cycle, even in the face of a trend of decreased bankruptcy filings, it remains a viable, and reasonable, alternative in certain instances. Whether you are a plaintiff or a defendant in any pending lawsuit, you need to understand the pros and cons of a possible bankruptcy filing, and how you may be impacted if one of the parties you are litigating against files for bankruptcy protection. Moreover, sometimes a party that you are litigating against may threaten a bankruptcy filing and you need to understand the strengths and weaknesses of their position so you can determine the real impact to your claims. This will prove useful in evaluating settlement alternatives and in subsequent litigation in bankruptcy court.

 

Here are just some of the issues to consider if you are the plaintiff seeking recovery against a defendant in a civil litigation case:

1) Will a judgment against the defendant be collectable, regardless of whether the defendant files for bankruptcy protection?

2) Is the individual truly a candidate for a Chapter 7 bankruptcy based on the statutory requirements or is the individual subject to claims by a Chapter 7 Trustee for preferences, fraudulent transfers and the like?

3) If the individual or corporation is a Chapter 11 candidate, what will happen to your claim? Is it a secured claim? Is it an unsecured claim?

4) What are the assets and cash flow of the corporation available to fund a Chapter11 case?

5) Have the officers or directors breached their fiduciary duty to the corporation or have the officers or directors caused what is known as “deepening insolvency” of the company?

 

What if you are a defendant considering bankruptcy alternatives instead of continuing with the litigation process?

1) Are you willing to disclose your financial situation even though it is not usually required in litigation prior to the plaintiff obtaining a judgment for damages against you?

2) If the defendant is an individual, will the financials show that the individual is not collectible, either because the assets the individual holds are exempt or no meaningful assets exist against which collection efforts would be successful?

3) Having said that, how long has the individual held the assets as exempt? Is this merely a wise financial plan or something that could be attacked?

4) If the defendant is a corporation, is the cost of filing a Chapter 11 and the drain on the business worth the benefit of forcing a restructuring plan against the plaintiff and the plaintiff’s claims?

 

What challenges may the defendant have in a Chapter 11, whether it be overcoming what is called the “absolute priority rule” or the ability to “cram down” a plan?

These are just some of the issues to consider. A full explanation of all of these issues is beyond the scope of what we can cover in this blog.

The below article addresses litigation in the foreclosure arena, specifically, whether the bank has the right to re-file a foreclosure case after one foreclosure case is dismissed and whether the bank is ever barred from re-filing a foreclosure case. When engaged in foreclosure litigation, it is very often necessary to understand the bankruptcy alternatives for the borrower and the strengths and weakness of such a position, as it is frequently used as leverage in a foreclosure case, and in negotiating possible deficiency claims, and it may actually be a reasonable alternative for some borrowers.

If you or your client need assistance in evaluating the alternatives in a pending lawsuit versus a bankruptcy filing or want to understand how you will be impacted should another party in your lawsuit file a bankruptcy case, please contact our firm to discuss these issues. Because no bankruptcy filing is the same, as each is dependent on the specific facts of the case, including the unique assets, debts, and income of the debtor, it is essential that you consult with a firm who can assist you with navigating the possible options.

 

The contents of this blog and website are for informational purposes only and do not constitute legal advice. Use of and access to this blog and website do not create an attorney-client relationship between the user and Iurillo Law Group, P.A.

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