The Standard in Bankruptcy Management

Factors that Effect Pricing

Type of Bankruptcy Cases

Chapter 13

Chapter 13 permits wage earners a period of time – typically three, but not more than five years – to repay their creditors according to a court supervised repayment plan. The plan, which must be approved by the court, is funded by the Debtors’ future disposable income and administered by the trustee who is charged with disbursing money to the Debtors’ creditors. While payment distributions to creditors can range between 0% and 100% of what they are owed, dividends typically are only a fraction of the debt. After the Debtors make their final payment under the plan, the court enters an order discharging them of any future obligation to those creditors.

Chapter 11

Chapter 11, by and large, facilitates the reorganization of business entities that may be publicly traded or have a large number of employees. Individuals, however, who have complex financial affairs or have a relatively large number of creditors and high amount debt, are eligible for relief under Chapter 11.

Chapter 7

Chapter 7 is the most common type of bankruptcy case and is often referred to as straight bankruptcy, or more precisely, “liquidation.” The overwhelming majority of Chapter 7 cases are judged to be “no asset cases,” meaning, those Debtors do not have enough unprotected property to satisfy the debt owed to their creditors and, as such, are discharged – or relieved – from having to repay most of their pre-bankruptcy, unsecured creditors. Whereas, cases in which Debtors have enough unprotected assets, the trustee will exercise his or her power to collect, sell or liquidate Debtor property and distribute the proceeds to the Debtors' creditors. Since asset cases are numerically rare, unsecured creditors seldom receive any payment distribution.


Status of Bankruptcy Case

Active

Once a Debtor commences a bankruptcy case under any chapter, the case is considered active, namely, that an order for relief has been entered, and most importantly, the Automatic Stay is protecting the Debtor and exposing creditors to a new level of legal liability. A case remains Active and the Automatic Stay enforceable until such time the court otherwise orders.

Discharged

A Discharge order relieving the Debtor from having to repay certain debts owed to its creditors is a primary objective of a petitioner. A Discharge order permanently prohibits creditors from taking any action by mail, telephone or otherwise to collect the discharged debt. While the scope of the Discharge is broad and the penalties for violating it are punitive, it does have a few narrow, but important, limitations. Non-filing co-borrowers and specific types of debt (such as most taxes, domestic support obligations, student loans and criminal fines) are usually not subject to the discharge.

Dismissed

An order Dismissing an Active bankruptcy case lifts the protection afforded to the Debtor – such as the Automatic Stay – and, at the same time, permits creditors to resume collection activity as if the bankruptcy case was never filed. Discharge orders are typically never entered in a Dismissed case.

Unconfirmed

In the consumer bankruptcy context, unconfirmed characterizes the status of a Debtor’s Chapter 13 bankruptcy repayment plan before such time a court approves – or “confirms” – its terms. Until the plan is confirmed, the treatment of a particular creditor’s claim is uncertain. Debtors may default or amend, creditors may object and the trustee may oppose confirmation.


Secured Account vs. Unsecured Account

Secured Account

In addition to the Debtor's promise to repay, a creditor may take an interest, called a security interest, in property owned by a Debtor as security for repayment of the account. The property securing such an account – typically real property, fixtures (U.C.C. filings), automobiles, household goods or jewelry – is called collateral. In the event a Debtor defaults, a creditor could reclaim its collateral, sell it and apply the proceeds to the outstanding balance. When a Debtor is in an Active bankruptcy case, a creditor’s right to exercise its security interest in a Secured Account is restricted and, in some cases, modified. Secured Accounts may have a higher value than Unsecured Accounts depending on the collateral value and the Debtor's intention with regard to such collateral.

Unsecured Account

An Unsecured Account is a monetary obligation not secured by collateral. Unsecured Accounts, typically credit cards and signature loans, receive the least favorable treatment in bankruptcy. Chapter 7 operates to quickly and completely Discharge a Debtor from ever having to pay a creditor on an Unsecured Account. Creditors holding Unsecured Accounts in Chapter 13 cases where a proof of claim is timely and properly filed may participate in distributions, if any, from the trustee. Distributions on Unsecured Accounts are typically non-priority and made subsequent to other creditors. When and if such payments do begin on Unsecured Accounts, the lender is paid a fraction of what is actually owed.


Proof of Claim Filed

Proof of Claim filed at court

A Proof of Claim is a form filed with the bankruptcy court evidencing a creditor's right to payment. The process, procedure and deadline to file a Proof of Claim vary from one bankruptcy district to another. If a Proof of Claim is not timely and properly filed, that creditor forfeits their right to payment in the bankruptcy case and, upon discharge, the debt may be extinguished.


Age of the Bankruptcy Case

The more money expected to be paid on a creditor's claim, the more valuable it is. The anticipated distributions from a bankruptcy case and the timing thereof depend on many factors including the class of claim and the age of each case. Certain types of claims – Unsecured Accounts, Secured Accounts, attorneys’ fees, domestic support obligations, etc – are earmarked for payment concurrently with or sequentially before other claims. While the Bankruptcy Code outlines the general order of claim payments, the distribution policies adopted by individual Chapter 13 trustees will influence the timing and amount of claim payments.


Type of Offer

As-Is

An "As-Is" sale of accounts is where the seller offers limited or no representation as to the condition of the accounts. Without qualification of the accounts, the purchaser must assume additional risk. An “As-Is” sale will generally trade at a discount to the purchase of qualified accounts.

Reps and Warranties

This describes the sale of accounts where the seller warrants that the accounts conform to certain criteria. The warranty of qualified accounts renders a higher sale price. Warranty contracts commonly have Put-Back provisions whereby the seller agrees to replace or refund non-conforming accounts post closing.


Availability of Media

Various types of loan products are originated with various types of media evidencing the indebtedness. The more documentation available that supports a creditor's right to receive payment on an account, the more valuable the claim is.


Geographic Location of Debt

Local

Accounts concentrated in a certain city or state. Since bankruptcy jurisdictions vary on the average amount paid to unsecured creditors, there is a higher concentration of risk associated with a geographically concentrated portfolio.

Regional

Accounts located in only a few states or a section of the country. Similar to local portfolios, the concentration of risk can sometimes have a positive or negative impact on the price.

National

Accounts spread across the country located in multiple states and not adversely selected. This diversification normally has a positive effect on a purchase price.

 


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