Debtor in Possession Financing and Chapter 11 Exit Financing

Exit Financing

“Exit financing” is a term used to describe new credit extended to a debtor-in-possession that allows it to fund its chapter 11 plan and exit its bankruptcy case. Thus, while a debtor must typically file a motion to enter into an agreement outside of the ordinary course of business (see 11 U.S.C. § 363(b)), the “exit” is made via the chapter 11 plan confirmation process. The real challenge then, would remain plan confirmation (and meeting the 16 requirements of 11 U.S.C. § 1129(a)).

Debtor in Possession Financing

A debtor-in-possession (“DIP”) in a chapter 11 case can also seek to obtain financing prior to plan confirmation. DIP financing is governed by 11 U.S.C. § 364. Section 364(a) allows a debtor in possession to obtain unsecured credit in the ordinary course of business (e.g., a DIP that has NET30 terms with a vendor can continue to order inventory from that vendor without first seeking court approval). Section 364(b) deals with unsecured credit outside the ordinary course of business–that requires the approval of a bankruptcy court, on notice and with a hearing but entitles the creditor extending credit to administrative priority status for repayment of its loan pursuant to 11 U.S.C. § 503(b)(1). Subsections (c) and (d) of section 364 deal with post-petition, secured debt. Subsection (c) addresses circumstances in which a DIP cannot get obtain credit on an unsecured basis. With court approval after notice and a hearing, a DIP can use one more more of the following tools to improve the position of its prospective lender: (i) a priority position over some or all administrative expense claims; (ii) a security interest in unencumbered assets of the DIP; and (iii) a junior lien on already encumbered, assets of the DIP. The Order granting authorization to enter into a loan agreement under 364(c) should explicitly address which of the incentives the lender is to be granted (and which if any administrative claims are subordinate to the lender). Subsection (d) allows a DIP to go even further to obtain financing and to prime the rights of existing lien holders notwithstanding protections those prepetition lenders might have in their loan documents. However, the ability to prime an existing lien is an extraordinary remedy. The DIP must show, not only that it would be otherwise unable to obtain credit, but also that it is providing adequate protection to the affected, subordinated lien holders. A DIP can adequately protected a primed lender by providing it with a replacement lien on other unencumbered property. However, when the effect of the DIP financing is merely to shift the risk of being unsecured or undersecured to the prepetition lender from the DIP lender, the court should deny the request for DIP financing. 3 Collier on Bankruptcy ¶ 364.05 (16th ed. 2013) citing In re Mosello, 195 B.R. 277, 293 (Bankr. S.D.N.Y. 1996). The burden of proving adequate protection of the affected lien holder is on the DIP. Id. In the end, DIP financing can be a very potent tool but it is vulnerable to many of the same challenges that a DIP proposing a chapter 11 plan that crams down on the rights of prepetition secured creditors (compare “adequate protection” required under section 364 to “realization… of the indubitable equivalent” in 1129(b)(2)(A)(iii) required to cramdown a plan over the objection of a secured creditor).

Bankruptcy Reaffirmation Agreement

What Exactly is a Reaffirmation Agreement?

A reaffirmation agreement is an agreement between a debtor in a bankruptcy case and a creditor through which the debtor agrees to continue to remain liable for the underlying debt and the creditor agrees to honor the terms of the agreement.  Typically these kinds of agreements only in exist the case of secured obligations (think car payments and mortgages).

When Does it Make Sense for a Debtor to Reaffirm a Debt?

The decision on whether to reaffirm a debt should not be taken lightly.  To start with, if a debtor doesn’t want to keep the property to which the debt is tied the answer is simple–don’t reaffirm the debt.  Instead, simply allow the creditor to take the asset back and have the debt discharged.

If you want to keep the asset, the question becomes a little more difficult.  In the case of an automobile loan, generally, if you have made your payments on time and you continue to make timely payments, you’re going to be able to keep the vehicle irrespective of whether you enter into an agreement reaffirming the car loan.  The difference is that if you reaffirm the debt and subsequently default on the loan, the lender can seek to collect a money judgment from you personally; if you do not reaffirm the debt but stop making the payments after the debt is discharged and your bankruptcy case is closed, the creditor’s only remedy is to repossess the vehicle.  For this reason, debtors’ lawyers and bankruptcy judges are apprehensive about allowing debtors to enter into reaffirmation agreements unless those agreements incorporate new terms, more favorable to the debtor (e.g., lower interest rate or reduction of the principal balance of the loan).

How Should a Debtor in A Bankruptcy Case Decide Whether to Reaffirm a Debt?

Because every situation is unique, debtors should have a serious conversation with their bankruptcy lawyers to determine whether it makes sense for them to reaffirm a debt.  Creditors nearly always want debtors to reaffirm their debts.  Debtors need to understand that by reaffirming a debt, they are giving up a signficant bankruptcy benefit–the discharge of their obligation to pay that debt.  For that reason, talking to a Pittsburgh bankruptcy attorney is the most prudent course of action.


Robleto Law – Free Consultation

(412) 925-8194

File Bankruptcy and Still Keep Your Car

Bankruptcy Lawyers in Pittsburgh

tend to hear the same question very often:  “Can I keep my car if I file a bankruptcy case?”  Typically, the answer is yes.  If you have $10,000 in credit card debt and you own a Ferrari, free and clear, the analysis changes but, in most cases, keeping the vehicle is possible.

Keeping a Vehicle in a Chapter 7 Bankruptcy Case

In Chapter 7, or “liquidation bankruptcy,” a debtor can typically keep at least one vehicle.  While exemptions vary by state, the Federal Exemptions, which are available to debtors in Pennsylvania, allow debtors to exempt up to $3,450 of their interest in a motor vehicle (spouses filing together each get their own exemption).  If you owe a loan on your vehicle, your “interest” in the vehicle is its value in excess of the amount you still owe.  For example, if you owe $7,000 on a vehicle that is worth $10,000, your “interest” in the vehicle is $3,000 which would make it fully exemptible under the vehicle exemption.  If your interest in your car is worth more than $3,450, you can also apply a “wildcard” exemption to cover the difference.  The wildcard exemption can be applied to any interest in property.  The value of the wildcard exemption varies from $1,150 to $11,975, depending on how much of the “homestead exemption” debtors need to use to protect their interest in their homes.

A rule of thumb is that, if you want to keep the car in bankruptcy, you have to keep the car payment current.  That rule is subject to some exceptions and variations.  If you’re badly behind on your payment, you can use a Chapter 13 bankruptcy case to pay the arrearages over time.  Interestingly, if you owe more on your car than it is worth, you can compel your lender to accept on the value of the vehicle.   There are some important limitations to this process, so you should talk to a bankruptcy lawyer in Pittsburgh to determine whether that process might make sense for you.

Keeping a Vehicle in a Chapter 13 Bankruptcy Case

Keeping a car in a Chapter 13, or “reorganization bankruptcy” follows the same set of rules that apply in a Chapter 7 bankruptcy case except that, under Chapter 13, debtors repay their creditors some or all of what they owe them over a period of three to five years.  Under Chapter 13, the exemption thresholds become less important to the “keeping the car in bankruptcy” inquiry.  Your car payment will be paid through your Chapter 13 plan.  The exemptions are not irrelevant in a Chapter 13 case.  The reason for this is what’s known as the bankruptcy liquidation analysis.  Generally, the rule for Chapter 13 cases is that, debtors must pay creditors at least as much as they would receive in a case under Chapter 7 if the debtors’ assets were liquidated.  This requires bankruptcy lawyers to imagine what would happen in a hypothetical Chapter 7 case.  If the vehicle is fully exempt, then there would be no sale proceeds available to pay unsecured creditors.  However, if a debtor owns a $100,000 Ferrari with no car payment and has $10,000 in credit card debt, that debtor would need to pay the credit card debt in full through the Chapter 13 plan.

In practice, the most common reason for filing a Chapter 13 case is to protect a house from foreclosure.  Generally, the arrearages are repaid over the plan period and the car is exempted just as it would be in a case under Chapter 7.  If the debtor has a car payment, that debtor would be required to continue making that payment over the life of the plan.

Contact a Pittsburgh Bankruptcy Law Firm today to answer your questions during a free initial consultation:  (412) 925-8194


Chapter 11 Protection for Game Maker, Atari


Chapter 11 for Historic Game Maker

Atari Interactive, Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on January 21, 2013 in the United States Bankruptcy Court for the Southern District of New York.  In 2000, the iconic game developer came under the wing of French video game concern, Infogrames–which later adopted the more familiar name of its subsidiary to become known as Atari, S.A.

However, Atari, S.A. has become financially distressed.  In fact, over the last year, its stock has given back almost half of its value.  Weeks ago, the French company’s situation worsened when its secured lender shut off its access to cash.  The early indications are that Atari, S.A. will seek to sell its American subsidiary, either through a sale under section 363 of the Bankruptcy Code or through a Chapter 11 Plan.  For a generation of gamers and technophiles, the Atari brand is recognized–not just for its kitschy, “can people ever actually played Centipede” value–but also as having provided considerable contributions to the evolution of modern entertainment.  Thus, in addition to the value of its intellectual property and its value as an enterprise, Atari also has considerable good will.  That mix should serve to generate some interest at the time of sale.

Atari is represented by Hunton & Williams, LLP and its bankruptcy case is docketed at 13-10176.


Robleto Law, PLLC  (412) 925-8194

Bankruptcy Lawyer – Finding the Right Fit

Bankruptcy Lawyer Needed to Assist Honest Debtor in Handling Debt.

A consumer in Pittsburgh might take out that advertisement in the Pittsburgh Post Gazette and interview a dozen bankruptcy attorneys (if they had the time and were willing to pay for the ad).  Those interviews–while time consuming–would tell our hypothetical consumer a lot about bankruptcy attorneys in Pittsburgh.  The debtor would soon learn that some lawyers really seem to understand bankruptcy law well.  Beyond that, some lawyers are better able to explain the bankruptcy process to their clients than others.  The ability to clearly explain bankruptcy issues can be especially important in complex area of the law.  Understanding the means test, bankruptcy exemptions, chapters of bankruptcy and the meeting of creditors is essential.  Additionally, knowing how medical debt, credit card debt and student loans will be treated in a bankruptcy case is important.  A debtor should know what debts will be discharged before the bankruptcy case is ever filed.

Lawyers with an office in Downtown Pittsburgh will very often offer a free initial consultation.  While it probably does not make sense to interview a dozen bankruptcy lawyers, taking advantage of a free meeting with a bankruptcy lawyer just makes sense.  Make a list of your questions before you go into that meeting.  Make sure that you’re comfortable with the lawyer–both as a person and in terms of legal competence. If you’re not comfortable after your interview, move on.

The choice to file bankruptcy is a major decision.  Having the right bankruptcy lawyer can make a world of difference.

Call (412) 925-8194 for your free consultation with a bankruptcy lawyer.

Bankruptcy Don’t Let Your Debts Push You Over a Fiscal Cliff

After months of inertia, a lame duck session of Congress passed a bill through the Senate and the House to avert our country from falling over the “Fiscal Cliff.”  Similarly, consumer debtors often wait until after the holidays to address their credit card, medical and other unsecured debt obligations.  In many cases, the consequences for individuals can feel every bit as drastic as perils posed by the so-called fiscal cliff.  Law suits, judgement liens, repossessions and foreclosures are serious business.  An experienced bankruptcy lawyer can help.

Chapter 7 bankruptcy can provide many people suffering under the weight of their debt obligations.  Often called “liquidation,” or “straight” bankruptcy, it is the simplest form of bankruptcy protection provided for under the United States Bankruptcy Code.  For many individuals, the process results in a discharge of most or all of their debts without having to enter into any difficult repayment plan.

Chapter 13 bankruptcy is available to individuals with a regular source of income who wish to repay some or all of their debts over a three to five year period.  For people attempting to stave off the foreclosure of their homes, this individual reorganization bankruptcy offers a way to repay significant arrearages over the life of a Chapter 13 plan.  As long as a Chapter 13 debtor continues to pay under a confirmed plan of reorganization, creditors must accept the payments provided for in that plan and cannot resort to foreclosure or repossession.  Chapter 13 is a powerful and important tool for consumer debtors.

With the holiday season behind us, it is imperative to face the new year with a clear vision for your financial future.  If a fresh start through bankruptcy makes sense, seek out a free initial consultation with an experienced bankruptcy professional.

Call (412) 925-8194 now.

Appointment of a Chapter 11 Trustee in a Business Bankruptcy Case

Business Continues OperationsThe Debtor in Possession

Business bankruptcy cases under Chapter 11 of the United States Bankruptcy Code generally give rise to a new entity known as a “debtor in possession.”  Under section 1108 of the Bankruptcy Code, the debtor in possession continues to operate the business.  While there are constraints upon how the debtor in possession must operate the business while remains in a Chapter 11 bankruptcy case, the norm is the business keeps its leadership intact to guide it through the reorganization process.  The policy of allowing the debtor in possession to continue the day to day operations of the business is usually very sound.  The management of the business typically understands the company better than any outsider does and, very often, has a strong incentive to restore the enterprise to profitability (if only to retain employment).

However, if the case is converted to a case under Chapter 7 of the Bankruptcy Code, the debtor in possession ceases to exist and a Chapter 7 trustee is appointed to oversee the liquidation of the business.  Sometimes an independent trustee is appointed to oversee the business affairs of a debtor with a strong prospect of reorganization.

Appointment of a Chapter 11 Trustee

For Cause Appointment of a Chapter 11 Trustee

Section 1104(a) of the United States Bankruptcy Code provides that any time between the filing of the bankruptcy case and before confirmation of a Chapter 11 plan, a court is empowered to appoint a Chapter 11 trustee.  The United States Trustee or a party in interest may request the appointment of a Chapter 11 trustee for cause.  Cause includes “fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtor by current management.”  The “for cause” appointment of a Chapter 11 trustee makes sense for the  same reason that it makes sense to retain existing management:  to maximize the debtor’s opportunity to effectively reorganize.  If the debtor’s management has demonstrated that it is not competent the manage the affairs of the debtor, than that debtor and its creditors are better served by replacing that management.

Nevertheless, the cases are clear that the appointment of a Chapter 11 trustee is an exception.  The debtor’s existing management is entitled to deference.  Furthermore, even if the appointment of a trustee would put the debtor in better hands, that might not mean that it would make the debtor better off.  If a court orders, a Chapter 11 trustee may be elected during a meeting of the debtor’s creditors.  The new trustee must learn enough about the business of the debtor to oversee its operations.  Also, the Chapter 11 trustee will typically be compensated from the debtor’s estate.

Appointment of a Chapter 11 Trustee Based on the Best Interests of Creditors or Interest Holders

The Bankruptcy Code also permits the appointment of a Chapter 11 trustee when that appointment is in the best interests of the creditors, equity security holders or other interests of the debtor’s estate.  This “best interests” appointment of a Chapter 11 trustee does not require a finding of negligence or wrongdoing on the part of the debtor’s existing management.  Whether a court appoints a Chapter 11 trustee under this test turns only on an analysis of the interests of those creditors.  However, because a business is typically best served by its experienced, pre-bankruptcy management, it is not typically in the best interests of interest holders to appoint a Chapter 11 trustee.

Appointment of a Chapter 11 Trustee When Grounds Exist to Convert or Dismiss the Bankruptcy Case

Additionally, a court can appoint a Chapter 11 Trustee when there are grounds to convert or dismiss a bankruptcy case but, conversion or dismissal of the case is not in the best interests of the creditors or the estate.  A case may be converted to a case under Chapter 7 or dismissed for a number of reasons including but not limited to failure to pay certain fees, failure to attend a meeting of creditors, failure to timely provide information to the United States Trustee or failure to comply with an Order of Court.  After finding that cause exists to convert the case to a case under Chapter 7, pursuant to section 1112 of the Bankruptcy Code, a court could decide to appoint a trustee instead of converting the case.

Limitations on Right to Appeal Appointment of a Chapter 11 Trustee

Recent case law suggests that the rights of an ousted debtor in possession has limited ability to appeal the Order appointing a Chapter 11 trustee.  Once a Chapter 11 trustee is appointed, it manages the affairs of the debtor and exercises its rights and responsibilities as a debtor.  Thus, the right to appeal an Order appointing a Chapter 11 trustee belongs to the Chapter 11 trustee.  Nevertheless, an ousted debtor in possession has some recourse to appeal the adverse decision of a bankruptcy court.  However, it must timely appeal and move to stay the Order appointing the Chapter 11 Trustee pending appeal.

The appointment of a Chapter 11 trustee is strong medicine.  Whether you are a creditor who would like to see the management of a debtor displaced or a debtor in possession seeking to maintain control of your business, you should talk to your bankruptcy attorney regarding the appointment of a Chapter 11 trustee.

(412) 925-8194

Business Bankruptcy Lawyers Pittsburgh

Pittsburgh Business Bankruptcy Finding the Right Commercial Bankruptcy Law Firm Might Save Your Business

When Your Business is in Jeopardy, You Should Rely Upon the Vast Experience of an Extraordinary Pittsburgh Bankruptcy Law Firm


Pittsburgh Business Bankruptcy

Bankruptcy May Protect Your Business

Pittsburgh has a “no quit” approach to the world. Pittsburgh’s resilience is evident from its early days as powerhouse of American industry through its financial self-reinvention as a modern day center of innovation in medicine and technology. Unsurprisingly, our sports teams recognize that a game “ain’t over until it’s over” and the Pittsburgh Steelers, Pittsburgh Pirates and Pittsburgh Penguins are known for their many come from behind victories.  With that in mind, it should come as no surprise bankruptcy is an option of last resort for many Pittsburgh businesses.  Still, a strategic commercial bankruptcy can sometimes result in a stronger, more profitable business enterprise going forward.  A business bankruptcy case does not carry the same stigma as a consumer bankruptcy case.  Sophisticated business people understand that entrepreneurs often undertake considerable risk in their business ventures.  Business risk involves the inherent potential for both profit and for loss.  When the debts of a business become so excessive that they threaten the ability of that business to continue as a going concern, a business bankruptcy case could offer a way back to solvency.

“A strategic commercial bankruptcy can sometimes result in a stronger, more profitable business enterprise going forward.”

First, consider the affect that a bankruptcy case might have on your business in terms of reputation within your industry.  Certain types of businesses suffer from the mere fact of having filed a bankruptcy case.  If you think your customer base would be substantially diminished as a consequence of filing a bankruptcy case, you should weigh that against the benefits you expect from filing a bankruptcy case (a temporary 20% loss of revenue may be tolerable if it eliminates a large chunk of debt).  Second, talk to your bankruptcy attorney about the benefits your company could see as a result of filing a bankruptcy case.  Your bankruptcy attorney should identify issues that are likely to arise in your particular case.  If your business has aggressive creditors, your bankruptcy lawyer should be able to anticipate the strategy those creditors will take in the bankruptcy case.

What Type of Business Bankruptcy Makes Sense for Your Business?

There is more than one type of commercial bankruptcy.  If you expect to continue operating your business after filing your bankruptcy, you will most likely file a Chapter 11 bankruptcy case.  Under Chapter 11 of the United States Bankruptcy Code, you will retain operational control over your business as a “debtor in possession.”  You will be able to conduct the day to day affairs of your business and to make transactions in the ordinary course of that business.  However, if you wish to undertake any transactions outside of the ordinary course of business (things like selling all of the assets of the business), your bankruptcy lawyer will need to seek the approval of the Bankruptcy Court.

Under Chapter 7 of the Bankruptcy Code, you will give up control of your business and turn over all accounts and records to a Chapter 7 Trustee who will liquidate the assets of the business for the benefit of its creditors and distribute proceeds according to the priorities set forth in the Bankruptcy Code.

Business Bankruptcy Exit Strategy

Before you file your business bankruptcy, you should know what your exit strategy will be.  In most successful business bankruptcy cases, the debtor files a plan of reorganization.  In order to become effective, the Bankruptcy Court must confirm the plan of reorganization and the bankruptcy disclosure statement describing it.  A plan may be approved by the creditors or confirmed over the objection of creditors through a process known as “cram down.”  To be confirmed, a plan must meet several tests, including that it must be fair and equitable, be in the best interest of creditors and meet all other requirements of the Bankruptcy Code.

Increase your chances of success by consulting with an experienced business bankruptcy lawyer in Pittsburgh today.

Medical Debt in Bankruptcy – Pittsburgh

A bankruptcy discharge typically eliminates medical debt from doctor bills, prescription costs and other costs arising from an injury, illness or disease. It does not matter how cautious your financial planing may be; a serious medical problem that is not covered by medical insurance can eliminate your savings and leave you insolvent.

Pittsburgh is fortunate to have excellent physician, specialist and hospital availability. However, our medical technology and professionals can be costly. If you find that health care debt has left you short on cash, it is time for you to talk to a Pittsburgh bankruptcy attorney about your options.

In a chapter 7 bankruptcy case, unpaid medical bills are almost always eliminated. In chapter 13 cases, where debtors enter into plans to repay some or all of their debts over a period of several years, medical debt may be paid in part through a plan with the remaining balance discharged at the conclusion of the plan.

Do not access your 401(k) or IRA to pay medical debt before talking to an experienced bankruptcy lawyer. In most cases, your retirement assets are entirely exempt in a bankruptcy case. That means that you can generally erase your medical bills without drawing down your retirement savings.

Do not enter into a repayment plan that you don’t believe will be feasible. Remember, as much as you may want to settle your debts, you will still need to pay your mortgage or rent, pay your utilities and purchase groceries, gasoline and other necessities. Before you commit to an unreasonable repayment plan, talk to an experienced debt lawyer to see whether some other strategy might produce a better result.

Most people do not want to file a bankruptcy case. For many who have conscientiously repaid their debts their entire lives, being faced with medical bills that they have no ability to repay can be frustrating. Many proud, honest but unfortunate people are resistant to the bankruptcy process. You do not need to face the challenge of medical debt alone. To discuss all of your options, call for a free consultation with an experienced debt lawyer today.

(412) 925-8194

How the Automatic Stay Works in Bankruptcy Case

The United States Bankruptcy Code provides for an automatic stay upon the filing of any bankruptcy petition. 11 U.S.C. § 362. The effect of the automatic stay is both immediate and broad. The stay halts law suits, stops sheriff sales and lien enforcement, attempts to garnish, repossess property or evict. With few exceptions, filing a bankruptcy case will halt any adverse legal action. In fact, section 362(k) of the Bankruptcy Code provides that debtors are entitled to damages for violations of the automatic stay and, when those violations are willful, a court can award punitive damages to the debtor.
In a Chapter 13 Bankruptcy case, a debtor might file a bankruptcy petition to prevent a sale and, under the provisions of Chapter 13, propose a plan to repay the mortgage arrears over a period of three to five years. In a Chapter 7 Bankruptcy case, the automatic stay could be used to prevent a judgment from getting entered against the debtor and, thereby avoid the fixing of a judgment lien on that debtor’s real estate. Also important to most debtors, the automatic stay prevents creditors from attempting to collect debts. This means that the harassing telephone calls from creditors and collection agencies will end.
From a logical perspective, the automatic stay must have broad application and be strictly enforced–otherwise the fresh start provided by a bankruptcy case would not exist, creditors would simply continue to attempt to collect upon their debts. The automatic stay provides debtors with breathing room.
How long does the automatic stay last? It ends when the debtor receives a discharge and the case closes but it can end sooner. A creditor can petition the bankruptcy court for relief from stay under section 362(d) of the Bankruptcy Code. Typically, an unpaid first mortgage creditor that will not be paid through a Chapter 13 plan will seek relief from stay to foreclose upon the debtor’s interest in the property subject to the mortgage. If a creditor is granted relief from stay, the stay is modified to the extent permitted by the Order of the Bankruptcy Court to allow that only that creditor to pursue its claims.
The automatic stay is one of the most important tools in the bankruptcy toolbox. To find out whether the automatic stay can help you protect your assets and interests in property, you should contact a Pittsburgh Bankruptcy Attorney for a free initial consultation.
(412) 925-8194