Filing bankruptcy can help a person by discarding debt or making a plan to repay debts. A bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity. All bankruptcy cases are handled in federal courts under rules outlined in the U. Bankruptcy Code. There are different types of bankruptcies, which are usually referred to by their chapter in the U.
Bankruptcy Basics provides detailed information about filing. Seeking the advice of a qualified lawyer is strongly recommended because bankruptcy has long-term financial and legal consequences. Individuals can file bankruptcy without a lawyer, which is called filing pro se. Learn more. Use the forms that are numbered in the series to file bankruptcy for individuals or married couples.
Use the forms that are numbered in the series if you are preparing a bankruptcy on behalf of a nonindividual, such as a corporation, partnership, or limited liability company LLC. Sole proprietors must use the forms that are numbered in the series. In this article, we will examine the basic mechanics of credit bidding and potential challenges that a secured creditor may face in achieving a successful credit bid.
Section k does not apply to unsecured claims. Only a creditor holding an allowed claim secured by a valid, perfected lien can credit bid for its collateral. A holder of an undisputed secured claim may credit bid if its claim is deemed allowed under Section of the Bankruptcy Code. A claim is deemed allowed if proof of such claim has been filed and there is no pending objection to such proof of claim or if the debtor listed the claim in the schedules filed with the Bankruptcy Court as non-contingent, undisputed and liquidated.
If there is a bona fide dispute as to the validity, extent or priority of the secured creditor's lien or the amount of its allowed claim, the Bankruptcy Court may condition the creditor's ability to credit bid on the creditor's agreement to pay the purchase price in cash if the claim is ultimately disallowed. Credit bids can be applied only to the secured creditor's collateral, which raises issues when a secured creditor wants to credit bid for a basket of assets that consists both of its collateral and other property.
These other assets may include property encumbered by senior liens of other creditors, property of non-debtor subsidiaries or assets that cannot be attached by liens, such as government licenses. In such circumstances, the credit bidder may be able to allocate value between its collateral and the assets not subject to its lien, and provide separate consideration in addition to the credit bid for the assets that are not subject to the bidder's lien.
Allocating value to specific assets can be challenging. Although there was a divergence of opinion whether only the secured portion based on the value of the collateral or the full amount of the claim can be credit bid, the prevailing view today is that a secured creditor can credit bid up to the full face amount of its claim.
A creditor who credit bids its secured claim at a sale under Section k can also include in its bid interest and costs to the extent permitted under the governing loan documents. First lien lenders can credit bid their debt on the assets subject to their first lien. Second lien or junior lenders can also credit bid their debt, as long as they pay in cash the full amount of the claims of lenders in front of them first including interest and fees under applicable loan documents.
Section k of the Bankruptcy Code provides that the court can deny a credit bid for cause. The term "cause" is not defined in Section , but it is intended to be a flexible concept enabling a court to fashion an appropriate remedy on a case-by-case basis.
Further, the language of Section k does not prohibit a bankruptcy court from placing conditions upon a secured creditor's ability to credit bid. Typically, "cause" to deny a credit bid may be found where i there is a bona fide dispute as to the extent, validity or priority of the creditor's lien in the property for which it seeks to credit bid; ii there is a bona fide dispute as to the allowed amount of the creditor's claim; iii when determining the status of a creditor's security interest or lien in the property would substantially extend the sale process and diminish the value of the property being sold; or iv where the secured creditor fails to follow the bidding procedures established by the Bankruptcy Court.
Frequently, unsecured creditors who, as a result of the credit bid would not receive any recovery, attempt to foil the credit bid by challenging the validity or priority of the secured creditor's lien. Some courts have criticized credit bidding by dominant creditors as unfair and likely to chill other bidding because a dominant creditor can submit a credit bid over and above the reasonable value of the assets.
If a pure credit bid, without any other consideration, is successful, then the bankruptcy estate receives no money for the assets sold, making it difficult or impossible for administrative expenses incurred during the bankruptcy case and other priority claims to be paid. If a sale based on a credit bid is likely to leave the debtor administratively insolvent, the Bankruptcy Court may be inclined not to approve the sale based on a credit bid without any cash component necessary to maintain the estate solvent.
Some courts have held that the Bankruptcy Code does not afford a secured creditor an absolute right to credit bid when the sale of the debtor's assets is part of a plan of reorganization as opposed to a stand-alone Section sale. In those instances, to protect their collateral from being sold at depressed value, holders of secured debt still have the ability to bid in cash for their collateral at an auction, with the expectation that they will receive most of the cash used in the bid back on account of their allowed secured claims.
In a simple credit bid scenario a single lender holds both the claim and the lien securing the claim. In syndicated loan transactions, each member of the syndicate holds a separate claim against the debtor, but the lien securing those claims is usually held by a collateral or administrative agent for the benefit of all members of the syndicate.