Bankruptcy - An Overview of the Process and the Bankruptcy Court's Authority

[Editor’s Note: Given recent developments, the NGFA is providing this information to members concerning the bankruptcy process and the authority of the bankruptcy court to restructure existing contractual arrangements between companies filing for bankruptcy and their suppliers. The bankruptcy process is highly complex, involving an extensive body of detailed laws, rules and procedures. This general information does not represent legal advice or NGFA’s views on any pending or future bankruptcy matter. Those individuals or companies involved (or potentially becoming involved) in a bankruptcy case should consult competent legal counsel.] The Bankruptcy Code, which has been amended several times since its enactment in 1978, is the uniform federal law that governs all bankruptcy cases. The bankruptcy process established under this code is governed by uniform federal rules and the local rules of each bankruptcy court. There is a federal bankruptcy court for each of the 90 federal judicial districts in the United States, with each state having one or more districts. The bankruptcy judge has ultimate discretion and decisionmaking power over bankruptcy cases. The bankruptcy judge may decide any matter connected with a case, including whether a debtor is eligible to file for bankruptcy. Importantly, the judge also has authority to decide which debts and obligations of a company found eligible for bankruptcy are to be honored, and which are to be discharged (dismissed or modified). Often, the attorneys for the company filing for bankruptcy will make specific requests to the bankruptcy court as to which, if any, contracts to honor. Much of the bankruptcy process is administrative, and is conducted away from the courthouse. In certain cases, this administrative process is implemented by a trustee appointed to oversee the case. Depending upon the type of bankruptcy case, the trustee may be a private individual or corporation whose responsibilities include reviewing the debtor’s petition and schedules, liquating the estate property, making distributions to creditors and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. Often, the only formal proceeding at which the interested parties appear is the meeting of the creditors – informally called a “341 meeting” – during which creditors can question the debtor about debts and property.