An Introduction to Corporate Insolvency Law in the USA

Corporate Insolvency law in the United States is primarily governed by federal law because Article 1, Section 8 of the United States Constitution gives Congress the authority to enact "uniform Laws on the subject of Bankruptcies." This is true even though individual states in the United States have laws that regulate the relationship between debtors and their creditors. The US bankruptcy system is now outlined in Title 11 of the United States Code (the Bankruptcy Code), which codified the Bankruptcy Reform Act of 19784 and later changed, even though Congress has passed numerous different bankruptcy acts throughout the years. The 2005 Bankruptcy Abuse and Consumer Protection Act was the Bankruptcy Code's most recent significant revision.

US insolvency law aims to give creditors (and, if possible, equity holders) of the debtor the maximum return possible. In this context, business debtors should be reorganized rather than liquidated to preserve employment and to realize the "going concern surplus" of reorganization value over liquidation value. By restructuring a debtor corporation under Chapter 11 of the Bankruptcy Code, this is achieved.  However, the debtor corporation may be liquidated under Chapter 11 or Chapter 7 of the Bankruptcy Code if reorganization is not viable or would not maximize value for creditors. In Chapter 7, a trustee chosen by the United States Trustee or appointed by the debtor's creditors takes over control of the liquidation process from the debtor's management, who are likely to be more knowledgeable about the assets and their value. Liquidations under Chapter 7 typically yield smaller recoveries for creditors. Therefore, if there are insufficient finances in the estate or access to the estate to pursue a Chapter 11 process, businesses are more likely to be liquidated under Chapter 7.

Starting proceedings

There are several kinds of different insolvency proceedings allowed by the US Bankruptcy Code. Not all of these processes are accessible to all kinds of businesses. A railroad can be a debtor under Chapter 11 but not Chapter 7, stockbrokers and commodity brokers can file for bankruptcy under Chapter 7 but not Chapter 11, and banking and insurance corporations are specifically prohibited from filing under either chapter.  Regardless of the kind of bankruptcy case, a debtor may voluntarily begin a plenary insolvency process by filing a petition with the bankruptcy court under Section 301(a) of the Bankruptcy Code.

An "involuntary" bankruptcy case is one in which a bankruptcy action is started against a debtor corporation. An involuntary case is started when three or more holders of non-contingent, uncontested claims file a petition with the bankruptcy court and their combined claims total at least US$15,775 more than the value of any lien the debtor has on any property that serves as security for those claims. Only if the debtor consistently fails to pay its debts when they are due—as opposed to when they are the subject of a genuine dispute regarding liability or amount—or when a custodian as defined in Section 303(h)(2) of the Bankruptcy Code has been appointed—a bankruptcy court grant relief against the debtor in an involuntary case.

A career in Corporate Insolvency Law in USA

You may represent either debtors or creditors as corporate insolvency lawyers, but the job will be adversarial. Corporate Insolvency lawyers are involved in all stages of the insolvency process, from arranging corporate voluntary arrangements to administering and receiving assets. They are also involved in the liquidation step, in which the assets of the individual or corporation are removed to pay off the outstanding sums owed.

An interest in business and money is required for this field of law. To advise customers on all aspects of corporate restructuring, you must have outstanding commercial acumen and compelling communication skills to deal with people in difficult situations. When negotiating with debtors or creditors (depending on which side you are representing), suing on your client's behalf, or working alongside other professionals involved in the process, from liquidators to accountants, strong communication skills are required. This is a difficult academic discipline of law that encompasses many various areas like banking, commercial, and litigation. You must be able to process big amounts of paperwork and make accurate decisions.

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