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Potential business litigation issues in bankruptcy

On Behalf of | Sep 19, 2023 | business litigation

The U.S. Courts reported business bankruptcy filings were up by 23.3% from June 2022 to June 2023. Bankruptcy is a complex legal process that can be fraught with challenges for businesses facing financial distress.

When a business files for bankruptcy, it often sets in motion a series of legal actions and proceedings, giving rise to various concerns related to business litigation.

Preference actions

Preference actions occur when the debtor (the struggling business) has made payments to certain creditors within a specific period before filing for bankruptcy. Creditors who received payments during this preference period may have to return those funds, which can lead to disputes and litigation.

Fraudulent conveyance claims

Fraudulent conveyance claims can arise if the debtor transfers assets to another party with intent to defraud creditors. Creditors or the bankruptcy trustee may initiate litigation to recover these assets.

Objections to discharge

Creditors may file objections to the discharge of debts the debtor owes. These objections can lead to litigation as parties dispute whether the court should discharge certain debts. This may also involve claims of fraud, false financial statements or other misconduct.

Adversary proceedings

Adversary proceedings are disputes that require a more formal legal process. These can involve a wide range of issues, from fraudulent transfers to violations of bankruptcy laws, leading to litigation between the debtor, creditors and other parties involved.

Asset valuation disputes

Determining the value of a debtor’s assets is an important step in bankruptcy, as it impacts the distribution of assets to creditors. Disagreements over the valuation of assets can result in litigation, with parties advocating for their valuations.

Relief from the automatic stay

When a business files for bankruptcy, an automatic stay goes into effect, halting most collection actions and legal proceedings. However, creditors can seek relief from the stay through litigation if they believe the stay unfairly impacts their rights.

Cramdowns and plan confirmation disputes

In Chapter 11 bankruptcy, which businesses use to reorganize, disagreements can arise over the confirmation of a reorganization plan. Creditors may litigate to challenge the terms of the plan if they feel it unfairly impacts their interests.

Priority and distribution disputes

The allocation of assets and payments to creditors is a central issue in bankruptcy. Disputes over the priority of claims, distribution amounts and the treatment of various creditor classes can result in litigation.

Violations of the automatic stay

Creditors who continue collection efforts despite the automatic stay can face legal actions and potential litigation for violating this protection afforded to debtors in bankruptcy.

Business litigation concerns are inherent in the bankruptcy process, as stakeholders navigate complex legal issues and disputes while attempting to resolve financial distress. Understanding these concerns can help you to work toward more equitable resolutions for your business.