'Avoidance action' is an umbrella term for any proceedings that seek to revoke illegitimate acts that diminish the debtor’s assets. These actions aim to protect creditors and maximise the value recovery from the debtor. Colombian law stipulates a variety of avoidance actions before and during insolvency proceedings, notwithstanding criminal liability for the revoked acts.

Before insolvency proceedings

Pre-pack proceedings involve the negotiation for the sale of one or more productive units of a debtor company to a third party. This sale aims to satisfy the obligations of the creditors of said company by reaching an agreement on its value before the company formally files for insolvency proceedings.

The U.S. Court of Appeals for the Sixth Circuit recently ruled in a case involving a Chapter 13 debtors’ attempt to shield contributions to a 401(k) retirement account from “projected disposable income,” therefore making such amounts inaccessible to the debtors’ creditors.^[1] For the reasons explained below, the Sixth Circuit rejected the debtors’ arguments.

Case Background

A statute must be interpreted and enforced as written, regardless, according to the U.S. Court of Appeals for the Sixth Circuit, “of whether a court likes the results of that application in a particular case.” That legal maxim guided the Sixth Circuit’s reasoning in a recent decision^[1] in a case involving a Chapter 13 debtor’s repeated filings and requests for dismissal of his bankruptcy cases in order to avoid foreclosure of his home.

On January 14, 2021, the U.S. Supreme Court decided City of Chicago, Illinois v. Fulton (Case No. 19-357, Jan. 14, 2021), a case which examined whether merely retaining estate property after a bankruptcy filing violates the automatic stay provided for by §362(a) of the Bankruptcy Code. The Court overruled the bankruptcy court and U.S. Court of Appeals for the Seventh Circuit in deciding that mere retention of property does not violate the automatic stay.

Case Background

When an individual files a Chapter 7 bankruptcy case, the debtor’s non-exempt assets become property of the estate that is used to pay creditors. “Property of the estate” is a defined term under the Bankruptcy Code, so a disputed question in many cases is: What assets are, in fact, available to creditors?

Once a Chapter 7 debtor receives a discharge of personal debts, creditors are enjoined from taking action to collect, recover, or offset such debts. However, unlike personal debts, liens held by secured creditors “ride through” bankruptcy. The underlying debt secured by the lien may be extinguished, but as long as the lien is valid it survives the bankruptcy.

A Chapter 13 bankruptcy plan requires a debtor to satisfy unsecured debts by paying all “projected disposable income” to unsecured creditors over a five-year period. In a recent case before the U.S.

The insolvency systems for companies and other legal entities vary from country to country. The main purpose of insolvency legislation, however, is fundamentally the same worldwide. If there is important value in the business, we need to protect it in order for the company to continue as a viable business and pay creditors. If the liquidation value is higher than the operational value, jurisdictions have liquidation mechanisms that allow companies to efficiently exit the market and pay creditors through an ordered sale of assets.

One of the objectives of the Bankruptcy Code is to ensure that each class of creditors is treated equally. And one of the ways that is accomplished is to allow the debtor’s estate to claw back certain pre-petition payments made to creditors. Accordingly, creditors of a debtor who files for bankruptcy are often unpleasantly surprised to learn that they may be forced to relinquish “preferential” payments they received before the bankruptcy filing.