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Bankruptcy Proceedings –A Summary

Writer: Liron Narunsky, Attorney.

What is Bankruptcy?

The bankruptcy process is intended for a person cannot repay his debts. In contrast to the common misconception that a company can be bankrupt, bankruptcy deals only with individuals, and the corresponding process that is appropriate for a company that is insolvent (that is, a company that cannot meet its financial obligations) is "liquidation." In any bankruptcy process, the debtor is the person who has fallen into debt, and the creditor is any party (company, individual, or partnership) to whom the debtor owes money.

What is the Purpose of the Bankruptcy Process?

The bankruptcy process has several objectives. The first is for the benefit of the creditors - the bankruptcy process allows consolidation (collect and concentrate) all of the debtor's assets and distribute them in the most efficient manner and in accordance with the ratio of debt owed to each creditor. The second is in favor of the debtor – the process enables the debtor who has difficulties and is unable to repay his debts to open a new chapter in his economic life by leaving behind his debts when all is donewith, receiving debt relief (as will be elaborated below), (another goal of the process, which is a broader social goal is the return of the bankrupt party to the work cycle, and returning him or her to a track where he or she will meet his or her earning capacity, which in turn increases the aggregate social wealth).

How Can I Start the Bankruptcy Process?

The commencement of the bankruptcy process can be by the debtor or by the creditor who, in accordance with the preconditions provided by law, can apply for bankruptcy. The Court with jurisdiction to hear the application is the District Court.

We Will Discuss Some Steps That Occur During the Bankruptcy Process:

Receivership Order – The District Court may issue a Receivership Order. The Receivership Order relates to the debts accrued by the debtor only up to the day of issuing the Receivership Order. Once the Receivership Order is issued, the creditors are prevented from commencing or continuing legal proceedings against the debtor [1] including from opening and pursuing an execution office file against the debtor, unless authorized to do so by the Court. At the same time, a creditor whose debt is secured (mortgage, pledge, etc.) can exercise his security with the consent of the Court. In addition, the Receivership Order does not suspend criminal proceedings and other proceedings such as an application for dismissal.

With its consent to the Receivership Order, the Court usually appoints a special manager/or trustee whose function is to consolidate the debtor's assets, to estimate and consider the total debts owed to the various creditors (debt claims, as explained below) and ultimately to repay the debts, up to a maximum, as approved by the trustee from the debtor's assets.

The official receiver (the official body responsible for the bankruptcy process) serves as the supervisor of the trustee's activities, and if no trustee is appointed for the debtor's assets, the official receiver will serve as trustee for the debtor's assets.

Debt Claims - A debt claim is the creditor's way of trying to receive the debt from the debtors once he is prevented from opening legal proceedings against the debtor after the Receivership Order is rendered. The debt claim will be filed within six months of publication of the Receivership Order in "Reshumot" (the official Government Gazette).

Creditors’ Arrangement - The debtor can reach an arrangement with his creditors throughout the bankruptcy process and even before it. The creditors' arrangement will be submitted to the Court for its approval, which in turn can accept the arrangement, make it conditional, or suspend/reject it.

Hearing on the Bankruptcy Application – Some six months after the date of the Receivership Order, the Court will hold a hearing on the bankruptcy application. The debtor, the creditors who filed a debt claim, and the official receiver will be called to the hearing. The Court may reject the application for bankruptcy if it is satisfied that the application was filed in bad faith, with the aim of abusing the bankruptcy process or if it is convinced that the debtor can repay its debts. In addition, the Court may postpone its decision on the request in order to enable the debtor to settle its obligations by way of compromise or arrangement. If the Court decides to declare the debtor bankrupt, the assets of the bankrupt party can be divided among the debtor's creditors and be vested with the trustee. After the bankruptcy order is issued, the trustee will be able to act to realize the debtor's assets and to distribute them among the creditors.

A debtor that has been declared bankrupt has financial limitations (and is deemed a "special restricted customer" – and is subject to a prohibition on the use of debit cards, as well as a prohibition against forming a corporation) that are intended to prevent said from creating new liabilities. Most of the restrictions are not "new" to the debtor, since most debtors are already involved in legal proceedings even before the Receivership Order, and similar restrictions have already been imposed on the debtor.

How Can the Bankruptcy Process Be Ended?

Bankruptcy Dismissal Order – Effectively, obtaining a Dismissal Order is the main purpose of the debtor during the bankruptcy process. The dismissal is the final stage in which the Court discharges the debtor from all or his or her obligations (except for certain debts). The bankrupt party may apply for the discharge at any time he or she wishes, but according to provisions of the official receiver, it will be possible to consider granting the dismissal order some 4 years from the date of issuing the Receivership Order.

Under the framework of the request to dismiss, the Court will hold a hearing in the presence of the debtor, creditors of the debtor, the trustee, and the official receiver, and will consider the conduct of the debtor before and during the bankruptcy process, as well as his or her debts and assets. The Court may grant the discharge, suspend or condition it on various terms and conditions.

In summary, the bankruptcy process is complex, and there are different and sometimes conflicting interests the economic significance of which may be very significant. Therefore, we recommend that both the debtor and the creditor receive comprehensive legal counsel of which the circumstances of each case will be considered on its merits.

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[1] As noted, in respect of debts accrued only up to the date of issue of the receivership order.

*This article is not meant to constitute legal advice for a particular client, for which consultation with a qualified attorney is required.