In this Q&A, Diane Lourdes Dick, the Charles E. Floete Distinguished Professor of Law at Iowa, answers general questions about bankruptcy proceedings. Dick’s area of expertise is business and tax law, with particular emphasis on commercial finance; business bankruptcy; and out-of-court restructuring, mergers and acquisitions, and business entity taxation.

Q: In a bankruptcy auction, who determines how the money will be used once the bid is accepted?

A: When a debtor in bankruptcy decides to sell assets through an auction process, the proceeds from the sale become part of the bankruptcy estate and are distributed in accordance with bankruptcy’s distributional norms. Generally speaking, in a Chapter 11 bankruptcy, this means that the proceeds will be distributed pursuant to a confirmed plan of reorganization. To be confirmed by the bankruptcy court, a plan of reorganization must comply with a list of requirements set out in the U.S. Bankruptcy Code. These safeguards ensure that the distributions honor creditors’ state law priorities. For instance, unless bankruptcy law creates a specific exception, creditors that normally have priority over another creditor ought to be paid first.

Q: How is an organization’s outstanding debt typically covered during a bankruptcy?

A: Bankruptcy is normally a situation of scarcity, meaning that the debtor is unable to satisfy all the claims against it. As a result, the debtor is often unable to satisfy all of its prepetition debts. General unsecured debts may receive only pennies on the dollar, while more senior debts may receive a higher recovery by taking new debt or equity securities in the reorganized entity. Post-petition liabilities—meaning those incurred by the debtor during the pendency of the case—are treated differently. These are viewed as expenses of the bankruptcy estate and are typically paid in full.

Q: If an organization has a foundation, is that money protected? How is it distributed following the bankruptcy?

A: It depends on whether the foundation is also a debtor in bankruptcy. If it is a debtor, then the assets will be considered property of a bankruptcy estate—either separately or consolidated with the other affiliated entities. If it is not a debtor, then the bankruptcy process will normally respect the legal separateness of this entity—unless there are reasons to challenge that presumption or the court deems it necessary to “claw back” assets transferred from the debtor to the foundation. 

Q: How long does a bankruptcy process typically go on after a sale hearing?

A: It varies. Some cases are wrapped up very quickly after a sale hearing—there are cases that have been wrapped up in a matter of days—other times, it can take months or even years to finalize a plan of reorganization. It depends on whether there are other lingering substantive matters that must be resolved.