Chapter 11 is very complex bankruptcy proceeding and typically involves corporations and partnerships who wish to reorganize their debts, restructure their businesses and embark on a new course toward profitability. Individuals and smaller businesses can also file under Chapter 11, though they are subject to other documentary requirements but have the benefit of a more streamlined process. A Chapter 11 petition can also be filed by a creditor against a business entity, forcing the entity into bankruptcy in an involuntary proceeding.
In the Chapter 11 petition, the debtor must file certain schedules regarding assets and liabilities, financial affairs, income and expenses and a list of executory contracts and unexpired leases.
If an individual or married couple files, they have to first complete a credit counseling course, submit a debt repayment plan if drafted within the counseling course, submit records of payments from employment, a monthly net income statement and certain other disclosures. The cost for filing is $1000, plus an administrative fee of $39. The filing fee can be paid in four installments within 120 days of filing.
In a Chapter 11, the business entity becomes the debtor-in-possession, meaning that it retains all of its assets without having a trustee appointed to oversee it. Under 11 U.S.C. § 1107(a), as debtor-in-possession, the entity can continue to conduct its business, renegotiate contracts and leases and do all the tasks that a trustee would normally perform.
The debtor can be a corporation or partnership. The assets of these entities are separate from those of the members, though in a partnership the personal assets of the partners might be used to pay creditors unless they file an individual petition.
Under 11 U.S.C. § 1107, the debtor-in-possession has a fiduciary duty and must account for property, consider and object to claims against it and file tax returns as well as monthly operational and information reports and any other reporting documents with the court. It can also hire attorneys, financial experts, appraisers and others to assist it.
After filing, the debtor files a written disclosure statement for the creditors’ benefit, which details the company’s history, goals, assets and liabilities, an explanation of why it filed for Chapter 11 and other disclosures under 11 U.S.C. § 1125. This statement must be approved by the court before a plan can be submitted.
Once approved, the debtor-in-possession has the exclusive right to file a reorganization plan for 120 days, although the court can extend the time up to 18 months. During this time, there is an automatic stay in effect that lasts throughout the bankruptcy.
Once the exclusivity period ends or if a plan is submitted before that time, any creditors’ committees that were formed will vote whether to affirm or reject it. These committees consist of unsecured creditors that may hire attorneys and other professionals to assist it. Shareholder and equity holder committees may be formed as well.
The reorganization plan categorizes these creditors in order of priority and how they will be treated. The creditors whose claims are “impaired” or that are to be paid at less than full value vote on the plan.
If the plan is rejected, the creditors can either submit a competing plan or plans or move to convert the case to a Chapter 7 or liquidation. In some cases, however, the plan can be “crammed down” down the creditors so that they are forced to accept it.
Role of the US Trustee
Generally, the US Trustee monitors the debtor-in-possession and ensures it is complying with all reporting requirements. The trustee also considers requests for compensation by attorneys and other professionals. The debtor does have to appear at the 341(a) or creditors’ meeting where the trustee questions the debtor under oath regarding its assets, liabilities and overall administration of the case.
Debtors also pay a quarterly fee to the trustee, which amount is based on the debtor’s disbursements during the quarter. The trustee does have the power to convert the case to a Chapter 7 if the debtor fails to comply with the reporting requirements or does not undertake efforts to bring the case to the plan confirmation stage.
Property or funds that were transferred during a certain time before the filing may be voided by the debtor-in-possession or trustee. Such transactions may be reversed and the property or funds restored to the bankrupt estate for distribution to creditors. Voidable transfers include certain transactions made to relatives or insiders up to one year before filing or within 90 days to other individuals.
Small Business or Individual Debtor Cases
A small business debtor is defined under 11 U.S.C. § 101(51C). The debtor must be engaged in a commercial or business activity not concerning owning or operating real property and have non-contingent secured and unsecured debt of $2,190,000 or less. Second, there must not have been any creditors’ committees appointed or they not active or representative enough.
The small business debtor has a number of required disclosures to make regarding its operations including balance sheets, cash flow statements and recent tax filings. Ongoing reporting regarding its profitability and projections are mandated. The debtor will have to meet with the trustee and answer questions about the offered reorganization plan, business viability and reporting obligations. The case is subject to monitoring by the trustee. In many of these cases, the debtor need not file a disclosure statement, which is typically required and must be approved before the reorganization plan is submitted.
Automatic Stay Provision
Under 11 U.S.C. § 362(b), an automatic stay goes into effect whenever a bankruptcy is filed, so that any collection activities, actions in court to collect on a debt, repossession and foreclosures are enjoined or prohibited from proceeding during the pendency of the bankruptcy. A creditor with secured property who can show that the debtor has no equity in it, such as in a piece of real property, and that it is not relevant to the bankruptcy, can ask to lift the automatic stay so that it can foreclose on it.
Conversion or Dismissal of the Case
As a debtor-in-possession, you have a one-time absolute right to convert the case to a Chapter 7. This right does not apply if this is an involuntary filing or the case was converted to a Chapter 11 by someone other than the debtor. You do not have the absolute right to dismiss the case.
Any party in interest may request that the case be converted to a Chapter 7 “for cause.” Cause is established at a hearing and the case must be converted or dismissed if it is found unless there is a finding that it would not be in the best interests of the creditors and estate. “Cause” to convert to a Chapter 7 consists of mismanagement of the business, continuing losses, failure to maintain insurance that poses a risk to the estate or public or the absence of the likelihood of rehabilitation.
“Cause” to dismiss the case include instances of unexcused failures to comply with reporting requirements, failure to attend an examination without good cause, failure to timely file post-petition taxes, to not file a disclosure statement or present a confirmation plan within the deadlines or to have a plan confirmed. If an individual debtor fails to pay child support obligations, it is cause for dismissal or conversion of the case.
Discharge and Final Decree
Under 11 U.S.C. 1141(d) (1), confirmation of the plan will discharge any debt that arose before the date of confirmation. Of course, the debtor is now required to make the required payments pursuant to the reorganization plan. The discharge of debts does not apply to any non-dischargeable debts under section 523 of the Bankruptcy Code. Once all the payments have been made under the plan, then the discharge is available.
A final decree that closes the case and allows the business or individual to emerge from Chapter 11 is issued once the case has been fully administered. The time for entering the final decree and closing the case is determined by the local rules governing the bankruptcy court.