Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a form of debt relief available to struggling businesses. In filing a petition for chapter 11 bankruptcy, businesses get the opportunity to reorganize their finances and restructure debt. This is why it is sometimes called a reorganization bankruptcy.

Any business can file for bankruptcy; in fact, even individuals can file chapter 11 bankruptcy provided they meet the requirements. Usually, it is the debtor (through their bankruptcy attorney) who files a petition for bankruptcy, but in certain instances, creditors can also file what is called an involuntary petition.

We will be providing an overview of what to expect when filing chapter 11 bankruptcy in a series of articles, with this being the first.

Filing A Petition

A case for bankruptcy is often started by filing a petition. As mentioned above, the person who usually does this is the debtor, who voluntarily submits the petition to the bankruptcy court. The petition is filed in the court, which serves the area of the debtor’s residence. The following documents must also be filed along with the petition:

• Schedules of assets and liabilities
• Schedule of current income and expenditures
• Schedule of executory contracts and unexpired leases
• Statement of financial affairs

The court will charge a filing fee and an administrative fee when a petition is filed. The filing fee amounts to $1,167, and the administrative fee is $550.

Kinds of Business

All kinds of businesses are covered by bankruptcy. For the purpose of the law, they are classified into three: sole proprietorship, partnership, and corporation. The distinction is important in a bankruptcy case because the kind of business will dictate the liability of the owners regarding their personal property.

For purposes of a bankruptcy case, a sole proprietorship does not have a separate existence from its owner. When a sole proprietorship business files for bankruptcy, the personal assets of the owner-debtors can be involved in the case as well as the business assets.

On the other hand, a corporation is deemed to be a separate and distinct entity from its stockholders by fiction of law. This means that when a corporation files for bankruptcy, the personal assets of the stockholders will not be exposed. Their investment in the company, however, may be included.

A partnership straddles the line between a corporation and a sole proprietorship. A partnership is deemed to have a separate and distinct personality under the law like a corporation. However, in a bankruptcy case, the personal assets of the partners may be exposed to the debts and used as payment like in the case of a sole proprietorship.

Proposing a Plan

One of the features of a chapter 11 bankruptcy is that a debtor has the exclusive right to submit a reorganization plan for the business. This exclusive right exists for four (4) months after the filing of the petition, but it may be lengthened by the court up to eighteen (18) months.

Upon the expiration of this exclusive period, creditors can also submit their own reorganization plans to the court.

Role of the Debtor

In the meantime, while the plan is being formulated, or is still subject to approval, the owner-debtor will continue to operate his/her business. The difference is that major decisions will now have to be approved by the court, such as the sale of assets, entering into lease agreements, etc. In deciding on major decisions, the creditors’ views will be taken into consideration by the court. Thus, creditors may oppose an action that requires court approval, subject to the court’s decision.

Bankruptcy Administrator

A U.S. trustee or bankruptcy administrator is also appointed in a bankruptcy proceeding. The trustee performs important functions, mainly relating to monitoring the debtor-in-possession’s operation of the business as well as ensuring the filing of reports and payment of fees.

The trustee may require the debtor-in-possession to report income and expenses, as well as pay the wages of employees. A trustee is often paid a quarterly fee by the debtor until the case is terminated. The fee may range anywhere from $325 to $30,000.

Creditor’s Committees

A creditor’s committee is an important part of Chapter 11 Bankruptcy proceedings. The committee is usually made up of unsecured creditors who hold the seven largest unsecured claims.

The creditor’s committee is empowered with a wide variety of powers. They can consult with the debtor and investigate the conduct of the business. The creditor’s committee can also participate in the formulation of a plan.

Disclosure Statement

The reorganization plan must be submitted for the court and creditor’s approval. Before a vote on the plan can occur; however, the debtor must first file a written disclosure statement and secure its approval from the court. The court usually conducts a hearing to determine whether or not the written disclosure statement should be approved.

The purpose of this written disclosure statement is to provide information regarding the affairs of the debtor. This will enable creditors and holders of claims to reach an informed judgment about the feasibility of the reorganization plan.

Approval of Plan

Once the disclosure statement is approved by the court, the debtor-in-possession can begin to solicit the approval of the reorganization plan. The following information must be mailed by the plan proponent to the US trustee, creditors, and equity security holders:

• The plan (or a court-approved summary thereof)
• The written disclosure statement which has been approved by the court
• Sufficient notice regarding the time when acceptance (or rejection) of the plan can be made.
• Any other information deemed necessary by the court.

It may occur that several plans are submitted for approval. This may happen when the exclusive period has elapsed for the debtor, and the creditors submit their own plan of reorganization. In some cases, the case trustee will also submit a plan. If the trustee does not submit a plan, he/she can either submit a report detailing why they will not submit a plan or file a recommendation for the conversion or dismissal of the case.

In order for the plan to be accepted, there must be acceptance of the plan by at least one class of ‘impaired’ claims. A claim is considered impaired if the claim will not be paid fully, or if there will be an alteration of a legal or contractual right.

Ultimately, a plan is only deemed approved upon confirmation of the court. In confirming a bankruptcy plan, the court will rely on several factors such as the feasibility of the plan, the fact of whether or not it was made in good faith, and whether or not the plan conforms with the Bankruptcy Code.

A plan is deemed to be feasible if it will not lead to further reorganization or liquidation after approval.

Once the plan is confirmed, the debtor must comply with the provisions of the plan, such as payment schedules.