Chapter 11 Bankruptcy
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What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a form of bankruptcy reorganization available to individuals, corporations and partnerships. It has no limits on the amount of debt, and is usually elected by individual debtors with too much debt that what is allowed in a Chapter 13. It is the usual choice for large businesses seeking to restructure their debt.
Who Can File for Chapter 11?
An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e). In addition, no individual may be a debtor under chapter 11 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
Creditors may also force a debtor into a Chapter 11 through an involuntary petition.
What Are the Advantages of Filing Chapter 11?
What Happens After I file a Chapter 11 Bankruptcy?
An individual ( or married spouses) Chapter 11 is largely similar to the process of a Chapter 13.
A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a principal place of business, or a domicile or residence. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. 11 U.S.C. §§ 301, 303.
Genreral information is submitted to the court via the petition including the debtor’s name(s), social security number or tax identification number, residence, location of principal assets (if a business), the debtor’s plan or intention to file a plan, and a request for relief. Upon filing a voluntary petition for relief under chapter 11 or, in an involuntary case, the entry of an order for relief, the debtor automatically assumes an additional identity as the “debtor in possession.” 11 U.S.C. § 1101. The Debtor in Possession retains the assets and controls the business under supervision of the court and as a fiduciary of the creditors. If the debtor’s management is ineffective or dishonest, a trustee may be appointed.
A creditors committee is usually appointed by the U.S.Trustee from among the 20 largest, unsecured creditors who are not insiders. The committee represents all of the creditors in providing oversight for the debtor’s operations and a body with whom the debtor can negotiate an acceptable plan of reorganization.
Generally, a written disclosure statement and a plan of reorganization must be filed with the court except in certain circumstances in a “small business case”. 11 U.S.C. §§ 1121, 1125. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization. 11 U.S.C. § 1125. The information required is governed by judicial discretion and the circumstances of the case. The plan must classify the claims and must specify how each class of claims will be treated under the plan. 11 U.S.C. § 1123. Certain creditors are deemed to be impaired meaning that the contracture rights with the creditor or the amount to which they are are scheduled to be modified. Impaired creditors vote on the plan by ballot. 11 U.S.C. § 1126. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.
A Chapter 11 plan is confirmed only upon the affirmative votes of the creditors, who are divided by the plan into classes based on the characteristics of their claims, and whose votes are a function of the amount of their claim against the debtor.
If the debtor can’t get the votes to confirm a plan, the debtor can attempt to “cram down” a plan on creditors and get the plan confirmed despite creditor opposition, by meeting certain statutory tests.
I’m a small business, how does a Chapter 11 work for me?
In some cases dealing with small businesses, the U.S. trustee may be unable to find creditors willing to serve on a creditors’ committee, or the committee may not be actively involved in the case. The Bankruptcy Code addresses this issue by treating a “small business case” somewhat differently than a regular bankruptcy case. A small business case is defined as a case with a “small business debtor.” 11 U.S.C. § 101(51C). Determination of whether a debtor is a “small business debtor” requires application of a two-part test:
- First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,190,000 or less.
- Second, the debtor’s case must be one in which the U.S. trustee has not appointed a creditors’ committee, or the court has determined the creditors’ committee is insufficiently active and representative to provide oversight of the debtor. 11 U.S.C. § 101(51D).
In a small business case, the debtor in possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents and must attend court and the U.S. trustee meeting through senior management personnel and counsel. The small business debtor must make ongoing filings with the court concerning its profitability and projected cash receipts and disbursements, and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax returns. 11 U.S.C. §§ 308, 1116.
The small business debtor must endure additional oversight by the US Trustee. Early on in the case, the small business debtor must attend an “initial interview” with the U.S. trustee, which is utilized to inquire about the debtor’s business plan, and explain certain debtor obligations including the debtor’s responsibility to file various reports. 28 U.S.C. § 586(a)(7). The U.S. trustee will also monitor the activity during the progression of the case to determine the debtors continued viability or inability to conform to the plan.
Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other chapter 11 cases. For example, only the debtor may file a plan during the first 180 days of a small business case. 11 U.S.C. § 1121(e). This “exclusivity period” may be extended by the court, but only to 300 days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. When the case is not a small business case, however, the court may extend the exclusivity period “for cause” up to 18 months.
Is Chapter 11 available to my Single Asset Real Estate Company?
A single asset real estate company is defined as a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 11 U.S.C. § 101(51B)
Additional protections in the form of Relief from Stay are available to creditors in the Single Asset Real Estate Debtor’s Chapter 11 Bankruptcy. At the request of a creditor, the court will grant a hearing to the creditor and ultimately is likely to grant relief from the automatic stay (meaning the creditor is free to pursue it’s usual remedies) unless the debtor files a feasible plan of reorganization or begins making interest payments to the creditor within 90 days from the date of the filing of the case, or within 30 days of the court’s determination that the case is a single asset real estate case. The interest payments must be equal to the non-default contract interest rate on the value of the creditor’s interest in the real estate. 11 U.S.C. § 362(d)(3).
Chapter 11 is probably the most flexible of all the chapters, and as such, it is the hardest to generalize about. Its flexibility makes it generally more expensive to the debtor. The rate of successful Chapter 11 reorganizations is depressingly low, sometimes estimated at 10% or less.
Individuals will typically only utilize Chapter 11 if they exceed the debt limits allowed in a Chapter 13 [unsecured debts of less than $336,900 and secured debts of less than $1,010,650. 11 U.S.C. § 109(e) ]usually reorganize under Chapter 13, which offers a streamlined plan at modest cost that allows the individual to keep possession of his assets, catch up on secured debt, and discharge unsecured debt at the end of the plan. Read how Chapter 13 works.
If my business filed for Chapter 11 are my personal assets safe?
If your corporation files for chapter 11, your personal assets (other than the value of your value in the shares of stock) are not affected. Sole proprietorships on the other hand are not entities separate and distinct from their owners, thus the assets of a sole proprietor are also exposed. In certain circumstances, the personal assets of a partner (where a partnership is the debtor in bankruptcy) are also exposed. Because of a partner’s or sole proprietors liability (and many times owners of a corporation who have personally guaranteed certain liabilities) owners are often forced to file for personal bankruptcy simultaneous to their organization’s Chapter 11.
Because the Debtor in Possession is empowered with almost the same duites and rights of the Chapter 11 Trustee (excluding the investigative powers) the DIP is required to perform the following functions: include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator (discussed below), such as monthly operating reports. 11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a). Further, the DIP is allowed to including the right, with the court’s approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during its bankruptcy case. Other responsibilities include filing tax returns and reports which are either necessary or ordered by the court after confirmation, such as a final accounting. The U.S. trustee is responsible for monitoring the compliance of the debtor in possession with the reporting requirements.
Individuals usually file Chapter 7 or Chapter 13 rather than Chapter 11.
