Overview of Chapter 11 Bankruptcy
Chapter 11 of the Bankruptcy Code primarily provides for reorganization, typically involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep the business operational while paying creditors over time. However, individuals in business can also seek relief under Chapter 11.
Background
A case filed under Chapter 11 of the United States Bankruptcy Code is commonly referred to as a “reorganization” bankruptcy.
Eligibility Restrictions
- An individual cannot file under Chapter 11 or any other chapter if a prior bankruptcy petition within the preceding 180 days was dismissed due to willful failure to appear before the court, comply with orders, or was voluntarily dismissed after creditors sought relief.
- Additionally, no individual may file under Chapter 11 without having received credit counseling within 180 days before filing. Exceptions exist in emergencies or if no approved agencies are available.
- If a debt management plan results from the counseling, it must be filed with the court.
How Chapter 11 Works
Filing the Petition
- A Chapter 11 case begins with a voluntary or involuntary petition filed in the appropriate bankruptcy court.
- Required filings include schedules of assets and liabilities, income and expenditures, executory contracts, and a financial affairs statement.
Filing Fees
- A $1,000 case filing fee and a $39 administrative fee apply. Payment may be made in installments under court permission.
Debtor in Possession
- Upon filing, the debtor becomes the “debtor in possession,” retaining control over assets during reorganization without a trustee, unless necessary.
Disclosure Statement and Reorganization Plan
- A disclosure statement outlines the debtor’s financial state, helping creditors evaluate the plan.
- In small business cases, courts may waive separate disclosure if sufficient information is within the plan.
Voting and Confirmation
- Impaired creditors vote on the plan. After court approval of the disclosure statement and ballot tally, a confirmation hearing is held.
The Chapter 11 Debtor in Possession
Entities Eligible
- Corporations, sole proprietorships, and partnerships
- Sole proprietorships include both personal and business assets
Duties and Powers
- The debtor in possession acts as a fiduciary with the powers of a trustee, subject to court and U.S. trustee oversight
- Responsibilities include asset management, objection to claims, reporting, and hiring professionals
U.S. Trustee or Bankruptcy Administrator Role
- Oversees debtor compliance, including operational reports and fees
- Conducts the creditors’ meeting and monitors business operations
- Enforces reporting and tax compliance
Creditors’ Committees
- Appointed by the U.S. trustee, typically comprising the seven largest unsecured creditors
- Consults with the debtor, investigates operations, and helps shape the plan
Small Business Case Considerations
- Applies to businesses with under $2,190,000 in secured and unsecured debts
- Enhanced reporting and court oversight
- Shorter exclusivity periods for plan proposals
Single Asset Real Estate Debtor
- Defined as debtors owning single real estate properties generating most income without other substantial business
- Creditors can seek relief from the stay under specific conditions
Appointment of Trustees or Examiners
- Rare but possible in cases of fraud, incompetence, or mismanagement
- Trustees manage the business and propose plans if appointed
- Examiners conduct investigations with limited authority
The Automatic Stay
- Stops all collections, foreclosures, and judgments post-petition
- Creditors may seek relief from stay under certain circumstances
Plan Filing Rights
- Debtors have exclusive rights for 120 days to file a plan; up to 18 months with extensions
- After expiration, creditors or trustees may file competing plans
Avoidable Transfers
- Debtors or trustees may void preferential or fraudulent transfers made within specific pre-filing periods
Cash Collateral and Operating Capital
- Court or creditor approval is required for use of cash collateral
- Debtors may obtain new capital with court-approved superpriority liens
Motions and Litigation
- Motions may involve stay relief, use of collateral, or assumption/rejection of contracts
- Adversary proceedings address disputes like lien validity or fraudulent transfers
Claims and Proofs
- Creditors must file proofs of claim if not scheduled or disputed
- Equity security holders file proofs of interest
Conversion or Dismissal
- Debtors may convert to Chapter 7 under certain conditions
- Courts may dismiss or convert cases for cause, including mismanagement or reporting failures
Disclosure Statement Requirements
- Must contain sufficient information for creditors to evaluate the plan
- Required court approval before solicitation, except in prepackaged plans
Acceptance of the Plan
- Acceptance requires approval by impaired creditors under specific voting thresholds
- Competing plans may be considered if debtor exclusivity lapses
Discharge of Debts
- Confirmation discharges pre-confirmation debts, with exceptions for certain individual obligations
Post-Confirmation Matters
- Post-confirmation modifications allowed before substantial consummation
- Final decrees issued upon full administration of the estate
Revocation of Confirmation
- Confirmation may be revoked within 180 days if procured by fraud
Final Decree
- Case closes by final decree upon full administration
Frequently Asked Questions
What is the purpose of Chapter 11 bankruptcy?
Chapter 11 bankruptcy allows businesses (and some individuals) to reorganize their financial affairs while continuing operations. The debtor proposes a plan to repay creditors over time, aiming to regain profitability and stability.
Can individuals file for Chapter 11 bankruptcy?
Yes, individuals, especially those with significant assets or business interests, can file for Chapter 11. However, they must meet eligibility requirements, including recent credit counseling and no recent dismissals of prior bankruptcy cases.
What is a “debtor in possession” in Chapter 11?
A debtor in possession is the entity that files for Chapter 11 and retains control of its assets and operations during the reorganization. The debtor assumes the responsibilities of a trustee, including reporting, asset management, and legal compliance.
How are creditors involved in the Chapter 11 process?
Creditors vote on the debtor’s reorganization plan after reviewing the disclosure statement. A creditors’ committee, often made up of the largest unsecured creditors, may be appointed to consult on business decisions and oversee the process.
What happens after a Chapter 11 plan is confirmed?
Once confirmed, the debtor is discharged from most pre-confirmation debts and begins implementing the reorganization plan. Modifications may be made before the plan is substantially completed, and the case is eventually closed with a final decree.