Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a form of bankruptcy reorganization available to individuals and businesses, including sole proprietors, partnerships and corporations. 

Benefits of filing Chapter 11:

Chapter 11 offers greater flexibility and options than other chapters and can be extremely useful even in lower debt cases. It is very useful in circumstances where you need time to catch up on payments, but keep your business running.

Chapter 11 is unique in that the Debtor is a debtor-in-possession, meaning that the Debtor remains in possession of all its assets and its ongoing business. In other words, the Debtor itself (or himself or herself) is the Trustee for the estate. While this is a great advantage, it does not come without its costs and there are many fiduciary responsibilities.

There are great powers afforded to Chapter 11 Debtors, such as the ability to object to your creditors' claims, avoid liens, reject leases and contracts with no penalty, extend the time for repayment to your existing creditors or even reduce the amount owed or paid to them.

Eligibility to file Chapter 11:

Large businesses primarily file a Chapter 11  in order to restructure their debts, but it is also available to individuals with large debts and assets who do not meet the strict asset/debt limitations of Chapter 13.

The debtor in chapter 11 files a petition which includes a list of assets and liabilities, and a detailed statement of financial affairs. The debtor will typically act as his own trustee, called a "debtor in possession", and will remain in possession of all estate property. The court can appoint a trustee for cause shown, including mismanagement.

Timeline of a Chapter 11:

About one month after the filing, the debtor and his attorney attend a meeting of creditors. The debtor files monthly operating reports, showing income and disbursements, profit and loss, and a balance sheet, and pays quarterly fees to the U.S. Trustee based on the amount of money disbursed.

The debtor has the exclusive right to file a plan, usually during the first 4 months. Thereafter, creditors are permitted to file plans. The Chapter 11 plan is accompanied by a disclosure statement, which describes the debtor’s financial circumstances, including:

• Prior History and cause of the Filing
• Assets and liabilities
• Income and expenses
• Treatment of creditors
• Liquidation analysis
• Projections of earnings
• Tax consequences
• Discussion of options

The Plan

The plan places creditors holding similar types of claims (i.e., unsecured, priority, etc.) into the same class. Creditors whose claims are impaired are allowed to vote on the plan. A class is impaired if its legal rights are altered by the plan. To be confirmed by the court, the creditors actually voting must approve the plan by a majority in number, and by a 2/3 majority in dollar amount of claims. At least one impaired class must approve the plan. If a class votes against the plan, the court may still approve ("cram-down") the plan if it finds that the plan is "fair and equitable" and does not unfairly discriminate.

A plan often calls for the debtor to remain in business, and to repay creditors from future earnings, from borrowings, or from sale of assets. In Chapter 11, priority claims, including recent tax claims, are required to be paid in full, plus interest. Secured claims are required to be paid in full, also with interest. Unsecured non-priority claims are required to be paid a dividend at least equal to that which they would receive if it were a Chapter 7 case. Within these limits, there are a variety of Chapter 11 plans, each based on the debtor’s own financial situation.

Cost of a Chapter 11:

Chapter 11 can be quite expensive and is always time consuming. Often there is litigation associated with any Chapter 11 case, either with the Debtor attacking the creditors, or vice versa.  There are constant administrative burdens which must be met. Regular reports must be filed with the court and the U.S. Trustee's Office, and fees must be paid. Since Chapter 11 cases can last from several months to several years, the professional fees (attorney, accountant, C.P.A.) can grow quite rapidly. The court filing fee is currently $1,039.00.