Chapter 11 Bankruptcy Basics

Chapter 11 Business Bankruptcy Case Basics

Upon filing a petition for a business in Chapter 11 bankruptcy the debtor assumes a new role as “debtor in possession” 11 USC 1101. This term means a debtor who keeps control and possession of assets while continuing to operate a business and attempting a reorganization (read as shedding debt or avoiding or adjusting other obligations the business is liable for).

The filing of a Chapter 11 case makes the debtor in possession a fiduciary. This means they are essentially the trustee for their own bankruptcy case, which in turn means the principals must run the business in a legitimate way and perform various duties such as accounting for assets, objection to claims, investigating preferences, filing operating reports and filing tax returns. 11 USC 1106, 1107.

Like in consumer cases the filing of a Chapter 11 for a business imposes an automatic stay against creditors. They are prevented from continuing lawsuits, engaging in other collection activities, evicting the debtor on a lease, or basically enforcing any pre-filing obligation that the business may have had. 11 USC 362. There are exceptions and motions may be made for relief from the automatic stay. A common objection is one by a secured creditor who seeks to enforce or foreclose on the secured property by arguing that the debtor has no equity in the property and that the property is not necessary for an effective reorganization. 11 USC 362(d). It is sometimes necessary for a debtor to “adequately” protect such creditors by making cash payments or giving new liens.

A debtor may use, sell, or lease (lend) cash collateral during the case only with the consent of all creditors who are secured thereby, or with prior approval of the court. Other types of property, that is property that is not secured, may generally be used , sold or pledged only the ordinary course of business.

 

Unless the Debtor elects to be treated as a small business debtor in the case the Debtor has an exclusive right after the filing (called the date of the “order for relief”) to propose a Chapter 11 plan of reorganization. A Chapter 11 plan must classify all claims and interests and a plan may be accepted or rejected only by class. To be accepted by a class of interests, the holders of at least two – thirds interests voting on the plan must vote to accept the plan. Classes who get nothing are automatically treated as rejecting, and classes that are paid in full are automatically treated as accepting the Plan.

If the holders or one or more classes of impaired claims do not vote to accept the plan then Debtor’s counsel must get the Court to confirm the plan over the objects of the disgruntled creditors. This is called a “cram – down” of a Chapter 11 plan. This term means something quite different in a Chapter 13 case where a cram down means reducing the amount to be paid to a car lender, for example, to the value of the car as opposed to the amount owed.

A formal disclosure statement must also be provided in a Chapter 11 plan of reorganization, and the court must approve the disclosure statement. A disclosure statement must contain sufficient information about the proposed plan, and about the history and financial condition of the debtor, to enable a creditor or party in interest to make an informed decision on the acceptance or rejection of the plan.

A person does not have to be engaged in a business to qualify for Chapter 11 relief, a consumer can file a chapter 11 plan of reorganization. In reality however the complexity and cost of a Chapter 11 case means that only persons with substantial investments or assets may use Chapter 11. A person must have some goal, some asset worth reorganizing or rehabilitating before

a Chapter 11 begins to make sense. Sometimes, individual debtors are forced into Chapter 11 because the debt level is too high to qualify for a Chapter 13.

 
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