CHAPTER 11 BANKRUPTCY

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Chapter 11 – Basics and Requirements of Chapter 11

“Reorganization” bankruptcy is the term used when a case is filed under the chapter 11 of the United States Bankruptcy Code.

Chapter 11 is a segment of the bankruptcy code, that provides relief in organizations or individuals by giving reorganization plan to carry on their business and repay their creditor over a time period. Filing bankruptcy under this chapter shall only be done after checking all other possible alternatives and analysis of the situation wherein professional help from Carl Chaff Law Office may be beneficial in exploring all alternatives and action plan.

A debtor cannot file under this chapter if a previous bankruptcy petition was dismissed due to the debtor’s to incompliance with orders from the court or intentional failure appearance on court, or was voluntarily dismissed after creditors pursued relief from a bankruptcy court to  recover a property they claim against during the preceding 180 days.  An individual credit counseling received within 180 days from an approved counseling agency is required before filing against this chapter; unless a there are insufficient approved agencies to do the required counseling as determined by the bankruptcy administrator or US trustees.


Chapter 11 – Who are Qualified to File Under

This is available for both individual and organizations. Typically, individuals seldom file against this chapter but if they do the usual reasons are reorganizing investment on real estate or reorganization of too high unsecured debts which is not qualified for Chapter 13.

Organizations usual cases under this chapter deals withs restructuring different debt types like secured and unsecured debt, leases and priority tax debt while looking protecting the assets of the business.

Stock and commodity brokers are prohibited from filing under chapter 11 and chapter 7.


Chapter 11  – Walkthrough Process

In general, a disclosure statement and reorganization plan shall be filled in a court. This will help the creditor to discern the debtor’s plan of reorganization.

It is a good idea to consult an attorney when filing for bankruptcy, as the total cost of bankruptcy depends on how it was filed. Carl Shaff Law Office can provide expert and professional guidance along the way for this this kind of complex case filing.

  1. Credit Counseling

    As mentioned in the Basics and Requirements of Chapter 11 prior to filing a case under this chapter an individual must finish a complete credit counseling by an approved agency. However, this is not required for organizations filing to reorganize business debts.

  2. Petition Filing

    A petition shall be filed in the bankruptcy court who has jurisdiction over the area of residence of the debtor.  There are two types of petition; voluntary the debtor filed it himself while there is involuntary wherein the creditor is the one who filed given all requirements are met

    Checklist to prepare, unless the court otherwise;

    1. Assets and liabilities
    2. Current income and expenditure
    3. Executory Contracts and unexpired leases
    4. Statement of financial affairs; if a debtor is an individual (or husband and wife)

      **additional document is required such as:
      a. certificate of credit counseling along with the copy of debt repayment plan
      b. payment from employers
      c. monthly statement income and any anticipated grow of expenses after filing
      d. interest in federal or state qualified education or tuition accounts

Voluntary Petition requires standard debtor’s information  like 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 under the appropriate chapter of the Bankruptcy Code.

Involuntary petition on the other hand set forth a new identity for the debtor which is “debtor in possession” (DIP) (see section Debtor in Possession (DIP)) without the case trustee appointment. A debtor will remain a DIP until the reorganization plan is confirmed, a trustee was appointed, or the debtor’s case was dismissed and transferred to chapter 7. The debtor in possession runs the business and performs the role of a trustee in other bankruptcy chapters.

3.Court Charges and Fees

Courts are required to charge case filling fee – $1,1167 and

miscellaneous and admin Fee – $550.

 

Court fees must be paid to court clerk upon filing or may, with court’s approval be paid in installment by the individual debtors limited to four number if installment for the filling fee.

120 days after the petition the final installment fee must be paid. For the reason stated, extension of installment time can be extended, given that the last installment is paid not less than 180 days after petition filing. 

 

Administrative fee may be paid in installments in the same way as the filling fee. Dismissal of the case may happen once there’s failure to settle these fees.

 

4. Disclosure Statement and Hearing

The debtor should file a disclosure agreement or any reorganization plan  to all parties of interest including the creditors. A court approval of the written disclosure statement is required before the plan of reorganization happen. This document must contain sufficient data on how the creditors or claimants to make decision about the plan.

Upon filling of disclosure statement, a hearing must be hold to determine approval or rejection of plan.

Debtor should mail the following to the bankruptcy administrator, equity shareholders and all creditors upon approval of court

  1. the plan, or a court approved summary of the plan
  2. The disclosure statement approved by the court
  3. Notice of the time within which acceptances and rejections of the plan may be filed
  4. such other information as the court may direct, including any opinion of the court approving the disclosure statement or a court-approved summary of the opinion

5. Acceptance of Plan

120 days is given by the bankruptcy court to the debtor to propose a plan from the date of petition for bankruptcy.  An additional 180 days can be granted by the court in the debtor proposed a plan within the timeframe in order to obtain plan confirmation. Classes and treatment of creditors should be included in the plan prioritizing secured creditors.

At least one class of creditor who holds impaired claim must approved the plan. Those with unimpaired claims considered to have accepted the plan. An entire class of claims is deemed to accept a plan if the two thirds of amount and at least one-half of the number of allowed claims in the class are accepted by the creditors.

Once the exclusive period expires and the debtor hasn’t file and obtain acceptance of plan, the creditors may be allowed file a plan.  Plan filed can compete with other plans filed by another party.  

When an objection is made the plan can still be enforced if the requirements are met. If no objections are filed, it is for the court to find if plan is feasible, proposed in good faith and compliant with the Chapter 11 of Bankruptcy Code.

 

A final decree must be fixed after the estate has been “fully administered”/

Chapter 11  – Debtor in Possession (DIP)

Chapter 11 is usually used to reorganize organizations, partnership and sole proprietorship

Corporation as debtor, the corporation separates from its owners and the stock holders. The personal assets of the stockholders are not in risk other than the investment value in company’s stock.

Partnership as debtor, same instance with corporation the partnership separates from its partner. In some cases, the personal assets of partners may be used to pay creditor’s bankruptcy case; may need to file for bankruptcy protection.

Sole proprietorship (owner as debtor), this does not have identity to separate and distinct from owners.

The Bankruptcy Code Section 1107 sets the debtor in position to possess the fiduciary rights and powers of chapter 11 trustee. Moreover, the duties and investigative functions of a trustee is expected is required to be performed by debtor in position.

The Bankruptcy Code and Federal Rules of Bankruptcy Procedure set forth the

 

Duties of debtor in position

  1. Accounting for properties
  2. Examining and objecting to claims
  3. Filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator such as: -Operating reports (monthly)
  4. Filing tax returns

Power of debtor in position (requires court approval)

  1. to employ lawyers, accountants, appraisers, auctioneers, or other professionals to help on bankruptcy case

Compliance of debtor in possession about reporting documents is tracked by the US trustee or bankruptcy administrator.

Chapter 11  Bankruptcy Administrator (US Trustee)

The function of a bankruptcy administrator is vital in monitoring the operations and progress of the administration of a chapter 11 case.

Responsibilities of a bankruptcy admin includes monitoring the debtor in possession’s work like reports (monthly income, operating expenses, new bank accounts, tax payable for employees and other withholding taxes) also fees submission, application for reimbursement and payment of professionals, plan and creditor’s committee.  The “section 341 meeting”, is the meeting for creditors that shall be facilitated by bankruptcy administrator with agenda concerning debtors conduct, actions and case administration.

The debtor in possession must pay a fee on a quarterly to the bankruptcy administrator as mandated by the law until the case is dismissed or converted.  This may range from $325 to $30,000 depending on the quarterly spending of the debtor.

 

Debtor’s failure to comply with the bankruptcy administrator requirements like reporting requirement, failure to bring the case to confirmation will enable them to file motion to dismissed or  convert the case to another bankruptcy code chapter in the court.

Chapter 11  Creditors’ Committees

This committee is appointed by the US trustees.  Usually, this consist of the top seven unsecured claims against the debtor.

 

 This was set up on behalf of the other creditors to consult with the debtor in possession on the case administration, also serves as the guard to the proper management of the business.   They look into debtor’s conduct and business operation and planning too.

Chapter 11  Small Business Case and Debtor

There were events that bankruptcy administrator cannot find creditors that are willing to be part of the creditor’s committee, or the committee formed Is not actively involved in the case which is common for small cases. This issue is addressed by the Bankruptcy code by treating the case as “small business case” which was defined as a case with a “small business debtor”.

In order to be classified as a small business debtor, the debtor must apply for a two-part test. The first the debtor must have less than $2,566,050 unsecured debts and must have business activities other than owning and having a real property. Second, the debtor’s case does not have an active committee which provide oversight of the debtor or the bankruptcy administrator has not able to assign a creditor’s committee in the first place.

 

In a small business case, these latest balance sheet, statement of operations, cash-flow statement and latest tax return filed are required to be presented by the debtor in position lacking of these documents 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 and must report its 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 also the profitability and projection of receivables and disbursements.

 

The small business debtor must attend an “initial interview” with the bankruptcy administrator at in order to evaluate the debtor’s viability, inquire about the debtor’s business plan, and explain certain obligations including the debtor’s responsibility to file various reports.  Immediate identification of the debtor’s inability to confirm the plan shall be oversee of the bankruptcy administrator.

A small business case normally proceeds more quickly than the normal other chapter 11 cases.

 

Chapter 11  Case Trustee Appointment/ Election

A case trustee is responsibility includes estate property management, debtor’s business operation and, if applicable reorganization plan filing.

 

In chapter 11, appointment of case trustee is rare. Prior to confirmation in a chapter 11 case an appointment of case trustee can be requested by the bankruptcy administrator or by a party in interest.

Appointment of trustee is required if there are reasonable grounds to believe that party controlling debtor engaged in various activities like fraud, gross mismanagement, dishonesty or criminal conduct in the management of the debtor or the debtor’s financial reporting. A trustee may be elected if the party of interest request the election of a trustee within 30 days after the court orders the appointment of a trustee. The purpose of electing a person to serve as trustee in a case shall be held by in a meeting with creditors by the bankruptcy administrator.

 

Termination of a trustee’s appointment and restoration of the debtor in possession is available anytime upon request of the bankruptcy administrator or a party in interest.

Chapter 11  – Examiner Role

In chapter 11, it is rare for an appointment of an examiner. Examiner’s role is limited versus of a trustee; able to execute trustee’s investigatory functions hence needed to file result of the conducted investigation.  The court is authorized to determine the examiners duties in every case. An examiner may perform the duties and responsibilities of the trustee that the court orders the debtor in possession to perform if there’s a court order.  Examiner has the right to help negotiate, reorganize and even review debtor’s claims if it was categorized correctly.

 

Chapter 11 – Automatic Stay and Avoidable Transfer

This provision shields the debtor against creditors actions like freezing their claim, collection, foreclosure, repossession and also includes starting or continuing court proceeding against debtor. The stay gives the debtor space during negotiation when trying to resolve the difficulties in debtor’s financial aspect. A creditor can request to the court to grant relief of automatic stay, provided that the debtor’s property has no equity and not required to be able to help on the reorganizing effectively.

 

Avoiding powers is granted to the trustee or the debtor in possession to be able to use in situations like cancellation of transactions not limited to payment and property transfer in order to pay the creditors. In order to take effect these should be within 90 days before filing for petition and still subject for approval.

 

Cash collateral cannot be used by the debtor in possession without court’s approval or permission of the secured party.  Defined in Section 363 “cash collateral” refers to ash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired , in which the estate and an entity other than the estate have an interest. This includes earnings, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities.

 

The value of creditors interest requires protection specially when there’s depreciation of property being used by debtor in possession.

 

Chapter 11 under Bankruptcy Code is wide and complex, hiring an experienced lawyer like Carl Shaff Law Office can see assess and give proper recommendation also the ability to see ahead the possible roadblock/s thus will make declaring bankruptcy more efficient and successful. Not hiring one is an expensive mistake.


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