Chapter 11 Bankruptcy

Chapter 11 Bankruptcy Advantages

A Chapter 11 bankruptcy gives you a chance to restructure the finances of your business so that you can continue to operate, thus providing your employees with jobs, paying your creditors and producing a return for your stockholders (if you have any). In creating Chapter 11, Congress understood that an ongoing business is more valuable to the community and economy than a business whose assets are merely sold (liquidated). If you can extend or reduce your debts or lower your operating costs, you may be able to return to profitability, which is best for not only you and your employees, but for society overall.

Chapter 11 Bankruptcy Eligibility

Basically, if you are eligible to file a Chapter 7 bankruptcy, you can file under Chapter 11 when your debts exceed the Chapter 13 limits. (These are currently set at $336,900 and are changed periodically. Consult your Sparber Rudolph Annen bankruptcy attorney for the latest limits.) Stockbrokers and commodity brokers may not file under Chapter 11, however, even though they may be eligible for Chapter 7 bankruptcy.

Unlike Chapter 7, there are no statutory limitations on how frequently you may file sucessive Chapter 11 bankruptcies.

The Chapter 11 Bankruptcy Process

Your Chapter 11 bankruptcy begins when your Sparber Rudolph Annen bankruptcy attorney files a bankruptcy petition with the bankruptcy court. This may be a voluntary bankruptcy, meaning filed by you, the debtor, or an involuntarily bankruptcy, meaning filed by creditors that meet certain requirements.

A voluntary Chapter 11 bankruptcy petition must be in the format of Form 1 of the Official Bankruptcy Forms. The voluntary petition includes all the standard information such as name, address, SSN or TIN, principle location of the assets, etc.; your reorganization plan or intention to file a plan; and your request for relief under Chapter 11 of the Bankruptcy Code. The petition should also indicate whether your business qualifies as a small business under the Bankruptcy Code.

When you file a Chapter 11 voluntary bankruptcy petition for debt relief you become the debtor in possession. You can also be a debtor in possession in an involuntary Chapter 11 bankruptcy pursuant to the Bankruptcy Court’s order. This term is used because you will keep control of your business and assets while the Chapter 11 case is proceeding. Only a very small number of cases appoint or elect a bankruptcy trustee.

You must file a written disclosure statement and a reorganization plan with the Bankruptcy Court. The disclosure statement must contain information concerning your assets, liabilities, and business affairs sufficient to enable a bankruptcy creditor to make an informed decision about your plan of reorganization. The exact information required is determined by the court and the circumstances of your case. For instance, if your Chapter 11 bankruptcy is a small business case, you may not have to file a separate disclosure statement if the Bankruptcy Court finds that there is adequate information contained in your plan of reorganization.

Bankruptyc Fees

The courts are currently required to charge a $1000 filing fee and a $39 miscellaneous administrative fee. This amount is current as of August 2008. Check with your bankruptcy attorney from Sparber Rudolph Annen for the most current figures.

Debtor in Possession

Debtor in possession refers to bankruptcy debtors that keep possession and control of their assets while undergoing a reorganization under Chapter 11. Unlike a Chapter 7 bankruptcy, there is usually no bankruptcy trustee appointed. You automatically assume this identity when you file a voluntary petition for reorganization or, in an involuntary case, upon the entry of the order for relief. You will remain a debtor in possession until one of the following happens:

1. • Your plan of reorganization is confirmed
2. • Your case is dismissed
3. • Your case is converted to a Chapter 7
4. • Chapter 11 trustee is appointed

Appointment of a trustee is rare. When this is done, it is at the request of a party in interest or the U.S. Trustee and only for good reason. The reason can be fraud, dishonesty, incompetence or gross mismanagement.

Debtor in Possession Responsibilities

As the debtor in possession you are placed a fiduciary position for your business. You usually operate your business and perform all of the duties that a bankruptcy trustee performs under other bankruptcy chapters. These duties include:

1. • Accounting for property
   
   
2. • Examining and objecting to claims
   
   
3. • Filing informational reports as required by the Bankruptcy Court and the U.S. trustee
   
   
4. • Employing, with the court's approval, attorneys, accountants, appraisers, auctioneers, or other professionals
   
   
5. • Filing tax returns and reports which are either necessary or ordered by the court after confirmation

The U.S. Trustee monitors your compliance (as the debtor in possession) with the reporting requirements.

Avoidable Transfers

The debtor in possession has avoiding powers. These are special powers to allow a transfer of money or property made before filing to be undone, or avoided. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or disgorgement of the payments or property, which then are available to pay all creditors. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors.

Small Business Bankruptcy

Some types of debtors have special classifications in the Bankruptcy Code. The small business debtor is one such case. You qualify as a small business debtor if you pass the following two part test:

1. 1. You must be engaged in a commercial or business activity (other than owning real estate) with total non-contingent liquidated secured and unsecured debts of $2,000,000 or less; and
   
   
2. 2. Your 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 not active enough to provide proper oversight.

As a small business case, you are debtor in possession and must attach to the petition:

1. • The most recently prepared balance sheet
2. • A statement of operations
3. • A cash-flow statement
4. • Your business’ most recently filed tax return

If these documents are not available, you must attach a sworn statement explaining why. You, as a small business debtor, also must attend Bankruptcy Court hearings and the U.S. Trustee meetings through your senior management and attorney.

There are additional requirements of the small business debtor. Because these requirements are so complex, you are well advised to seek a qualified bankruptcy lawyer to guide you through the process. Mistakes can be costly, more costly than retaining legal counsel. The bankruptcy attorneys at Sparber Rudolph Annen are experienced in small business cases and can guide you through the many additional requirements for you and your small business when you are filing Chapter 11 bankruptcy.

The Automatic Stay

As with other chapters of the Bankruptcy Code, a stay of creditor actions against you automatically goes into effect when you file the bankruptcy petition. During this automatic stay, all judgments, collection activities, foreclosures, and repossessions of property must be suspended and cannot be continued by your creditors for any debt or claim that arose prior to the filing of your bankruptcy petition. This automatic stay provides a breathing spell for you and a time for negotiations to try to resolve your financial difficulties.

There are certain circumstances for which the automatic stay does not apply. Among these are family-court related actions, such as petitions for divorce, collections of past due support obligations, or civil actions concerning domestic violence.

In other circumstances a creditor can request that the bankruptcy court remove the automatic stay. Your bankruptcy attorney can provide you with the specific details of these and other exceptions and tell you whether or not they apply to you. Contact the bankruptcy attorneys at Sparber Rudolph Annen for more information on stay relief and the automatic stay.

The Single Asset Real Estate Debtor

If you are a single asset real estate debtor, you are subject to special provisions of the Bankruptcy Code regarding the automatic stay. Specifically, the Bankruptcy Code provides relief from the automatic stay for your creditors.

Single asset real estate is a single piece of property, not including residential properties with less than four residential units, that generates substantially all of your gross income. You must not be conducting any other business activities on the property other than basically running the property.

Your creditors can receive relief from the automatic stay unless you file a feasible plan of reorganization or begin to make interest payments on the debt within 90 days of filing your bankruptcy petition. Talk to your bankruptcy attorney at Sparber Rudolph Annen if you think this situation may apply to you.

Creditors' Committees

Creditors' committees play a major role in Chapter 11 cases. The U.S. trustee appoints creditors’ committee which usually consists of unsecured creditors who hold the seven largest unsecured claims against you.

Among other things, this committee:

1. • Consults with the debtor in possession on administration of the case
   
   
2. • Investigates the debtor's conduct and operation of the business
   
   
3. • Participates in formulating a plan

The creditors' committee may hire attorneys or other professionals to assist them in their duties.

In cases involving small businesses, the U.S. Trustee may not be able to find creditors willing to serve on a creditors' committee, or the committee may not be actively involved in the case. This is one of the reasons the Bankruptcy Code treats a small business case differently than a Chapter 11 bankruptcy case involving a larger business.

The Reorganization Plan

Your reorganization plan must classify your creditors’ claims and specify what each class of claims will receive under the plan. Your reorganization plan must be fair to the different classes of creditors and must demonstrate how you're going to support (pay for) the plan. Your plan can specify repayment by:

1. • Future profits
2. • Selling some or all of your assets
3. • Recapitalization
4. • Merger

A majority of your creditors must approve your plan and it must also be confirmed by the Bankruptcy Court. You and your creditors are then both bound by the plan’s terms of repayment.

Unless you’re a small business debtor, you have a 120-day exclusive period to file the reorganization plan. If your Chapter 11 bankruptcy is a small business case, you have a 180-day exclusivity period.

This exclusivity period may be extended or reduced by the court. But, in no event, may the exclusivity period, including all extensions, be longer than 18 months (300 days for small business cases). After the exclusivity period, a creditor or the case trustee may file a competing reorganization plan. The U.S. trustee may not file a reorganization plan.

The length of the exclusivity period shows that a Chapter 11 Bankruptcy can take years to resolve. There is a limit to the exclusivity period so that the debtor will have incentive to file the reorganization plan. The length of time it takes to resolve the Chapter 11, combined with the myriad of details is what add to the overall cost of filing and Chapter 11 bankruptcy.

Who Can File a Reorganization Plan

Only you, the debtor, may file a plan of reorganization during the first 120-day period after petition filing (or after entry of the order for relief, if it was an involuntary petition). The Bankruptcy Court may extend this exclusive period for up to 18 months. Additionally, you have 180 days after the petition date or entry of the order for relief to get acceptances of your plan. The court may extend (up to 20 months) or reduce this acceptance exclusive period for cause.

If the exclusive period expires before you file and obtain acceptance of a reorganization plan, other parties in interest, such as the creditors' committee or a creditor, may file a plan. Such a plan may compete with a plan filed by another party in interest or yourself.

The Bankruptcy Code lists both the mandatory and discretionary provisions of a Chapter 11 plan. A Chapter 11 plan will usually classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.

The Bankruptcy Court will hold a hearing on whether or not to confirm the reorganization plan. Any party in interest may file an objection to the confirmation. If there is no objection to confirmation, the court will determine whether the plan has been proposed in good faith and according to law. Before granting confirmation, the court will ensure that all the other requirements of the code have been satisfactorily met. The Bankruptcy Court must find that:

1. • the plan is feasible;
2. • it is proposed in good faith; and
3. • the plan and the proponent of the plan comply with the Bankruptcy Code.

To satisfy the feasibility requirement, the court must determine that confirmation of the plan is not likely to be followed by liquidation (unless the plan is a liquidating plan) or the need for further financial reorganization.

The U.S. Trustee or Bankruptcy Administrator

The U.S. Trustee is not the same as an appointed bankruptcy trustee. The U.S. Trustee is an agency of the Federal government and oversees bankruptcy cases to protect the public interest. A bankruptcy trustee actually takes control of the bankruptcy estate and is a specially qualified private person or company that receives fees from the bankruptcy estate for their services. A case can have both a bankruptcy trustee and the U.S. Trustee involved.

The U.S. trustee plays a major role in the progress of a Chapter 11 case. The U.S. trustee is responsible for monitoring the debtor in possession's business operations and operating report submissions and fees. The U.S. trustee also oversees applications from professionals for payment, the plans and disclosure statements filed with the court, and the creditors' committees.

The 341 Meeting

The U.S. trustee conducts a creditors meeting called the section 341 meeting, which is named after the section of the code that requires it. During this meeting you will be sworn in and then the trustee and/or your creditors can ask you questions concerning your conduct, property, and the administration of the case.

Conversion or Dismissal

When you file for bankruptcy protection under Chapter 11, you have a one-time absolute right to convert your Chapter 11 case to a case under Chapter 7 unless:

1. • You are not a debtor in possession
   
   
2. • The case originally was an involuntary case under Chapter 11
   
   
3. • The case was converted to a Chapter 11 bankruptcy case other than at your request

In a Chapter 11 bankruptcy case, you do not have an absolute right to have the case dismissed upon request. However, a creditor or other party in interest may move to dismiss or convert the case to a Chapter 7. This must be done for a good reason. The courts have found a good reason to include, among other things: gross mismanagement of the bankruptcy estate, unauthorized use of cash collateral, or failure to maintain insurance that then poses a risk to the public or the bankruptcy estate.

Because of the many variables that can cause a conversion or dismissal of your Chapter 11 bankruptcy case, you should consult an experienced bankruptcy attorney at Sparber Rudolph Annen for help and advice in this matter.

The Disclosure Statement

You (or any plan proponent) must file and get Bankruptcy Court approval of a written disclosure statement before the creditors can vote on the reorganization plan. The disclosure statement must provide enough information concerning your financial affairs to allow the creditors to make an intelligent decision about the reorganization plan. In small business cases the court may determine that the reorganization plan contains enough information and that a separate disclosure statement is unnecessary.

After the disclosure statement is filed, the Bankruptcy Court holds a hearing to determine whether it should be approved. Once the court approves the disclosure statement, the debtor or proponent of a plan can solicit acceptances of the reorganization plan, and creditors may solicit plan rejections.

The Discharge

Confirmation of the reorganization plan discharges you from any debt that arose prior to the confirmation date. After the plan is confirmed, you are required to make plan payments and are bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.

There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. As with all of the various chapters of bankruptcy, there are certain types of debts that are not discharged. What is and is not dischargeable is complex. Consult your bankruptcy attorney at Sparber Rudolph Annen for information on the non-dischargeable debts in a Chapter 11 bankruptcy.

The Final Decree