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A Chapter 11 bankruptcy permits a person or business to reorganize while obtaining protection from its creditors. Chapter 11 of the Bankruptcy Code is entitled “Reorganization.” The Bankruptcy Code is the name given to that portion of the federal laws that deal with bankruptcy.
Legally, anyone except a governmental agency, an estate, a non-business trust, a stockbroker, a commodity broker, an insurance company, a bank, or an SBA-licensed small business investment company may file under Chapter 11. An individual may not file under Chapter 11 if he or she has had another bankruptcy case dismissed upon certain grounds within the last 180 days. As a practical matter, Chapter 11 is available to virtually any business or person able to afford the expenses of the case.
No. There are no financial or insolvency requirements for filing a voluntary Chapter 11 case other than the good faith requirement that the case be filed primarily for purposes of reorganization.
A debtor is a person or business concerning whom a case under the Bankruptcy Code has been commenced. A person or business who files a Chapter 11 case is referred to as a debtor. A debtor who qualifies may elect to be treated as a qualifying small business debtor in a Chapter 11 case.
To qualify as a small business debtor, a debtor must be engaged in a commercial or business activity (other than one whose primary activity is the business of owning or managing real property and activities incidental thereto) and the total amount of the debtor’s non-contingent liquidated secured and unsecured debts must not exceed $2,000,000 when the case is filed.
A QUALIFYING SMALL BUSINESS DEBTOR?
By filing a written notice of the debtor’s election to be treated as a qualifying small business debtor with the bankruptcy court within 60 days after the case is filed. The election is usually made by checking the appropriate box on the petition.
AS A QUALIFYING SMALL BUSINESS DEBTOR?
Being treated as a qualifying small business debtor expedites the handling of a Chapter 11 case by dispensing with the necessity of a creditor’s committee, by shortening the period for filing plans, and by liberalizing the procedures for obtaining acceptance of a plan.
No. A business filing under Chapter 11 may be very large, very small, or anywhere in between. Under Chapter 11, a business may be a sole proprietorship, a partnership, a limited liability company or a corporation any size. Only those entities listed in the answer to question 2 above are not eligible to file under Chapter 11.
The Chapter 11 filing fee is $1,039, which must be paid to the clerk of the bankruptcy court when the case is filed. In addition, there is a quarterly fee payable to the U.S. Trustee that is based on the amount disbursed during the quarter by the debtor during the Chapter 11 case until such time as a plan is confirmed. The amount of the quarterly fee varies from $250.00 to $10,000.00 per quarter, depending on the amount disbursed.
The United States Trustee is an employee of the United States Department of Justice and serves independently of the bankruptcy court. The function of the United States Trustee in a Chapter 11 case is to monitor the case, appoint one or more creditors’ committees, call and preside at meetings of creditors, appoint a trustee in the case if ordered to do so by the bankruptcy court, and collect the quarterly fee.
The amount charged by an attorney for handling a Chapter 11 case for a small business debtor varies greatly depending on such matters as the size of the business, the type and extent of relief needed by the debtor, the attitude of the debtor’s creditors, the type of reorganization needed or contemplated by the debtor, and whether the owners of the business are in agreement or disagreement as to how the business should be reorganized. Unless the case is a simple one, most attorneys charge on an hourly basis and require a retainer to be paid in advance. The total fee charged for handling a small business Chapter 11 case may vary from $2,500 or less for a simple case to several times that amount for a complex case. All fees charged or collected by an attorney in connection with a Chapter 11 case, whether prior to or after the case is filed, must be approved by the bankruptcy court as being reasonable in amount.
The filing of a Chapter 11 case automatically stays all foreclosures, collection actions, civil litigation, and creditor action of any kind against the debtor or the debtor’s property. The only significant proceedings not stayed by the filing of a Chapter 11 case are criminal proceedings against the debtor, divorce-related proceedings, and proceedings by governmental agencies to enforce police or regulatory powers.
If the debtor’s business is reorganized, it may continue to function either in its present form or in a revised form, and its present creditors will be permitted to satisfy their claims only to the extent provided in the debtor’s plan of reorganization.
A Chapter 11 case must be broken down into two phases: the pre-confirmation phase and the post-confirmation phase. The first phase, which is the phase prior to the confirmation of a plan, normally lasts from six to twelve months, although the time may vary. The second phase, which is the phase where the confirmed plan is implemented and carried out by the debtor, normally lasts from three to five years.
In a Chapter 11 case the debtor receives a discharge when a plan is confirmed by the court. The order of the court that confirms the plan also contains the debtor’s Chapter 11 discharge. A discharge is a court order relieving the debtor from liability for certain debts. A debt that is discharged is a debt for which the debtor is no longer liable, except as provided in the Chapter 11 plan.
The debts discharged in a Chapter 11 case depend on whether the debtor is an individual (a natural person) or a non-individual (a corporation, partnership, etc.). The discharge received by an individual debtor in a Chapter 11 case discharges the debtor from all pre-confirmation debts except those that would not be dischargeable in a Chapter 7 case filed by the same debtor. The discharge received by a non-individual debtor in a Chapter 11 case depends on whether the plan confirmed is a plan of reorganization or a plan of liquidation.
Yes. As long as the order of confirmation is not revoked by the court (which seldom happens), the discharge received by the debtor in the order of confirmation is valid even if the debtor later fails to fulfill its obligations under the Chapter 11 plan.
A Chapter 11 case is filed with the clerk of the bankruptcy court in the district where the debtor either resides, has its principal place of business, or has its principal assets.
Generally, only the creditors, owners, and employees of a small business debtor are aware that the debtor has filed a Chapter 11 case.
Most Chapter 11 debtors receive a moratorium on the payment of most of their general unsecured debts for the period between the filing of the case and the confirmation of a plan. This period usually lasts for six to twelve months. During this period, however, it may be necessary to pay secured creditors and creditors whose property, goods, or services are needed to continue the debtor’s business.
Cash collateral is cash or property that is easily converted to cash. Property such as bank accounts, checks, securities, and other cash equivalents constitutes cash collateral. Because it is easily disposed of, the use or sale of cash collateral is subject to strict rules in Chapter 11 cases.
Unless a trustee is appointed, the debtor may continue to operate its business during a Chapter 11 case as debtor in possession. In operating its business during a Chapter 11 case, the debtor, as a debtor in possession, must abide by the requirements of Chapter 11 and the orders of the bankruptcy court.
There are two grounds for the appointment of a trustee in a Chapter 11 case: a trustee may be appoints either for cause or if the appointment would be in the best interests of creditors. Cause for the appointment of trustee includes fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or during the case. A trustee is not appointed in most small business Chapter 11 cases.
If appointed, the trustee assumes most of the management functions of the debtor’s business and takes control of the debtor’s property. The trustee may also assume control over many aspects of the debtor’s Chapter 11 case.
For purposes of use, sale, or lease during a Chapter 11 case, a debtor’s property is divided into two categories: cash collateral and all other property. Until a plan is confirmed, the debtor, as a debtor in possession, may not use, sell, or lease cash collateral unless each creditor secured by the cash collateral consents to the proposed use, sale, or lease, or unless the court approves the proposed use, sale, or lease. Unless the court orders otherwise, the debtor may use, sell, or lease any of its property except cash collateral in the ordinary course of business during the case without prior notice to creditors or court approval. The debtor may use, sell, or lease property other than cash collateral outside the ordinary course of business during the case only after notice to any affected creditors and a court hearing.
Yes. Unless the court orders otherwise, the debtor, as a debtor in possession, may obtain unsecured credit and incur unsecured debt in the ordinary course of business during a Chapter 11 case without court approval. Further, the unsecured credit or debt so obtained or incurred is payable as an administrative expense in the case, which means that those creditors get paid ahead of all other unsecured creditors. Court approval is required prior to obtaining or incurring any other type of credit or debt during the case. Thus, secured credit or unsecured credit not in the ordinary course of business may be obtained during the case only with the prior approval of the bankruptcy court.
Yes. Under Chapter 11, the debtor, as a debtor in possession, may, at its option and without the consent of the other party, reject, assume, or assign most contracts or leases under which the debtor is obligated.
It is a document prepared by the proponent of a Chapter 11 plan that discloses financial and other information about the debtor and the proposed plan to the debtor’s creditors.
It is a written document that states the terms of how the debtor will deal with its creditors and, if necessary, interest holders.
Much depends on whether a creditor is fully secured or under-secured. The claim of a fully secured creditor must be paid in full in cash, and if deferred cash payments are made on the claim, interest must be paid to the creditor for not receiving its cash immediately. An under-secured creditor may elect to have its claim treated as being fully secured, and if such an election is made the claim must be paid in full in cash, but if deferred cash payments are made, interest does not usually have to be paid on the claim.
A fully secured creditor is the holder of a claim that is secured by properly of a value that equals or exceeds the amount of the claim. An under-secured creditor is the holder of a claim that is secured by property of a value that is less than the amount of the claim.
Priority claims must be paid in full in cash under a Chapter 11 plan, unless a creditor agrees otherwise. Further, all priority claims except tax claims must be paid when the plan is confirmed or shortly thereafter, unless a particular creditor agrees to accept payments under the plan. Tax claims may be paid in deferred cash payments with interest over a period not exceeding six years from the date of assessment of the tax. An unsecured creditor with a non-priority claim must be paid at least as much as the creditor would have received had the debtor filed under Chapter 7, and the payments need not be in cash. Non-priority claims may be paid in cash, property, or securities of the debtor or the successor to the debtor under the plan.
A priority unsecured claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. Priority unsecured claims include the following types of claims: the administrative expenses of the Chapter 11 case, wage claims of up to $4,000.00 per employee, wage benefit claims of employees up to certain limits, consumer deposit claims of up to $1,800.00 each, most divorce-related claims, and unsecured tax claims. Administrative expenses include the fees of debtor’s attorney and unsecured debts incurred in the ordinary course of operating the debtor’s business during the case. A non-priority unsecured claim is a general unsecured claim incurred against the debtor prior to the filing of the Chapter 11 case.
Yes, but only under certain conditions.
If any of the conditions described in the answer to the previous question occur entitling a party other than the debtor to file a Chapter 11 plan, any party to the case may file a plan, including a creditor, an interest holder, or a creditors’ committee. The United States Trustee may not file a plan.
It is a committee appointed by the U.S. Trustee that represents the interests of creditors in the case. A creditor’s committee must be appointed in a Chapter 11 case unless the debtor elects to be treated as a qualifying small business in the case and requests that a creditors’ committee not be appointed.
Voting on a plan begins after the court approves or conditionally approves a disclosure statement prepared by the party proposing the plan. Each eligible creditor is mailed a ballot for voting on the plan. The ballot is accompanied by a copy of the disclosure statement and a copy or summary of the proposed plan. The court sets a deadline for voting on the plan, and a creditor’s ballot must be filed with the court prior to the voting deadline in order to be counted.
After a Chapter 11 plan is confirmed by the court, the plan must be implemented and carried out, either by the debtor or by the successor to the debtor under the plan. And of course, the claims of creditors must be paid in the manner specified in the plan.
If the court decides not to confirm a Chapter 11 plan, it will usually permit the party proposing the plan to modify the plan so that it can be confirmed. If the court refuses to confirm any plan, the Chapter 11 case must either be dismissed or converted to Chapter 7.
The plan may be amended so that it can be complied with, if sufficient grounds exist for such an amendment. Otherwise, the Chapter 11 case may be dismissed or converted to Chapter 7. If the debtor, or the successor to the debtor under the plan, fails to carry out its obligations under the plan, creditors may sue, or foreclose on the property of, the debtor or its successor either in the bankruptcy court or in other courts.
When all of the provisions and requirements of a Chapter 11 plan have been fulfilled or carried out, the plan is said to have been consummated and a final report and accounting must be filed, and the case will be closed by the court.
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