Bankruptcy Foundations: Chapter 11
We are living in unprecedented times as the COVID-19 virus takes hold of the world. As businesses big and small are forced to close, business owners are in desperate need of a solution.
For many business owners affected by this pandemic, filing for bankruptcy seems like the only option.
If you’re a business owner struggling to stay in business during these tough times, filing for Chapter 11 bankruptcy may allow you to stay open while you sort out your finances.
Keep reading to learn more about the fundamentals of filing for Chapter 11 bankruptcy and how it can help save your struggling business.
Chapter 11 Bankruptcy: 101
If you’re a business owner facing crippling debt, chances are you will consider filing Chapter 11 bankruptcy. Chapter 11 is just one of your options. We recommend exploring all of your options before deciding to file for Chapter 11 bankruptcy because it tends to be the most expensive type of bankruptcy case.
When a debtor files for Chapter 11 bankruptcy, their debts and assets are reorganized but not erased.
So who can file for Chapter 11 bankruptcy? While this type of bankruptcy is most commonly filed by corporations, it can also be filed by partnerships, sole proprietorships, and even individuals.
By reorganizing your debts and assets, your business can continue to operate. The catch is that you must operate under supervision and be subject to the fulfillment of certain obligations.
When you file for Chapter 11 bankruptcy, your business will operate under the management of what is called a “debtor in possession.” The debtor in possession will essentially take control of the operations of your business.
They will examine claims, look at employment of professionals including auctioneers, attorneys, and accountants, and account for your business property. The debtor in possession will be supervised by a trustee.
This trustee will ensure the debtor in possession is in compliance with all reporting requirements as determined by the court.
Filing for Chapter 11 Bankruptcy
The first step in filing for Chapter 11 bankruptcy is to file a petition in the bankruptcy court where you reside.
The petition for bankruptcy can be either voluntary or involuntary. A voluntary petition is one that is submitted by the debtor.
In order to file voluntarily, the debtor must not have had a previous bankruptcy petition dismissed due to their own fault. This includes failing to comply with court orders or appear in court.
On the other hand, an involuntary petition is one filed by creditors. They must meet certain requirements as set by the bankruptcy court.
The Automatic Stay
When a petition is filed, an automatic stay goes into effect. This order ensures that all collections activities that arose before the petition was filed are suspended.
This stay against creditors goes into effect immediately upon the filing of the petition. Suspended activities include foreclosures, judgments, and repossessions.
This gives the debtor a chance to negotiate and resolve the financial issues.
In certain cases, secured creditors may be able to apply for relief from the automatic stay. This means that they can continue to foreclose on assets if they apply the proceeds from the sale to the owed debt.
Filing a Voluntary Petition
With a voluntary petition, a debtor has to include the following:
- Schedule of current income and expenditures
- List of assets and liabilities
- Unexpired leases
- Statement of financial affairs
- Executory contracts
A voluntary petition will also include the debtor’s tax identification number (TIN), residence, location of assets, and the intention to file a plan of reorganization.
The bankruptcy court is required to charge a filing fee and administrative fee when they receive a voluntary petition. The filing fee is $1,167 and the administrative fee is $500.
These fees can be paid to the court clerk as a lump sum or in installments depending on the preferences of the court. If the court does allow payments to be made in installments, the debtor must pay the entire sum within four installments and not later than 120 days after the case was filed.
The debtor must include a disclosure statement and a plan of reorganization with their petition. The disclosure statement should contain detailed information about the debtor’s assets and liabilities as well as business affairs.
The goal is to provide enough information that the court can make an informed decision about the plan of reorganization. This plan will include a list of claims and their classification as well as the treatment for each claim.
If a claim is unimpaired, the creditor accepts the plan of reorganization.
If a claim is impaired, the creditor rejects the plan. For these claims, the creditors will vote regarding the plan using ballots.
The court will review the disclosure statement, add up the votes, and hold a hearing on whether to confirm the plan of reorganization.
After filing the petition, the debtor becomes the debtor in possession. This happens automatically and the debtor takes control of the operations of the business and its assets in this role.
Confirming the Reorganization Plan
A debtor must propose a plan of reorganization within 120 days of filing a petition for Chapter 11 bankruptcy. As long as the debtor proposes a plan within the required period, the court will grant another 180 days so that the debtor can confirm the plan.
As described previously, the plan of reorganization should classify claims for treatment as part of the reorganization. Creditors should be listed in order of priority. This means that secured creditors should be at the top of the list.
With Chapter 11 bankruptcy, an entire class of creditors is deemed to have accepted the plan if creditors with at least 2/3 in amount and 1/2 of the number of allowed claims in the class accept it. In order for the plan to be approved, at least one class of creditors with impaired claims must accept it.
Creditors with unimpaired claims are assumed to have accepted the plan of reorganization.
If a class of creditors votes in opposition to the plan, it can still be confirmed if all of the requirements are met. This means that the plan must be fair and it doesn’t discriminate against that class of creditors.
If no creditors file an objection, the court will decide whether all requirements have been met in order to confirm the plan of reorganization. The court must find that the plan has complied with the rules of Chapter 11, that it is feasible, and that it has been proposed in good faith.
Once it has been confirmed, the plan is binding. The plan confirms how the debtor’s debts will be treated under the plan.
What if the Plan is Not Accepted?
If the reorganization plan is not accepted and confirmed for any reason, there are a couple of options.
The court can either dismiss the case or convert it to a Chapter 7 bankruptcy. If a plan is rejected, things will return to the way they were before the petition was filed.
At this point, creditors can take action to protect their own interests.
The Debtor in Possession
With Chapter 11 bankruptcy, the debtor is automatically placed in possession of their business. They take on the role of handling all business functions with the exception of investigative actions and the roles designated to the trustee.
The debtor in possession will be tasked with looking into and objecting to claims, accounting for assets, and filing reports required by the bankruptcy court. If the court approves, the debtor in possession can employ certain professionals to assist it. These might include attorneys, auctioneers, accountants, and appraisers.
The trustee is responsible for monitoring the compliance of the debtor. The trustee must ensure the debtor in possession completes all reporting requirements from the court.
If the debtor in possession doesn’t comply with the reporting requirements set by the court or of the trustee, then the trustee can file a petition to have the case dismissed entirely or have it converted to another chapter of the bankruptcy code like Chapter 13.
Are You Considering Filing for Chapter 11 Bankruptcy?
Is your business going under? Are you considering filing for Chapter 11 bankruptcy?
If you’re in a position to file for bankruptcy, it’s important to explore all of your options. For some businesses, Chapter 11 bankruptcy is the best way to remain in control of your business’s operations while resolving your financial liabilities.
If your business is considering filing for Chapter 11 bankruptcy or has already filed, we can help you stay afloat.
Click here to learn more about how you can secure debtor in possession financing today.