Chapter 11 Bankruptcy is so named because its elements are contained in Chapter 11 of the United States Code for Bankruptcy. An Individual, a Corporation, Partnership or Sole Proprietorship may file a Chapter 11 Bankruptcy. The majority of Debtors, however, that file Chapter 11 Bankruptcy are Corporations. It is relatively uncommon, for example to find an Individual who must file a Chapter 11 Bankruptcy because the Debt Limits for a Chapter 13 Bankruptcy are approximately 1.2 million dollars. Not many Individual persons are able to amass that large amount of Debt.
In a Chapter 11, in most examples, the Debtor retains control of its business and operations, as a Debtor In Possession.
The Debtor In Possession in a Chapter 11 Bankruptcy has the ability to obtain new financing and loans by offering those Creditors first priority on the earnings of the business. In addition, the Debtor In Possession in Chapter 11 Bankruptcy may Reject Leases, and enjoy protection of the Automatic Stay, which prevents Creditors from harassing or generally attempting to Collect on the Debts subject to the Chapter 11 Bankruptcy.
In Chapter 11 Bankruptcy, there is a Period Of Exclusivity. The Period Of Exclusivity is the period of 120 days from the date of the filing of the Chapter 11 Bankruptcy in which the Debtor has an opportunity to propose a plan to the Bankruptcy Court. No other Party during that 120 day period may propose a plan. Hence, its title.
If the Debtor proposes a Plan during the 120 day period, then there is granted an additional 180 days in which the Debtor is given the opportunity to attempt approval and confirmation of the proposed plan.
The Creditors will be given an opportunity to vote on the plan. Even if one or more Creditors do not agree on a plan, the plan may still be approved on Confirmed, based upon varying criteria. The final arbiter is the Bankruptcy Judge.
In terms of how Creditors are paid, the Rules of Chapter 11 Bankruptcy are the same as those followed in Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. These are referred to as the Priorities. Generally, Administrative Expenses are paid first. These expenses include employee wages and attorney fees. Secured Creditors are paid and then Unsecured Creditors are paid. Taxes, as in a Chapter 13 or Chapter 7 Bankruptcy can be classified as Priority, meaning they are paid before the Secured Creditors, Secured and Unsecured, depending on varying criteria of age, type, and other classifications.
When Debtor files Chapter 11 Bankruptcy, stock of its Corporation usually is delisted on numerous stock exchanges. This includes the New York Stock Exchange, NASDAQ, and the American Stock Exchange.
Numerous business owners in the Tampa Bay area will ask me if they should file Chapter 11 Bankruptcy. My advice is generally no. The business owner may need to file Bankruptcy, but generally other Chapters of the Bankruptcy Code provide better relief to such business owners.
Many times a small business owner will operate his business under a business form such as a Corporation or Sub S Corporation. Usually he will choose this model for Asset Protection, Liability, Tax and other issues. However, if the Debtor needs to Reorganize his Debts and he meets the Debt Limits of Chapter 13 Bankruptcy, I will often construct a mechanism which gives him Eligibility to file Chapter 13. Chapter 11 Bankruptcy is a more burdensome process for the Debtor than either a Chapter 13 Bankruptcy or a Chapter 7 Bankruptcy. In addition, the Attorney fees in Chapter 11 Bankruptcy are usually much more than in a Chapter 13 or Chapter 7.
It is best to consult with Mr. Weller regarding the particular facts of your case.
Pursuant to Bankruptcy Code Section 1115, Property of the Bankruptcy Estate in a Chapter 11 Bankruptcy includes not only Property owned by the Debtor pursuant to Section 541 of the Bankruptcy Code, but also any Property that the Debtor acquires after the filing of the Bankruptcy, but before the Case is either Dismissed, Closed or Converted.
Bankruptcy Code Section 1121 is titled ‘Who May File A Plan’, in a Chapter 11 Bankruptcy. The Bankruptcy Debtor may file a Chapter 11 Bankruptcy Plan at any time, and has a Exclusivity Period in which only the Chapter 11 Debtor may file a Plan within the first 120 days after the Bankruptcy begins. After 120 days, certain Parties In Interest may, with some limitations, also file their own proposed Chapter 11 Bankruptcy Plan.
The Debtor in the Chapter 11 Bankruptcy has the Exclusive Right to file a Plan of Reorganization, within the first 120 days after the filing of the Chapter 11 Bankruptcy. After the initial 120 day period, any Party in Interest or Creditor may file their own Chapter 11 Bankruptcy Plan.
In a Chapter 11 Bankruptcy, some of the Creditors have the opportunity to Object to the Confirmation of the Chapter 11 Bankruptcy Plan. Despite such Objections, the Debtor may still have the Chapter 11 Bankruptcy Plan Confirmed, through a process called Cramdown. In order to Cramdown the Chapter 11 Bankruptcy, the Debtor must prove that the Plan is Fair and Equitable, and that the amount paid to the Creditors in the Chapter 11 Bankruptcy are equivalent to the amounts such Creditors would receive if the Debtor was to file Chapter 7 Bankruptcy. This is referred to as the Liquidation Test.
One of the advantages of the Chapter 11 Bankruptcy is that the Debtor, with a few exceptions, remains in control and possession of the Bankruptcy Estate. This means that the Debtor in the Chapter 11 Bankruptcy can continue its business affairs, with little or no interference from either the Bankruptcy Trustee or the Bankruptcy Court. The Debtor in the Chapter 11 Bankruptcy retains all the Rights and Powers of the Bankruptcy Trustee, if appointed. A Trustee may be appointed in only limited circumstances, to manage the Bankruptcy Estate. These exceptions include instances of Fraud, Gross Mismanagement, or Incompetence.
Bankruptcy Code Section 1144 is titled “Revocation Of An Order Of Confirmation” and discusses the requirements for a Party In Interest, to obtain a Revocation of an Order of Confirmation in a Chapter 11 Bankruptcy. A Party In Interest in the Chapter 11 Bankruptcy may seek the Revocation of a Confirmed Chapter 11 Plan provided it seeks such Revocation within 180 days after the entry of the Order Of Confirmation, and if such Order of Confirmation was obtained by Fraud. Both the 180 days requirement and the Fraud element must be present for a Party In Interest to obtain a Revocation of an Order Confirming a Chapter 11 Bankruptcy Plan.
Section 1141 of the Bankruptcy Code is titled “Effect Of Confirmation” of a Chapter 11 Bankruptcy Plan. The Effect of Confirmation of the Chapter 11 Bankruptcy Plan is that such Plan binds the Debtor, and the participating Creditors, or other Parties in Interest, to the terms of the Chapter 11 Bankruptcy Plan.
Section 1129 of the Bankruptcy Code refers to the Confirmation of the Chapter 13 Plan. This Bankruptcy Code Section plainly states that after Notice, the Bankruptcy Court can hold a Hearing on Confirmation of the Chapter 11 Bankruptcy Plan. Any Party In Interest may object to Confirmation of the Chapter 11 Bankruptcy Plan. The Confirmation Hearing in a Chapter 11 Bankruptcy is basically a Hearing where the Bankruptcy Judge reviews the Bankruptcy Plan, hears any Objections to the Chapter 11 Plan, and decides whether to Confirm or Approve, the Chapter 11 Bankruptcy Plan, as presented.
Bankruptcy Code Section 1127 describes the Modification of a Chapter 11 Bankruptcy Plan. The Bankruptcy Code states that the Proponent of the Chapter 11 Bankruptcy Plan may Modify such Plan before or after Confirmation of the Bankruptcy, provided such Modification does not violate Sections 1122 or 1123 of the Bankruptcy Code.
Bankruptcy Code Section 1123 refers to the Title of “Contents Of Plan” in a Chapter 11 Bankruptcy. The Chapter 11 Bankruptcy Plan must designate specific Classification of Claims, must state any Claims or Interests that are impaired under the Chapter 11 Plan, and provide that similar Claims or Interests be treated equally. This is the concept of Nondiscrimination. The Chapter 11 Bankruptcy Plan must also provide elements for the implementation of the Chapter 11 Bankruptcy Plan including, the retention of the Bankruptcy Debtor of all or part of the Bankruptcy Estate, the Curing of any Default, and the Sale of any Property of the Bankruptcy Estate.
Bankruptcy Code Section 1122 addresses the “Classification Of Claim Or Interests” in a Chapter 11 Bankruptcy. This Bankruptcy Code Section provides that the Chapter 11 Bankruptcy Plan may place a Claim or Interest in a particular Class, only if the Claim or Interest is Substantially Similar to other Claims or Interests in that Class. This general rule states that, for example, that all Unsecured Claims should be treated similarly in a Chapter 11 Bankruptcy. Likewise, a Chapter 11 Bankruptcy Plan may not treat a Secured Creditor as an Unsecured Claim and treat such a Secured Creditor as an Unsecured Creditor, or Claim. The only exception to this Rule is stated in Section 1122(b) that the Bankruptcy Court may designate a separate class of Claims consisting only of every Unsecured Claim that is less than or reduced to an amount that the Bankruptcy Court approves as reasonable and necessary for administrative convenience.
Section 1116 of the Bankruptcy Code refers to the Duties of the Bankruptcy Trustee and Bankruptcy Debtor in Possession in small business Chapter 11 Bankruptcy. Among the Duties determined in the Bankruptcy Debtor in a Chapter 11 Bankruptcy are the requirement, with some Exceptions, within 7 days after the commencement of the Bankruptcy, a most recent Balance Sheet, Statement of Operations, Cash Flow Statement, and Federal Tax Returns. The Chapter 11 Bankruptcy Debtor must also attend, through its Senior Management Personnel and Counsel, meetings scheduled by the Bankruptcy Court, or the United States Trustee. The Bankruptcy Debtor in a Chapter 11 Bankruptcy must also provide Statements of Financial Affairs, and file periodic Financial and other Reports, as required by the Bankruptcy Procedures, in the various Bankruptcy Courts. The Bankruptcy Debtor in a Chapter 11 Bankruptcy must also permit the United States Trustee to inspect the Bankruptcy Debtor’s premises, records, and books, after given Reasonable Notice of such intent to inspect, unless the Bankruptcy Debtor Waives such Notice.
Bankruptcy Code Section 1113 provides that in a Chapter 11 Bankruptcy, the Debtor may Reject Collective Bargaining Agreements, under certain circumstances, and with certain limitations.
The Chapter 11 Debtor generally can Convert a Chapter 11 Bankruptcy to a Chapter 7 Bankruptcy UNLESS:
- The Chapter 11 Debtor is not a Debtor In Possession;
- The Chapter 11 Bankruptcy was originally commenced as an Involuntary Bankruptcy;
- The prior Bankruptcy Case was Converted to a Chapter 11 Bankruptcy, without the request of the Debtor
Substantial Consummation is defined in Section 1101(2) of the Bankruptcy Code as:
- A Transfer of All or Substantially All, of the Property proposed by the Chapter 11 Bankruptcy Plan, to be transferred; AND
- Assumption by the Bankruptcy Debtor of the business or management of All or Substantially All, of the Property dealt with in the Chapter 11 Bankruptcy Plan; AND
- Commencement of Distribution under the Chapter 11 Bankruptcy Plan
There are some advantages that the Debtor in a Chapter 11 Bankruptcy has over a Debtor in other forms of Bankruptcy. The individual Debtor in a Chapter 11 Bankruptcy is not required to commit all of his disposable income to the Chapter 11 Bankruptcy Plan, as opposed to a Debtor in a Chapter 13 Bankruptcy. Also, because the Chapter 11 Debtors are usually of higher income means, the expenses that they claim as their budget are usually given much wider latitude than Debtors in Chapter 13 Bankruptcy or Chapter 7 Bankruptcy. Secondly, in a Chapter 11 Bankruptcy the Debtor may Cramdown certain Secured Claims without the limitations that apply in a Chapter 13 Bankruptcy.
There are two varieties of Debtors that would choose to file Chapter 11 Bankruptcy. First, a Corporation seeking to reorganize its Debts may file Chapter 11 Bankruptcy. Chapter 13 Bankruptcy is only available to Individuals or unincorporated businesses, seeking to reorganize their Debts, and Chapter 7 Bankruptcy for a Corporation, would generally entail the Liquidation of the Corporation. Secondly, an Individual that does not qualify for a Chapter 7 Bankruptcy because his income exceeds that permitted under the Means Test, and has Debts exceeding the limits prescribed in a Chapter 13 Bankruptcy, may decide to file Chapter 11 Bankruptcy.
A Chapter 11 Bankruptcy is also referred to as a Chapter 11 Reorganization. A Chapter 11 permits an individual or a corporation that do not qualify for a Chapter 13 Bankruptcy or a Chapter 7 Bankruptcy, to reorganize and reduce his or its debt obligations.