What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is best known as the way that large businesses reorganize their debts and assets. In a Chapter 11, businesses, partnerships, and sole proprietors usually propose plans to reorganize their businesses and keep them “alive” while proposing to pay creditors over time. Individuals also use Chapter 11 to reorganize their finances when they have too much debt to reorganize in a Chapter 12 bankruptcy or a Chapter 13 bankruptcy. The typical consumer does not generally use Chapter 11 due to the increased cost and complexity required to navigate that type of bankruptcy. However, Chapter 11 is a crucial tool for businesses and individuals who find themselves in need of reorganization under the protections of the Bankruptcy Court.
Personal Bankruptcy Chapter 11
Individuals usually choose to file Chapter 11 bankruptcy where they have too much debt to reorganize in a Chapter 13 bankruptcy. Chapter 11 bankruptcy is available to both individuals and married couples who seek to reorganize their debts and receive a discharge from the federal bankruptcy court. Individuals with mostly business debt may have the option to fast-track their Chapter 11 reorganization by electing to proceed under Subchapter V, which offers some advantages over traditional Chapter 11.
Business Bankruptcy Chapter 11
Companies usually choose to file Chapter 11 bankruptcy to keep their business operational without selling assets. While the company owners could choose to sell their assets to pay off creditors, Chapter 11 allows them to make more money off of revenue long-term, which enables them to pay debts more efficiently. If your business has been struggling as a result of COVID-19, you should consider a Subchapter V Bankruptcy.
These types of bankruptcy cases can be risky without proper planning and specific consideration with an experienced bankruptcy attorney.
A Chapter 11 bankruptcy is commenced by the filing of a petition with the Bankruptcy Court. Petitions and filing fees are generally electronically filed with the Bankruptcy Court. Once a petition is filed, a case number and Bankruptcy Judge are assigned to the case. A Subchapter V trustee is also assigned where the Chapter 11 debtor has elected to proceed under Subchapter V bankruptcy.
About 30 days after the petition is filed with the Bankruptcy Court, the Chapter 11 debtor must attend and participate in a 341 meeting of creditors and a n Initial Debtor Interview. Both of these events are organized and run by the Office of the United States Trustee.
A Chapter 11 debtor must next file a plan. A debtor’s plan may be a plan of reorganization or a plan of liquidation. A plan of reorganization tells the Bankruptcy Court, creditors, and all parties in interest exactly how the Chapter 11 debtor is going to treat all debts and assets. A plan of liquidation has many of the elements of a plan of reorganization, except the debtor does not plan to keep operating its business after confirmation, but rather sell off and dispose of its assets.
The Bankruptcy Code requires that different creditors receive specific treatment in Chapter 11 bankruptcy. These are referred to as different classes of creditors. Creditor classes may generally be classified into the following categories:
– Administrative creditors, which include the debtor’s attorney and other professionals who are involved in the Chapter 11 reorganization and the restructuring of the debtor.
– Secured creditors, which include any creditor that has a preexisting lien on the debtor’s assets, such as in the case of a mortgage on real property, or a note on a financed automobile.
– Priority unsecured creditors, which include certain taxing authorities like the Internal Revenue Service, the State of New Jersey Division of Taxation, and other types of claims that receive special treatment under the Bankruptcy Code.
– General unsecured creditors, which include creditors who are not priority, and have no security in any of the debtor’s property, such as credit cards, medical bills, and any other type of general debt owed by the Chapter 11 debtor.
– Lastly, where the debtor is a business entity, any creditors who hold equity in the business, such as members in a limited liability company and stockholders in a corporation.
Creditors must file proofs of the amounts they allege due, and provide the Bankruptcy Court with specific details about how they allege they should be treated by the debtor. These are called proofs of claim. The Bankruptcy Court sets a deadline for creditors to file these proofs of claim. The debtor has the right to review and, where appropriate, to challenge any proof of claim believed to be inaccurate.
How these classes of creditors are treated by the Chapter 11 debtor in a plan of reorganization or liquidation are guided by the Bankruptcy Code. A Chapter 11 plan must treat creditors in each class the way required by the Bankruptcy Code. However, the Chapter 11 debtor may separately classify certain claims on a case by case basis, and may challenge whether certain creditors should be treated differently, completely reclassified, or even expunged and not treated as a claim at all.
A Chapter 11 plan may consist of a combined plan and disclosure statement, or the Court may require the debtor to file a separate plan and disclosure statement This plan and disclosure statement outlines exactly how the debtor proposes to treat each class of creditor claims over the life of the plan. The Bankruptcy Court must generally first approve the disclosure statement before the Chapter 11 debtor sends the plan out to creditors for review and consideration.
Creditors have the right to vote for the plan must do so by completing a ballot before a deadline. The Chapter 11 debtor must add up these ballots and advise the Bankruptcy Court how many creditors voted in favor or against the plan, and the class of each of these creditors. The Bankruptcy Court can confirm a Chapter 11 plan with the required number of votes. Alternatively, the Bankruptcy Court can confirm a plan over creditor objection if the plan is deemed to be fair and equitable, and offer creditors more than they would receive in a hypothetical Chapter 7 liquidation by a Chapter 7 trustee.
Chapter 11 plans are the most complex kind of bankruptcy reorganization. If a debtor is unable to confirm their Chapter 11 plan, their case is at risk of conversion to a Chapter 7 liquidation or dismissal. A Chapter 11 case can also be dismissed for the debtor’s failure to file monthly operating reports, to pay quarterly fees to the Office of the United States Trustee, or failure to follow the terms of the plan of reorganization. The complexity of a Chapter 11 case requires the assistance of experienced bankruptcy attorneys. Not all bankruptcy attorneys even know how to navigate a Chapter 11 case, and would rather stick to the more approachable Chapter 7 and Chapter 13 cases. Therefore, before filing a Chapter 11 case, it’s crucial to make sure that you retain counsel that knows how to not only file a Chapter 11 petition with the Bankruptcy Court, but who also knows how to confirm a Chapter 11 plan.
About Middlebrooks Shapiro
At Middlebrooks Shapiro, our attorneys have over 30 years of bankruptcy law experience. From our office in Springfield, NJ, we help clients with the most basic or complex personal and business bankruptcy cases by leading them through the legal process of our numerous practice areas.
Call 973-218-6877 to speak with the experienced bankruptcy attorneys at Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the right guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.