If you are the owner of a small business contemplating bankruptcy, you may be thinking that the filing is the end of your business. I want to assure you it is not the end. In fact, it is only the beginning. If you’ve never done it, it’s a pretty weird feeling knowing everything that’s about to happen and then having no clue what really will. The day the chapter 11 bankruptcy petition is filed, if your company still has a viable business, is likely going to be one of the busiest and most complicated. You and your attorney will be trying to keep all the balls in the air to make sure business continues as usual: an absolute “must” in a chapter 11. Here is what that day involves, in roughly the order it happens.
The Petition Is Filed in the Local Bankruptcy Court
The first thing to know is that the petition is filed in the local bankruptcy court for the jurisdiction where the debtor (that’s the company) lives or is domiciled. There are two ways to file the petition, voluntary and involuntary. Voluntary is when the company files the petition. Involuntary is when your creditors file. The requirements for an involuntary case in Chapter 11 are the same as an involuntary case in Chapter 7. The company filing for Chapter 11 does not need to be insolvent; insolvency is not a prerequisite for a voluntary petition. If it’s eligible for Chapter 7, it’s also eligible for Chapter 11, with the exception that stockbrokers and commodity brokers are only allowed to file Chapter 7 petitions, and railroads are only allowed to file Chapter 11 petitions.
The petition is filed on Official Form 1. There are a number of documents required to be filed along with the petition. Required documents to be filed include schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs. You have to figure out your assets, and the value of each asset. What is it worth? You have to put a number on it. Then you have to take all your current obligations and list them. Your rent, your leases, your loans.
There is a case filing fee and an administrative fee, which must be paid to the clerk, but you don’t necessarily have to come up with all of it the day you file. If the debtor can’t pay the fees immediately, the court can allow payment in up to four installments, with the final payment due no more than 120 days after the petition.
Creditors Are Given Notice
The debtor provides the list of creditors; creditors are given notice that an order for relief under Chapter 11 has been entered. You will find the world around you quite different. What’s more, you find the whole world (your employees, contractors, customers, suppliers, etc.) looking at you in a new way. They all realize that if you are filing Chapter 11, your problems are serious.
After the notice goes out, some of the burden shifts to the other side. Your creditors’ role starts when they check to see whether you scheduled their claims correctly. The presence of a creditor’s claim on the schedules is generally treated as confirmation of the validity and amount of the claim; a proof of claim is “deemed” to have been filed. However, if the claim is not listed on the schedules, or is listed as disputed, contingent or unliquidated, the creditor has to file a proof of claim with appropriate documentation or risk not being allowed to vote on the plan or be paid any distributions under the plan. Equity security holders (owners) file a proof of interest, but the rules are largely the same.
Then there is the creditors’ committee. A business in trouble may owe money to hundreds of unsecured creditors. The debtor cannot possibly deal with each of them individually. So a creditors’ committee steps in and represents all the unsecured creditors. The U.S. trustee selects its members, and it is trying to select people who represent the various types of creditors. In practice, however, it often picks the holders of the seven largest claims even though it is not required to do so. The committee consults with the trustee or debtor in possession on the administration of your case, investigates your acts and financial condition, helps you develop a Chapter 11 plan, and performs “such other services as are in the interest of those represented.”
First Day Orders
While all of that is being set up, the company has its own urgent business with the judge. When a chapter 11 case is filed, the debtor will file a set of “first day orders” with the court that they want to be entered as soon as possible after the filing. “First day orders” are usually administrative and not very controversial, such as notices and orders relating to the appointment of professionals (such as the attorneys and accountants). Some are used to cope with business emergencies and keep operations going. For example, first day orders may authorize the company to obtain post-petition financing, as well as to pay its employees their prepetition wages, and the prepetition obligations of the company’s suppliers for goods and services received.
My point is that the business isn’t over the day of the filing; there is a lot to be done to keep it afloat. If you’re beholden to suppliers, loans and MCAs, and you’re running out of time, don’t start the process casually. The reality is the opening day is a ton of work, and it’s not without cost. Bottom line: the filing of a chapter 11 bankruptcy petition is not the end of the world. It’s a beginning, and one that involves a lot of busy-ness. If you are not at that point yet, it is worth talking through every option, including working out terms with your creditors, before the petition is filed.
