Everyone who thinks “Chapter 11” goes straight for the U.S. Courts guide, “Chapter 11 - Bankruptcy Basics”. It’s the first document that comes up when you Google “Chapter 11.” It’s a great guide, really, but it is not so basic. If you’re new to bankruptcy, it swamps you. So let’s walk it through in plain English.
How a Bankruptcy Case Gets Filed
The court’s guide starts with how a bankruptcy case gets filed. If you’re just learning this stuff now, you probably only care about half of that chapter, because there’s two ways to file a case; voluntarily and involuntarily. As a business getting ready to go into bankruptcy, you care about the voluntary side of things.
The petition itself is a legal form with very particular requirements. And while you’re filing it, there’s usually some other documents you’ll have to put in along with it too.
- A list of what the business owns and what it owes.
- A list of how much money your business earns and how much it spends.
- A list of executory contracts and leases that have not yet ended or expired.
- A report that explains the financial situation of the debtor.
You’ll probably also have a disclosure statement, and reorganization plan to file. Whether or not you have to have a disclosure statement depends on whether you’re filing a traditional Chapter 11 business bankruptcy or a Subchapter V small business case. And in some cases you don’t even need a disclosure statement. A lot of the material in this court’s guide is very, very detailed. That’s where an attorney’s got a big advantage - knowing what you need from the list of things the government wants you to file.
Debtor in Possession
Unless there’s exceptional circumstances, in the usual business case, you’d be the person who’s in charge of running the business in the bankruptcy process. Which means the business would be “debtor in possession,” for as long as the case is open.
The Debtor In Possession is a fiduciary who has all the rights and powers of a trustee. A DIP has all the trustee duties, EXCEPT for investigating the estate’s financial affairs. A DIP has to account for the estate’s property, object to claims, and file reports. These reports are the ones that the court, U.S. trustee or bankruptcy administrator might ask for. It saves the debtor the cost of a trustee, but comes with all the risk of a trustee, too. You and your officers would need to know and understand the duties and liability involved here, but for keeping the cost of the case down this is probably the most important part.
Role of the United States Trustee
The U.S. trustee is one of the most misunderstood aspects of the bankruptcy system. But the trustee does NOT take over your business. That’s right. A trustee does not actually run your business. Under Chapter 11, you continue running the business as the DIP. So the trustee’s job, is sort of like that of a cop - to keep an eye on the case, and if need be to step in to protect the estate’s assets.
The section about the U.S. Trustee, I think is incomplete. Mostly because it overlooks the role of the creditors. Creditors are major players in bankruptcy. They protect their right to payment, and bring claims and defenses to keep it as intact as possible. In some cases they ask the trustee to step in, but in most, they just take it on themselves through an adversary proceeding.
The creditors committee can be very important in a case or not, depending on if you are a traditional Chapter 11 or Subchapter V small business. And if you’re a small business, there is no creditors’ committee at all, as the guide explains in this section. (For small business cases, the cutoff for a small business case is no more than $7.5 million of secured and unsecured debt with at least half of the debt being from business activities.)
No committee means something for your business. It opens the door for a reorganization where there might have not been one had a creditors’ committee been appointed. In fact, most Chapter 11 reorganizations these days are Subchapter V.
From here on the court’s guide talks about plan acceptance and getting discharged. Pay most attention to the first part on plan acceptance. That’s where you should focus your time and prep. The more prepped you are, the fewer your roadblocks will be, and the more ready your company will be to set up for growth. In the end, Chapter 11, is a tool. Understanding how to get acceptance of a plan before you file is the first step toward ensuring the best result once your business files.
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