We often get asked by owners under MCA and loan pressure whether they should file Chapter 11. It’s important to know how the case proceeds before making that decision. Chapter 11 is for reorganizing your debts and assets. It can be used by individuals, sole proprietorships, partnerships, and corporations. Most filings are made by corporations. If you file for Chapter 11, your business stays open, but it is supervised. It is the most expensive kind of bankruptcy, so be sure to look at other options first. If you understand how the process works, and know how much things will cost, then you can weigh the pros and cons better. Here are the seven stages a case moves through.
The Petition
The first stage is the petition, filed in the bankruptcy court where you are a resident. There are two ways to file: voluntary and involuntary. A debtor files voluntary. A group of creditors can file involuntary, but they have to meet certain rules. One note: a voluntary petition can’t be filed if a previous bankruptcy was dismissed because the debtor intentionally didn’t show up for court or failed to follow the court’s orders. The petition, which goes along with the schedules listing income and expenses, assets and debts, as well as the executory contracts and unexpired leases and a statement of financial affairs, also has a line item for the tax ID number, the location of the primary assets, place of residence, and whether or not you plan to submit a reorganization plan. There are fees for filing the case. The filing fee is $1,167 plus a $500 administrative fee. These fees are paid to the clerk. It is possible for the judge to let the debtor pay these fees in installments, up to four payments, with the final payment within 120 days of filing.
The second stage begins the moment the case is filed, and it lasts as long as the reorganization does. When you file, the debtor automatically becomes a ”debtor in possession”, meaning he/she retains control over the operation and assets of the business during the time of the reorganization. You, as the DIP, are the one in charge of managing the affairs of the estate, doing everything that a trustee would do except investigate things. You’re responsible for keeping track of property, sitting down and examining and objecting to claims, filing reports. You can hire attorneys, accountants, appraisers, and even auctioneers, but only with the court’s approval.
The third stage, the automatic stay, is the one most owners have heard about. Once the petition is filed, the automatic stay goes into effect, suspending judgments, foreclosures, collection activity and repossessions by creditors on debts that arose before the petition. The automatic stay gives you time to try and work out what to do with your financial mess. In some cases, a lender who’s got collateral for a debt can ask the court to lift the automatic stay to foreclose on the property and use the proceeds of the sale to pay off the debt. In short, the automatic stay freezes the legal scene just enough so the debtor can figure out how to proceed.
The fourth stage is oversight. The trustee monitors the debtor-in-possession’s (DIP’s) compliance with the court’s reporting requirements. If the DIP fails to comply, the trustee can move to dismiss the case or convert it to another chapter of the Bankruptcy Code.
The Debtor Needs to Come up with a Plan
The fifth stage is the plan. Within 120 days of filing, the debtor needs to come up with a plan. If it does, then it is given another 180 days to get the plan confirmed. Alongside it, the debtor submits a disclosure statement, which sets forth its assets, liabilities, business, etc. in enough detail that the court can make an informed decision about the plan. The plan specifies how the claims will be classified, and how each will be treated. Secured creditors are given first priority.
The sixth stage is the vote. Impaired creditors vote on the plan by ballot. A class accepts the plan if at least two-thirds in dollar amount and half in numbers of allowed claims vote yes. A plan must be accepted by at least one impaired class. Any class that is unimpaired is deemed to have accepted the plan.
The seventh stage is confirmation. After the court has approved the disclosure statement, and the votes have been tallied, it holds a hearing on confirmation. If a class of creditors does not consent, the court can still approve the plan if it finds that the plan is fair and equitable and that it does not discriminate unfairly against that class. The court also must find that the plan is feasible and that it was proposed in good faith and otherwise in compliance with Chapter 11. The plan is then binding, and it spells out how your debts will be treated for as long as the plan runs. If the plan isn’t approved, the court can either convert the case to Chapter 7 or dismiss it altogether. Dismissal just puts everything back where it was before the bankruptcy was filed, so the creditors are free to go back to regular non-bankruptcy remedies to protect their interests.
That is a long and costly road, and it may not be the right one for your business. We are a business debt settlement company, not a law firm. We negotiate with merchant cash advance funders and lenders for less than the full balance due. At Delancey Street, we don’t sugarcoat it. If the case can’t be won or if there’s a cheaper option, we say so on the first call. If bankruptcy is the better path, we refer the owner to a vetted independent bankruptcy attorney. Your first consultation is free and confidential.
