In the current economic climate, we’re hearing a lot from owners in business distress, and more often than not they’re asking what Chapter 11 is and how they can file. To be clear, we are not a law firm, and Chapter 11 is a reorganization process that applies to a debtor’s debts and assets. It is available to individuals, sole proprietorships, partnerships, and corporations, though corporations use it more than the other entities. The business remains operational during the process and is supervised. Here are the eight steps from filing to plan.
The first step happens before anything is filed. Before you file, check your exits. Chapter 11 is not a cheap rescue; it is the most expensive route out of a solvency crisis, and you ought to make sure the other doors are locked before you go through it.
When You File the Bankruptcy Petition
The second step is the petition. To begin a Chapter 11 bankruptcy case, you must file a petition in the bankruptcy court where you live. That can be voluntary or involuntary. Voluntary is when you file; involuntary is when your creditors file it for you (they have to meet certain requirements). You can’t file a voluntary petition if you previously filed a bankruptcy petition that was dismissed because you intentionally failed to appear in court or to comply with court orders. Your voluntary petition has to list your tax ID number, where your principal assets are located, where you live, and that you intend to file a plan of reorganization.
Step three is paperwork. Once your petition is filed, you will have to file schedules of current income and expenditures, assets and liabilities, executory contracts, and unexpired leases, as well as a statement of your financial affairs. After filing, you will automatically become ’debtor in possession’. This means you maintain control of the business’s operations and assets during the reorganization process.
Fourth, the fees. The court charges a $1,167 filing fee, plus $500 for administrative purposes, when it receives your petition. Both are paid to the clerk of the court and may be paid in full or in installments, if the court approves. No more than four installments will be allowed. The final installment must be paid within 120 days of the case filing date.
Fifth comes relief from collections. The automatic stay means just what it sounds like: when you file the bankruptcy petition, a stay immediately takes hold against all judgments, foreclosures, collection actions and repossessions by creditors arising before the petition. The purpose is to give the debtor time to negotiate and resolve its financial distress. In certain cases, a secured creditor can ask the court for relief from the stay to foreclose on assets and apply the sale proceeds to the debt.
Debtor in Possession
Sixth, you run the business as debtor in possession, and you do all of its functions besides the investigative ones and the ones that go with a trustee. That includes, amongst other things, the examination and objection to claims, the accounting of assets and property, and the reporting required by the court. With the court’s approval you can hire professionals such as attorneys, accountants, auctioneers, and appraisers. Meanwhile, a trustee watches to see if the debtor in possession is meeting the reporting requirements established by the court. Should the debtor in possession fail to comply with the reporting requirements established by the trustee or the court, the trustee may file a motion to dismiss the case or to convert it to another chapter of the Bankruptcy Code. In short, do not forget the paperwork.
Plan of Reorganization
The seventh step is the plan itself. When a debtor files for Chapter 11, it has 120 days to submit a plan of reorganization. If a plan is proposed during those 120 days, the court grants a second 180 days to obtain confirmation. The plan classifies claims and specifies how each class will be treated. It also lists creditors in order of priority, secured creditors being at the top. A plan is filed along with a disclosure statement. The statement contains information about the debtor’s assets, liabilities and business affairs. It has to provide sufficient detail to enable the court to make an informed decision about the plan.
Eighth and last, creditors vote and the court decides. Creditors whose claims are impaired vote on the plan by ballot. Unimpaired creditors are deemed to accept the plan. A whole class of creditors is deemed to accept the plan if creditors holding at least two-thirds in amount and at least half in number of the allowed claims in that class accept it. The plan must also be accepted by at least one class of impaired claims. After the court approves the disclosure statement and votes are tallied, the court holds a confirmation hearing. A class voting against a reorganization plan does not mean the plan fails. It may still be confirmed if it is fair and equitable, and if it does not discriminate against that class. If there are no objections to the plan the court still must be satisfied that it meets all of the requirements, including feasibility and proposed in good faith and complies with Chapter 11. The plan once confirmed is binding, the terms of it control how the debts are treated for the life of the plan.
If a reorganization plan in a Chapter 11 case is not accepted, the court can convert the case to Chapter 7 or dismiss it altogether. Dismissal means the case is treated as if the petition had never been filed, and creditors then can turn to non-bankruptcy law to protect their interests. The upshot for the owner is that a failed Chapter 11 can result in the business ending up exactly where it was before the case, only poorer.
Chapter 11 is a heavy suit of armor, not a Band-Aid. Before you put it on, ask yourself if you can negotiate a reduced payoff with your merchant cash advance funders and lenders. We handle those negotiations. If bankruptcy is the better route, we will tell you and connect you with a vetted, independent bankruptcy attorney. First consult is free and confidential.
