Chapter 11 Bankruptcy

Chapter 11 is an option under the Bankruptcy Code generally considered appropriate for businesses such as corporations, partnerships or sole proprietors due to the complexity and length of the procedures and the expenses involved. Also, there are distinctions in the procedure for these three classes of debtor. As with other bankruptcy options, individuals, or husband and wife, electing chapter 11 bankruptcy must undergo credit counseling. Corporations’ personal assets are not involved in chapter 11 bankruptcy proceedings apart from the stocks of the company, but partnerships may find personal assets involved and sole proprietors can anticipate both personal and business assets being subject to rulings. Cases designated ‘small business’ may proceed at a faster pace and be subject to fewer official demands than other cases, but to be a small business debts must be below approximately $2.2 million and have no creditors’ committee involvement.

Filing under chapter 11 may be at the debtor’s discretion or it may be an involuntary petition filed by creditors. All debtors are required to provide the court with full disclosure statements of all debts and assets (though the extent of the disclosure statement varies depending on the type of debtor) and pay fees in excess of $1000 and a repayment or liquidation plan.

Filing a voluntary chapter 11 petition means the debtor remains in charge of the business and is referred to as the ‘debtor in possession’. The debtor in possession has considerable responsibilities to manage and move the case along. Tardiness can have negative repercussions. A US trustee maintains a close supervisory role over the case in relation to the operation of the business requiring reports on all endeavors including operating expenses and income. The US trustee can have the case converted under the Bankruptcy code should the debtor in possession be found to negligent in proceeding with confirmation of a plan or otherwise fail to report appropriately on the activities of the business. In addition the US Trustee is paid by the debtor in possession.

Additional officials may be involved in complex on-going chapter 11 petitions such as a case trustee or an examiner who works with the trustee. Creditors’ committees may be formed of unsecured creditors to work with the debtor in possession and may also hire other professionals at the courts discretion.

Chapter 11 requires that a repayment plan must set out what types of claims are to be addressed and how they will be addressed. The plan along with the disclosure statement must provide sufficient information for creditors to assess the viability of the plan. There is an opportunity to vote by ballot for those creditors who cannot necessarily anticipate full repayment under the plan. Also, creditors are able to provide alternative plans.

Following filing, there is the usual period in which an automatic stay comes in to act with regard to the actions of most creditors. However, some secured creditors can petition the court for the right to foreclose on property under special circumstances such as in the case of single asset real estate debtors. This type of action on the part of creditors and other possible motions related to stays can be forestalled by the confirmation of a plan or commencement of repayment of interest on debt to the creditor.

Adherence to the requirements of a confirmed plan generally leads to discharge of debts accrued before confirmation. But, under chapter 11, only individuals are granted discharge as a result of confirmation of a liquidation plan.

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