Chapter 11 - Frequently Asked Questions
Common Questions about Chapter 11 Bankruptcy
What is Chapter 11?
Chapter 11 bankruptcy is a form of bankruptcy where the debtor, usually a business, obtains a reorganized payment plan that enables them to continue paying their creditors. Unlike a Chapter 7, a Chapter 11 bankruptcy allows debtors to keep control of their assets or business rather than give them up to the courts for liquidation.
Why is Chapter 11 bankruptcy any different from Chapter 13?
Both Chapter 11 and Chapter 13 involve reorganizing debts into a repayment plan that allows the debtor to hold onto their assets. However, several differences remain between the two forms of bankruptcy. The most important difference is the debt limit enforced in chapter 13 cases -- debtors can only have so much secured and unsecured debt if they wish to file for chapter 13. A debtor ineligible for chapter 13 may find that chapter 11 is suitable.
Are individuals eligible for Chapter 11?
Although chapter 7 and chapter 13 bankruptcies tend to be more suitable options, individuals can file for chapter 11 bankruptcy. Often, high-income individuals or small business owners who otherwise could not qualify for bankruptcy will elect to file for chapter 11. It is important to note, however, that chapter 11 can be a longer and more complicated process for an individual, and thus should be entered only after careful consideration and advice from a bankruptcy attorney, usually as a last resort.
How much does a Chapter 11 bankruptcy cost?
Generally speaking, chapter 11 is known as the most expensive form of bankruptcy in the United States. To begin with, the filing fee for a Chapter 11 is over $1,000 – almost four time the cost of chapter 7. Also, because the negotiations that go into the reorganization plan can be obstacle-ridden, legal fees tend to be significant. A small chapter 11 bankruptcy can cost $10,000 or more, and larger cases can lead to much higher expenses.
How long will the Chapter 11 bankruptcy last?
Chapter 11 bankruptcies can vary in length. Unlike chapter 13 bankruptcies, there is no time limit to the repayment plan. Instead, the length of the plan is up to the discretion of the court, based on the case. Therefore, a chapter 11 bankruptcy repayment plan potentially can be quite long; on average, chapter 11 plans last between 4 and 5 years.
Does a debtor receive a discharge in a Chapter 11 bankruptcy?
Yes, a chapter 11 does allow debtors to receive a formal discharge. Generally, after a complete repayment plan has been approved and confirmed, remaining debts not included in the plan are discharged. From that point forward, the debtors become responsible to make plan payments as ordered by the court. For an individual debtor, however, debts not paid in full under the plan are usually only discharged upon successful completion of the plan. Also, certain debts generally are non-dischargeable some examples of which include student loans, and marital domestic support obligations. You should discuss the types of debts you have with bankruptcy counsel to determine if any of your debts will not be discharged by the bankruptcy.
Are Chapter 11 bankruptcies public record?
As a civil proceeding, chapter 11 bankruptcy is a matter of public record. That means that the public has access to information about your filings through the courts. If you own a business, it is possible for customers or suppliers to find out that you are currently filing bankruptcy. A chapter 11 bankruptcy will also be listed on an individual debtor’s credit report for 10 years.
When a business files chapter 11, who runs the business?
In most chapter 11 cases, the debtor assumes the status of a “debtor in possession” and continues to run the business in that capacity until confirmation of a chapter 11 plan. In some cases, a trustee will be appointed by the court to run the debtor's business and perform the other fiduciary duties of the debtor. While the case is pending, a debtor in possession generally also is responsible for accounting for property; examining and objecting to claims; filing required monthly operating reports; employing attorneys, accountants, appraisers, auctioneers, and other professionals to assist with a case; and filing tax returns.
When a business files bankruptcy, who prepares the plan and disclosure statement?
The plan and disclosure statement are prepared by the attorney representing the debtor in possession in close cooperation with the debtor. This means that the debtor and attorney work together to explain to the debtor’s creditors and the court how the business and debt will be restructured so as to yield the debtor profitable when it exits bankruptcy. While the attorney will do the majority of the drafting, crucial financial information and information about the structure and management of the business has to be provided by debtor’s management. Also, it is the debtor’s sole responsibility to seek the assistance of other professionals to devise a business plan that sheds unprofitable parts of the business and creates a new business models that will be profitable on a going-forward basis. The chapter 11 plan generally can help the debtor shed some existing unsecured debt, but it is up to the debtor and its financial and management team – not bankruptcy counsel – to devise a business model that will work.
How does a Chapter 11 reduce a business’ debt?
Under the confirmed plan, the debtor can reduce its debts by proposing to repay a portion of its obligations and discharging others. The debtor also can terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business. A creditor that is to receive less than the full amount owed is called an “impaired creditor.” Impaired creditors may approve a plan under which they will receive less than the full amount owed because the alternative to reorganization almost always is that the business will file chapter 7 – leaving the unsecured creditor with nothing – or will simply shut its doors without paying its debts and cease operations. Therefore, most often accepting a plan that is fair and appears to be the debtor’s best effort is the best way for an impaired unsecured creditor to minimize its losses. Moreover, if the debtor’s reorganization is successful, the impaired creditor actually could benefit by continued business from the reorganized debtor.
When a business files bankruptcy, how is it able to secure credit to fund its operations?
A debtor in possession may not use prepetition lines of credit to fund ongoing business operations. Therefore, a business in chapter 11 must rely on funds generated from post-petition operations and new extensions of credit. "Cash collateral" (cash in which a creditor has a security interest and the proceeds of collateral in which a creditor has an interest) may not be used by the debtor in post-petition business operations without prior consent of the creditor or authorization from the court. Thus, post-petition extensions of credit and sales on credit to debtors in possession are allowed by the court subject to the limitations and requirements provided in the bankruptcy code. The debtor in possession must secure approval from the court before entering into any such credit arrangement.
How does a chapter 11 plan get approved?
Creditors whose claims are "impaired," (i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims), vote on the plan by ballot. Holders of unimpaired claims are deemed to have accepted the plan. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan. An entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class. If there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered). A plan that is confirmed over the objection of some creditors but which has been accepted by one impaired class is considered a “cram down” plan. A cram down plan can be approved only if the court finds that the plan does not discriminate unfairly and the plan is fair and equitable.
How does a business exit bankruptcy?
A chapter 11 debtor in possession has a number of responsibilities to perform after confirmation of the plan. These include performing under the plan, reporting on the status of consummation, and applying for a final decree from the court closing the case. Thus, companies exit chapter 11 after the plan has been approved by the court and debtor consummates the plan.
What is Chapter 11?
Chapter 11 bankruptcy is a form of bankruptcy where the debtor, usually a business, obtains a reorganized payment plan that enables them to continue paying their creditors. Unlike a Chapter 7, a Chapter 11 bankruptcy allows debtors to keep control of their assets or business rather than give them up to the courts for liquidation.
Why is Chapter 11 bankruptcy any different from Chapter 13?
Both Chapter 11 and Chapter 13 involve reorganizing debts into a repayment plan that allows the debtor to hold onto their assets. However, several differences remain between the two forms of bankruptcy. The most important difference is the debt limit enforced in chapter 13 cases -- debtors can only have so much secured and unsecured debt if they wish to file for chapter 13. A debtor ineligible for chapter 13 may find that chapter 11 is suitable.
Are individuals eligible for Chapter 11?
Although chapter 7 and chapter 13 bankruptcies tend to be more suitable options, individuals can file for chapter 11 bankruptcy. Often, high-income individuals or small business owners who otherwise could not qualify for bankruptcy will elect to file for chapter 11. It is important to note, however, that chapter 11 can be a longer and more complicated process for an individual, and thus should be entered only after careful consideration and advice from a bankruptcy attorney, usually as a last resort.
How much does a Chapter 11 bankruptcy cost?
Generally speaking, chapter 11 is known as the most expensive form of bankruptcy in the United States. To begin with, the filing fee for a Chapter 11 is over $1,000 – almost four time the cost of chapter 7. Also, because the negotiations that go into the reorganization plan can be obstacle-ridden, legal fees tend to be significant. A small chapter 11 bankruptcy can cost $10,000 or more, and larger cases can lead to much higher expenses.
How long will the Chapter 11 bankruptcy last?
Chapter 11 bankruptcies can vary in length. Unlike chapter 13 bankruptcies, there is no time limit to the repayment plan. Instead, the length of the plan is up to the discretion of the court, based on the case. Therefore, a chapter 11 bankruptcy repayment plan potentially can be quite long; on average, chapter 11 plans last between 4 and 5 years.
Does a debtor receive a discharge in a Chapter 11 bankruptcy?
Yes, a chapter 11 does allow debtors to receive a formal discharge. Generally, after a complete repayment plan has been approved and confirmed, remaining debts not included in the plan are discharged. From that point forward, the debtors become responsible to make plan payments as ordered by the court. For an individual debtor, however, debts not paid in full under the plan are usually only discharged upon successful completion of the plan. Also, certain debts generally are non-dischargeable some examples of which include student loans, and marital domestic support obligations. You should discuss the types of debts you have with bankruptcy counsel to determine if any of your debts will not be discharged by the bankruptcy.
Are Chapter 11 bankruptcies public record?
As a civil proceeding, chapter 11 bankruptcy is a matter of public record. That means that the public has access to information about your filings through the courts. If you own a business, it is possible for customers or suppliers to find out that you are currently filing bankruptcy. A chapter 11 bankruptcy will also be listed on an individual debtor’s credit report for 10 years.
When a business files chapter 11, who runs the business?
In most chapter 11 cases, the debtor assumes the status of a “debtor in possession” and continues to run the business in that capacity until confirmation of a chapter 11 plan. In some cases, a trustee will be appointed by the court to run the debtor's business and perform the other fiduciary duties of the debtor. While the case is pending, a debtor in possession generally also is responsible for accounting for property; examining and objecting to claims; filing required monthly operating reports; employing attorneys, accountants, appraisers, auctioneers, and other professionals to assist with a case; and filing tax returns.
When a business files bankruptcy, who prepares the plan and disclosure statement?
The plan and disclosure statement are prepared by the attorney representing the debtor in possession in close cooperation with the debtor. This means that the debtor and attorney work together to explain to the debtor’s creditors and the court how the business and debt will be restructured so as to yield the debtor profitable when it exits bankruptcy. While the attorney will do the majority of the drafting, crucial financial information and information about the structure and management of the business has to be provided by debtor’s management. Also, it is the debtor’s sole responsibility to seek the assistance of other professionals to devise a business plan that sheds unprofitable parts of the business and creates a new business models that will be profitable on a going-forward basis. The chapter 11 plan generally can help the debtor shed some existing unsecured debt, but it is up to the debtor and its financial and management team – not bankruptcy counsel – to devise a business model that will work.
How does a Chapter 11 reduce a business’ debt?
Under the confirmed plan, the debtor can reduce its debts by proposing to repay a portion of its obligations and discharging others. The debtor also can terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business. A creditor that is to receive less than the full amount owed is called an “impaired creditor.” Impaired creditors may approve a plan under which they will receive less than the full amount owed because the alternative to reorganization almost always is that the business will file chapter 7 – leaving the unsecured creditor with nothing – or will simply shut its doors without paying its debts and cease operations. Therefore, most often accepting a plan that is fair and appears to be the debtor’s best effort is the best way for an impaired unsecured creditor to minimize its losses. Moreover, if the debtor’s reorganization is successful, the impaired creditor actually could benefit by continued business from the reorganized debtor.
When a business files bankruptcy, how is it able to secure credit to fund its operations?
A debtor in possession may not use prepetition lines of credit to fund ongoing business operations. Therefore, a business in chapter 11 must rely on funds generated from post-petition operations and new extensions of credit. "Cash collateral" (cash in which a creditor has a security interest and the proceeds of collateral in which a creditor has an interest) may not be used by the debtor in post-petition business operations without prior consent of the creditor or authorization from the court. Thus, post-petition extensions of credit and sales on credit to debtors in possession are allowed by the court subject to the limitations and requirements provided in the bankruptcy code. The debtor in possession must secure approval from the court before entering into any such credit arrangement.
How does a chapter 11 plan get approved?
Creditors whose claims are "impaired," (i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims), vote on the plan by ballot. Holders of unimpaired claims are deemed to have accepted the plan. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan. An entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class. If there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered). A plan that is confirmed over the objection of some creditors but which has been accepted by one impaired class is considered a “cram down” plan. A cram down plan can be approved only if the court finds that the plan does not discriminate unfairly and the plan is fair and equitable.
How does a business exit bankruptcy?
A chapter 11 debtor in possession has a number of responsibilities to perform after confirmation of the plan. These include performing under the plan, reporting on the status of consummation, and applying for a final decree from the court closing the case. Thus, companies exit chapter 11 after the plan has been approved by the court and debtor consummates the plan.
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603-882-3223
CONCORD:
603-223-0063
TEXT:
603-490-3177