Chapter 11
Chapter 11 is available to businesses and individuals. In the case of individuals, chapter 11 bears some similarities to chapter 13, although it is much more expensive. Chapter 11 is the only reorganization vehicle available to a business; businesses are not eligible for chapter 13.
Businesses having trouble meeting their financial obligations, and wishing to seek bankruptcy protection from creditors, have two options: chapter 7, also referred to as "liquidation" (this process involves termination of the business and sale of all assets); or chapter 11, also referred to as "reorganization." For a business, a chapter 11 reorganization offers the following unique benefits: forces the business to reevaluate its business plan and make changes to return the business to profitability; allows the business to remain in control of its operations while enjoying certain protections from its creditors; and grants its management time to put together a plan to repay its debts based on the new business plan. A business may repay all or just a fraction of its debt.
For an individual debtor, chapter 11 almost always is too costly. Chapter 11 is known as the most expensive form of bankruptcy in the United States. The filing fee for a chapter 11 is over $1,000 – almost four times the cost of chapter 7. Quarterly payments must be made to the United States Trustee’s Office, and paperwork and negotiations that go into the reorganization plan because the legal fees to be significant. A small chapter 11 often costs $10,000 or more, and larger cases will have much higher legal fees and expenses. However, chapter 11 might be the right bankruptcy solution for an individual if: (i) you have large nondischargeable debts and significant non-exempt assets; (ii) you have significant non-exempt assets some of which, given time, could be liquidated under your terms (instead of by a chapter 7 trustee) and used to pay off your debts; (iii) and you do not qualify for chapter 13 because you are over the debt thresholds. Your situation will need to be analyzed carefully to determine if your unique circumstances make an individual chapter 11 a good choice for you.
Eligibility for Chapter 11
Most businesses are eligible for chapter 11. Some examples include: corporations; partnerships; limited liability companies; unincorporated associations; individuals running a sole proprietorship; and business trusts. There are no debt or income requirements or limitations for filing bankruptcy under chapter 11. From a practical standpoint, a business needs to have a plan for restructuring itself into a profitable operation; without that, chapter 11 won’t be helpful. This may mean selling off n unprofitable subsidiary or product line, laying off certain nonessential workers, hiring new turn-around management, or otherwise restructuring the business plan so that the company can come out of bankruptcy (after shedding some of its old debt) with a profitable outlook for the future. In most instances substantial changes will need to be made. A business must embark on chapter 11 with a new business plan and the willingness to make the changes necessary to make it work.
Individuals also are eligible to file chapter 11. However, certain restrictions are placed on individuals related to the timing of successive bankruptcies. An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. Also, an individual may not be a debtor under chapter 11 or any other chapter unless he/she has, within 180 days before filing, received credit counseling from an approved source and has received a certificate. While there are some exceptions in emergency situations, most debtors are better off securing the credit counseling certificate.
Filing a Chapter 11 Case
A chapter 11 case begins by filing a petition with the bankruptcy court where the debtor has a domicile or residence. The filing fee for a chapter 11 is almost four times the fee for a chapter 7.
The voluntary petition will include standard information concerning the debtor's name, social security number or tax identification number, residence, location of principal assets (if a business), the debtor's intention to file a plan, and a request for relief under chapter 11.
Unless the court orders otherwise, the debtor also must file: schedules of assets and liabilities; a schedule of current income and expenditures; a schedule of executory contracts and unexpired leases; and a statement of financial affairs. If the debtor is an individual, there are additional requirements including: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions. The debtor, whether an individual or a business, also must file a plan of reorganization and a disclosure statement. These filings take considerable attorney time which is why proceeding under chapter 11, even as an individual, is considerably more expensive than chapter 7 or 13.
Upon filing chapter 11 the debtor automatically assumes an additional identity known as the "debtor in possession." The term refers to a debtor that keeps possession and control of its assets while undergoing reorganization. A debtor will remain a debtor in possession until the debtor's plan is confirmed, the debtor's case is dismissed or converted to chapter 7, or a chapter 11 trustee is appointed. The appointment or election of a trustee occurs only in a small number of cases, generally when it appears the debtor in possession is not acting in the best interest of its creditors. The debtor in possession operates the business and performs many of the functions that a trustee performs in cases under other chapters.
The Plan and Disclosure Statement
The debtor generally has a 120-day period during which it has an exclusive right to file a plan. This exclusivity period may be extended or reduced by the court. In no event may the exclusivity period, including all extensions, be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee (if one has been appointed) may file a competing plan. A written disclosure statement also must be filed. In a small business case, however, the court may determine that the plan itself contains adequate information and that a separate disclosure statement is unnecessary. The disclosure statement is a document containing information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization. After the disclosure statement is filed, the court must hold a hearing to determine whether it should be approved. Acceptance or rejection of a plan usually cannot be solicited until the court has first approved the written disclosure statement. The plan must include a classification of claims and specify how each class will be treated. In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than under chapter 7.
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).
Any party in interest may file an objection to confirmation. If no objection is timely filed, the court will determine whether the plan has been proposed in good faith and complies with all the other requirements for confirmation. In order to confirm the plan, the court must find, among other things, that: the plan is feasible; it is proposed in good faith; and the plan and the proponent of the plan are in compliance with the bankruptcy code. In order to satisfy the feasibility requirement, the court must find that confirmation of the plan is not likely to be followed by liquidation (unless the plan is a liquidating plan) or the need for further financial reorganization.
The Effect of Confirmation of the Plan
Generally confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization discharges any type of debtor – corporation, partnership, or individual – from most types of prepetition debts. It does not, however, discharge an individual debtor from any debt made nondischargeable by section 523 of the bankruptcy code. Moreover, except in limited circumstances, a discharge is not available to an individual debtor unless and until all payments have been made under the plan. Confirmation does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, unless the debtor is an individual (e.g. corporations filing liquidating plans do not receive a discharge, they just dispose of all of their assets and use the money to pay their creditors). When the debtor is an individual, confirmation of a liquidation plan will result in a discharge after plan payments are made unless grounds would exist for denying the debtor a discharge if the case were proceeding under chapter 7.
More Questions? Check out our Chapter 11 FAQ's
Deshaies Law has extensive experience in all aspects of the bankruptcy process and has guided many debtors to a brighter future. Deshaies Law would like to help you through your difficult situation.
Please call (603) 580-1416 to schedule your free initial consultation.
The above summary was derived from a publication of the Bankruptcy Judges Division of the Administrative Office of the United States Courts 2011 Edition entitled Bankruptcy Basics. It has been modified by removing legal citations and select sections to condense the materials. Some of the content has been re-worded and rearranged to suit the needs of Deshaies Law. The full, unabridged version can be found at the Court’s website at: http://www.nhb.uscourts.gov by clicking on “Filing Resources” then “Filing without a Lawyer,” and then “Bankruptcy Basics.”
Businesses having trouble meeting their financial obligations, and wishing to seek bankruptcy protection from creditors, have two options: chapter 7, also referred to as "liquidation" (this process involves termination of the business and sale of all assets); or chapter 11, also referred to as "reorganization." For a business, a chapter 11 reorganization offers the following unique benefits: forces the business to reevaluate its business plan and make changes to return the business to profitability; allows the business to remain in control of its operations while enjoying certain protections from its creditors; and grants its management time to put together a plan to repay its debts based on the new business plan. A business may repay all or just a fraction of its debt.
For an individual debtor, chapter 11 almost always is too costly. Chapter 11 is known as the most expensive form of bankruptcy in the United States. The filing fee for a chapter 11 is over $1,000 – almost four times the cost of chapter 7. Quarterly payments must be made to the United States Trustee’s Office, and paperwork and negotiations that go into the reorganization plan because the legal fees to be significant. A small chapter 11 often costs $10,000 or more, and larger cases will have much higher legal fees and expenses. However, chapter 11 might be the right bankruptcy solution for an individual if: (i) you have large nondischargeable debts and significant non-exempt assets; (ii) you have significant non-exempt assets some of which, given time, could be liquidated under your terms (instead of by a chapter 7 trustee) and used to pay off your debts; (iii) and you do not qualify for chapter 13 because you are over the debt thresholds. Your situation will need to be analyzed carefully to determine if your unique circumstances make an individual chapter 11 a good choice for you.
Eligibility for Chapter 11
Most businesses are eligible for chapter 11. Some examples include: corporations; partnerships; limited liability companies; unincorporated associations; individuals running a sole proprietorship; and business trusts. There are no debt or income requirements or limitations for filing bankruptcy under chapter 11. From a practical standpoint, a business needs to have a plan for restructuring itself into a profitable operation; without that, chapter 11 won’t be helpful. This may mean selling off n unprofitable subsidiary or product line, laying off certain nonessential workers, hiring new turn-around management, or otherwise restructuring the business plan so that the company can come out of bankruptcy (after shedding some of its old debt) with a profitable outlook for the future. In most instances substantial changes will need to be made. A business must embark on chapter 11 with a new business plan and the willingness to make the changes necessary to make it work.
Individuals also are eligible to file chapter 11. However, certain restrictions are placed on individuals related to the timing of successive bankruptcies. An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. Also, an individual may not be a debtor under chapter 11 or any other chapter unless he/she has, within 180 days before filing, received credit counseling from an approved source and has received a certificate. While there are some exceptions in emergency situations, most debtors are better off securing the credit counseling certificate.
Filing a Chapter 11 Case
A chapter 11 case begins by filing a petition with the bankruptcy court where the debtor has a domicile or residence. The filing fee for a chapter 11 is almost four times the fee for a chapter 7.
The voluntary petition will include standard information concerning the debtor's name, social security number or tax identification number, residence, location of principal assets (if a business), the debtor's intention to file a plan, and a request for relief under chapter 11.
Unless the court orders otherwise, the debtor also must file: schedules of assets and liabilities; a schedule of current income and expenditures; a schedule of executory contracts and unexpired leases; and a statement of financial affairs. If the debtor is an individual, there are additional requirements including: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions. The debtor, whether an individual or a business, also must file a plan of reorganization and a disclosure statement. These filings take considerable attorney time which is why proceeding under chapter 11, even as an individual, is considerably more expensive than chapter 7 or 13.
Upon filing chapter 11 the debtor automatically assumes an additional identity known as the "debtor in possession." The term refers to a debtor that keeps possession and control of its assets while undergoing reorganization. A debtor will remain a debtor in possession until the debtor's plan is confirmed, the debtor's case is dismissed or converted to chapter 7, or a chapter 11 trustee is appointed. The appointment or election of a trustee occurs only in a small number of cases, generally when it appears the debtor in possession is not acting in the best interest of its creditors. The debtor in possession operates the business and performs many of the functions that a trustee performs in cases under other chapters.
The Plan and Disclosure Statement
The debtor generally has a 120-day period during which it has an exclusive right to file a plan. This exclusivity period may be extended or reduced by the court. In no event may the exclusivity period, including all extensions, be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee (if one has been appointed) may file a competing plan. A written disclosure statement also must be filed. In a small business case, however, the court may determine that the plan itself contains adequate information and that a separate disclosure statement is unnecessary. The disclosure statement is a document containing information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization. After the disclosure statement is filed, the court must hold a hearing to determine whether it should be approved. Acceptance or rejection of a plan usually cannot be solicited until the court has first approved the written disclosure statement. The plan must include a classification of claims and specify how each class will be treated. In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than under chapter 7.
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).
Any party in interest may file an objection to confirmation. If no objection is timely filed, the court will determine whether the plan has been proposed in good faith and complies with all the other requirements for confirmation. In order to confirm the plan, the court must find, among other things, that: the plan is feasible; it is proposed in good faith; and the plan and the proponent of the plan are in compliance with the bankruptcy code. In order to satisfy the feasibility requirement, the court must find that confirmation of the plan is not likely to be followed by liquidation (unless the plan is a liquidating plan) or the need for further financial reorganization.
The Effect of Confirmation of the Plan
Generally confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization discharges any type of debtor – corporation, partnership, or individual – from most types of prepetition debts. It does not, however, discharge an individual debtor from any debt made nondischargeable by section 523 of the bankruptcy code. Moreover, except in limited circumstances, a discharge is not available to an individual debtor unless and until all payments have been made under the plan. Confirmation does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, unless the debtor is an individual (e.g. corporations filing liquidating plans do not receive a discharge, they just dispose of all of their assets and use the money to pay their creditors). When the debtor is an individual, confirmation of a liquidation plan will result in a discharge after plan payments are made unless grounds would exist for denying the debtor a discharge if the case were proceeding under chapter 7.
More Questions? Check out our Chapter 11 FAQ's
Deshaies Law has extensive experience in all aspects of the bankruptcy process and has guided many debtors to a brighter future. Deshaies Law would like to help you through your difficult situation.
Please call (603) 580-1416 to schedule your free initial consultation.
The above summary was derived from a publication of the Bankruptcy Judges Division of the Administrative Office of the United States Courts 2011 Edition entitled Bankruptcy Basics. It has been modified by removing legal citations and select sections to condense the materials. Some of the content has been re-worded and rearranged to suit the needs of Deshaies Law. The full, unabridged version can be found at the Court’s website at: http://www.nhb.uscourts.gov by clicking on “Filing Resources” then “Filing without a Lawyer,” and then “Bankruptcy Basics.”
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NASHUA:
603-882-3223
CONCORD:
603-223-0063
TEXT:
603-490-3177