Chapter 11 bankruptcy and your company

Chapter 11 bankruptcy might be the best option for you if your company is facing insurmountable hardship. Chapter 11 helps you stay in business, protects your necessary business assets and prevents harassment from business creditors.
Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs and assets. Corporations usually file Chapter 11 for this purpose.

Below are some of the very basic components of a Chapter 11 bankruptcy case but are by no means the full extent of what could take place in your Chapter 11 filing. I simply offer them as a basic review of a Chapter 11 bankruptcy. The processes can be quite involved.

During our consultation, I will lead you through the procedures of your Chapter 11 bankruptcy case, which may or may not comprise all or part of the details listed here. — Steven Bryson, Bankruptcy Attorney

We’ll explore, in brief, these aspects of a Chapter 11 bankruptcy:

• Debtor in Possession
• Small Business Debtor
• Single Asset Real Estate debtor or SARE
• Automatic Stay
• Creditor’s Committee
• The United States Trustee
• The Disclosure Statement
• Plan Acceptance
• Chapter 11 Discharge

Here are some of the components of Chapter 11 bankruptcy:

Debtor in Possession

Although individuals can file for Chapter 11, this petition is typically used to reorganize a business such as a corporation, sole proprietorship or partnership.

Chapter 11 allows for a reorganization of debts while also protecting personal assets of the owners / stockholders.

With a business sole proprietorship, the business and the personal assets of the owner are not separate. The Chapter 11 filing prevents the sole proprietor’s personal assets from being used to pay creditors in a Chapter 11 bankruptcy case.

Small Business Debtor

Certain types of debtors have special provisions that apply only to them. In the case of a small business, this debtor is defined as a person engaged in commercial or business activities (does not include a person primarily owning or operating real property) that have a combined non-contingent liquidated secured and unsecured debts that do no exceed $2,343,300.00.
Small business cases that qualify are then fast-tracked and treated differently than a regular Chapter 11 case. The appointment of a creditor’s committee and a separate hearing to approve the disclosure statement are not mandatory.

Single Asset Real Estate Debtor

SARE is a single property or project (other than residential real property with fewer than four residential units) that generates substantially all of the gross income for the debtor. The property or project must have no substantial work or business being conducted by a debtor other than operating the real property that has aggregate non-contingent liquidated secured debts of no more than 4 million dollars.

Under Chapter 11, The SARE debtor can reorganize with the protection of the automatic stay if certain requirements are met.

The Automatic Stay

Judgments, collections, foreclosures and repossessions are suspended and cannot be pursued if the claim arose before the filing of Chapter 11. The stay goes into effect as soon as the bankruptcy petition is filed. The stay gives you some breathing room to regroup and negotiate with creditors.

Under certain circumstances, such as when the debtor has no equity in the particular property and that property is not necessary for an effective reorganization or repayments to the secured creditors are not recommended, the secured creditor can obtain an order from the court granting relief from the automatic stay to foreclose on the property, sell it, and apply the proceeds to the debt.

Note: A secured creditor is one that has a lien against or interest in certain property of the debtor to secure payment of a debt or performance of an obligation.

There are certain types of actions that the stay does not protect under Chapter 11. We can review those in my office.

Creditor’s Committee

As opposed to a Chapter 7 bankruptcy, a creditor’s committee can be involved in a Chapter 11 filing. The creditor’s committee plays a significant role in Chapter 11. The creditor’s committee is appointed by the United States Trustee.

The creditor’s committee is comprised of people willing to serve and who hold the seven (7) largest unsecured claims against the debtor. Unsecured claims are an extension of credit based on an evaluation of the debtor’s ability to pay and are not secured by real or personal property.

There may be other unsecured claims from such issues as patent infringement, personal injury or other damage claims. The committee might choose to consult with the debtor on the administration of the case and might also investigate the conduct of the debtor in the operation of the business, etc.

The committee may also coordinate a plan with the debtor. The creditor’s committee is an important safeguard to the management of business under Chapter 11.

The United States Trustee

The U.S. trustee plays an important role in the observing and monitoring of the progress of a Chapter 11 bankruptcy case.

The United States trustee’s role in a Chapter 11 bankruptcy case:

• Supervises the Chapter 11 administration

• Monitors the debtor in possession’s operation of the business

• Monitors the submissions of operating reports and fees, applications for compensation and reimbursement, plans and disclosure statements and creditor’s committees

• Conducts a meeting of the creditors, often referred to as the “341(a) meeting,” in a chapter 11 case.
The trustee and creditors may question the debtor under oath at the 341(a) meeting concerning the debtor’s actions, conduct, property, and the administration of the Chapter 11 case

The United States trustee also requires certain actions of the debtor. The trustee may require the debtor to report the company’s monthly income and operation expenses, any establishment of new bank accounts and the payment of current employee withholding or other taxes.

The Disclosure Statement

This written statement is a full disclosure of information regarding the debtor’s affairs, operations, etc. This disclosure statement is filed in the course of the Chapter 11 bankruptcy filing in order to create a plan of reorganization. This statement makes it possible for a claim holder to make an informed judgment about the plan.

After the disclosure statement is filed, the court will hold a hearing to determine if the statement should be approved. The acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement. When the disclosure statement is approved, the debtor can then begin to solicit acceptance of the plan from creditors. Creditors also have the right to reject the plan.

This is why you need solid legal counsel to understand the many issues and angles of a Chapter 11 filing. Not understanding and failing to follow proper procedures can result in a denial of confirmation of the plan or dismissal of the case. I can help you understand and mitigate these potential problems as they arise.

Chapter 11 Plan Acceptance

During the first 120-day period after the filing of a Chapter 11 bankruptcy petition, which also acts as the order of relief that begins the automatic stay, only the debtor in possession may file a plan of reorganization.

The debtor in possession has 180 days after the filing of the voluntary petition (or in a case commenced by an involuntary petition after the order for relief) to get acceptances of the plan by creditors. The court may extend or reduce this period.

The exclusive right of the debtor in possession to file a plan is lost, and any party in interest, including the debtor, may file a plan if an only if:

1. A trustee has been appointed in the case
2. The debtor has not filed a plan within the 120-day exclusive period or any extension granted by the court; or
3. The debtor has not filed a plan, which has been accepted by each class of claims, or interests that are impaired under the plan within the 180-day period or any extensions granted by the court.

If the period expires before the debtor has filed and received plan acceptance, other parties in interest in a case, such as the creditors’ committee or a creditor, may file a plan. Such a plan may compete with a plan filed by another party in interest or by the debtor.

If a trustee is appointed, the trustee is responsible for filing a plan, a report of why the trustee will not file a plan, or a recommendation for the conversion or dismissal of the case. A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and solicitation.

Chapter 11 Discharge

Section 1141(d)(1) of the Chapter 11 bankruptcy states that the confirmation of a plan discharges the 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 or Chapter 11 discharge 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 will discharge any type of debtor – corporation, partnership, or individual – from most types of pre-petition debts. It does not, however, discharge an individual debtor from any debt made non-dischargeable by section 523 of the Bankruptcy Code .

Confirmation of the Chapter 11 does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, and the debtor is not an individual. When the debtor is an individual, confirmation of a liquidation plan will affect a discharge unless grounds would exist for denying the debtor a discharge if the case were proceeding under Chapter 7 instead of Chapter 11 banruptcy.

Call or email me today and let’s discuss whether Chapter 11 bankruptcy is for you. — Steven Bryson, bankruptcy attorney, Los Angeles