Chapter 11 allows for the reorganization of debts. Chapter 11 also allows a business to continue to carry on routine operations in the ordinary course of business while going through the reorganization. Corporations, partnerships and sole proprietorships are all eligible for Chapter 11 reorganization. 11 U.S.C. § 109. If a corporation files under Chapter 11, the personal assets of the stockholders, beyond the value of the stock they own, are not at risk. Because a sole proprietorship does not have a separate legal identity from its owner, both the personal and business assets of a sole proprietor are involved in a Chapter 11 case. A partnership is separate from its partners, but the partners’ personal assets may be used to pay creditors in a Chapter 11 case in some instances. An experienced bankruptcy attorney can help you determine whether Chapter 11 is a good option for your business.
Chapter 11 Procedures
A Chapter 11 case begins with the filing of the petition. The debtor may file a voluntary petition, or creditors (that meet certain requirements) can file an involuntary petition. The voluntary petition includes information such as the debtor’s name, tax identification number, residence, location of principal assets and the debtor’s plan or intention to file a plan. The filing of a bankruptcy petition triggers the automatic stay. This means that collection efforts by most creditors must stop. Along with the petition, the debtor must file a schedule 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. Fed. R. Bankr. P. 1007(b). In most cases, the debtor must also file a written disclosure statement, which contains information about assets, liabilities and business affairs, and plan of reorganization with the court. 11 U.S.C. §§ 1121, 1125.
Once the voluntary petition is filed, the debtor becomes a debtor in possession. 11 U.S.C. § 1101. A debtor in possession is a debtor that maintains possession and control of its assets while going through Chapter 11 reorganization without a trustee being appointed. A debtor in possession runs the business and performs many of the same functions that a trustee would do in cases filed under other chapters. 11 U.S.C. § 1107(a). For example, the debtor in possession has the duty to account for property, examine and object to claims and file informational reports. The debtor in possession also has “avoiding powers” with which pre-filing date transfers of money or property can be set aside. By setting aside the transaction, the money or property will be returned and used to pay all creditors.
In a Chapter 11 case, the United States Trustee has a significant role in overseeing the administration of the proceedings. The U.S. Trustee oversees the debtor in possession’s running of the business and submission of reports and fees, and conducts a meeting of creditors pursuant to 11 U.S.C. § 341.
After filing the petition, the debtor has an exclusive 120-day period in which it can file a plan. 11 U.S.C. § 1121(b). After 120 days, a creditor or trustee may file a competing plan. The plan may be a liquidating plan. The Bankruptcy Code provides that a Chapter 11 plan must designate classes of claims and interests for treatment under the reorganization. Generally, claims and creditors are classified as secured creditors, unsecured priority creditors, general unsecured creditors and equity security holders. Any party in interest may object to the confirmation of a plan. Before the court will confirm a plan, the court must find that the plan satisfies the requirements for confirmation found in section 1129 of the Bankruptcy Code. The court must find that the plan is feasible, was proposed in good faith and the plan and proponent of the plan comply with the Bankruptcy Code’s requirements.
Confirmation of a plan will generally discharge the debtor – whether a corporation, partnership or individual – from any debt that arose before the filing of the petition, other than debts that are nondischargeable under section 523 of the Bankruptcy Code. After confirmation, the debtor must make payments under the pan and is bound by the plan’s terms. If the plan is a liquidation plan, only an individual debtor is entitled to discharge.
Small Business Debtors
Small business bankruptcy cases are treated a bit differently than regular business bankruptcy cases under Chapter 11. A small business case involves a small business debtor, which is determined by a two-part test. First, the debtor must be engaged in commercial or business activities with total non-contingent liquidated secured and unsecured debts not to exceed a dollar amount specified in the Bankruptcy Code. Second, the U.S. Trustee must not have appointed a creditors’ committee in the case or the court has decided that the creditors’ committee is not active and representative enough to oversee the debtor. 11 U.S.C. § 101(51D). Small business cases generally move faster than other Chapter 11 cases because of differences in filing deadlines and the fact that extensions are hard to obtain.
The U.S. Trustee provides more supervision over the small business debtor. In a small business case, the debtor in possession must file the most recent balance sheet, statement of operations, cash-flow statement and most recent tax return along with the petition. In addition, the small business debtor must regularly file reports about its profitability and projected cash receipts and disbursements.
Speak to a Bankruptcy Lawyer
Filing for bankruptcy under Chapter 11 or any of the other chapters is a complicated process. Experienced Denver bankruptcy attorney Jon Clarke can help your business navigate through the regulations and meet all the bankruptcy filing requirements.
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