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Who Files Chapter 11 Bankruptcy?

Who Files Chapter 11 Bankruptcy?There are both individual (personal) and business chapter 11 bankruptcy filers. The vast majority of chapter 11 bankruptcies are businesses. There is no such thing as a business bankruptcy in Chapter 13, therefore, any business looking to file bankruptcy must choose either chapter 7 (liquidations) or chapter 11 (reorganization). Assuming the business owner wants to keep the business in operation, chapter 11 bankruptcy is the only way to file bankruptcy to keep the business going. Chapter 7 business bankruptcy filers are planning to wind down or go out of business. The chapter 7 bankruptcy will sell off or liquidate any assets and pay creditors with whatever money is received. The business is essentially liquidated out and then goes under. However, in chapter 11, debts are reorganized into a plan. The bankruptcy filer makes payments pursuant to the plan and receives a discharge at the end of the case similar to chapter 13 bankruptcy. Plan payments can range in number of years or length of the plan. Typically, anyone looking to file a chapter 11 will need to hire a competent bankruptcy lawyer. The lawyer will draft the bankruptcy petition and once it is filed, the lawyer will need to file "First Day Motions." These motions are court papers asking the court for numerous things which might include:

Asking the court for permission to hire professionals, such as a bankruptcy lawyer, real estate agents or brokers, certified public accountants, lawyers for other aspects dealing with the business, or any other professional in which services are needed;

Asking the court for permission to continue payroll for employees of the business;

Asking the court for permission to use cash collateral, if the business is generating income;

Asking the court for permission or approval to continue with any leases or contracts in which the business may be a party;

And various other aspects of the business which may need court approval to continue.

The bankruptcy filer or “Debtor” will have a list of “homework” provided to it from the Unites States Trustee’s office. Things the Debtor will be required to do include; closing all pre-bankruptcy bank accounts and opening new bank accounts under the “debtor-in-possession,” filling out forms about the Debtor and its business structure as required by the Trustee’s office, attending hearings, creating monthly operating reports, and more. The Debtor must continue these things for as long as the bankruptcy continues plus payment of quarterly fees to the bankruptcy court, which are determined based on a percentage of the Debtor’s monthly income.

A debtor in chapter 11 bankruptcy is afforded all the same protections as a chapter 7 or 13 bankruptcy debtor. The debtor receives the automatic stay, which prevents creditors from seeking to sue, garnish, levy, repossess, foreclose on any of the debtor’s property. Creditors are forbidden from contacting the debtor for any reason, including reporting on credit, through mail or phone, and email. The debtor also is given the same protections for their property called exemptions. The exemptions protect your property from being taken by a trustee or the court. It is recommended that any debtor wanting to file a chapter 11 should speak with a competent and knowledgeable chapter 11 bankruptcy attorney prior to filing any chapter 11 case. Therefore, a Chapter 11 bankruptcy stops creditors form doing the following:

Contacting you in any way including stopping the harassing phone calls, text messages, and emails.

Stopping any court action against you including foreclosure, repossession, lawsuits, judgments, garnishments, levies, set off’s, etc.

Reporting anything on your credit whether such reporting is good or bad.

Filing bankruptcy does not stop any criminal proceedings against you.

Filing a Chapter 11 Plan of Reorganization:

The rules (laws) of chapter 11 are complex. The Debtor must adhere to these rules, plus all deadlines for submitting a plan of reorganization to the bankruptcy court. Along with the plan, the Debtor must also submit a disclosure statement. The disclosure statement essentially states what the rules of the plan are and how each creditor in the plan will be treated by the Debtor. Creditors have the right to file claims and/or object to the plan, if the creditor feels its treatment goes against the bankruptcy rules or is not being treated fairly. There will be much negotiating between Debtor and creditors before getting to a plan that satisfies both the law and the fair treatment of all creditors. Creditors will have the opportunity to vote on the plan. Once the plan is voted in, the Debtor will ask the court to approve the plan, which confirms the case and treatment for all creditors. In the event creditors vote down the plan, Debtor still might have the option to hold a confirmation hearing in the bankruptcy court. A confirmation hearing is a mini-trial where the Debtor will attempt to justify treatment of claims in the plan to the bankruptcy judge in hopes of getting court approval over the objecting creditors. Either side may require witnesses or experts to testify as to the proposed claim treatment and why the plan should be approved or denied. If a plan is ultimately denied, the Debtor must decide whether to keep going in the bankruptcy by accepting alternative treatment for creditors that satisfies what the creditors want, converting to chapter 7 bankruptcy, or requesting the court dismiss the case altogether.

Debtor Needs an Impaired Class:

Chapter 11 is different from other chapters of bankruptcy in that the Debtor must have an impaired class. Creditors are categorized into different classes (types) of debt. A real property loan might be one class, vehicle loans might be another, and unsecured debt is another class. Typically, an impaired class will be some type of secured debt i.e. real property loan or vehicle loan that holds the property as collateral for the security on the loan. An impaired class means that at least one class of secured debt has agreed to modify its existing agreement with the Debtor. For example, a loan on a commercial property might agree to allow the Debtor to move late payments or arrears to the end of the loan by creating a balloon payment. It also might agree to new terms on the deal by lowering the interest rate or principle balance on the loan. When a creditor takes less than it originally agreed with the Debtor, that makes the creditor an impaired class. Most chapter 11 cases must have some type of impaired creditor prior to the court approving confirmation of the plan. Without an impaired class, the case may be converted to chapter 7 by the court.

Subchapter V of Chapter 11:

A new type of bankruptcy that recently was approved by Congress and went into effect in early 2020 is Subchapter V. This bankruptcy comes from the Small Business and Reorganization Act of 2019 signed into law on August 23, 2019. Subchapter V is almost a hybrid of bankruptcy law between Chapter 13 and Chapter 11. Subchapter V is meant for small business owners to file a business or personal bankruptcy specifically for their small business. Subchapter V has some of the same requirements of Chapter 11, but the rules are relaxed. The costs are less and the process towards plan confirmation is easier. The process includes negotiating with creditors to eliminate debt, modify existing contracts, and confirm a plan of reorganization. A trustee may be assigned to the case. The trustee sometimes acts as a mediator between debtor and creditors and helps facilitate agreements between sides. Subchapter V is still very new and will likely have some kinks to work through as more of these cases are filed. Anyone with a small business looking to file a bankruptcy should inquire about filing a Subchapter V case to see if they might qualify for this chapter of bankruptcy rather than filing a full Chapter 11 case. In most other chapter 7 or 13 cases, bankruptcy lawyers will charge flat fee agreements with their clients. Almost all Chapter 11 cases are billed by the hour. Attorney billable hour costs vary and the total price for a Chapter 11 can be expensive. A Subchapter V case is much easier to get through and while still billed by the hour, a Subchapter V case will cost much less in the end.

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We will go the extra mile to get you to an approved bankruptcy through the court. We will negotiate on your behalf with creditors and the trustee. If your case needs to go to trial for any reason, we are experienced in the bankruptcy courts. We know bankruptcy law and have completed thousands of bankruptcy cases. We have proven time and again that we understand what you are going through in this stressful time in your life. Talk to us today for help with your bankruptcy case.