Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a powerful tool for helping businesses reorganize their finances so that they can emerge strengthened and well-positioned to flourish in the years ahead. Any business, large or small, can find itself the victim of unfortunate financial circumstances. How the leadership of that business chooses to react to a difficult debt situation can determine the enterprise’s future viability.
To gain the maximum benefit from Chapter 11 bankruptcy, a business owner should choose wisely when selecting an attorney to help guide the business through the Chapter 11 bankruptcy process. Dunlap Bennett & Ludwig bankruptcy lawyers have represented large and small businesses–from commercial property developers to newspapers and churches–in bankruptcy reorganizations and liquidations.
How Chapter 11 Works
As with all bankruptcy cases, a Chapter 11 case begins with the filing of a petition with the appropriate bankruptcy court, along with (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. If the debtor is a high net worth individual (or husband and wife), there are additional document filing requirements, among them, pay stubs, income statements, and a credit counseling certificate.
Upon filing a petition for relief under chapter 11, the debtor automatically assumes the role if a “debtor in possession,” which means that (unlike Chapter 7 and Chapter 13) the debtor keeps possession and control of its assets while undergoing a Chapter 11 reorganization, without the appointment of a trustee. A debtor will remain a debtor in possession until the debtor’s plan of reorganization 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, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs in cases under other chapters of the bankruptcy code.
Generally, a written disclosure statement and a plan of reorganization must eventually be filed with the court. The disclosure statement is a document that must contain 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. The information required is governed by judicial discretion and the circumstances of the case. In a “small business case” (discussed below), the debtor may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan. The plan’s contents must include a classification of claims and specify how each class of claims will be treated under the plan. 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 under the plan, vote on the plan by ballot. 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.
The Small Business Case and the Small Business Debtor
In a small business case, the debtor in possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement, and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents and must attend court and the U.S. trustee meeting through senior management personnel and counsel. The small business debtor must make ongoing filings with the court concerning its profitability and projected cash receipts and disbursements, among other things.
Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other Chapter 11 cases. For example, only the debtor may file a plan during the first 180 days of a small business case. This “exclusivity period” may be extended by the court, but only to 300 days only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. However, when the case is not a small business case, the court may extend the exclusivity period “for cause” up to 18 months.
The Automatic Stay
The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before filing the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation.
Generally, any creditor whose claim is not scheduled (i.e., listed by the debtor on the debtor’s schedules) or is scheduled as disputed, contingent, or unliquidated must file a proof of claim (and attach evidence documenting the claim) to be treated as a creditor for purposes of voting on the plan and distribution under it. But filing a proof of claim is unnecessary if the creditor’s claim is scheduled (but is not listed as disputed, contingent, or unliquidated by the debtor) because the debtor’s schedules are deemed to constitute evidence of the validity and amount of those claims. It is the responsibility of the creditor to determine whether the claim is accurately listed on the debtor’s schedules.
Confirmation of a plan generally discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor must 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.
Of course, there are exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization discharges any debtor – corporation, partnership, or individual – from most types of prepetition debts. However, it does not 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 instead of reorganization unless the debtor is an individual.
For companies that are struggling, it is important to understand that early planning is the best medicine. Our attorneys take a flexible approach to a reorganization, simultaneously seeking solutions outside of the bankruptcy system while also planning a bankruptcy strategy. But the most successful reorganizations are usually those that have had strategies planned well in advance of an actual default. If your business is struggling, please contact our attorneys for a consultation to discuss your business’s reorganization options.