But more often, creditors or other parties dissatisfied with the debtor's progress will move to dismiss or convert the case to Chapter 7. Creditors are entitled to vote on whether they accept a proposed Chapter 11 plan.
At least one class of "impaired" claims must vote in favor of a Chapter plan. An impaired claim is an obligation that will not be paid in full upon plan confirmation or when originally due. In reality, the debtor and creditors can agree to any plan that they choose. If a creditor objects to the plan, however, the court will consider factors, including:. The bankruptcy court must find that the proposed plan is feasible or likely to succeed.
The debtor must prove the ability to raise sufficient revenues to cover expenses and creditor payments. Good Faith. The plan must be proposed in good faith and not seek to further an agenda forbidden under the law. Best Interests of Creditors. The "best interests" test requires that creditors receive at least as much under a proposed plan as they would if the debtor's case were converted to a Chapter 7 liquidation wherein the debtor's property would be sold and distributed to creditors.
In some cases, the "best interests" test requires the debtor to pay all of its creditors in full. Most Chapter 11 debtors, however, are financially underwater and can meet the "best interests" test by paying creditors only a fraction of what they owe. Fair and Equitable. The plan also must be "fair and equitable. Counsel must represent all businesses that file for Chapter A bankruptcy attorney will be in the best position to explain your options and the specific procedures you can expect in your case.
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Meet the Editors. Chapter 11 Bankruptcy: An Overview. Chapter 11 bankruptcy is designed to allow struggling businesses to restructure their finances and maximize the return to their creditors and owners. In this article, you'll learn: how Chapter 11 bankruptcy works other bankruptcy options for individuals and small businesses, and how to get started filing for Chapter 11 bankruptcy. How Does Chapter 11 Bankruptcy Work? Collection Actions Stop All bankruptcy chapters work by stopping the collection process.
For instance, the stay will temporarily stop: payment requests an eviction or foreclosure a collections trial bank levies, till taps, property seizure, and other collection processes. Filer Retains Control of the Business Unlike other bankruptcy chapters, a bankruptcy trustee isn't put in charge of the business and other bankruptcy property.
Debt Relief Through a Payment Plan The goal of Chapter 11 is to create a financial plan that the filer, creditors, and the court agree will enable the company to remain open and prosper. Chapter 7 for individuals. People who file for Chapter 7 keep the things they need to maintain a household and employment. All other property gets sold for the benefit of creditors.
In exchange, qualifying debt gets discharged without the need to pay into a repayment plan. Chapter 7 for small business owners.
It's unusual for a small business to file for Chapter 7. Not only will Chapter 7 close most companies, but business entities other than sole proprietors aren't entitled to a debt discharge. Plus, a business owner can discharge more debt—business and personal alike—by personally filing an individual Chapter 7 case after the business closure.
But Chapter 7 can make sense in some cases. Because certain filing deadlines are different and extensions are more difficult to obtain, a small business case normally proceeds more quickly than other chapter 11 cases.
In a small business case, only the debtor may file a plan during the first days after the case is filed. This "exclusivity period" may be extended by the court, but only to days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. In a subchapter V small business case, only the debtor may file a plan. In other chapter 11 cases, however, the court may extend the exclusivity period "for cause" up to 18 months.
Another example of the faster pace of small business and subchapter V cases is that the debtor may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan. In a traditional chapter 11 case, the debtor must file a separate disclosure statement. Subchapter V cases go beyond other chapter 11 and small business cases by allowing for relaxed plan confirmation requirements.
Plans can be confirmed as long as they do not discriminate unfairly, are fair and equitable with respect to each class of claims or interests, provide that all projected disposable income of the debtor or equivalent value is paid into the plan for a three to five year period. Single asset real estate debtors are subject to special provisions of the Bankruptcy Code.
The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.
The Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay which are not available to creditors in ordinary bankruptcy cases. On request of a creditor with a claim secured by the single asset real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor unless the debtor files a feasible plan of reorganization or begins making interest payments to the creditor within 90 days from the date of the filing of the case, or within 30 days of the court's determination that the case is a single asset real estate case.
The interest payments must be equal to the non-default contract interest rate on the value of the creditor's interest in the real estate. Single asset real estate cases are ineligible for the small business or subchapter V election. Additionally, the U.
By law, the debtor in possession must pay a quarterly fee to the U. Should a debtor in possession fail to comply with the reporting requirements of the U. In North Carolina and Alabama, bankruptcy administrators perform similar functions that U. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.
For purposes of this publication, references to U. Creditors' committees can play a major role in chapter 11 cases. The committee is appointed by the U. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor's conduct and operation of the business; and participates in formulating a plan.
A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties.
A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession. Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the U. The court, on motion by a party in interest or the U.
Moreover, the U. The trustee is appointed by the U. Alternatively, a trustee in a case may be elected if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that instance, the U. The case trustee is responsible for management of the property of the estate, operation of the debtor's business, and, if appropriate, the filing of a plan of reorganization.
Section of the Bankruptcy Code requires the trustee to file a plan "as soon as practicable" or, alternatively, to file a report explaining why a plan will not be filed or to recommend that the case be converted to another chapter or dismissed. Upon the request of a party in interest or the U. The appointment of an examiner in a chapter 11 case is rare. The role of an examiner is generally more limited than that of a trustee.
The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation conducted.
If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform. Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken.
The examiner may not subsequently serve as a trustee in the case. Examiners may not be appointed in subchapter V cases.
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 the filing of 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 filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U. 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. Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt.
The Bankruptcy Code permits applications for fees to be made by certain professionals during the case. Thus, a trustee, a debtor's attorney, or any professional person appointed by the court may apply to the court at intervals of days for interim compensation and reimbursement payments.
In very large cases with extensive legal work, the court may permit more frequent applications. Although professional fees may be paid if authorized by the court, the debtor cannot make payments to professional creditors on prepetition obligations, i. The ordinary expenses of the ongoing business, however, continue to be paid. The debtor except for a "small business debtor" has a day period during which it has an exclusive right to file a plan.
This exclusivity period may be extended or reduced by the court. But 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 may file a competing plan.
A chapter 11 case may continue for many years unless the court, the U. The creditors' right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.
The debtor in possession or the trustee, as the case may be, has what are called "avoiding" powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition.
By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or "disgorgement" of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within 90 days before filing the petition.
But transfers to "insiders" i. In addition, under 11 U. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors. Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise.
If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court. A debtor in possession may not use "cash collateral" without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected.
Section defines "cash collateral" as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest.
It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor's security interest.
When "cash collateral" is used spent , the secured creditors are entitled to receive additional protection under section of the Bankruptcy Code.
The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide "adequate protection" to the creditor.
Adequate protection may be required to protect the value of the creditor's interest in the property being used by the debtor in possession.
This is especially important when there is a decrease in value of the property. The debtor may make periodic or lump sum cash payments or provide an additional or replacement lien that will result in the creditor's property interest being adequately protected. When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved "superpriority" over other unsecured creditors or a lien on property of the estate.
Before confirmation of a plan, several activities may take place in a chapter 11 case. Continued operation of the debtor's business may lead to the filing of a number of contested motions. The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit.
There may also be litigation over executory i. Delays in formulating, filing, and obtaining confirmation of a plan often prompt creditors to file motions for relief from stay, to convert the case to chapter 7, or to dismiss the case altogether. Frequently, the debtor in possession will institute a lawsuit, known as an adversary proceeding, to recover money or property for the estate.
Adversary proceedings may take the form of lien avoidance actions, actions to avoid preferences, actions to avoid fraudulent transfers, or actions to avoid post-petition transfers. Unfortunately, the bankruptcy process does not guarantee that a Creditor will receive payment on their claim. If there is nothing remaining from the bankruptcy estate for the Debtor to make distributions from, Creditors will not receive a claim payout. Alternative methods may be pursued by the Debtor such as the issuing of promissory notes, creation of installment payment plans, or conversion to equity in the reorganized Company.
The typical Ch. However, in complex bankruptcy cases this process can take much more time, in some cases several more years. After a long and grueling legal process, the Debtor has finally resolved its disagreements, reduced its liabilities, obtained creditor votes, and received court confirmation on its Plan of Reorganization. Once the Plan of Reorganization is put into effect and payouts have been distributed or remedies made to Creditor classes on their claims, the Debtor can successfully emerge anew.
Having reorganized to be a healthier and more financially viable business, the Debtor has effectively restructured its debts, assets, and other affairs through the Ch.
As stated above, the premise behind Ch. With so many parties involved and dependent factors at play in the court proceedings, a Debtor might not be successful in emerging from Chapter 11 Bankruptcy via a confirmed Plan of Reorganization. Some of the common outcomes that arise from an unsuccessful Ch. In order to seek its best interests as an entity and for its owners, the Debtor may utilize the Ch. Instead of preserving ownership in its business future through a reorganization, the Debtor chooses to or is forced to by Creditor objections and the court to divest its ownership through a sale.
As a consequence, the Debtor liquidates all of its assets, divests its interests, and uses the proceeds to meet Creditor claim obligations. After the completion of the liquidation process under Ch. Unfortunately, this can be a relatively common outcome that can result when the Ch.
While incredibly complex, Chapter 11 Bankruptcy can provide an opportunity for financially distressed organizations to reorganize, refinance, and re-emerge as a healthier, more profitable business. In addition to the advantages for the Debtor, the Ch. If you are a Creditor caught in the cross-fire of a Chapter 11 bankruptcy case, you have two options. You can wait for the bankruptcy proceedings to pan out. Or you can sell your bankruptcy claim for immediate cash.
The Marketing Team at XCLAIM writes content, develops resources, and distributes information across channels to propel the XCLAIM vision of revolutionizing the bankruptcy claims trading market and to usher in a transparent and digitally efficient future. Login Get Started. What is Chapter 11 Bankruptcy? Why Do Companies File for Chapter 11? What is the Goal of Ch. Obtain Legal Representation When a company evaluates the decision of pursuing Chapter 11 bankruptcy relief, it will require professional guidance and counsel specialized in bankruptcy laws and procedures.
Choosing a Bankruptcy Court to File In In addition to obtaining legal representation, the next decision a Debtor and their counsel will need to make is where to officially file its bankruptcy petition. Petition Filing with the Court After selecting legal representation and the specific court district to declare bankruptcy, the Debtor can proceed with officially filing their bankruptcy petition.
Debtor in Possession vs. Continuing Operations The Ch. Plan of Reorganization A mandatory step within the Ch. In most Chapter 11 cases, a Debtor may arrive at a Plan of Reorganization in one of three ways: Traditional Plan of Reorganization also known as "Free-Fall" No agreements are reached between the Debtor and its Creditors before the petition date.
As a result, the bankruptcy process as described in this article goes into full swing and will bear significant uncertainty for all parties involved. The legal proceedings may include negotiation, litigation, and compromises with Creditors to arrive at an acceptable Plan of Reorganization, then ensuring sufficient votes for its confirmation. This type of scenario is by far the most common for large corporations and their Chapter 11 bankruptcies. Free-fall Ch.
Pre-Negotiated Plan of Reorganization also known as "Pre-Arranged" In advance of the court proceedings, a Debtor may negotiate or arrange terms with its Creditors ahead of time. Before the petition date, agreement has been reached between most Creditor parties—but not all—with the Debtor, which is enough to have confidence on how the bankruptcy process can be expected to play out for the Debtor to exit Ch.
This approach can dramatically simplify and accelerate the remaining aspects of the bankruptcy process in court, having reached pre-negotiated agreement with most Creditors prior.
Pre-Packaged Plan of Reorganization Using standardized agreements and methods, and a templated approach to formulating a Plan of Reorganization, a Debtor is able to expedite consensus for its Plan before ever reaching the court, and thus proceeds through Ch. Full agreement between all Creditor and Debtor parties are settled before setting foot in court. The vast majority of any uncertainty is removed in regards to how the legal proceedings will play out before the bankruptcy petition is filed.
Plan Solicitation, Voting, and Confirmation After the Plan of Reorganization and accompanying Disclosure statement have been submitted, a hearing is held by the bankruptcy court to examine the documents, and to ensure that it has the necessary information to be approved. Post-Confirmation Administration The court maintains the authority to declare any other order necessary for administration after the Plan has been confirmed.
A debtor in possession or designated case trustee is required by the Bankruptcy Code to perform the following responsibilities post-confirmation: Consummating the plan Reporting on status and progress of plan Applying for a final decree After settlement of proceedings the Debtor can exit the Ch.
Claims Resolution and Creditor Recovery During the pendency of the bankruptcy case, the Debtor will review all of the filed Creditor claims and compare the information with their own financial records to confirm validity, accuracy and the amount of all the owed amounts. What are Successful Bankruptcy Outcomes? What are Unsuccessful Bankruptcy Outcomes? Wrapping Up… While incredibly complex, Chapter 11 Bankruptcy can provide an opportunity for financially distressed organizations to reorganize, refinance, and re-emerge as a healthier, more profitable business.
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