If you own or manage a small business with significant debt call Sacramento Law Group LLP to explore your chapter 11 bankruptcy debt relief options. Unlike chapter 7 or chapter 13 bankruptcy, chapter 11 bankruptcy can help highly-leveraged small businesses restructure their debt while remaining in control of the business. To learn more about chapter 11 bankruptcy call our firm at (916) 596-1018 to schedule a free consultation.
Overview of Chapter 11 Bankruptcy
Chapter 11 bankruptcy can hold many advantages for a business owner compared to chapter 7 and chapter 13 bankruptcy. A primary feature of chapter 11 bankruptcy is that the business owner can continue operations while remaining in possession of the business itself.
Small businesses aren’t the only entities that have turned to chapter 11 bankruptcy. Many large businesses and corporations have resorted to chapter 11 bankruptcy for debt relief. McClatchy, a publisher of newspapers including the Sacramento Bee, is a well-known example of a business that filed for chapter 11. The purpose of filing for a chapter 11 bankruptcy is for the business to reorganize its business operations and become profitable again.
Chapter 11 vs. Chapter 7 & 13
Chapter 11 bankruptcy is known as a reorganization bankruptcy. It is intended to protect the assets and the business while a reorganization plan is being formulated and approved. This primarily distinguishes it from chapter 7 bankruptcy which is known as a “liquidation bankruptcy.” Under chapter 7 bankruptcy the assets of the debtor are liquidated and the proceeds thereof are paid to creditors.
On the other hand, a chapter 13 bankruptcy is filed by individuals. Individuals can also file for chapter 11 bankruptcy if their debt exceeds the limit set by chapter 13 bankruptcy. Businesses, however, cannot file for Chapter 13 Bankruptcy as that option is solely available to individuals who earn income.
In chapter 13 bankruptcy the individual agrees to pay a certain amount from their income to creditors over a period of years in exchange for debt relief. In chapter 11 bankruptcy the business (or individual) proposes a reorganization plan subject to approval from the court.
Starting a Chapter 11 Bankruptcy
Chapter 11 bankruptcy is initiated with the filing of a petition. The petition is filed in a court which has jurisdiction either over the residence of the debtor or over the principal place of business. A filing fee is also required to be paid with the petition. Currently, the Eastern District fees for chapter 11 bankruptcy stand at $1,167 for the filing fee and $550 miscellaneous administrative fee.
Upon the filing of the petition, the debtor has the exclusive right to propose a reorganization plan for the business. This right exists for 120 days or approximately four months. A debtor can petition the court to extend this time – up to 18 months. In a similar vein, the exclusive period can also be shortened by the court if adequate reason is given.
A primary feature of chapter 11 bankruptcy is that the debtor remains in possession of the business while the business is allowed to continue operations. This is why the debtor is also called as a debtor-in-possession for chapter 11 bankruptcy.
The debtor is allowed to hire attorneys, accountants, and other necessary personnel to assist with the formulation of the reorganization plan. However, the debtor must seek the court’s permission when it comes to other important matters such as the sale of assets, entering into lease contracts, etc.
The debtor-in-possession generally remains in control of the business and its assets until the reorganization plan is approved, or the case is otherwise terminated.
The Automatic Stay
Once the petition is filed, a stay against the actions of creditors goes into effect. This precludes creditors from enforcing a claim on a property, or from collecting. The purpose of this is to allow the debtor to negotiate with the creditors especially regarding the reorganization plan.
In certain instances, however, a creditor can petition the court for relief from the automatic stay. This applies to cases in which the property in question is not necessary for an effective reorganization.
Appointment of Trustee
A trustee is rarely appointed in a chapter 11 bankruptcy case because the debtor usually remains in possession of the business and its assets. There are two instances however when the court may decide to appoint a trustee:
- Fraud, dishonestly, incompetence or gross mismanagement; or
- The appointment of a trustee is for the best interest of the creditor, equity security holders or other interested persons.
The appointment of a trustee divests the debtor of their status as a debtor-in-possession. If a trustee is appointed, he or she will be responsible for managing the business and its estate. The trustee does not work independently, but rather in consonance with the orders of the court.
In some cases, a trustee may be responsible for filing a plan of reorganization. If the trustee elects to not submit a plan of reorganization, the Bankruptcy Code requires the trustee to either file a report on why he or she elected not to submit a plan, or to file a recommendation on the possibility of the case being converted or dismissed.
A trustee can also be divested of their status upon request. If the court grants this, the debtor will be restored to their position as a debtor-in-possession.
At this point, it’s important to distinguish that there are actually two kinds of trustees in a bankruptcy case: the US Trustee and the Case Trustee.
The US trustee is a staple feature of bankruptcy cases, while a case trustee may or may not be appointed depending on the case.
The US trustee is actually an employee of the Department of Justice. They monitor the conduct of the debtor-in-possession during the pendency of the bankruptcy case. The case trustee is appointed only when the instances mentioned above are met. The case trustee actually takes over the functions of the debtor-in-possession, unlike the US trustee.
The US trustee may appoint a committee composed of the 7 creditors holding the seven largest unsecured claims. This committee is referred to as the ‘creditors committee’. The function of this committee is mainly to safeguard the proper management of the business during bankruptcy proceedings. The tasks of the committee may involve but are not limited to consulting with the debtor-in-possession, participating in the formulation of the plan, and hiring of necessary professionals for the bankruptcy proceedings.
Confirmation of the Plan
The last stage in the approval of the plan is the confirmation by the court.
There may be competing plans submitted by the debtor, creditors or trustee. In order for a plan to be accepted or confirmed by the court, at least one class or unsecured claims must accept the plan. (The debtor can use certain strategies to increase their chances of confirmation). The court will consider whether or not the plan is feasible, was made in good faith and conforms to the requirements of the Bankruptcy Code before confirming it.
Once a plan has been confirmed by the court, the confirmation can only be revoked upon showing that the confirmation was procured through fraud.
A case for Chapter 11 Bankruptcy may be converted to a case for Chapter 7 Bankruptcy upon request of the debtor. The right however is not available under the following circumstances:
- The debtor is not a debtor-in-possession
- It was originally commenced as an involuntary case
- The case had been converted before