Since the coronavirus pandemic began, our economy has seen a myriad of changes. Due to the shutdowns early on many businesses had to shutter their doors. Some were unable to reopen or continue business operations. The ones that could remain open are saddled with overwhelming debt including overdue mortgages and leases.
With foreclosure and eviction moratoriums coming to an end in many states, it is expected to see more businesses close up shop. However, there may be an answer in the form of bankruptcy.
What is Chapter 11 Bankruptcy?
The Bankruptcy Code allows debtors, whether as individuals or a business, to file a Chapter 11 case to reorganize their debts. Chapter 11 is mostly known as a solution for business debtors. However, it can also be a remedy for individual debtors who have income too high to file a Chapter 7 and are who are above the debt limits for filing a Chapter 13 bankruptcy.
There are several types of Chapter 11 cases including the typical Chapter 11, Small Business Chapter 11, the new Small Business Reorganization Act Chapter 11 (SubChapter V) and a single-asset Chapter 11.
This article will focus on the standard Chapter 11 case.
Filing the Petition
A Chapter 11 bankruptcy case begins with the filing of a bankruptcy petition. This petition will include a listing of the debtor’s secured and unsecured debts, unexpired leases and contracts, income, and expenses, as well as a listing of the debtor’s assets.
This bankruptcy filing creates an automatic stay to protect the debtor from collection by secured and unsecured creditors. Creditors can request relief from stay from the court if cause exists to do so. A hearing will be held to determine whether the request for relief from stay will be granted.
Once the Chapter 11 debtor files the petition they are known as a debtor in possession. The debtor in possession will maintain control and possession of assets and continue operations while under the watchful eye of the United States Trustee and the Bankruptcy Court. At the outset of the case the debtor must close open bank accounts, opening new ones for the bankruptcy process, as well as procure insurance for assets of the estate. The debtor must provide monthly operating reports for the business. The debtor in possession has many responsibilities similar to that of a trustee including objecting to creditor claims and pursuing preference and fraudulent transfer actions.
A Chapter 11 trustee is not appointed unless there is a cause to do so, such as debtor misconduct or inability to perform the duties of a debtor in possession.
The United States Trustee has an active role in the Chapter 11 process to ensure the debtor in possession performs their duties properly. A fee is paid to the US Trustee quarterly based on distributions to creditors. In addition, the US Trustee nominates a creditor committee to assist in oversight of the debtor in possession and the plan.
A meeting of creditors will be held with the debtor, US Trustee and creditors that choose to participate. This allows the debtor an opportunity to explain the plan and gives the US Trustee and creditors an opportunity to question the debtor about the petition and plan.
Disclosure Statement and Chapter 11 Plan
Following the filing of the bankruptcy petition, the debtor will file a disclosure statement. The disclosure statement gives the court and creditors background information about the debtor and its business operations, such as income and expenses, debts, and information about debtor’s business model. It is meant to persuade the creditors that the proposed plan will be manageable based on the anticipated future operations of the debtor’s business.
The disclosure statement must provide adequate information for the creditor to develop an informed opinion about the viability of the debtor’s plan. The court must approve the statement.
Once the disclosure statement is approved, a Chapter 11 plan will be filed. The Chapter 11 plan will inform the court and the creditors how the debtor is proposing to classify and treat the creditors’ claims. Some of the permissive provisions that may be part of the plan include spreading out the terms of repayment, and in many cases much longer than the five years allowed in Chapter 13 cases. Loans can be re-amortized at a lower interest rate, stripped off, or may be crammed down to the value of the secured property (except for residential property that is debtor’s primary residence).
A debtor has the exclusive right to file a plan in the first 120 days after the petition. This period may be extended with approval of the court. At the end of this exclusivity period, competing plans can be submitted by creditors. Creditors must also provide disclosure and submit ballots to creditors.
The plan must be served on the US Trustee, SEC, and any creditors who request a copy along with ballots in an attempt to encourage acceptance of the plan. The debtor has 180 days after filing to gain acceptance of the plan. This time frame may also be extended by the court.
If the debtor changes the amount or terms of a debt owed to a creditor, these creditors are considered “impaired” and may vote on whether they approve of the plan.
Modifications may be made to the plan at any time prior to confirmation. Any previously consenting creditor is deemed to accept the modified plan if no objection is raised.
Voting and Confirmation
For a creditor to vote on the plan, their claim must be scheduled by the debtor or a proof of claim must be filed by the creditor. This same process applies to any equity security holder of the debtor except that a proof of interest is filed by the holder.
Only impaired classes may vote on the plan. An impaired class is one that is not being paid pursuant to original contract terms. Impaired classes do not include administrative claims or priority claims.
A class is deemed to have accepted the plan if more than half of the claimholders accept the plan and the accepting creditors make up at least two-thirds of the total claim dollar amount in that class. At least one impaired class must accept the plan for the plan to be confirmed.
A confirmation hearing will be held by the bankruptcy court to determine if the plan will be confirmed. The court must determine if the plan was proposed in good faith, is feasible, is not likely to result in liquidation and satisfies all other bankruptcy code requirements. The court will take up any objections to confirmation of the plan at the confirmation hearing.
Discharge, Administration, and Final Decree
A discharge in Chapter 11 operates very differently than in Chapter 7 and 13. Confirmation of the plan alters the relationship between creditors and debtor. It places debtor in the position of replacing the old contract obligations owed to creditors with new contract obligations. A discharge is generally received after confirmation unless the debtor is an individual. An individual debtor must complete payments before receiving a discharge. In addition, as is the case in Chapter 7, some debts under the code are non-dischargeable.
Modifications may be made to a plan after confirmation but must meet the guidelines under the bankruptcy code. The case must not be substantially consummated which means debtor has begun payments or transferred property under the plan provisions.
The debtor must administer the case as well as provide reports to the court. Once the case has been fully administered, the debtor will request a final decree from the court.
If you or your business are struggling financially and would like more information regarding bankruptcy laws and the bankruptcy process please contact Susan Browning, 513.943.6650 at the Finney Law Firm for a FREE CONSULTATION.