2. Who may file under Chapter 11?
Legally, anyone except a governmental agency, an estate, a nonbusiness trust, a stockbroker, a commodity broker, an insurance company, a bank, or an SBA-licensed small business investment company may file under chapter 11. An individual may not file a chapter 11 if he or she has had another bankruptcy case dismissed upon certain grounds within the last 180 days. As a practical matter, chapter 11 is available to virtually any business or person able to afford the expenses of the case.
4. What is a Debtor?
A Debtor is a person or business concerning whom a case under the Bankruptcy Code has been commenced. A person or business who files a Chapter 11 case is referred to as a Debtor. A Debtor who qualifies may be treated as a small business Debtor in a Chapter 11 case.
6. How does a Debtor get to be treated as a small business Debtor?
A qualifying Debtor who checks the appropriate box on the Chapter 11 petition will be treated as a small business Debtor unless and until the Court orders otherwise.
8. Are there any restrictions on the size or type of business that may file under Chapter 11?
No. A business filing under Chapter 11 may be very large, very small or anywhere in between. Under Chapter 11, a business may be a sole proprietorship, a partnership, a limited liability company or a corporation of any size.
10. What type of relief from creditors may a Debtor obtain by filing under Chapter 11?
The filing of a Chapter 11 case automatically stays all foreclosures, collections actions, civil litigation, and creditor action of any kind against the Debtor or the Debtor’s property. The only significant proceedings not stayed by the filing of a Chapter 11 case are criminal proceedings against the Debtor, divorce-related proceedings, and proceedings by governmental agencies to enforce police or regulatory powers. All other proceedings and acts against the Debtor or the Debtor’s property, whether in or out of Court, are stayed. Even telephone calls or the sending of letters or bills to the Debtor, if for the purpose of collecting a prepetition debt, are precluded by the automatic stay. An act or proceeding that is stayed is held in abeyance, and no further action may be taken in the matter without the approval of the bankruptcy Court. The automatic stay that accompanies the filing of a Chapter 11 case normally gives the Debtor a moratorium of several months on the payment of many of its debts.
12. How long does a Chapter 11 case last?
A Chapter 11 case must be broken down into two phases: the pre-confirmation phase and the post-confirmation phase. The first phase, which is the phase prior to the confirmation of a plan, normally lasts from six to twelve months, although the time may vary depending on the condition of the Debtor, the type of plan proposed by the Debtor, and the reaction of the creditors to the plan. The second phase, which is where the confirmed plan is implemented and carried out by the Debtor, normally lasts from three to five years, although it, too, may vary in duration. See answer to question 39 below.
14. What debts are discharged by a Chapter 11 discharge?
The debts discharged in a Chapter 11 case depend on whether the Debtor is an individual (i.e., natural person) or a nonindividual (i.e., a corporation, partnership, etc.). The discharge received by an individual Debtor in a Chapter 11 case discharges the Debtor from all pre-confirmation debts except those that would not be dischargeable in a Chapter 7 case filed by the same Debtor. The discharge received by a nonindividual Debtor in a Chapter 11 case depends on whether the plan confirmed is a plan of reorganization or a plan of liquidation. The discharge received in the confirmation of a plan of reorganization discharges a nonindividual Debtor from al scheduled pre-confirmation debts without exception. However, if the plan confirmed is a plan of liquidation and if the Debtor does not engage in business after consummation of the plan, a nonindividual Debtor does not receive a discharge.
16. How is a Chapter 11 case commenced?
A voluntary Chapter 11 case is commenced by filing a voluntary petition with the clerk of the bankruptcy Court requesting relief under Chapter 11 of the Bankruptcy Code. A number of other documents are usually filed with the petition. However, if it is necessary to file the case before the other documents can be prepared, most of the other documents may be filed within 14 days after the petition is filed. The filing fee must usually be paid when the petition is filed, although an individual Debtor may pay the filing fee in installments. As a practical matter, however, Debtors who are unable to pay the filing fee when a Chapter 11 case is filed seldom succeed a Chapter 11.
18. Is the public informed of the filing of a Chapter 11 case?
When a Chapter 11 case is filed, all of the Debtor’s creditors, shareholders, partners and other persons directly involved with the Debtor are notified. Notice of a Chapter 11 case is not normally published in newspapers or trade journals unless the filing of the case is considered newsworthy by the newspaper or journal. Generally, only the creditors, owners and employees of a small business Debtor are aware that the Debtor has filed a Chapter 11 case.
20. How does a Chapter 11 case proceed after it has been filed?
After a Chapter 11 case has been filed, the Debtor must file documents with the Court listing the names and addresses of its creditors and owners, describing all of its property and other assets, and disclosing its financial condition. The Debtor, as a “Debtor in possession,” is usually permitted to continue to operate its business during the course of the case, but must comply with the requirements of Chapter 11 and the bankruptcy Court in doing so. A creditor whose collateral is threatened may apply to the Court for relief from the automatic stay or for adequate protection of its security interest. The Debtor must prepare a Chapter 11 plan and file it with the Court, usually within 180 days after the case is filed if the Debtor is a small business Debtor. The Debtor must also prepare, file, and obtain Court approval of a disclosure statement that adequately informs its creditors and interest holders of its financial condition and of its reorganizational plans. After the disclosure statement has been approved by the Court, copies of the statement and Chapter 11 plan are distributed to creditors and interest holders, who may vote on whether to accept or reject the Debtor’s plan. If the plan is accepted by at least one class of creditors whose claims are impaired (i.e., not paid in full, see question 45 below) under the plan, the plan may be confirmed by the Court. After the completion of voting, a confirmation hearing is held wherein the Court must decide whether to confirm the plan. If the plan is confirmed by the Court it becomes effective and must be carried out and consummated by the Debtor. After the plan has been consummated, a final report is filed and the case is closed.
22. What is a “Debtor in possession” and what is required of it in a Chapter 11 case?
A “Debtor in possession” is the Debtor in a Chapter 11 case in which a trustee has not been appointed. As a Debtor in possession, the Debtor is legally charged with rights, duties, and obligations as a trustee in dealing with the Debtor’s property and operating the Debtor’s business for the benefit of its creditors and interest holders. As a Debtor in possession, the Debtor must abide by the rules and standards of Chapter 11 and the orders of the bankruptcy Court. The failure of a Debtor in possession to perform its obligations and duties may result in the appointment of a trustee, a Court order terminating the Debtor’s business, the conversion of a case to Chapter 7, or the dismissal of the case. A Debtor ceases to be a Debtor in possession when a plan is confirmed by the Court.
24. What limitations are placed on a Debtor’s right to use, sell or lease its property during a Chapter 11 case?
For purposes of use, sale, or lease during a Chapter 11 case, a Debtor’s property is divided into two categories: cash collateral and all other property. Until a plan is confirmed, the Debtor, as a Debtor in possession, may not use, sell, or lease cash collateral unless each creditor secured by the cash collateral consents to the proposed use, sale, or lease, or unless the Court approves the proposed use, sale or lease. Unless the Court orders otherwise, the Debtor may use, sell or lease any of its property except cash collateral in the ordinary course of business during the case without prior notice to creditors or Court approval. The Debtor may use, sell, or lease property other than cash collateral outside the ordinary course of business during the case only after notice to any affected creditors and a Court hearing.
26. May a Debtor break its contracts or leases in a Chapter 11 case?
Yes, under a Chapter 11, the Debtor, as a Debtor in possession, may, at its option and without the consent of the other party, reject, assume, or assign most contracts or leases under which the Debtor is obligated. This may be done either by motion during the Chapter 11 case or as part of the Chapter 11 plan.
28. What is a Chapter 11 plan?
It is a written document that states the terms of how the Debtor will deal with its creditors and, if necessary, interest holders. A Chapter 11 plan may be simple or complex, but it must comply with the legal requirements of Chapter 11. Most Chapter 11 plans are plans of reorganization, but a Chapter 11 plan may also be a plan of partial or complete liquidation, if desired.
30. How are unsecured creditors dealt with in a Chapter 11 plan?
The answer depends on whether a creditor has a priority or a nonpriority claim. Priority claims must be paid in full in cash under a Chapter 11 plan, unless a creditor agrees otherwise. Further, all priority claims except tax claims must be paid when the plan is confirmed or shortly thereafter, unless a particular creditor agrees to accept payments under the plan. Tax claims may be paid in regular cash payments with interest over a period not exceeding 5 years from the date the case is filed. An unsecured creditor with a nonpriority claim must be paid at least as much as the creditor would have received had the Debtor filed under Chapter 7, and the payments need not be in cash. Nonpriority claims may be paid in cash, property, or securities of the Debtor or the successor to the Debtor under the plan.
32. What must a creditor do to become entitled to payment in a Chapter 11 case?
For a creditor to be entitled to payment in a Chapter 11 case, the creditor’s claim must be filed and allowed by the Court. If a creditor’s claim is listed on the schedules filed by the Debtor in the case, and is not listed as being disputed, contingent, or unliquidated, then the claim is considered to be filed in the case in the amount and priority listed on the Debtor’s schedules. Otherwise, a creditor must file a document called a “proof of claim” in order for its claim to be filed. Once a claim is filed, either by virtue of being included in the Debtor’s schedules or by the filing of a “proof of claim,” the claim is automatically allowed by the Court unless someone files an objection to the allowance of the claim, in which case the Court must hold a hearing to determine whether to allow the claim. If a creditor’s claim is correctly listed in the Debtor’s schedules and if no one files an objection to the claim, the claim will automatically be allowed in the case, even if the creditor does nothing. It is up to the creditor, however, to check and insure that its claim is correctly listed on the Debtor’s schedules.
34. How is it determined whether a plan is accepted or rejected by creditors?
All voting on the acceptance or rejection of a plan is by class. The creditors in each class of impaired claims vote on whether the plan will be accepted by that class of claims. To be accepted by a class of claims, a plan must be accepted by creditors holding at least two-thirds in dollar amount and one-half in number of claims in the class that actually vote on the acceptance or rejection of the plan. At least one class of impaired claims must vote to accept the plan before the plan can be confirmed by the Court.
36. When and under what circumstances may a plan be confirmed by the bankruptcy Court?
After creditors and interest holders have votes on whether to accept or reject a proposed Chapter 11 plan, the bankruptcy Court will hold a hearing for the purpose of determining whether to confirm the plan. This hearing is called the confirmation hearing. At the confirmation hearing, the party proposing the plan, which is usually the Debtor, must present evidence showing that, the plan complies with the Chapter 11 confirmation requirements. A plan may be confirmed by the Court either through the regular confirmation method or through what is called a “cramdown.” The regular method of confirmation is used when the plan has been accepted by the holders of every class of impaired claims and interests. The cramdown method of confirmation is used when the plan has been rejected by the holders of one or more classes of impaired claims or interests, but has been accepted by the holders of at least one class of impaired claims. A plan that has not been accepted by the holder of at least one class of impaired claims cannot be confirmed by the Court.
41. What happens when all of the provisions and requirements of a Chapter 11 plan have been carried out?
When all of the provisions and requirements of a Chapter 11 plan have been fulfilled or carried out, the plan is said to have been consummated. When a plan has been consummated, a final report and accounting must be filed, and the case will be closed by the Court.