Re-organization

THE FOLLOWING QUESTIONS AND ANSWERS ABOUT CHAPTER 11 BANKRUPTCY ARE FOR INFORMATIONAL PURPOSES ONLY, AND NOT LEGAL ADVICE.  THIS Q & A IS GENERAL IN NATURE.  FEEL FREE TO CALL US WITH QUESTIONS.

1. What is a Chapter 11 Bankruptcy?

Chapter 11 permits a person or business to reorganize while obtaining protection from its creditors.

2. Who may file a Chapter 11?

Anyone except a governmental agency, estate, nonbusiness trust, stockbroker, commodity broker, insurance company, bank, or SBA-licensed small business investment company may file under Chapter 11.  An individual may not file under Chapter 11 if he or she has had another bankruptcy case dismissed within the last 180 days.  Chapter 11 is available to virtually any business or person able to afford the expenses of the case.

3. What is a small business Debtor?

To qualify as a small business Debtor, a Debtor must be engaged in a commercial or business activity (other than one whose primary activity is the business of owning or managing real property and activities incidental thereto) and the total amount of the Debtor’s noncontingent liquidated secured and unsecured debts must not exceed $2,190,000 when the case is filed.

4. Are there any restrictions on the size or type of business that may file under Chapter 11?

No.  A business may be a sole proprietorship, a partnership, a limited liability company or a corporation of any size.  Only those entities listed in the answer to question 2 above are not eligible to file under Chapter 11.

5. Does a person have to be engaged in business to qualify for Chapter 11 relief?

A person does not have to be engaged in business to obtain Chapter 11 relief.  A consumer is legally eligible to file under Chapter 11.  However, the person filing under Chapter 11 must have something to reorganize, rehabilitate, or liquidate before Chapter 11 relief can be granted.  A Debtor with substantial personal investments or assets may use Chapter 11 to reorganize or liquidate investments or assets, even if he or she is not engaged in business in the traditional sense.

6. What are the Court costs in a Chapter 11?

The Chapter 11 filing fee is $1717.  In addition, there is a quarterly fee payable to the U.S. Trustee that is based on the amount disbursed during the quarter by the Debtor during the Chapter 11 until such time as a Plan is confirmed.  The amount of the quarterly fee varies from $250 to $10,000 per quarter, depending on the amount of money or property that is disbursed under the Plan.

7. 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 creditors to the Plan. The second phase, which is the phase where the confirmed Plan is implemented and carried out by the Debtor, normally lasts from three to five years, although it, may vary in duration.

8. Is a Chapter 11 discharge valid if the Debtor later fails to carry out the Plan?

The validity of a Chapter 11 discharge is not affected by the subsequent failure of a Debtor to carry out the Plan.  An individual Debtor does not receive a discharge until the completion of payments under the Plan.

9. Is the Debtor permitted to operate its business during a Chapter 11?

Unless a trustee is appointed, the Debtor may continue to operate its business during a Chapter 11 as a debtor in possession.  In operating its business during a Chapter 11, the debtor in possession, must abide by the requirements of Chapter 11 and the orders of the Bankruptcy Court.

10. What limitations are placed on a Debtor’s right to use, sell, or lease its property during a Chapter 11?

Until a Plan is confirmed, the Debtor may not use, sell, or lease cash collateral unless each creditor secured by the cash collateral consents, 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.

11. May a Debtor incur new debts and obtain new credit during a Chapter 11?

A Debtor may obtain unsecured credit and incur unsecured debt in the ordinary course of business during a Chapter 11 without Court approval.  Further, the unsecured debt obtained is payable as an administrative expense.  An administrative expense means that those creditors get paid ahead of all other unsecured creditors.  Court approval is required prior to obtaining any other type of debt.  Thus, secured credit or unsecured credit not in the ordinary course of business may be obtained during the case only with the prior approval of the Bankruptcy Court.

12. 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 must comply with the legal requirements of Chapter 11.  Most Chapter 11 Plans are Plans of reorganization, but may also be a Plan of complete or partial liquidation.

13. For how long a period may a Chapter 11 Plan run?

A Chapter 11 Plan must be long enough to convince the Court and creditors that the Debtor is making a good faith effort to pay as much of its debt as is realistically possible.  On the other hand, the Plan must not be so long that it does not appear feasible to the Court.  Typically, it takes from three to five years to carry out the Chapter 11 Plan.

14. What happens if the Debtor is unable to comply with the provisions of a confirmed Plan?

The Plan may be amended so that it can be complied with, if sufficient grounds exist for such an Amendment.  Otherwise, the Chapter 11 may be dismissed or converted to Chapter 7.  Creditors may sue, or foreclose on the property either in the Bankruptcy Court or in other Courts.

15. What happens when all of the provisions and requirements of a Chapter 11 Plan have been carried out?

The Plan is said to have been consummated.  A final report and accounting must be filed when a Plan has been consummated.  Then the case will be closed by the Court.

Should you have any other questions please feel free to contact Corcoran Law Office at (231) 929-7000.