Chapter 11 Re-organization

If your business is struggling or threatened with closure, we can help.  We can negotiate with your creditors and perhaps work out an arrangement, sometimes called a “forbearance agreement”.  We can seek modifications of loan notes or rental agreements.  We can bring in outside accountants, tax advisors, business counselors and efficiency experts.  If traditional solutions are not an option, we can file your company into Chapter 11, the Reorganizational form of bankruptcy.  The following is a comprehensive Q & A on Chapter 11.

THE FOLLOWING QUESTIONS AND ANSWERS ABOUT CHAPTER 11 CASES ARE FOR INFORMATIONAL PURPOSES ONLY, AND NOT LEGAL ADVICE.  DIFFERENCES BETWEEN EACH STATE AND HOW EACH STATE IMPLEMENTS THE BANKRUPTCY CODE NECESSARILY MAKES THIS Q & A  GENERAL IN NATURE.  SPECIFIC INFORMATION FOR MICHIGAN RESIDENTS, AND IN PARTICULAR, ASSET AND ESTATE PLANNING,  SHOULD BE ADDRESSED BY AN ATTORNEY.  FEEL FREE TO CALL US WITH QUESTIONS.

 

QUESTIONS AND ANSWERS ABOUT CHAPTER 11

 

1. What is Chapter 11?

Chapter 11 is the chapter of the Bankruptcy Code that permits a person or business to reorganize while obtaining protection from its creditors. Chapter 11 of the Bankruptcy Code is entitled “Reorganization”. The Bankruptcy Code is the name given to that portion of the federal laws that deal with bankruptcy.

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 under 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.

3. Are there any financial or insolvency requirements for filing under Chapter 11?

No. There are no financial or insolvency requirements for filing a voluntary Chapter 11 case other than the good faith requirement that the case be filed primarily for purposes of reorganization. A voluntary Chapter 11 debtor may be solvent or insolvent, its assets may exceed its liabilities by any amount (or vice versa), and its income may be substantial or nonexistent. The only financial restriction is the practical one of whether the cost of the case to the debtor is justified by the intended benefit. A voluntary Chapter 11 case is a Chapter 11 case filed by the debtor. An involuntary Chapter 11 case is a Chapter 11 case filed against the debtor by its creditors.

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.

5. What is a small business debtor?

A small business debtor is a debtor who chooses to be treated as a small business debtor in a Chapter 11 case. 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.

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.

7. What are the advantages of being treated as a small business debtor?

Being treated as a small business debtor expedites the handling of a Chapter 11 case by dispensing with the necessity of a creditor’s committee, by shortening the period for filing plans, and by simplifying the procedures for obtaining acceptance of a plan.

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. Only those entities listed in the answer to question 2 above are not eligible to file under Chapter 11.

9. 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 in the traditional sense to obtain Chapter 11 relief. A consumer is legally eligible to file under Chapter 11. As a practical matter, 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 his or her investments or assets, even if he or she is not engaged in business in the traditional sense.

10. What are the court costs in a Chapter 11 case?

The Chapter 11 filing fee is $1213, which must be paid to the clerk of the bankruptcy court when the case is filed. 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 case 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.

11. What is a United States Trustee and what does it do in a Chapter 11 case?

The United States Trustee is an employee of the United States Department of Justice and serves independently of the bankruptcy court. The function of the United States Trustee in a Chapter 11 case is to monitor the case, appoint one or more creditors’ committees, call and preside at meetings of creditors, appoint a trustee in the case if ordered to do so by the bankruptcy court, and collect the quarterly fee. Generally, the United States Trustee takes appropriate action to insure that all reports and documents are filed, that all fees are paid, and that there is no undue delay in the case. Most Chapter 11 debtors are required to make periodic financial and operating reports to the United States Trustee during the course of the case, at least until a plan is confirmed. The United States Trustee should not be confused with the trustee that is sometimes appointed in a Chapter 11 case to operate the debtor’s business and take possession of the debtor’s property. A trustee in a Chapter 11 case is appointed by the United States Trustee, and is discussed in the answers to questions 28 and 29 below.

12. How much are the attorney’s fees in a Chapter 11 case?

The amount charged by an attorney for handling a Chapter 11 case for a small business debtor varies greatly depending on such matters as the size of the business, the type and extent of relief needed by the debtor, the attitude of the debtor’s creditors, the type of reorganization needed or contemplated by the debtor, and whether the owners of the business are in agreement or disagreement as to how the business should be reorganized. Unless the case is a simple one, most attorneys charge on an hourly basis and require a retainer to be paid in advance. The total fee charged for handling a small business Chapter 11 case may vary from $7,500 or less for a simple case to several times that amount for a complex case. All fees charged or collected by an attorney in connection with a Chapter 11 case, whether prior to or after the case is filed, must be approved by the bankruptcy court as being reasonable in amount.

13. 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, collection 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.

14. What type of long-term relief may a debtor obtain under Chapter 11?

Long term relief in the form of either a reorganization of the debtor’s business or an orderly, debtor-controlled liquidation of the debtor’s assets may be obtained under Chapter 11. If the debtor’s business is reorganized, it may continue to function either in its present form or in a revised form, and its present creditors will be permitted to satisfy their claims only to the extent provided in the debtor’s plan of reorganization. A reorganization may consist of anything from an extension of time for the repayment of debts to a total restructuring of the business.

15. 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, too, may vary in duration. See the answer to question 52 below.

16. When does the debtor receive a discharge in a Chapter 11 case?

In the Chapter 11 case filed by a corporation, limited liability company, or other nonindividual, the debtor receives a discharge when a plan is confirmed by the court. The order of the court that confirms the plan also contains the debtor’s Chapter 11 discharge. In a Chapter 11 case filed by an individual (i.e., a natural person), a discharge is granted by the court separately, after the completion of payments under the plan. A discharge is a court order relieving the debtor from liability for certain debts. A debt that is discharged is a debt for which the debtor is no longer liable, except as provided in the Chapter 11 plan.

17. 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., a 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 all 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.

18. Is a Chapter 11 discharge valid if the debtor later fails to carry out the plan?

The validity of a Chapter 11 discharge granted to a nonindividual debtor is not affected by the subsequent failure of a debtor to carry out the plan. As long as the order of confirmation is not revoked by the court (which seldom happens), the discharge received by a debtor of this type is valid even if the debtor later fails to fulfill its obligations under the Chapter 11 plan. As explained in the answer to question 16 above, an individual debtor does not receive a discharge until the completion of payments under the plan. However, under certain circumstances an individual debtor who has not completed payments under the plan may also receive a Chapter 11 discharge.

19. 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 under Chapter 11.

20. Where is a Chapter 11 case filed?

A Chapter 11 case is filed with the clerk of the bankruptcy court in the district where the debtor either resides, has its principal place of business, or has its principal assets.

21. 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.

22. Does a person or business filing under Chapter 11 have to continue to pay its debts after the case is filed?

Most Chapter 11 debtors receive a moratorium on the payment of most of their general unsecured debts for the period between the filing of the case and the confirmation of a plan. This period usually lasts for six to twelve months. During this period, however, it may be necessary to pay secured creditors and creditors whose property, goods, or services are needed to continue the debtor’s business.

23. 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 all 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 so doing. 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 the Chapter 11 plan are distributed to creditors and interest holders, who may then 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.

24. What is an interest holder and what is its role in a Chapter 11 case?

An interest holder is the holder of an equity interest in the debtor. In Chapter 11 cases interest holders are often referred to as equity security holders. A shareholder is an interest holder of a corporation and a member is an interest holder of a limited liability company. If the rights of interest holders are dealt with in a Chapter 11 plan, interest holders are treated like creditors and are permitted to file proofs of their interests, vote on the acceptance or rejection of a plan, and participate in distribution under the plan. However, most plans in small business Chapter 11 cases deal only with creditors and do not deal with the rights of interest holders.

25. 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 the rights, duties, and obligations of 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 the 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.

26. What is cash collateral?

Cash collateral is cash or property that is easily converted to cash. Property such as bank accounts, checks, securities, and other cash equivalents constitutes cash collateral. Because it is easily disposed of, the use or sale of cash collateral is subject to strict rules in Chapter 11 cases. The use or sale of cash collateral is discussed in the answer to question 30 below.

27. Is the debtor permitted to operate its business during a Chapter 11 case?

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

28. What are the grounds for the appointment of a trustee in a Chapter 11 case?

There are three grounds for the appointment of a trustee in a Chapter 11 case: a trustee may be appointed for cause, if the appointment would be in the best interests of creditors, or if grounds exist to dismiss the case but the court determines that the appointment of a trustee, rather than dismissal, is in the best interests of creditors and the business. Cause for the appointment of a trustee includes substantial or continuing business or asset loss, gross mismanagement of the affairs of the debtor by current management, failure to comply with orders of the court, and several other grounds. A trustee is not appointed in most small business Chapter 11 cases.

29. What happens if a trustee is appointed in a Chapter 11 case?

If appointed, the trustee assumes most of the management functions of the debtor’s business and takes control of the debtor’s property. In effect, the trustee will replace the debtor’s current management in the operation of the debtor’s business during the course of the Chapter 11 case until a plan is confirmed. The trustee may also assume control over many aspects of the debtor’s Chapter 11 case. When a trustee is appointed in a Chapter 11 case, the debtor ceases to be a “debtor in possession.”

30. 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.

31. May a debtor incur new debts and obtain new credit during a Chapter 11 case?

Yes. Unless the court orders otherwise, the debtor, as a debtor in possession, may obtain unsecured credit and incur unsecured debt in the ordinary course of business during a Chapter 11 case without court approval. Further, the unsecured credit or debt so obtained or incurred is payable as an administrative expense in the case, which means that those creditors get paid ahead of all other unsecured creditors. Court approval is required prior to obtaining or incurring any other type of credit or debt during the case. 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.

32. May a debtor break its contracts or leases in a Chapter 11 case?

Yes. Under 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 a Chapter 11 plan.

33. What is a disclosure statement?

It is a document prepared by the proponent of a Chapter 11 plan that discloses financial and other information about the debtor and the proposed plan to the debtor’s creditors. A disclosure statement must contain information that is sufficient to enable creditors to make an informed decision on whether to accept or reject a proposed plan. A disclosure statement must be approved by the court before it is distributed to creditors. In a small business case, the debtor’s Chapter 11 plan may also serve as the disclosure statement if it contains adequate information about the debtor and the plan.

34. 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 complete or partial liquidation, if desired.

35. How are secured creditors dealt with in a Chapter 11 plan?

Much depends on whether a creditor is fully secured or undersecured. The claim of a fully secured creditor must be paid in full in cash, and if deferred cash payments are made on the claim, interest must be paid to the creditor for not receiving its cash immediately. An undersecured creditor may elect to have its claim treated as being fully secured, and if such an election is made the claim must be paid in full in cash, but if deferred cash payments are made, interest does not usually have to be paid on the claim. If an undersecured creditor does not elect to have its claim treated as being fully secured, the secured portion of its claim must be paid in the same manner as a fully secured claim, while the unsecured portion may be paid as an unsecured claim.

 36. What is the difference between a fully secured creditor and an undersecured creditor?

A fully secured creditor is the holder of a claim that is secured by property of a value that equals or exceeds the amount of the claim. An undersecured creditor is the holder of a claim that is secured by property of a value that is less than the amount of the claim. Suppose, for example, that the debtor has a truck valued at $10,000 that is subject to a $7,000 first mortgage held by Bank A and a $5,000 second mortgage held by Bank B. Because its $7,000 claim is secured by property valued at $10,000, Bank A’s claim is fully secured. Bank B’s $5,000 claim is undersecured because it is secured only by an interest in property valued at $3,000 (the $10,000 value of the truck less the $7,000 first mortgage lien against it). An undersecured creditor is treated as having two claims, one secured and the other unsecured. However, in a Chapter 11 case, an undersecured creditor may waive its unsecured claim and elect to have its claim treated as being fully secured by exercising what is called a Section 1111(b) election.

37. How are unsecured creditors dealt with in a Chapter 11 plan?

The answer depends on whether a creditor has a priority or a non-priority 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 non-priority 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. Non-priority claims may be paid in cash, property, or securities of the debtor or the successor to the debtor under the plan.

38. How does a priority unsecured claim differ from a non-priority unsecured claim?

A priority unsecured claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. Priority unsecured claims include the following types of claims: the administrative expenses of the Chapter 11 case, wage claims of up to $10,950 per employee, wage benefit claims of employees up to certain limits, consumer deposit claims of up to $2,425 each, most divorce-related claims, and tax claims. Administrative expenses include the fees of the debtor’s attorney and unsecured debts incurred in the ordinary course of operating the debtor’s business during the case. A nonpriority unsecured claim is a general unsecured claim incurred against the debtor prior to the filing of the Chapter 11 case. The claims of most trade creditors are nonpriority unsecured claims.

39. May someone other than the debtor file a Chapter 11 plan?

Yes, but only under certain conditions. If the debtor chooses to be treated as a small business debtor, only the debtor may file a plan for the first 180 days after the case is filed and creditors then have 120 days in which to file a plan. Otherwise, the debtor has the exclusive right to file a Chapter 11 plan for the first 120 days after the filing of the case, unless a trustee is appointed during the 120-day period. If the debtor files a plan during the 120-day exclusive period, the debtor must gain acceptance of its plan by creditors and interest holders within 180 days after the case is filed in order to retain the exclusive right to file a plan. A party other than the debtor may file a plan if a trustee is appointed in the case, if the debtor fails to file a plan within the exclusive period, or if the debtor fails to gain acceptance of a plan within 180 days after the case is filed.

40. Who may file a Chapter 11 plan if the debtor fails to do so?

If any of the conditions described in the answer to the previous question occur entitling a party other than the debtor to file a Chapter 11 plan, any party to the case may file a plan, including a creditor, an interest holder, or a creditors’ committee. The United States Trustee may not file a plan.

41. What is a creditors’ committee?

It is a committee appointed by the United States Trustee that represents the interests of creditors in the case. A creditor’s committee must be appointed in a Chapter 11 case unless the debtor chooses to be treated as a small business debtor and requests that a creditors’ committee not be appointed. While other committees may be appointed upon request, the only committee, if any, appointed in most small business cases is the unsecured creditors’ committee, which represents the interests of nonpriority unsecured creditors in the case. The unsecured creditors’ committee is usually composed of the seven largest unsecured creditors who are willing to serve on the committee.

42. 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 in 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.

43. When do creditors vote on whether to accept or reject a Chapter 11 plan?

Voting on a plan begins after the court approves or conditionally approves a disclosure statement prepared by the party proposing the plan. Each eligible creditor is mailed a ballot for voting on the plan. The ballot is accompanied by a copy of the disclosure statement and a copy or summary of the proposed plan. The court sets a deadline for voting on the plan, and a creditor’s ballot must be filed with the court prior to the voting deadline in order to be counted.

44. What creditors are eligible to vote on the acceptance or rejection of a Chapter 11 plan?

Creditors must qualify both individually and by class in order to be permitted to vote on the acceptance or rejection of a plan. Individually, a creditor’s claim must be allowed by the court in order to be eligible to vote. The allowance requirements for claims for purposes of voting are the same as the allowance requirements for purposes of payment, and are described in the answer to question 42 above. Except for certain priority claims, a Chapter 11 plan must put each claim in a class. To be eligible to vote on the acceptance or rejection of a plan, a class of claims must be impaired by the plan and must receive something under the plan. For a class of claims to be impaired by a plan, at least one claim in the class must be impaired under the plan. Classes of unimpaired claims are presumed to have accepted the plan and classes of claims receiving nothing under the plan are presumed to have rejected the plan. Creditors in these classes of claims do not vote on the acceptance or rejection of a plan. Creditors with allowed claims in all other classes of impaired claims are eligible to vote on the acceptance or rejection of a plan.

45. What is an impaired claim?

An impaired claim is a claim that is impaired by the terms of a Chapter 11 plan. A claim is impaired by a plan if the rights of the creditor to enforce its claim are diminished or materially changed by the plan. A claim that is not paid in full under a plan is an impaired claim. Even if a claim is paid in full under a plan, the claim is considered to be impaired if the original maturity date or any other obligation contained in the agreement upon which the claim is based is not met under the terms of the plan. However, a debtor is permitted to cure a defaulted note, mortgage, or other obligation so that the creditor’s claim is no longer impaired. A defaulted obligation is deemed to be cured and not impaired by a plan if the obligation is made current, the creditor is compensated for any expenses incurred by reason of the debtor’s default, and the rights of the creditor under the obligation are thereafter unaltered.

46. 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 the 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 a plan before the plan can be confirmed by the court.

47. What happens when a plan is confirmed by the court?

To become legally effective, a Chapter 11 plan must be confirmed by the bankruptcy court. A plan is confirmed by the bankruptcy court when the bankruptcy judge signs an order approving the plan and ruling that the debtor and all creditors and interest holders are bound by the provisions of the plan.

48. When and under what circumstances may a plan be confirmed by the bankruptcy court?

After creditors and interest holders have voted 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 holders of at least one class of impaired claims cannot be confirmed by the court.

49. How does confirmation of a plan under a “cramdown” differ from the regular method of confirmation?

When the holders of every class of impaired claims vote to accept a plan and confirmation is sought under the regular confirmation method, the plan will be confirmed by the court if the debtor proves that it has complied with the Chapter 11 confirmation requirements. When confirmation of a plan is sought under a cramdown, in addition to satisfying the Chapter 11 confirmation requirements, the debtor must show that the plan does not discriminate unfairly against any class of claims who have not accepted the plan and that the plan is fair and equitable with respect to each class of claims that has not accepted the plan. It is more difficult to obtain confirmation under a cramdown than under the regular confirmation method.

50. What happens if the court does not confirm a Chapter 11 plan?

If the court decides not to confirm a Chapter 11 plan, it will usually permit the party proposing the plan to modify the plan so that it can be confirmed. If a Chapter 11 plan is modified, it is usually necessary to hold another confirmation hearing on the modified plan. If the court refuses to confirm any plan, the Chapter 11 case must either be dismissed or converted to Chapter 7.

51. What happens after a Chapter 11 plan has been confirmed by the court?

After a Chapter 11 plan is confirmed by the court, the plan must be implemented and carried out, either by the debtor or by the successor to the debtor under the plan. If the plan calls for the debtor to be reorganized or for a new corporation to be formed, this function must be carried out first. If the plan calls for property to be transferred or for liens to be created or modified, this must also be done. And of course, the claims of creditors must be paid in the manner specified in the plan.

52. For how long a period may a Chapter 11 plan run?

There are no specified limits on the length of a Chapter 11 plan. 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 and consummate the Chapter 11 plan of a small business debtor.

53. What happens if the debtor is unable to comply with or carry out the provisions of a plan after it has been confirmed by the court?

If the debtor, or the successor to the debtor under the plan, 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 case may be dismissed or converted to Chapter 7. If the debtor, or the successor to the debtor under the plan, fails to carry out its obligations under the plan, creditors may sue, or foreclose on the property of, the debtor or its successor either in the bankruptcy court or in other courts.

54. 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.

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