Chapter 11 Bankruptcy
Bankruptcy cases filed under chapter 11 of the United States Bankruptcy Code are usually called "reorganization" bankruptcy. Corporations, sole proprietorships, and partnerships use this type of bankruptcy to reorganize their business. If the company is a corporation, the fact that bankruptcy is filed does not endanger the stockholders' personal assets. If the company is a sole proprietorship or non-limited partnership, both business and personal assets may be used to pay off debts. In order to be eligible for Chapter 11, the business or individual must have unsecured debts of at least $336,900 or secured debts of $1,010,650. Chapter 11 is most often used by corporations.
The debtor who files bankruptcy acts as the fiduciary in chapter 11, as if he were the trustee. This means he must account for property, examine and object to claims, and file all the informational reports that the court requires. In addition, he may employ attorneys, accountants and other professionals if the court approves it. The business is allowed to keep running, but the court can grant partial or complete relief from debt in order to grant the company a fresh start.
When a chapter 11 case is filed, the U.S. Trustee monitors the debtor's business operation. He or she also monitors all the applications for compensation that are filed in relation to the case. The trust then holds a creditors' meeting, usually called a section 341 meeting, so that the creditors and debtor may come together for a meeting of the minds.
Fees
For chapter 11, the filing fee is $1,000 and the administrative fee is $39. If the filing is joint, only one fee is charged. There is also one fee that is different from chapter 7 and 13: according to law, the debtor must pay a quarterly fee to the U.S. trustee for each quarter that the case is monitored by the court. This fee could be as low as $250 or as much as $10,000. The amount of the fee will depend on how much debt the debtor has disbursed during the quarter.
The Reorganization Plan
The implementation and delivery of the reorganization plan is the main issue in the chapter 11 case. The debtor generally has 120 days to file the plan, but small business debtors have 180 days. Before the plan can be confirmed, there may be several contested motions filed by creditors looking for relief from the automatic stay on creditors that is granted when the petition is filed. There also may be lawsuits if there are unfulfilled contracts or unexpired leases.
If the debtor is a “small business debtor” he or she must meet with the trustee in the beginning of the case. The small business debtor must provide the court with the most recent:
- Tax return
- Balance sheet
- Cash flow statement
- A statement of operations
- Also, a small business person must file ongoing paperwork with the court showing profit, loss, and disbursements.
The debtor may submit more than one plan to creditors for approval. The court tries to determine whether the plan is:
- Feasible
- In good faith
- In compliance with Bankruptcy Code.
Resolving the Case
Chapter 11 bankruptcy may take a few months or several years to settle. Plans are presented, creditors vote, and the court makes many reviews until a decision is reached. If the plan is not able to be confirmed, the court may either liquidate the business under Chapter 7 or dismiss the case. If the case is dismissed, creditors may again pursue their claims.
Filing for bankruptcy is a serious undertaking, and this article is only meant as an overview. Please consult with your attorney before making a decision to file bankruptcy.