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What is Chapter 11 Bankruptcy?

 

Chapter 11 of the bankruptcy code is a “reorganization” and is primarily for businesses (small or large) such as corporations and partnerships, LLCs or for individuals with debts Unsecured debts over $394,725 or Secured debts over $1,184,200 (limits valid through 2019) and assets who do not meet the strict asset/debt limitations of Chapter 13.

Chapter 11 offers greater flexibility and options than other chapters and, in the hands of experienced bankruptcy reorganization attorneys, can be extremely useful even in lower debt cases.

It is very useful in real estate cases where you are trying to find ways to catch up on past due payments, or buy some time for selling a piece of property that has equity, or for dealing with delinquent taxes, or any scenario where you need time to catch up on payments, but keep your business running. The reduction of mortgage balances and elimination of some unsecured debt is also available in certain situations in a Chapter 11. Many investment and business analysts have long recommended Chapter 11 as a viable approach to reorganize a business to allow for a continuation of the business resulting in future profitability.

If you are an individual or a small business owner (not a corporation or partnership), make sure to also check out the information for bankruptcy Chapter 7 and Chapter 13 and read the information on business bankruptcy options to better understand the difference between your personal liabilities and that of your business/corporation.

Who Can File Chapter 11?

Chapter 11 was originally designed for Business Corporations and Partnerships (including LLCs and LLPs), but individuals can also file Chapter 11. Common businesses such as Real Estate, Restaurants, Manufacturers, Professionals and other types of business entities have long since benefited by Chapter 11.

Individuals would normally file a Chapter 11 if they do not meet the debt limitations of Chapter 13.

Businesses file when they want to continue operating their business but need some breathing room from creditors and a chance to propose a repayment plan.

The Chapter 11 “Debtor-in-Possession”

Chapter 11 is unique in that the Debtor is a debtor-in-possession, meaning that he/she/it remains in possession of all its assets and most often control of its ongoing business operations.

In other words, the Debtor itself (or himself or herself) is the Trustee for the Chapter 11 bankruptcy estate.

While this is a great advantage, it does not come without its costs and there are many fiduciary responsibilities because the debtor-in-possession must act in the best interests of the creditors of the bankruptcy estate–not necessarily in the best interest of the owners or officers. This is all guided by experienced Chapter 11 attorneys.

There are great powers afforded to Chapter 11 Debtors, such as the stopping of law suits, repossession and foreclosure of assets against the business all cease. The ability to object to your creditors’ claims, avoid liens, reject leases and contracts with no penalty, extend the time for repayment to your existing creditors or even reduce the amount owed or paid to them come automatically with the filing of a Chapter 11.  An experienced Chapter 11 lawyer will know how to utilize these tools.

Often there is litigation associated with any Chapter 11 case, either with the Debtor attacking the creditors, or vice versa.

Costs of Chapter 11 Cases

Chapter 11 can be quite expensive and is always time consuming.   There are the obvious attorney and lawyer fees which can be quite high.   Initial, up-front attorney’s fees (for a competent attorney) and costs can range anywhere from $15,000 to $50,000+ depending on the complexity of the case and anticipated amount of work to be done.

Attorneys and other professionals cannot be paid after the Chapter 11 case is filed, except upon approval by the bankruptcy court, and an application for fees can only be filed every 4 months.   Up-front retainers are required to enable professionals to ensure sufficient funds will be available to pay their fees and costs as the case progresses.

In addition to the attorney fees, there are constant administrative burdens which must be met:

Regular reports must be filed with the court and the U.S. Trustee’s Office, and fees must be paid.

Other compliance items must be submitted to the U.S. Trustee’s Office, many within the first 7 days of the case!

Since Chapter 11 cases can last from several months to several years, the professional fees (attorney, accountant, C.P.A.) can grow quite rapidly.

The court filing fee is $1,717 as of June 2014.  This is of course in addition to any attorney’s fees.

There are also quarterly fees which must be paid to the US Trustee’s Office.  For a schedule of these fees, please see the link in the upper right corner.

Keys to Successful Chapter 11 Cases

The key to a successful Chapter 11 bankruptcy case is pre-bankruptcy planning .

As is the case with Chapter 13 and, to an extent, with Chapter 7, very few Chapter 11 cases are successful when the Debtor arrives at the office of a bankruptcy attorney needing to file the petition immediately.

This is true with any chapter of the bankruptcy code, but is particularly true in a Chapter 11.

Why?

Because the administrative burdens, time constraints, financial pressures, and other problems are so great, that a failure to plan ahead, and prepare as much documentation as possible prior to filing, will usually spell disaster.

All you will end up doing is paying your attorney several thousand dollars for a few months’ breathing room, only to end up where you were to begin with.

Chapter 11 Bankruptcy Plans

The ultimate purpose of a Chapter 11 case is to get a Plan of Reorganization (repayment) confirmed by the court.

This is by no means a simple task and the requirements for doing this are rather complex (see links above) and will not be discussed in detail here.

The Plan is basically a contract with one’s creditors as to how they will be repaid, and from what source.

In order for the plan to be approved, the creditors must vote in favor of the Plan in certain numbers, or if they do not vote in sufficient numbers for the Plan, they may sometimes be forced to accept the Plan if other requirements are met, although that may also result in the debtor having to give up assets.   Ultimately, the key to a successful Chapter 11 plan is in reaching agreements with the creditor through negotiation.

There are many ways to formulate a Plan, subject to the requirements and limitations of the Bankruptcy Code, and the more skilled attorneys will explore all avenues to improve your business and financial position.

LEGAL DISCLAIMER

Nothing contained herein should be construed to constitute advice for your personal circumstances. Furthermore, this is intended as a peripheral glance at the various options available, but by no means is this a comprehensive or exhaustive analysis of the bankruptcy laws. Whether or not you should file a  bankruptcy will vary depending on your personal circumstances and should only be undertaken after careful consideration and analysis, and after consultation with a professional.

 

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