Chapter 11 is a business entity reorganization that is used primarily for corporations or small businesses. Filing fees are considerably more than in Chapter 7 or 13. Chapter 11 is used for complex business situations, and only a detailed consultation can fully explain the use of this procedure. Chapter 11 is also used by individuals, who exceed the debt ceiling of Chapter 13. See our page for Chapter 13 for more information on this procedure.
Businesses can file for protection under the U.S. Bankruptcy Code whether individuals, partnerships or corporations. Normally, corporations, partnerships or business proprietors file Chapter 11 proceedings, but individuals can file under Chapter 13 or 11, and family farmers can file under Chapter 12 of the U.S. Bankruptcy Code. There are debt ceilings in a Chapter 13 proceeding. Chapter 11 filing fees, court costs, and attorney fees are usually higher than in a Chapter 12 or 13 proceeding. Personal property exemptions, available to individuals in any chapter under the Code, are not applicable in corporate cases.
The filing of a petition in bankruptcy court invokes an “automatic stay.” The stay operates as an injunction, prohibiting creditors from moving forward on lawsuits, foreclosures, repossession, shutoff or eviction.
Debts that existed at the petition date are pre-petition claims and are paid in accordance with the debtor’s plan. Secured claims must either be paid in full, to the extent of the value of the collateral, or the collateral can be surrendered. Certain claims are priority claims and must be paid either in full or before lower class claimants. Leases are treated specially and must be cured promptly, if in arrears, or can be rejected. Priority tax claims must be paid within six years from the date of confirmation of the plan or six years from the date of assessment of the tax, whichever is earlier. Depending on the value of the debtor’s assets, unsecured claims may be paid for less than what is owed and interest stops accruing. The debtor’s plan is a written document, which can be lengthy and governs the relationship with creditors and repayment of claims. In a Chapter 13 proceeding, the length of the plan payments cannot exceed five years, but may be longer in a Chapter 11 proceeding.
In a Chapter 11 proceeding, confirmation of the plan is dependent upon the number of votes cast by creditors supporting the plan. The voting process allows one vote per creditor. Creditors are grouped by classes: e.g. general unsecured debts, equity security holders, secured debts, lease debts, etc. Each class may be treated differently under the plan, but in no event can a junior class receive payment before all senior creditors are paid in full. At least two-thirds in dollar amount and more than half in number of the claims in one or more classes of claims must vote in order for the court to confirm a plan. If at least one impaired class votes in favor of a plan, it is possible to confirm a plan over the reservations or objections of other classes. After confirmation, the terms of the plan control most issues.
After filing a Chapter 11 proceeding, the debtor can remove all pending litigation to the bankruptcy court for further disposition. The debtor can also initiate proceedings against other debtors to collect debts or accounts receivable. Creditors who were either paid or increased their priority within ninety days can be sued to recover preferential payments and return property to the estate. Property that was seized or transferred within certain time frames can also be recovered under the fraudulent transfer provisions. Property belonging to the debtor can be forced to be returned to the debtor.
Chapter 11, as with any litigation, can be risky and should only be used after all other options are exhausted. A trustee can be appointed to control and operate the debtor’s business at considerable expense. Many cases do not result in reorganization and are converted to Chapter 7 liquidation and the business must cease operations. Chapter 11 can be expensive due to the court costs and professional fees. In a Chapter 7 proceeding, the business assets are liquidated to pay costs of administration and then creditors. Individuals can be discharged of their debts or escape legal liability, if creditors do not successfully object to discharge based upon fraud or other reasons. Corporations normally do not obtain discharges and are liquidated under Chapter 7.
This outline is intended only to give a broad overview of business bankruptcy. There are many opportunities and complexities that should be discussed with an attorney to fully understand how the proceedings operate and what potential outcomes may be. Each case depends upon the facts of the case.