Chapter 11 Bankruptcy

1. What is Chapter 11 Bankruptcy?

A chapter 11 bankruptcy involves a bankruptcy reorganization plan that accommodates debt reorganization through a payment plan. This is similar to a Chapter 13 bankruptcy. Under this chapter, debtors prepare a disclosure statement which describes their proposed reorganization proposal and payment plan. The proposed plan is voted on by the various classes of creditors and then submitted to the Court for final approval.

2. Who Qualifies for a Chapter 11 Bankruptcy?

Both businesses and individuals may qualify for bankruptcy under Chapter 11. There is no limit to the amount of debt that can be discharged or repaid under a Chapter 11 bankruptcy. There is also no time limit for the duration of the bankruptcy.

3. What are the advantages of a Chapter 11 Bankruptcy?

A major advantage of a Chapter 11 filing is that the debtor generally remains in possession of their property and operates their business subject to court supervision. This is known as being a debtor in possession, or DIP. The debtor then acts as a trustee with respect to the property during the bankruptcy. Chapter 11 debtors also often keep a substantial portion of their assets. The provisions of Chapter 11 allow the debtor relief from pending obligations and the opportunity to reorganize its business and restructure debts while continuing to operate the business. There is also no limit to the amount of debt a debtor may have when filing for protection under Chapter 11, unlike Chapter 13.

4. What are the disadvantages of a Chapter 11 Bankruptcy?

For individual debtors, a disadvantage of a Chapter 11 bankruptcy is that there is no discharge unless the debtor makes all of the plan payments. Unsecured creditors can also object to the proposed plan and force payment in full or the receipt of all disposable income for the duration of the plan. There is also no time limit for a chapter 11 bankruptcy plan to be completed, whereas a chapter 13 plan is completed within 5 years.

5. What provisions must be included in every Chapter 11 plan?

One of the most important plan requirements is the classification of creditors because creditors vote to object or approve the plan by class. For individual chapter 11 debtors, the plan must specify that all or a portion of the debtor’s post petition income from services or other future income will be used to fund plan payments. For all chapter 11 debtors, a disclosure statement describing the proposed plan must be prepared and approved by the Court as containing adequate information before it can be distributed to creditors and interest holders, and votes ultimately solicited for the approval of the plan.

6. How is a Chapter 11 plan approved?

Creditors and equity holders whose claims or interests are not paid in full under the plan, also known as impaired parties, have the right to vote to accept or reject the plan. A plan is confirmed when the court holds a hearing after the vote. A plan that has been approved by creditors after a vote is not binding on the debtor until it has been formally approved by the court.

7. When is a Chapter 11 filing converted to a Chapter 7?

Chapter 11 filings are often converted to Chapter 7 liquidation plans when the debtor-in -possession fails to propose a plan that is approved by the court. Debtors generally always have the right to convert their case from a Chapter 11 to a Chapter 7 filing; however, Creditors may only request the conversion by filing a motion with the court.

8. Does the Automatic Stay apply to a Chapter 11 filing?

Yes. The automatic stay, or a stop, goes into effect as soon as a petition for bankruptcy is filed. This stay goes into effect by operation of law and not by judicial action. The stay does not prevent creditor action against co-obligors, non-debtor spouses, and other classifications of interested parties not protected by the bankruptcy filing.

9. What are the common types of creditor claims in a Chapter 11?

The three most common classes of claims are: 1) administrative, tax, and other priority claims; 2) secured claims; and 3) general unsecured claims. Priority claims include domestic support obligations (child and spousal support), as well as debts owed to employees for wages and commissions.

  1. What are the duties of a Debtor-In-Possession during a Chapter 11 bankruptcy?
    1. DIPs owe a fiduciary duty to its creditors.
    2. DIPs have a duty to account all property received in connection with the chapter 11 case
    3. DIPs have a duty to examine and object to any improper creditor claims
    4. DIPs have a duty to respond to inquires about the estate and its administration
    5. DIPs have a duty to file required documents including statements and schedules, business operating reports and post-confirmation reports
    6. DIPs have the duty to provide notice regarding domestic support obligations
    7. DIPs have the duty to continue administering an employee-benefit plan, if any.
    8. DIPs have the duty to propose a chapter 11 plan
    9. DIPs have the duty to file tax returns
    10. DIPs have the duty to notice financial institutions that they have filed for bankruptcy protection
    11. DIPs have the duty to pay post-petition expenses of operating its expenses as those debts come due: i.e. wages and utilities
    12. DIPs have the duty to comply with state law while operating their business or other property during the bankruptcy case
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