Chapter 11 FAQs
Frequently Asked Questions About the Chapter 11 Process
What is Chapter 11 bankruptcy?
Chapter 11 is a type of “reorganization” that is most often used by corporations, but individuals can also qualify. The debtor proposes a bankruptcy reorganization plan that deals with outstanding debt. The plan may pay some creditors in full or in part depending on the type of claim. The plan typically involves monthly payments over a certain timeframe, but could also provide for the sale of property or the sale of a business. It is similar to a Chapter 13 bankruptcy plan, but much more complex. In Chapter 11, debtors prepare a disclosure statement that is similar to a stock prospectus. The disclosure statement should provide creditors with enough information about the reorganization proposal so that they can vote whether to accept or reject the plan. Assuming the creditors have voted in favor of the plan, the bankruptcy court must grant final approval.
Who qualifies for a Chapter 11 bankruptcy?
Both businesses and individuals can qualify for bankruptcy under Chapter 11. Unlike Chapter 13, there is no limit to the amount of debt that can be discharged or repaid. In addition, the plan term can be longer than the five year maximum of Chapter 13.
What are the advantages of a Chapter 11 bankruptcy?
A major advantage of a Chapter 11 filing is that the debtor gets the immediate benefit of the automatic stay upon filing of the case, just like in other Chapters, and is allowed to remain in possession of its property and operate its 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 and submits monthly financial reports on the progress being made. Another key benefit is that the debtor does not have to start paying on its pre-petition debts until the plan of reorganization is approved. This gives the debtor substantial breathing room and the opportunity to reorganize its business and restructure debts while continuing operations. In many cases it may be a year or more before plan approval.
What are the disadvantages of a Chapter 11 bankruptcy?
For individual debtors, a disadvantage of a Chapter 11 bankruptcy as compared to a Chapter 7 bankruptcy is that there is no discharge unless the debtor makes all of the plan payments. Unsecured creditors, in addition to those with secured debt, can object to the proposed plan and seek payment-in-full on their claims or make the debtor pay all disposable income for the duration of the plan. Cost is another factor to consider. Chapter 11 bankruptcies can be expensive and time consuming because of the complexities involved. Chapter 11 cases can also end up being converted into Chapter 7 if the debtor cannot propose a confirmable plan. Court approval is required to dismiss a Chapter 11 case, whereas a Chapter 13 case can normally be dismissed at any time.
Does the automatic stay apply to a Chapter 11 filing?
Yes. The automatic stay goes into effect as soon as a petition for bankruptcy is filed. This happens 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. The stay will operate as an immediate stop as to foreclosure sales, bank levies, and lawsuits.
What provisions must be included in every Chapter 11 plan?
One of the most important plan requirements is that creditors must be classified, since creditors vote to object or approve the plan based on class. For example, a particular debtor may have three classes of creditors: one class for the first deed of trust holder on their residence, another for outstanding tax debt, and a third for outstanding credit card debt. For individual Chapter 11 debtors, the plan must specify that all or part of the debtor’s post-petition 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, confirming that it contains adequate information. Following this approval, it can be distributed to creditors and interest holders, whose votes are ultimately solicited for the approval of the plan.
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 recent tax obligations, domestic support obligations (child and spousal support), as well as debts owed to employees for wages and commissions owed within a certain period pre-petition.
How is a Chapter 11 plan approved?
The plan must be approved by creditors and then by the court. Creditors 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 notice and 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.
When is a Chapter 11 filing converted to a Chapter 7?
Chapter 11 cases are often converted to Chapter 7 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.
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