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Reorganization Under Chapter 11 – What is it?

It seems there are more chapter 11 filings than ever before. Most people have heard of this chapter of the Bankruptcy Code but few really know what it is and what it entails. This chapter of the Bankruptcy Code provides generally for reorganization involving a business of some type but sometimes individuals can also file under this chapter. Basically, it involves repaying creditors while keeping the business open and operating. An individual cannot file under this or any other chapter if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders from the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property, which they hold liens. No debtor can file this chapter or any other chapter if they have not completed an approved Credit Counseling class within 180 days before filing. Sometimes there are exceptions.

The way a Chapter 11 works, to begin with a petition is filed like in any Chapter of the Bankruptcy Code where the individual or business resides. A voluntary petition is filed by the debtor, which must be filed on the standard official form prescribed by the Judicial Conference of the United States. Federal law governs the Bankruptcy Code. Unless the court order otherwise, the debtor’s
must file schedules of assets and liabilities, a schedule of current income and expenses, a schedule of executory contracts and unexpired leases and finally a Statement of financial affairs.  The debtor may file an emergency Petition or skeleton petition to get the case started however only has 14 days from the date the petition was filed to file all the schedules or risk the case being dismissed by the court.

If the debtors are husband and wife there are additional document filing requirements. Such debtor’s must file a certificate of credit counseling and a copy of any debt repayment plan developed through the class; evidence of payment from employers (the last 60 days prior to filing the petition); a statement of  monthly net income; any anticipated increase in income or expenses after filing and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife can file either jointly or individually. The courts are required to charge a filing fee of $1000 with administrative fee of $46 that must be paid to the clerk of the court when the petition is filed. If the debtor does not have the filing fee they may ask for a payment plan but it is up to the court to approve and allow the filing fee to be paid in installments.

Failure to pay these fees may cause the case to be dismissed. If it is a joint filing, there is only the one filing fee to be paid to the clerk of court. If installment payments are approved, by the court, the final installment must be paid within 120 days from the petition filing date or the case may be dismissed. The voluntary petition includes standard information regarding the debtors name, social security number or tax ID number, residence, location of principal assets (if a business), the debtors plan or intention to file a plan  and a request for relief under the appropriate chapter of the Bankruptcy Code.  When a voluntary petition is filed under a Chapter 11 the entry of an order for relief, the debtor automatically assumes an additional identity as Debtor in Possession.

This term refers to a debtor that keeps possession and control of its assets while the reorganization is in process without the appointment of a case trustee. A debtor will remain a debtor in possession until the debtors plan or reorganization is confirmed, the case is dismissed or converted to a chapter 7 or a trustee is appointed. The appointment of a case trustee in a chapter 11 is not very common but it does happen from time to time. Generally, the debtor in possession operates the business and performs many of the functions that a trustee performs in cases under other chapters. Generally a written disclosure statement and a plan of reorganization is required to be filed with the court. This statement discloses information concerning assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment of the debtor’s plan of reorganization.  The information required is governed by judicial discretion and the circumstances of the case.

In a “small business case”, the debtor may not have to file a separate disclosure statement if the court determines that adequate information is contained in the plan. The plan must include a classification of claims and must specify how each class of claims will be treated under the plan. Creditors should review the plan and if they are “impaired” (their contractual rights are to be modified, or will be paid less than the full value of their claims under the plan, vote on the plan by ballot. They have only a short period in which to vote. Once the disclosure statement is approved by the court and the ballots are collected and tallied, the court will set a confirmation hearing to determine if the plan should be accepted or not. This chapter of the Bankruptcy Code is much more complex than the other chapters and must be prepared by an experienced bankruptcy attorney that has extensive knowledge in this chapter. It is best to seek a bankruptcy lawyer for this chapter.

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