- How Chapter 11 Works
- The Debtor in Possession
- The Small Business Debtor
- The Single Asset Real Estate Debtor
- The Automatic Stay
- Creditor’s Committees
- Filing the Chapter 11 Plan
- Avoidable Transfers
- Cash Collateral, Adequate Protection, & Operating Capital
- Appointment or Election of a Case Trustee
- The Examiner’s Role
- The U. S. Trustee or Bankruptcy Administrator
- Adversary Proceedings
- Equity Security Holders
- Conversion or Dismissal
- The Disclosure Statement
- Acceptance of the Plan of Reorganization
- The Discharge
- Post-confirmation Modification of the Plan
- Post-confirmation Administration
- Revocation of the Confirmation Order
- The Final Decree
- State Bankruptcy Courts (List with links to website)
Up |1. How Chapter 11 Works
A bankruptcy case commences when you file a petition with the bankruptcy court.
A petition may be a voluntary petition, which is filed by you, or it may be an involuntary petition filed by your creditors who meet certain requirements. 11 U.S.C. 301, 303.
A voluntary petition should adhere to the format of Form B1: Voluntary Bankruptcy Petition of the Official Forms prescribed by the Judicial Conference of the United States. The voluntary petition includes the following standard information:
- debtor’s name(s);
- social security number or tax identification number(s);
- residence or location of principal assets (if a business);
- the debtor’s plan or intention to file a plan, and;
- a request for relief under the appropriate chapter of the bankruptcy code.
Also, the voluntary petition must indicate whether you qualify as a small business as defined in 11 U.S.C. 101(51C) and whether you elect to be considered a small business under 11 U.S.C. 1121(e).
Upon the filing of a voluntary petition for relief under chapter 11 or, in an involuntary case, you automatically assume the additional identity as the “debtor in possession” 11 U.S.C. § 1101.
The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee.
A debtor will remain a debtor in possession until the debtor’s plan of reorganization is confirmed or the debtor’s case is dismissed or converted to chapter 7 or a chapter 11 trustee is appointed.
The appointment or election of a trustee occurs only in a small number of cases. Generally, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs in cases under other chapters. 11 U.S.C. 1107(a).
You must file a written disclosure statement and plan of reorganization with the court. 11 U.S.C. 1121.
The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization. 11 U.S.C. § 1125.
judicial discretion and the circumstances of the case govern information requirements. The contents of the plan must include a classification of claims and must specify how you will treat each class of claim under the plan. 11 U.S.C. § 1123.
Creditors whose claims are “impaired,” i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims vote on the plan by ballot. 11 U.S.C. § 1126.
After the disclosure statement is approved and the ballots are collected and tallied, the bankruptcy court will conduct a confirmation hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.
Up | 2. The Debtor in Possession
While the law does not preclude individuals from using chapter 11, it is more typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership.
A corporation exists separate and apart from its owners, the stockholders.
The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company’s stock.
A sole proprietorship (owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s); accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors.
Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case (partnership as debtor), however, the partners’ assets may, in some cases, be used to pay creditors in the bankruptcy case, or the partners may, themselves, be forced to file for bankruptcy protection.
Section 1107 of the Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a chapter 11 trustee, and requires the performance of all but the investigative functions and duties of a trustee. These Bankruptcy Code and Federal Rules of Bankruptcy Procedure outline these duties. 11 U.S.C. 1106, 1107; Fed. R. Bankr. P. 2015(a). Such powers and duties include:
- accounting for the property;
- examining and objecting to claims and;
- filing informational reports as required by the court and the United States trustee, such as monthly operating reports.
The debtor in possession also has many of the other powers and duties of a trustee, including the right, with the court’s approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during its bankruptcy case.
Other responsibilities include filing tax returns and filing such reports as are necessary or as the court orders after confirmation, such as a final accounting.
The United States trustee is responsible for monitoring the compliance of the debtor in possession of the reporting requirements.
Up |3. The Small Business Debtor
The Bankruptcy Code defines a small business debtor as a person engaged in commercial or business activities (not including a person that primarily owns or operates real property) that has aggregate non-contingent liquidated secured and unsecured debts that do not exceed $2,000,000. 11 U.S.C. § 101(51C).
If a debtor qualifies and elects to be considered a small business under 11 U.S.C, § 1121(e), the case is put on a “fast track” and treated differently than a regular chapter 11 case under the Code. For example, the appointment of a creditors’ committee and a separate hearing to approve the disclosure statement are not mandatory in a small business case. 11 U.S.C. 1102(a)(3).
A small business case proceeds faster than a regular chapter 11 case because the court may conditionally approve a disclosure statement, subject to final approval after notice and a hearing and solicitation of votes for acceptance or rejection of the plan. After that, the disclosure statement hearing and confirmation hearing may be combined. 11 U.S.C. § 1125(f).
Also, the debtor has a shortened period (100 days from the date of the order for relief) within which only the debtor may file a plan. After the 100-day period expires, any party in interest may file a plan; however, you must file all plans within 160 days from the date of the order for relief. 11 U.S.C. § 1121(e).
Up | 4. The Single Asset Real Estate Debtor
Another type of debtor that has special provisions under the Bankruptcy Code is a single asset real estate debtor.
The term “single asset real estate” is defined as “a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor and on which the debtor conducts no substantial business other than operating the real property and which has aggregate non-contingent liquidated secured debts of no more than $4,000,000. 11 U.S.C. § 101(51B).
The Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay, which is not available to creditors in ordinary bankruptcy cases. 11 U.S.C. § 362(d).
On request of a creditor with a claim secured by the single asset real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor unless the debtor files a feasible plan of reorganization or begins making interest payments to the creditor within 90 days from the date of the order for relief.
The interest payments must be equal to the current fair market interest rate on the value of the creditor’s interest in the real estate. 11 U.S.C. § 362(d)(3).
The automatic stay provides for a period in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.
As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the debtor automatically goes into effect when the debtor files the bankruptcy petition. 11 U.S.C. 362(a).
The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U.S.C. § 362(b). The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation.
Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and that property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt. 11 U.S.C. 362(d).
Special Note: Although creditors are prohibited (stayed from action) from taking against the debtor (unless the court grants relief under section 331), the Bankruptcy Code permits applications for fees to be made by certain professionals during the case.
Thus, a trustee, a debtor’s attorney, or any professional person appointed by the court may apply to the court at intervals of 120 days for interim compensation and reimbursement payments.
In very large cases with extensive legal work, the court may permit more frequent applications. Although you can pay professional fees according to authorization by the court, the debtor cannot make payments to professional creditors on pre-petition obligations, i.e., obligations which arose before the filing of the bankruptcy petition.
The ordinary expenses of the ongoing business, however, continue to be paid.
Up | 5. The Automatic Stay
Creditors’ committees can play a major role in chapter 11 cases. The United States trustee, a federal employee to be distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102.
The committee may consult with the debtor in possession of the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan. 11 U.S.C. 1103.
A creditors’ committee may, with the court’s approval, hire an attorney or other professionals to assist in the performance of the committee’s duties. A creditors’ committee can be an important safeguard to the proper management of the business by the debtor in possession.
Up | 6. Creditor’s Committees
There is no specific statutory time limit set for the filing of a plan; however, the debtor (unless a “small business” debtor, as set out above) has a 120-day period during which it has an exclusive right to file a plan. 11 U.S.C. 1121(b).
Official Bankruptcy Forms are not available from the court. They may be:
Up | 7. Filing the Chapter 11 Plan
- Purchased at legal stationery stores or
- Downloaded FREE at free-bankruptcy-forms.com
The debtor in possession or the trustee, as the case may be, has “avoiding” powers. Such powers can undo a transfer of money or property made during a certain period before the filing of the bankruptcy petition.
By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or “disgorgement” of the payments or property, which then are available to pay all creditors. Generally, the power to avoid transfers is effective against transfers made with-in 90 days before the filing of the petition.
However, transfers to insiders (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing can be avoided. 11 U.S.C. §§ 101(31), 101(54), 547, 548.
Also, under 11 U.S.C. § 544, the trustee is given the authority to avoid transfers under applicable state law, which often provides for longer periods. Avoiding powers are used, for example, to prevent unfair pre-petition payments to one creditor at the expense of all other creditors.
Up | 8. Avoidable Transfers
Although the preparation, confirmation, and implementation of a plan of reorganization are at the heart of a chapter 11 case, other issues may arise, which must be addressed by the debtor in possession.
The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business without prior approval unless the court orders otherwise. 11 U.S.C. § 363(c). If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court.
A debtor in possession may not use “cash collateral,” i.e., collections of accounts subject to security interests or proceeds from the sale of pledged inventory or equipment, without the consent of the secured party or authorization by the court which must first examine whether the interest of the secured party is adequately protected. 11 U.S.C. § 363.
When “cash collateral” is used (spent), the secured creditors are entitled to receive additional protection under section 363 of the Bankruptcy Code. Section 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest.
It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.
The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession’s use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. 11 U.S.C. § 363(c)(4).
A party with interest in property used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide “adequate protection” to the creditor. Adequate protection may be required to protect the value of the creditor’s interest in the property used by the debtor in possession. Adequate protection is especially important when there is a decrease in the value of the property.
The debtor may make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the adequate protection of the creditor’s property interest. 11 U.S.C. § 361.
When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved “superpriority” over other unsecured creditors or a lien on the property of the estate. 11 U.S.C. § 364.
Up | 9. Cash Collateral, Adequate Protection, and Operating Capital
Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the United States trustee can request the appointment of a case trustee or examiner at any time before confirmation in a chapter 11 case.
The court, on motion by a party in interest or the United States trustee and after notice and hearing, shall order the appointment of a case trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate. 11 U.S.C. § 1104(a).
The United States trustee appoints the trustee after consultation with parties in interest and subject to the court’s approval. Fed. R. Bankr. P. 2007.1.
Alternatively, a trustee in a case may be elected if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that instance, the United States trustee convenes a meeting of creditors to elect a person to serve as trustee in the case. 11 U.S.C. 1104(b).
The case trustee is responsible for the management of the property of the estate, operation of the debtor’s business, and, if appropriate, the filing of a plan of reorganization. Section 1106 of the Code requires the trustee to file a plan “as soon as practicable” or to file a report explaining why a plan will not be filed or to recommend that the case be converted to another chapter or dismissed. 11 U.S.C. § 1106(a)(5).
The court, after notice and hearing, may, at any time before confirmation, upon the request of a party in interest or the United States trustee, terminate the trustee’s appointment and restore the debtor to possession and management of the property of the estate and the operation of the debtor’s business. 11 U.S.C. 1105.
Up | 10. Appointment or Election of a Case Trustee
The appointment of an examiner in a chapter 11 case is rare.
The role of an examiner is generally more limited than that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation conducted. If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform. 11 U.S.C. § 1106.
Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor’s schedules to determine whether some of the claims are improperly categorized.
Sometimes, the examiner is directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken. An examiner may not serve as a trustee. 11 U.S.C. 321.
Up | 11. The Examiner’s Role
In addition to the case trustee or examiner and the creditors’ committee, the United States trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration.
The United States trustee is responsible for monitoring the debtor in possession’s operation of the business, and the submission of operating reports and fees. Additionally, the U.S. Trustee monitors applications for compensation and reimbursement by professionals, plans and disclosure statements filed with the court, and creditors’ committees.
The United States trustee conducts a meeting of the creditors, often referred to as the “section 341 meeting,” in a chapter 11 case. 11 U.S.C. § 341. The United States trustee and creditors may question the debtor or the debtor’s corporate representative under oath at the section 341 meeting concerning the debtor’s acts, conduct, property, and the administration of the case.
The United States trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, the establishment of new bank accounts, and the payment of current employee withholding and other taxes.
By law, the debtor in possession must pay a quarterly fee to the United States trustee for each quarter of a year until the case is converted or dismissed. 28 U.S.C. 1930(a)(6). The amount of the fee, which may range from $250 to $10,000, depends upon the dollar amount of the debtor’s disbursements during each quarter.
Should a debtor in possession fail to comply with the reporting requirements of the United States trustee or orders of the bankruptcy court or fail to take the appropriate steps to bring the case to confirmation, the United States trustee may file a motion with the court to have the debtor’s chapter 11 case converted to a case under another chapter of the Code or to have the case dismissed.
Special Note: North Carolina and Alabama, bankruptcy administrators perform similar functions that United States trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the Department of Justice administers the United States trustee program.
Up | 12. The U. S. Trustee or Bankruptcy Administrator
Before confirmation of a plan, several activities may take place in a chapter 11 case. The continued operation of the debtor’s business may lead to the filing of several contested motions. The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit.
There may also be litigation over executory (i.e., unfulfilled) contracts and unexpired leases and the assumption or rejection of those executory contracts and unexpired leases by the debtor in possession. 11 U.S.C. 365.
Delays in formulating, filing, and obtaining confirmation of a plan often cause creditors to file motions for relief from stay or motions to convert the case to chapter 7 or to dismiss the case altogether. Although the appointment of a case trustee is a rarity in a chapter 11 case, a party in interest or the United States trustee can request the appointment of a case trustee or examiner at any time before confirmation in a chapter 11 case.
Up | 13. Motions
Frequently, the debtor in possession will institute a lawsuit, known as an adversary proceeding, to recover money or property for the estate. Adversary proceedings may take the form of:
Up | 14. Adversary Proceedings
- lien avoidance actions;
- actions to avoid preferences;
- actions to avoid fraudulent transfers, or;
- actions to avoid post-petition transfers.
A claim is a right to payment or a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment. 11 U.S.C. 101(5). In some instances, a creditor must file a proof of claim form along with documentation evidencing the validity and amount of the claim.
When proofs of claim are required, creditors must file the proofs of claim with the bankruptcy clerk in the district where the case is pending. The clerk is required to keep a list of claims filed in a case when it appears that there will be a distribution to unsecured creditors.
Most creditors whose claims are listed by the debtor on the debtor’s schedules, but not listed as disputed, contingent, or unliquidated, need not file claims because the schedule of liabilities constitutes evidence of the validity and amount of those claims. 11 U.S.C. 1111.
Any creditor whose claim is not scheduled, or is scheduled as disputed, contingent, or unliquidated, must file a proof of claim to be treated as a creditor for purposes of voting on the plan and distribution under it—3003 (c)(2).
If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim—3003 (c)(4).
It is the responsibility of the creditor to determine whether the claim is accurately listed. The debtor must provide notification to those creditors whose names are added and whose claims are listed as a result of an amendment to the schedules. The notification also should advise such creditors of their right to file proofs of claim and that their failure to do so may prevent them from voting upon the debtor’s plan of reorganization or participating in any distribution under that plan.
When a debtor amends the schedule of liabilities to add a creditor or change the status of any claims to disputed, contingent, or unliquidated claims, the debtor must provide notice of the amendment to any entity affected—1009 (a).
Up | 15. Claims
An equity security holder is a holder of equity security of the debtor. Examples of an equity security are a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a share, security, or interest of a share in a corporation or an interest in a limited partnership. (11 U.S.C 101(16) , (17)).
An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim. A proof of interest is deemed filed for any interest that appears in the debtor’s schedules unless it is scheduled as disputed, contingent, or unliquidated. 11 U.S.C. § 1111.
An equity security holder whose interest is not scheduled or scheduled as disputed, contingent or unliquidated must file a proof of interest to be treated as a creditor for purposes of voting on the plan and distribution under it. Fed. R. Bankr. P. 3003(c)(2).
A properly filed proof of interest supersedes any scheduling of that interest. Fed. R. Bankr. P. 3003(c)(4). Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest.
Up | 16. Equity Security Holders
A debtor in a case under chapter 11 has a one-time absolute right to convert the chapter 11 case to a case under chapter 7 unless: (11 U.S.C. § 1112(a)).
Up | 17. Conversion or Dismissal
- the debtor is not a debtor in possession;
- the case originally was commenced as an involuntary case under chapter 11, or;
- the case was converted to a case under chapter 11 other than at the debtor’s request.
- The court may convert or dismiss a case “for cause” when:
- there is a continuing loss to the estate;
- an inability to effectuate a plan;
- an unreasonable delay that is prejudicial to creditors;
- denial or revocation of confirmation, or;
- inability to consummate a confirmed plan.
The filing of a written disclosure statement is preliminary to the voting on a plan of reorganization, and the disclosure statement must provide “adequate information” concerning the affairs of the debtor to enable the holder of a claim or interest to make an informed judgment about the plan. 11 U.S.C. § 1125.
After the disclosure statement is filed, the court must hold a hearing to determine whether the disclosure statement should be approved. Acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement. 11 U.S.C. § 1125(b).
After the disclosure statement has been approved, the debtor or proponent of a plan can begin to solicit acceptances of the plan, and creditors may also solicit rejections of the plan. Fed. R. Bankr. P. 3017(d) requires that, upon approval of a disclosure statement, the following must be mailed to the United States trustee and all creditors and equity security holders:
Up | 18. The Disclosure Statement
- the plan or a court-approved summary of the plan;
- the disclosure statement approved by the court;
- notice of the time within which acceptances and rejections of the plan may be filed; and
- such other information as the court may direct, including any opinion of the court approving the disclosure statement or a court-approved summary of the opinion. Fed. R. Bankr. P. 3017(d).
- notice of the time fixed for filing objections;
- notice of the date and time for the hearing on confirmation of the plan; and
- a ballot for accepting or rejecting the plan and, if appropriate, a designation for the creditors to identify their preference among competing plans.
As noted earlier, during the first 120- day period after the filing of the voluntary bankruptcy petition, which filing also acts as the order of relief, only the debtor in possession may file a plan of reorganization. The debtor in possession has 180 days after the filing of the voluntary petition (or in a case commenced by an involuntary petition, after the order for relief) to obtain acceptances of the plan. 11 U.S.C. 1121.
For cause, the court may extend or reduce this exclusive period. 11 U.S.C. § 1121(d).
The exclusive right of the debtor in possession to file a plan is lost and any party in interest, including the debtor, may file a plan if and only if:
Up | 19. Acceptance of the Plan of Reorganization
- a trustee has been appointed in the case;
- the debtor has not filed a plan with-in the 120-day exclusive period or any extension granted by the court, or;
- the debtor has not filed a plan which has been accepted by each class of claims or interests that is impaired under the plan within the 180 days or any extensions granted by the court. 11 U.S.C. § 1121.
- secured creditors;
- unsecured creditors entitled to priority;
- general unsecured creditors, and;
- equity security holders.
- the plan is feasible;
- it is proposed in good faith, and;
- the plan and the proponent of the plan comply with the Code.