Chapter 11 Chapter 7 Conversion: Liquidation Flow Chart
Contrary to misconception, liquidations can occur in Chapter 11 as well.
The notable difference is that the management team oversees the process therefore, even if Chapter 11 ends in liquidation, creditors still tend to prefer Chapter 11 because of managements active role.
- Chapter 7 liquidation has more of a fire sale aspect to it, in which liquidating the assets as quickly as possible is prioritized over maximizing the recovery rates
- Chapter 11 can be a lengthy, drawn-out process but if it ends in liquidation to some creditors it could have still been worth the risk even if it meant fewer recovery proceeds now
If Chapter 11 fails, it can be converted into a Chapter 7 liquidation, as shown below:
Despite the provisions and list of potential remedies granted by the Court in financial restructuring procedures to improve the odds of the debtor achieving its goal such plans can easily fall apart and end up in liquidation.
Chapter 11 processes can start off optimistically, but prolonged negotiations that seemingly progress nowhere can frustrate creditors, especially if the value of the estate has continued to decline noticeably.
Usually, such circumstances coincide with vocal creditors that have become disappointed from the lack of improvement shown by the debtor, which will often cause the Court to acknowledge a liquidation might be best for all parties involved.
Understand the Restructuring and Bankruptcy Process
The Mechanics Of A Chapter 11 Case
A Chapter 11 case, starts like any bankruptcy case with the filing of the debtors bankruptcy petition and schedules. However, in Chapter 11, as opposed to Chapter 7, the debtor remains in charge of its assets and finances as a debtor in possession. The automatic stay immediately protects the debtor upon the filing and the case is assigned a bankruptcy case number and a bankruptcy judge to oversee the case. The case is overseen by the Office of the United States Trustee and the bankruptcy court through regular hearings including a creditors meeting, status conferences and motion practice. In a regular Chapter 11 case the trustee is an attorney from the U.S. Trustees office charged with overseeing the case. In a Subchapter V case the trustee is a private business person, overseen by the U.S. Trustees Office.
During the case the debtor operates its business, engages in activity that may help it reorganize and gives constant disclosure as to its ongoing efforts and finances through monthly debtor in possession operating reports and regular hearings before the Court. In order to allow Court supervision of the debtor it must start a new bank account called the debtor in possession account and give regular updates at Court status conferences.
The Populist Backlash In Chapter 11
From a bankruptcy perspective, the pandemic has unfolded differently than many expected. Prior economic crises have caused sharp upswings in bankruptcy filings. The 2007-2009 crisis was true to form, with business bankruptcy filings doubling during this time, to 60,837 in 2009 from 28,322 in 2007.1 Given that governments almost completely shut down the American economy in 2020, an even greater surge seemed likely. Many observers predicted a massive wave of bankruptcies.2 Bankruptcy scholars and bankruptcy organizations sprang into action, calling for Congress to increase the capacity of the bankruptcy system and to assure access to financing for companies that filed for bankruptcy.3
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Chapter 7 Bankruptcy: Liquidation
Chapter 7 is the straight liquidation of the assets belonging to the debtor and subsequent distribution of the proceeds with senior secured debt securities holding precedence in recoveries over unsecured claims.
Standard Chapter 7 Procedure
Distressed M& a: Buying A Company Out Of Bankruptcy
Bankruptcy often presents an opportunity for qualified bidders with access to cash to purchase quality assets at a bargain price. Before considering a distressed purchase, a savvy investor must diagnose whether the distress was primarily caused by the industry, company, or management. Best to understand the root problems before evaluating potential turnaround solutions. If a potential buyer believes the debtors troubled operations can be saved, then it is important to acknowledge the amount of time, liquidity, and risk involved in the turnaround effort. A cheap price may not be a bargain but rather may reflect the risk of catching a falling knife.
Ultimately, distressed M& A is a complex topic that is worth exploring in greater detail in a future article.
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Cost Of Filing Chapter 11 Bankruptcy
It costs $1,738 to file for Chapter 11 bankruptcy, but the real costs start when you pay attorneys fees. Attorneys fees for an individual Chapter 11 bankruptcy cost at least $10,000 but can go much higher. Typical fees for small business Chapter 11 bankruptcy run from $15,000-$30,000, but can go as high as $100,000, depending on the complexity of the case.
The high costs of attorneys fees make Chapter 11 bankruptcy relatively unappealing, except in cases involving a large amount of debt. If Chapter 11 bankruptcy makes sense in your situation, compare fees from multiple lawyers. You may be able to find a less expensive bankruptcy attorney who is equally qualified to represent you.
Complex Chapter 11 Cases
General Instructions
The four General Orders and related Chapter 11Guidelines implemented by the Bankruptcy Court for the District of New Jersey are as follows:
The pivotal piece of the Chapter 11 Initiative is the General Order Governing Procedures for Complex Chapter 11 Cases. By definition, this General Order applies exclusively to a Chapter 11 once designated by the Court as complex. The other General Orders and related Chapter 11 Guidelines may apply to any Chapter 11 case filed in the District.
The General Order Governing Procedures for Complex Chapter 11 Cases functions independently of the other three General Orders. That is, should the Court issue an order denying an Application for Designation as a Complex Case, debtors counsel retains the option of making application to the Court under the Chapter 11 Procedures outlined in the General Order Adopting Guidelines Governing First Day Matters General Order Adopting Guidelines For Financing Requests and General Order Adopting Guidelines Governing Procedures for Payment of Interim Compensation and Reimbursement of Expenses to Professionals.
E-FILING TIPS
Application for Expedited Consideration:
Master and Core Service Lists:
Please use the event indicated below when filing the following motions:
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TYPE OF MOTION |
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Advantages Of A Chapter 11 Bankruptcy Case
A Chapter 11 case can be advantageous when a business entity or an individual with larger amounts of debts needs to protect themselves from their creditors and to restructure their finances in a manner where they can go forward during and after the case and function better economically and in a more sustaining manner. Chapter 11 like every bankruptcy case gives a debtor safety through the automatic bankruptcy stay which stops all creditor collection activity against the debtor. During the case, while protected from creditors, the debtor has the time and space to take initial steps to reorganize either by shrinking expenses, reducing debt, increasing income and/or selling assets. These initial steps taken during the case would hopefully allow the debtor to function more profitably and would lay the groundwork for the more formal Chapter 11 plan of reorganization and the disclosure statement that accompanies the Chapter 11 plan. The plan and disclosure statement together give the terms for the debtors proposed reorganization, which the debtors creditors need to vote on and the Court needs to approve.
Besides the fact that a Chapter 11, rather than a Chapter 13 case, is the appropriate chapter for reorganizing businesses and individuals with larger amounts of debt, there are other advantages to Chapter 11 that are only present in Chapter 11, as follows:
Lender Control Of Bankruptcy Outcomes
Another controversial feature of current practice is lenders use of their financing agreement and related contracts to dictate the outcome of a Chapter 11 case. When Neiman Marcus filed for bankruptcy, it had signed a financing agreement with lenders to borrow $675 million, together with a so-called Restructuring Support Agreement that locked in a reorganization plan that required Neiman to transfer control to the lenders.25 Once the financing was approved, the case was overno other outcome was possible.
If the market for providing financing to debtors in bankruptcy were competitive, lenders use of lending agreements to control the restructuring process might be less problematic. But the debtors current senior lenders have a monopoly, or nearly so, because other lenders fear that their loan will simply subsidize the senior lenders if the senior lenders have priority over the new lenders. Only if the court awards new lenders a priming lienthat is, priority over the current senior lenderswill new lenders offer to finance the debtors operations in bankruptcy. Bankruptcy courts have the power to provide priming liens if the senior lenders will be adequately protected, but they have been reluctant to do so.26
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Sale As A Going Concern
In order to seek its best interests as an entity and for its owners, the Debtor may utilize the Ch.11 process to stabilize its finances and improve the health of its operations to stay afloat but choose to ultimately put up its business for sale. This is known as a âGoing Concernâ sale, meaning the Debtor strikes a deal with an acquirer to purchase the business in order to continue its operations indefinitely. Instead of preserving ownership in its business future through a reorganization, the Debtor chooses to to divest its ownership through a sale.
S Samuel Arsht Professor Corporate Law
The big surprise of the current pandemic is that the great bankruptcy wave of 2020 never materialized. The number of very large corporate bankruptcies increased,4 but overall business bankruptcies went down rather than up , and the decrease in consumer bankruptcy filings was even more dramatic .5 The most obvious reason for the surprising decline in bankruptcy filings was the enormous amount of stimulus money that buoyed the economy, including well over $1 trillion of business lending capacity in the CARES Act of March 2020 and subsequent boosters of the small business portion of the legislation. In addition, the buoyancy of the stock market provided access to equity capital for firms that might have found themselves in bankruptcy under other circumstances.
Although the pandemic confounded the typical pattern of rising bankruptcies during an economic crisis, in another respect the pandemic has proved true to form: It has provoked a populist backlash. During the 2007-2009 crisis, populist movements emerged on both ends of the political spectrumthe Tea Party on the right and Occupy Wall Street on the leftin each case, protesting bailouts of large financial institutions.
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Alternatives To Chapter 11 Bankruptcy
If the cost, the time and that low 10% to 15% success rate for Chapter 11 bankruptcy filings are too discouraging, it might be worth exploring some of the available alternatives.
Among them are:
- Asset Sales: In some cases, a restructuring plan can work when it includes some of a companys assets being sold. It can be managed outside of bankruptcy, and it might provide the debtor with a greater amount to pay off creditors.
- Restructuring with a Fiduciary: By assigning a trustee to manage the restructuring process, it might be possible to arrange an agreement in which a companys secured creditors are repaid more quickly than a Chapter 11 would mandate. The unsecured creditors, in this arrangement, are paid back over time from some of the revenue generated by the still-operating business.
- Section 363: This is a faster version of Chapter 11 bankruptcy. A Section 363 sale occurs during the bankruptcy process. The parties negotiate an asset sale and present it to the court for approval. It can address at least some of a companys debts quickly and efficiently.
Confirmation Of The Reorganization Plan
The bankruptcy court requires the debtor to propose a plan within 120 days from the date of filing the bankruptcy petition. If the debtor proposes a reorganization plan within the stated period, the court grants another 180 days to allow the debtor to obtain confirmation of the plan. The plan designates classes of claims for treatment in the reorganization. Also, the plan lists the creditors in order of priority, with secured creditors topping the list.
Chapter 11 dictates that the entire class of creditors is deemed to have accepted the reorganization plan if it is accepted by creditors with at least two-thirds in amount and at least one-half of the number of allowed claims in the class. Also, the plan must be approved by at least one class of creditors who hold impaired claims. The holders of unimpaired claims are deemed to have accepted the plan.
If at least one class of creditors vote to object, the plan can still be confirmed as long as the requirements are met. The basis of this confirmation is that the plan must be fair and equitable, and should not discriminate against that class of creditors. If no objections are filed, the court must be satisfied that the plan has complied with all the requirements for confirmation. The court must also find that the plan is feasible, it is proposed in good faith, and that the plan and its components have complied with Chapter 11. The plan then becomes binding and identifies how debts will be treated for the plan duration.
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Chapter 11 Filing Fees And Administrative Fees
As of 2020, you will pay $571 to file a Chapter 11 bankruptcy. This is considered an administration fee.
If you ask to divide a joint case , you will pay another $571 in administration fees. Then, you will pay $1,167 to file the new motion with divided cases. It is $1,167 to reopen a dismissed case.
Diverse Types Of Unsecured Creditors
Vendors are only one type of unsecured creditor in the general unsecured class. In a large bankruptcy case, there can be thousands or tens of thousands of other unsecured creditors in the same bucket. Since, in general, all unsecured creditors must receive the same rate of recovery on their prepetition claims, it can be helpful for vendors to monitor developments affecting other unsecured creditors. For example, the trading price of an unsecured bond may indicate the recovery rate for all unsecured creditors, including vendors.
Types of Unsecured Creditors
There are many types of unsecured creditors which may include:
- Utilities that have provided unbilled, prepetition services to the debtor
- Vendors who are awaiting payment after shipping goods or providing services to the debtor in the prepetition period
- Landlords who entered into prepetition leases that have been rejected by the debtor in the postpetition period and have damages resulting from such breach
- Plaintiffs with meritorious litigation claims against the debtor
- Investors who hold bonds, debentures, subordinated notes, and other types of unsecured securities
- Counterparties with swaps, futures, or other trades with the debtor that are unsettled and in-the-money as of the petition date
- Governments due unpaid, prepetition, nonpriority taxes
- Employees who are due unpaid, prepetition wages and benefits
- Retirees due unfunded amounts from pensions
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Bitcoin Miner Core Scientific To File For Chapter 11 Bankruptcy
The company will file for bankruptcy protection in Texas early on Wednesday morning but will not liquidate, the report published late on Tuesday said, adding that it will continue to operate normally while reaching a deal with senior security noteholders.
The development comes after one of the largest creditors of Core Scientific B. Riley Financial Inc had offered $72 million last week to avoid the bitcoin miner’s bankruptcy.
Core Scientific did not immediately respond to a Reuters’ request for comment outside business hours.
The Austin, Texas-based miner, which operates in Georgia, Kentucky, North Carolina, and North Dakota, mines digital assets, including coins like bitcoin and ethereum.
Bitcoin miners have been under severe pressure as their profitability dropped amid a slump in cryptocurrency prices and soaring energy rates. The extreme market conditions have also led to bankruptcies of other major cryptocurrency lenders such as Celsius Network and Voyager Digital Ltd.
Core Scientific was also impacted by the litigation with Celsius Networks LLC and its affiliates.
Is Chapter 11 Your Best Bankruptcy Choice
When possible, most debtors elect to file for bankruptcy under Chapter 7 or 13 to avoid the time, cost, and risk involved in Chapter 11 proceedings. So your first step should be to learn about personal bankruptcy and bankruptcy options for small businesses.
Find more information about how filing for bankruptcy affects small businesses, qualifying for Chapter 7 bankruptcy, and eligibility for Chapter 13 bankruptcy.
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Chapter 11 Bankruptcy: Understanding The Basics
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.
Business owners and individuals struggling under the weight of debt may find new life under Chapter 11 bankruptcy. Commonly called reorganization bankruptcy, Chapter 11 allows businesses to continue operating while the business owner and creditors reorganize the debts so the business can be profitable once again.
However, keeping a business running isnt the only reason to consider bankruptcy. This guide explains how Chapter 11 bankruptcy works and when business owners and individuals may want to consider filing.
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