Whats Chapter 11 Bankruptcys Requirement In Terms Of Reorganization
Typically, once Chapter 11 has been filed, the business has 4 months to submit their reorganization plan. In some cases, the timeline can be extended to up to 18 months. If the company doesnt submit a plan in the agreed-upon timeline, the creditors can propose a plan.
Once a plan has been submitted, the creditors must vote on the plan for it to be approved by the bankruptcy court. It is possible for creditors to reject a companys plan .
If creditors do reject the plan, the debtor can request a cram down, which essentially forces creditors to accept it.
Going forward, the plan serves as a contract between the company and the creditors. It spells out how the company will pay for expenses and operate. Usually, that plan involves downsizing.
Along with the plan, the business must submit a disclosure statement containing specifics about the companys assets, liabilities, and business affairs.
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Explained: The Chapter 11 Bankruptcy Process
14 Min Read
Learn everything you need to know about Chapter 11. How does the bankruptcy process work? What happens during a Ch.11 bankruptcy case? We have the answers.
Iconic companies from major retailers to airline corporations to rental car companies have declared bankruptcy. What does this mean? Bankruptcy can be an unavoidable outcome for some businesses when they experience long-term financial distress. It often is accompanied by a lasting impression of failure and concerns that the company cannot continue to operate. While many companies do ultimately close their doors due to a liquidation or sale of the business after filing for bankruptcy, this isnt the story for most Corporate Bankruptcy cases.
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Chapter 11 Reorganization Plans
Ordinarily, the debtor has the exclusive right to propose a reorganization plan for the first four months however, the court can extend the debtor’s “exclusivity period” for to up 18 months after the petition date. This provision is one of the reasons why Chapter 11 is so costly. .
Once the exclusivity period expires, the creditors’ committee or other parties can propose alternate reorganization plans. But more often, creditors or other parties dissatisfied with the debtor’s progress will move to dismiss or convert the case to Chapter 7.
Chapter 11 Vs Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy is reserved for individuals rather than businesses. Its a relatively fast process that liquidates your assets and uses the money to settle your debts with your creditors. Youll be able to keep some of your property, but much of it is sold off.
In order to qualify for Chapter 7, you must meet a means test that takes into consideration your income, family size, and expenses. If you dont make enough money to have disposable income that can be applied to your debt, then youll qualify for Chapter 7. The entire process from start to finish typically takes no more than a few months.
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Are There Advantages To Filing Chapter 11
The biggest advantage is that the entity, usually a business, can continue operations while going through the reorganization process. This allows them to generate cash flow that can aid in repayment process. The court also issues an order that keeps creditors at bay. Most creditors are receptive to Chapter 11 as they stand to recoup more, if not all, of their money over the course of the repayment plan.
How Creditors Are Paid In Chapter 11
The goal of Chapter 11 is to give your creditors financial recourse for what you owe but they arent treated equally. And a reorganization plan doesnt guarantee that creditors included in the filing will receive 100% of the money theyre owed.
Secured creditors receive first priority in a Chapter 11 bankruptcy since theyre owed debts that are secured by some type of collateral. For example, if you own a building thats mortgaged or a fleet of business vehicles that you used an equipment loan to purchase, those creditors would have to be addressed first in your reorganization plan. Generally, these creditors have to receive payment thats equal to the fair market value of the collateral associated with the loan.
Unsecured creditors would come next. This group of creditors may include your vendors and suppliers, credit card companies or anyone else you owe unsecured loans to. These creditors can only be paid once secured creditors have been paid. So for example, if your suppliers are owed money that isnt secured by inventory then theyd have to take a backseat until secured creditors are paid.
Last on the payment totem pole are general creditors, which can include corporate stockholders. If a company issues shares of preferred stock and common stock, shareholders owning preferred stock get paid first.
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A Review Of Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows struggling businesses to restructure and maximize their return to creditors and owners.
In the past, only large corporations were able to afford Chapter 11 bankruptcy. Chapter 11 has improved and is now available to large corporations. And small businesses can be used to keep your doors open. Individuals who arent eligible for Chapters 7 or 13 may also file.
Chapter 11 Plan Confirmation
In reality, the debtor and creditors can agree to any plan that they choose. If a creditor objects to the plan, however, the court will consider factors, including:
Feasibility. The bankruptcy court must find that the proposed plan is feasible or likely to succeed. The debtor must prove the ability to raise sufficient revenues to cover expenses and creditor payments.
Good Faith. The plan must be proposed in good faith and not seek to further an agenda forbidden under the law.
Best Interests of Creditors. The “best interests” test requires that creditors receive at least as much under a proposed plan as they would if the debtor’s case were converted to a Chapter 7 liquidation . In some cases, the “best interests” test requires the debtor to pay all of its creditors in full. Most Chapter 11 debtors, however, are financially underwater and can meet the “best interests” test by paying creditors only a fraction of what they owe.
Fair and Equitable. The plan also must be “fair and equitable.” Under the “fair and equitable” test:
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Pros And Cons Of Declaring Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a bankruptcy option that is typically available to large corporations. This type of plan often referred to as a debt reorganization, is favorable for businesses because it allows them to keep running and making a profit while paying off their debts. There are many positive aspects of the plan, and a few negative elements to consider when weighing the different bankruptcy options. Below is a brief overview of the pros and cons of declaring bankruptcy under Chapter 11.
Disclosure Statement And Plan Of Reorganization
The debtor has a 120-day period during which it has an exclusive right to file a plan.
This exclusivity period may be extended or reduced by the court. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan.
A disclosure statement and a plan of reorganization must be filed with the court before the debtor may solicit confirmation of a plan of reorganization.
The disclosure statement must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment regarding the plan.
After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan.
Under section 1126 of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class.
If there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims .
Holders of unimpaired claims are deemed to have accepted the plan.
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Who Can File Chapter 7 Vs Chapter 11
An individual debtor can file under both Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code as long as they meet the minimum eligibility requirements. That’s right – even though Chapter 11 bankruptcy is most often referred to in the context of a big business filing for bankruptcy protection, like General Motors, Sears, or most recently, Purdue Pharma, individuals can file Chapter 11 as well.
Corporations, partnerships, and other business entities can also file under both Chapter 7 or Chapter 11 of the Bankruptcy Code.
What Are The Disadvantages Of Filing Chapter 11
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For a company that is struggling to the point where it is considering filing for bankruptcy, the legal costs alone might be a bit onerous. Plus, the reorganization plan has to be approved by the bankruptcy court and must be manageable enough to where they can reasonably pay off the debt over time. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
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What Is The Goal Of Ch 11 Bankruptcy
The primary objective of the Ch.11 bankruptcy process is to stabilize the finances of a Debtors business and restructure its debts with the goal of exiting as a financially healthier and viable business. For this reason, the terms bankruptcy protection or relief are often used interchangeably in reference to the Ch. 11 debtor.
- Reduce or pay off debts and liabilities
- Liquidate assets
- Reorganize into a healthier structure or entity
Ch.11 bankruptcy was created for the purpose of helping debtors stabilize their financial affairs and keep their creditors at bay. At the same time, the justice upheld in the law provides Creditors their rights of recourse against the Debtor within the legal proceedings. Ultimately, the goal of the bankruptcy process is to protect the Debtor and address the health of its business, while upholding the rights of its Creditors.
Chapter 11 For Small Businesses
Chapter 11 bankruptcy reorganization is commonly associated with larger corporations, but it is available to qualifying small businesses.
A “small business” is one with fewer than 500 employees, as defined by the Small Business Administration. Small businesses make up most of the Chapter 11 filings. But they don’t always remain in Chapter 11.
Small business Chapter 11 bankruptcies often get dismissed and converted to Chapter 7. This typically happens because the court decides the business has little or no chance of becoming profitable. Partnerships, which have very few bankruptcy options, may file for Chapter 11 if the business entity has a chance of surviving and profiting on its own.
According to the U.S. Bankruptcy Code, a “small business debtor” is an individual engaged in business activities with total debts of $2,725,625 or less at the time of the petition.
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What Is The Difference Between Chapter 7 Vs Chapter 11
For a business, a Chapter 7 case is the final step in shutting down the business. Businesses that file under Chapter 7 do so to get the protections of the automatic stay and the benefits of all bankruptcy protections available to them while going through a Chapter 7 liquidation. They do not continue business operations.
The difference between Chapter 7 vs. Chapter 11 for a business is that Chapter 11 allows a business to continue operating. The Chapter 11 is a reorganization bankruptcy for the business. Each class of creditors can be provided for in the bankruptcy plan proposed by the Chapter 11 debtor in possession, often in the form of monthly payments distributed based on the types of debt the filer has. Unsecured creditors typically receive the lowest priority when it comes to receiving payments from the bankruptcy estate.
Individuals who file under Chapter 7 vs. Chapter 11 are able to get rid of thousands of dollars in unsecured debts, in a relatively short period of time and without committing their disposable income to a repayment plan. Creditorsâ claims are paid only if there is nonexempt property the Trustee can sell. Since individuals are able to protect most personal belongings, this happens in less than 10% of Chapter 7 cases.
What To Expect When Filing A Chapter 11 Case
A Chapter 11 case is commenced by filing a Chapter 11 bankruptcy petition. To file this case, the bankruptcy court charges a $1,167 filing fee and a $550 miscellaneous administrative fee. As part of the petition, the debtor must list of all assets and all debts a list of all their current income and expenses a list of all their contracts and leases and a statement of financial affairs. Individual debtors are also required to file a certificate of credit counseling. The debtor must also file a plan of reorganization that meets the complicated requirements of chapter 11 and provides for repayment of the debts. In order for a chapter 11 plan to be approved by the court, creditors are given the right to vote to approve or disapprove the plan of reorganization. Once the creditors have voted, the court will count the votes and review the case, and either confirm or deny the plan.
To confirm the plan, the court must find:
A Chapter 11 bankruptcy is the most complex, expensive, and demanding of the 4 types of bankruptcy cases. It is very important that you consult with a bankruptcy attorney if you are interested in filing a Chapter 11 bankruptcy.
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Not Just For Big Businesses
While Chapter 11 is often the choice for large corporations, small businesses have been known to file under this chapter as well. A small business is typically defined as one with 500 employees or fewer. A smaller business might choose Chapter 11 over Chapter 7 because it allows them more time to negotiate with creditors and work out affordable repayment plans.
Typically, Chapter 11 gives 180 days to work with creditors, whereas Chapter 7 only affords about 2 weeks to attempt renegotiations. Because Chapter 7 is geared more toward liquidating assets to pay off debts, it can be harder for small businesses to continue to run if they need to sell off their assets.
However, a small business may find Chapter 11 too costly to consider.
Although they wont need to sell their assets, they will be looking at a filing fee that is higher than one in Chapter 7, and possibly higher court costs as well. If a business is trying to recoup some of its money, Chapter 11 may not be the best option.
Chapter 11 Compared To Other Chapters
Businesses that know they need to and close up shop should consider a Chapter 7 business bankruptcy rather than continue to operate.
Another type of lesser-known bankruptcy case is Chapter 12. This is typically used by individuals who are family farmers or fishermen.
If you do not run a business, you might be looking for Chapter 7 bankruptcy and Chapter 13 bankruptcy. These are the most common types of bankruptcy filings for individuals and some companies in specific circumstances.
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The Single Asset Real Estate Debtor
Single asset real estate debtors are subject to special provisions of the Bankruptcy Code. 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 who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 11 U.S.C. § 101. The Bankruptcy Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay which are not available to creditors in ordinary bankruptcy cases. 11 U.S.C. § 362. 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 filing of the case, or within 30 days of the court’s determination that the case is a single asset real estate case. The interest payments must be equal to the non-default contract interest rate on the value of the creditor’s interest in the real estate. 11 U.S.C. § 362.
Single asset real estate cases are ineligible for the small business or subchapter V election. 11 U.S.C. § 101, 1182.