Chapter 11 reorganization is a type of bankruptcy available to individuals and business entities such as partnerships, limited liability companies (“LLCs”), and corporations. Unlike Chapter 13 it has no limits on the amount of debt and it is highly flexible. Chapter 11 is also very complex. The flexibility and complexity make Chapter 11 very expensive. The legal fees can quickly reach tens of thousands of dollars which makes Chapter 11 unavailable to most people.
Chapter 11 is designed to allow businesses to restructure and keep going, keeping their employees working. Despite this objective, Chapter 11 can also be used to allow a controlled liquidation. Chapter 11 is well known because there are always reports in the news about large companies who have filed for Chapter 11 because they want “bankruptcy protection” or they want “to reorganize”. Although Chapter 11 was designed for more complicated reorganization situations, it can also be used by individuals and property owners who cannot take advantage of Chapter 13.
Because of its complexity, it is impossible to provide more than basic Chapter 11 concepts on this site.
The goal of every Chapter 11 case is supposed to be a Chapter 11 Plan. The truth, however, is that more companies use Chapter 11 to control their liquidation than to reorganize with a Plan. There are complicated rules about what a Chapter 11 Plan may contain and what it must contain. (Chapter 11 Plans are not limited to 5 years like Chapter 13 Plans). The bankruptcy laws also require another document called a Disclosure Statement. The Disclosure Statement is supposed to tell creditors and others what the Plan is about, how it is supposed to work, and why the Plan should be approved by the Bankruptcy Court. Under current law, some Courts permit the Plan and the Disclosure Statement to be combined into one document. If the debtor takes too long to file a Plan, then creditors and others are given a chance to do so on the debtor's behalf.
The Plan approval process is complex and can take months to complete. The process not only requires Bankruptcy Court approval, but creditors are also given the chance to vote. Under certain circumstances, the Bankruptcy Court can overrule creditors and approve a Plan even if the creditors have voted against it. This is called “cram down” – a term that is now incorrectly being applied to mortgage modifications.
During the reorganization process, debtors usually remain in control of their financial affairs. During this period they are called a “Debtor-in-Possession”. The Bankruptcy Court may appoint a Chapter 11 Trustee for various reasons such as the debtor is not following the rules of Chapter 11, the debtor or its management has conflicts of interest, too much time has passed without a Plan being proposed, or any other good reason which a creditor might bring to the attention of the Court.
The Chapter 11 process is not only supervised by the Court, but a part of the Department of Justice, known as the Office of the United States Trustee, will also actively supervise the progress of all Chapter 11 cases. The Office of the United States Trustee has many rules and regulations which relate to Chapter 11 cases and which must be observed. Among them is the payment of a quarterly user fee which is based on the debtor's disbursements during that calendar quarter. Failure to pay these fees is one of the fastest ways to have a Chapter 11 case dismissed or converted to Chapter 7.
Sometimes in Chapter 11 cases, the Office of the United States Trustee will appoint a Committee of Creditors to represent the interests of creditors in negotiations with the debtor and its management. In larger cases, there may be different kinds of committees such as a committee for landlords, a committee for unsecured creditors, a committee for franchisees, and other types of committees. If a committee is appointed, it has the right to hire an attorney, an accountant, and perhaps other professionals and make the debtor pay all of the fees.
During the Chapter 11 case, the actions of a debtor are closely supervised by the Bankruptcy Court, the Office of the United States Trustee, and, if one has been appointed, the Creditor Committee. Debtors are allowed to do things that are in the ordinary course of business without specific Bankruptcy Court approval, but things that are not routine must be specifically brought to the attention of the Bankruptcy Court for Court approval. This takes time and costs money.
The beginning of each Chapter 11 case is a time for substantial confusion and activity not only for the creditors but also for the debtor and its management. Crossing into Chapter 11 means new rules, new procedures, and restrictions that must be imposed immediately. There are almost always issues directly related to the boundary, such as how to pay payroll which was earned before the Chapter 11 case was filed using post-filing money. There are many such issues and each must be brought to the attention of the Bankruptcy Court and resolved within days of a Chapter 11 filing.
There are special rules for different kinds of Chapter 11 cases. Special rules apply to individuals who file Chapter 11. There are different rules for “small” businesses and still others when the debtor owns only one piece of property that is not occupied by the debtor as its residence. There are special rules for partnerships and different rules still for stockbrokers. Then there are special rules for specific types of businesses such as airlines, those that have Unions, and those which have toxic waste problems.
Chapter 11 cases are very complicated. There are many rules which must be followed as soon as the case is filed and pre-filing preparation is often critical. Chapter 11 should not be attempted without the assistance of an experienced bankruptcy lawyer. If someone offers to represent you in Chapter 11 for what seems like a very low fee, check their credentials twice or three times. If the fee is similar to the Chapter 13 fee, find another lawyer. Even the Court's filing fee is substantially more than the fee for a Chapter 7 or Chapter 13 case.
Because of the complexity, Patrick M. Hunter will generally work with The Law Offices of David A. Tilem on any Chapter 11 cases.