Chapter 11 Bankruptcy Provides Protection From Creditors While Restructuring Debt
Other Filing Options
A state court receivership is often a preferred alternative to Chapter 11, especially when seeking to operate or wind down the affairs of a business under court protection without the complexity and expense of a bankruptcy restructuring.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is intended to quickly eliminate all dischargeable debt, and allow individuals to begin rebuilding their finances as quickly as possible. Chapter 7 is also used by businesses to terminate operations, and resolve tax liabilities that might otherwise become personal liabilities of the principals.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also referred to as a “Wage Earner’s Plan,” allows time to bring past due payments on home loans and car loans, and avoid foreclosure or repossession while payments are made under a court approved plan. Chapter 13 can also be filed when individuals have too much disposable income under the Means Test under Chapter 7.
Chapter 11 Bankruptcy
A Chapter 11 bankruptcy filing will immediately stop foreclosures, repossessions, lawsuits and collections. Under Chapter 11 bankruptcy, a business may continue operations under court protection while a plan of reorganization is proposed to creditors. Chapter 11 bankruptcy can also be filed to liquidate the assets of a business, in whole or in part, usually under the control of existing management.
Reorganize Under Court Protection
Chapter 11 bankruptcy is typically used to reorganize a business as a going concern under court protection. Upon filing, the debtor in Chapter 11 automatically becomes a “debtor in possession.” As a debtor in possession, the business is authorized to operate without the appointment of a trustee until a plan of reorganization is confirmed, the case is dismissed or converted to a Chapter 7 bankruptcy, or a Chapter 11 trustee is appointed (which is rare).
The preparation, confirmation, and implementation of a plan of reorganization is at the heart of a Chapter 11 bankruptcy case. A Chapter 11 plan often allows the debtor in possession to either restructure the operating business, or sell business assets under better circumstances than a chapter 7 liquidation. Under Chapter 11, the debtor and creditors can structure an orderly sale of assets, and provide for a quicker distribution of the sale proceeds than would occur under Chapter 7.
Chapter 11 can be filed by almost any corporation, partnership or individual. A Chapter 11 case for an individual is similar to a case under a Chapter 13 bankruptcy. Property of the estate for an individual debtor includes the debtor’s earnings and property acquired by the debtor after filing until the case is closed, dismissed or converted. Funding of the plan may be from the debtor’s future earnings. A plan cannot be confirmed over a creditor’s objection without committing all of the debtor’s disposable income over five years unless the plan pays the claim in full, with interest, over a shorter period of time.
Disclosure Statement and Plan of Reorganization
The debtor (other than a “small business debtor” as defined by the Bankruptcy Code) 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(c) 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 (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered). Holders of unimpaired claims are deemed to have accepted the plan.
Discharge of Debt
Section 1141(d)(1) generally provides that confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.
There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization discharges any type of debtor – corporation, partnership, or individual – from most types of pre-petition debts. It does not, however, discharge an individual debtor from debts that cannot be discharged in a Chapter 7 or Chapter 13 case. The individual debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 11 case. A discharge is also not available to an individual debtor unless and until all payments have been made under the plan.
We Can Help
We are experienced counsel to debtors in possession in Chapter 11 reorganizations and restructuring, with a long history of providing experienced and tenacious representation to parties in insolvency proceedings. The bankruptcy lawyers of Davidson Backman Medeiros have been the regional counsel of choice for parties to business reorganizations, bringing specific experience in virtually all segments of commerce, including distressed real estate developments, golf club and course development, commercial properties, apartments, financial services, dealerships, manufacturing, construction, health care, agriculture, timber and transportation.
We represent individuals and businesses in all aspects of bankruptcy proceedings, as well as debt settlements and loan restructurings. Call (509) 624-4600 or email email@example.com for further information regarding a possible bankruptcy filing under Chapter 11.