Chapter 11 Bankruptcy FAQs – Business Reorganization

The real costs and opportunities of Chapter 11 – an Overview

Chapter 11 is usually the most expensive and most complex form of bankruptcy, and should be considered extremely carefully before you choose to file. The fees can vary wildly depending on a number of factors. For example, the Lehman Brothers bankruptcy generated in the range of One Billion Dollars ($1,000,000,000.00 – that’s a lot of zeros) in attorney’s fees, and the General Motors Bankruptcy was also very expensive. The good news in those widely publicized and recent cases is that Lehman Brothers is now debt free with Twenty Billion Dollars ($20,000,000,000.00 – still more zeros) in cash, and General Motors is healthy, saved a lot of U.S. Jobs, and is contemplating an Initial Public Offering to investors.

1.What is Chapter 11 Bankruptcy?

Chapter 11 is a reorganization plan for a business entity and the debtor remains in control of its business operation as a debtor in possession, unless a separate trustee is appointed. A Chapter 11 can also be used as a mechanism for liquidation. Chapter 11 can be filed when the debtor is unable to pay its debt or pay its creditors.

2.Who can qualify?

Although individuals and businesses both qualify, typically it is most commonly used by corporate entities. There exists no limit to the amount of debt and for the duration of the bankruptcy.

3.Who can file a plan? Exclusivity Period

The debtor (unless a “small business debtor”) has a 120-day period during which it has an exclusive right to file a plan (11 U.S.C. § 1121 (b)). This Exclusivity Period may be extended or reduced by the court. But in no event may the Exclusivity Period, including all extensions, be longer than 18 months (11 U.S.C. § 1121 (d)). After the Exclusivity Period has expired, a creditor or the case trustee may file a competing plan. The U.S. trustee may not file a plan (11 U.S.C. § 307).

A Chapter 11 case may continue for many years unless the court, the U.S. Trustee, the committee, or another party in interest acts to ensure the case’s timely resolution. The creditor’s right to file a competing plan provides incentive for the debtor to file a plan within the Exclusivity Period and acts as a check on excessive delay in the case.

4.What are the advantages?

Chapter 11 is distinguished among other types of bankruptcy because it allows the debtor to remain in possession of their business. The debtor can also still acquire financing and loans. The debtor will reorganize, save the jobs of those in the company and continue to make money to pay off the debt.

An automatic stay occurs when a petition for bankruptcy is filed. It is an operation of law and not a judicial action. An automatic stay prevents creditors from contacting you and furthering filing any court action against you.

5.What are the disadvantages? – And a Caveat

The major disadvantage is that there is no discharge until the debtor satisfies all payments in the plan. Another disadvantage is that Chapter 11 cases are often not successful, meaning that the plans do not actually obtain court approval. This may be because the plan is insufficient to save the business, the creditors challenge the plan because they are unhappy with their “payouts”, or the business continues to flounder and is unable to abide by the plan. CAVEAT and Worst Case Scenario: There is a possibility that that a debtor will pay an attorney to put together a plan, negotiate with creditors, defend against creditors, fail to persuade the court to approve the plan, or the plan simply fail under its own weight. In this case, a Chapter 7 liquidation is usually still available for businesses who are unsuccessful in filing a Chapter 11, and Chapter 7 is much less expensive.

6.How the automatic stay works?

The automatic stay provides for a period of time 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 Chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.

7.After filing a Chapter 11 Bankruptcy, may I convert to another Chapter?

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: 1) the debtor is not a debtor in possession, 2) the case originally was commenced as an involuntary case under Chapter 11, or 3) the case was converted to a case under Chapter 11 other than at the debtor’s request. A debtor in a Chapter 11 case does not have an absolute right to have the case dismissed upon request.

8.How much does it cost to file Chapter 11?

The mandated court filing fees for filing Bankruptcy Chapter 11 are $1,039 USD. Attorneys fees vary depending on the complexity of the Chapter 11 case (number of creditors, number of creditors who file a dispute, complexity of the debtor’s financial situation, etc.). At a minimum, a Chapter 11 will likely cost $20,000.00 in filing and defense fees. However, it could easily be much more than that depending on the factors mentioned above.