Hiring an attorney to help with a chapter 11 bankruptcy case is a necessary cost for some businesses to reorganize and find a better path forward for a business. Chapter 11 bankruptcy lawyers can help businesses navigate the process so they can resume operations from a place of strength.
What Is Chapter 11 Bankruptcy?
Chapter 11 is a form of bankruptcy under the United States Bankruptcy Code (the Code) that enables a business to reorganize and continue to operate. The reasons business debtors choose chapter 11 over other forms of bankruptcy include:
Chapter 11 provides the flexibility many businesses need to restructure its business debts. In most chapter 11 cases, the debtor usually remains in possession and control of its assets. The debtor is referred to as the “debtor-in-possession”.
Chapter 11 cases can be quite complicated, but for a small business in debt the Code offers a streamlined, simplified process that saves time and expense. An experienced chapter 11 bankruptcy lawyer can determine whether your business is eligible for the streamlined process. Generally, a small business debtor is a person or entity who: (1) is engaged in business or other commercial activities; and (2) owes no more than $2,725,625 as of April 1, 2019 ($2,566,050 for cases filed through March 31, 2019) in total claims, excluding obligations owed to insiders such as family members of the business owners.
Reorganize or Liquidate
A business debtor can use chapter 11 to liquidate all or part of its business. Chapter 11 is often used by complex businesses to liquidate all of their assets because of the flexibility chapter 11 offers compared to the more rigid chapter 7 liquidation provisions.
Differences between Chapter 11 Reorganization and Chapter 13 Consumer Reorganization
In chapter 11, any individual or business entity may file for bankruptcy relief (with exceptions for certain entities specified in the Code). Chapter 13, known as the “consumer reorganization” bankruptcy, is available only for debtors who are individual consumer debtors, not business entities.
Chapter 13 is available for individual debtors to restructure their debts but their total debt cannot exceed a set amount. Chapter 11 has no limits on the amount of debt.
In chapter 13, the plan of reorganization is limited to 5 years duration (with some extensions possible), while no strict time limits apply to chapter 11 plan of reorganization.
Initiating a Chapter 11 Case
To initiate a chapter 11 case, the Code requires the debtor to file a significant amount of papers with the United States Bankruptcy Court located in the district where the debtor files its bankruptcy case. The required paperwork pertains to the debtor’s business and financial conditions. The financial information is provided upon penalty of perjury.
Once filed, the debtor must meet the Code requirements pertaining to certain deadlines, provide required notices to creditors, and timely file a plan of reorganization (similar to a business plan) that meets the Bankruptcy Code’s requirements—for example, the plan must explain how the debtor will restructure debt, pay its creditors, and emerge from bankruptcy as a viable business.
Immediately upon the filing of any bankruptcy case, including chapter 11 cases, the bankruptcy automatic stay becomes effective. The automatic stay prohibits all creditors from taking any steps to collect their debt against the bankruptcy debtor without first getting permission from the bankruptcy court. This gives the debtor the breathing room it needs to get a plan in place.
Benefits to the Bankruptcy Debtor of Working with an Experienced Chapter 11 Lawyer
An experienced chapter 11 bankruptcy lawyer will know what to do if a creditor violates the automatic stay. Any creditor who violates the stay faces significant penalties.
The attorney will also know what issues the plan will have to address for court approval, known as “confirmation”. At a minimum, the plan must demonstrate to the court that the creditors will be paid at least as much as they would receive in a liquidation of the business. Plan confirmation is the goal of the debtor in possession.
Early in the case, the bankruptcy lawyer will begin negotiating with the largest creditors of the debtor to develop a plan. In many cases, the bankruptcy lawyer will begin the process before the bankruptcy petition is even filed, and perhaps help the debtor avoid bankruptcy altogether.
In larger chapter 11 cases, a creditors’ committee will be created, consisting of the debtor’s largest unsecured creditors who are not insiders of the debtor’s business. The creditors’ committee represents all of the debtor’s unsecured creditors and plays an important role in the debtor’s ongoing business operations.
The creditors’ committee frequently is represented by an experienced chapter 11 lawyer to represent their interests before the court, ensure that the debtor in possession meets its obligations under applicable bankruptcy law, and negotiate the plan payment terms for the creditors with the debtor.
Operating a Business Under Chapter 11 Bankruptcy
Upon filing the bankruptcy petition, the debtor in possession will continue to operate the business under the protection of the automatic stay. The debtor’s business operations will be under the supervision of the court and must be operated for the benefit of creditors.
Challenges of Operating a Business While Meeting Code Obligations
The debtor in possession will often discover that operating the business while simultaneously complying with all of the requirements of the Bankruptcy Code is extremely challenging. If the debtor in possession fails to meet its obligations under the Code, the court could impose a range of remedies such as imposing certain requirements on the debtor in possession, removing the debtor in possession and appointing a trustee, converting the case to a chapter 7 liquidation, or dismissing the case entirely which would remove the protection of the automatic stay, or other remedy.
For those reasons, a debtor in possession should be represented by experienced chapter 11 counsel.
Creditor Votes and Cram Down
As noted earlier, the debtor’s objective in chapter 11 is to get a plan confirmed by affirmative vote of the creditors. If the creditors believe the debtor’s plan is viable and provides a return better than they would get in liquidation, the creditors are likely to vote to approve the plan.
If the debtor cannot get enough affirmative votes to confirm a plan, the debtor can attempt to “cram down” a plan on creditors over their objections and get the plan confirmed. To cram down the plan, the plan must meet certain criteria outlined in the Bankruptcy Code. Chapter 11 counsel can guide the debtor in possession on cram down.
Legal and Fiduciary Duties for Debtors and Creditors
The debtor in possession is a fiduciary for the creditors. With the help of an experienced chapter 11 lawyer, the debtor will be able to operate the business in an effective and honest manner. Violating the fiduciary duty to creditors could result in the appointment of a trustee.
Members of a creditors’ committee have a fiduciary duty to all creditors represented by the committee. This means committee members must act with loyalty to the creditors and to avoid any conflict of interest that would impair such loyalty.
Easing the Business Back to Profitability
During post-confirmation period, the debtor attempts to make good on its restructured business by making payments to creditors as called for by the plan. Failure to complete the plan obligations could lead to a chapter 7 liquidation.
Contact the Chapter 11 Bankruptcy Attorneys at KPPB LAW
Chapter 11 makes sense for many debtors, large and small. It also provides the potential for creditors to maximize their recoveries, provided they take steps to protect their interests as the Bankruptcy Code permits. To ensure your rights are protected to the fullest extent of the law, contact KPPB LAW today to retain the help of the chapter 11 bankruptcy lawyers.