The Law Offices of Ken McCartney P.C.

Chapter 11

 

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This is bankruptcy at its most complex and powerful stage.

    The court filing fee is $1046.00. By comparison, the Chapter 7 court filing fee is currently  $306.00.

    Unlike a Chapter 7 where business actually ceases at filing, a business may  continue to operate when a Chapter 11 is filed. The pre-petition operators stay in place, absent abuse or misconduct.  An estate is created consisting of the petition date assets, and operators continue as a fiduciary for the benefit of creditors and owners.

    After filing, extensive reporting of operations is required. The Office of the United States Trustee administers this reporting process. Some clients choose to hire outside accounting help to meet these requirements. Some clients with sophisticated  double entry bookkeeping software, or experienced in-house bookkeepers are able to comply based on a good internal system.

    Once capable of complying with the reporting requirements, the fiduciary relationship evolves.   The debtor entity then comes forward with a "plan of reorganization." Unlike Chapter 13, where plan forms exist and monthly payments for thirty-six (36) months are the norm, Chapter 11 plans vary across a broad spectrum.

    Procedurally: a secured creditor or lessor can request relief from the bankruptcy process anytime. A plan must be filed within one hundred twenty (120) days, or an extension of that period requested of the court.  The bankruptcy court may set a scheduling conference and shorten any or all deadlines, including the statutorily described exclusive period in which to file a plan.

    When the Chapter 11 plan is filed, a disclosure statement is required to accompany it.  A disclosure statement must contain all of the information necessary to allow the debtor's uninformed creditors to make a knowledgeable decision regarding the debtor's plan.

    Chapter 11 plans may do many things. They must do some things and cannot do certain others.

MAY 

  • Allow retention of a secured creditor's collateral
  • Require a landlord to keep a lease in place, BUT this requires the  cure of  any existing arrearage and keeping the lease current thereafter.
  • Allow the repayment of taxes and unsecured claims over time without the hassle of lawsuits
  • Allow the sale or lease of any or all of the debtor's assets at various times if a proper sale develops in the interim.

MUST

  • Treat all claimants in each class equally unless they agree otherwise
  • Adhere to all of the requirements of Chapter 11
  • Disclose all insider employees
  • Comply with the requests of the Office of the United States Trustee as well as submit all required reports in a timely manner
  • Pay taxes within sixty (60) months of their assessment or secure the taxing authorities' consent to other treatment.

MAY NOT 

  • Pay professionals without prior court approval
  • Solicit plan acceptance without first obtaining an approved disclosure statement.

    When a Chapter 11 plan's disclosure statement is approved, the plan is circulated and creditors vote on its acceptability. Within each class of claims two-thirds in amount and half in number will cause the class to receive an elected treatment over objection by the remaining creditors in that class. This drags along objecting creditors, but should not be confused with the real power of Chapter 11,  "cram down."

    An entire objecting class of claimants can be "crammed down." That is, forced by the bankruptcy court on request of the debtor, to accept a plan treatment (i.e. payments over 120 months in lieu of the currently due balloon) over the objection of that claimant. There are requirements to qualify for a cram down.  The court must find that the plan does not discriminate unfairly, that it is fair and equitable with respect to each class of claims that it impairs, and:

  • At least one class must accept the plan
  • If the claimant is secured, the court must find that the plan proposal
    • allows the claimant's lien to stay in place, and
    • provides  a string of payments equal to the allowed value of the claim
  • If the claimant is unsecured the plan must 
    • propose a string of payments equal to its allowed petition date value, or
    • no junior class may receive anything under the plan.

        How long Chapter 11's take depends to a large extent on  how amicable the creditors involved act.

  • Many Chapter 11's are filed with an agreed plan prepared, accepted, and a  disclosure statement which the creditors all agree to,  which fast-tracks confirmation.
  • Many Chapter 11's run into objections at stay relief, disclosure statement adequacy hearing,  and at the plan confirmation stages.  It is difficult to accomplish a contested Chapter 11 in less than a calendar year.

    Counsel's fees are allowed only upon approval  by the bankruptcy court.  Approval is based  on detailed application  forms for that specific purpose.  Fees are generally hourly, probably with a retainer, and may be sought in several interim stages. The range of fees vary with the complexity of the case. Written estimates subject to the vagaries of the practice  of law are typical.

        You may wish to refer to Chapter 11 in Plain Talk About Bankruptcy for a listing of frequently asked questions with answers about Chapter 11.

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