Chapter 11 bankruptcy provides the debtor with time and the ability to reorganize its debts while continuing to operate. The purpose of a Chapter 11 bankruptcy proceeding is to facilitate a fresh start to a viable business by ensuring equality of distribution, avoiding a race to enforcement by creditors, preserving operations, and maximizing the value of assets and distributions.
Chapter 11 bankruptcy is available to both individuals and businesses. However, a vast majority of cases involve businesses struggling under the burdens of large amounts of debt.
This can be a long process involving multiple stages. Knowing the timeline of a Chapter 11 case is helpful and will help to ensure that you stay on track during the process. A typical Chapter 11 proceeding consists of five key phases: pre-petition, the petition date, pre-confirmation, confirmation, and post-confirmation.
During the pre-petition phase, the debtor begins by negotiating with lenders for debtor-in-possession (“DIP”) financing. Lending gives you enough time to restructure your finances and operation in order to stabilize the business. In preparation for filing your Chapter 11 petition, attorneys will also collect and analyze creditor data to select the right case type and plan case strategy.
The formal Chapter 11 bankruptcy process commences when a petition is filed with the bankruptcy court. This petition may be filed voluntarily by the debtor, or involuntarily by creditors of the debtor. Bankruptcy courts charge $1,738 to file a Chapter 11 petition and require the inclusion of a “disclosure statement.” The disclosure statement must provide “adequate information” concerning the affairs of the debtor to enable the holder of a claim or interest to make an informed judgment about the plan. The statement must include a list of creditors, schedule of assets and liabilities, schedule of current income and expenditures, and a statement of the debtor’s financial affairs. At the time of filing, certain provisions of the bankruptcy code will trigger regarding the appointment of a trustee, defining avoidable transfers, and enacting the automatic stay.
The pre-confirmation stage comprises a majority of the Chapter 11 process. During this time, the DIP continues to operate and stabilize the business’s financial affairs. Upon the filing of the Chapter 11 petition, the court sends information about your case to the Office of the U.S. Trustee, which is responsible for monitoring the progress of the case and supervising its administration.
Specifically, the US Trustee is obligated to monitor the DIP’s operation of the business and the submission of operating reports and fees. The DIP is required to pay a quarterly fee to the U.S. trustee for each quarter of a year until the case is converted or dismissed.
The US Trustee is also responsible for appointing the creditors committee, who represent the interests of all involved unsecured creditors. Generally, this committee consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. The creditors committee may consult with, or investigate, the DIP on the administration of the case and operation of the business. The committee may also serve as a useful tool in formulating the reorganization plan.
Usually between 21 and 50 days after the filing of the petition, the US Trustee conducts the Section 341 meeting of the creditors, which all debtors must attend. Creditors are notified that they may attend the meeting and ask debtor questions but are not required to do so. The meeting permits creditors and the US Trustee to question the debtor under oath regarding debtor’s conduct, property, liabilities, financial condition, and other matters that may affect the administration of the case. The debtor’s failure to appear or to provide the requested information may result in the dismissal of the case.
The reorganization plan is a key component of the Chapter 11 process that outlines how the debtor will pay back creditors over time. The debtor has the exclusive right to file a reorganization plan anytime during a 120-day period from the date of filing the petition. If this exclusivity period ends before the debtor has filed and obtained acceptance of the plan, other interested parties such as the creditors committee may file a plan. The debtor may still file its plan and obtain acceptance after this period, but it may be competing with other plans. When competing plans are presented, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm. The contents of the reorganization plan must include a classification of claims and must specify how each class of claim will be treated under the plan.
The disclosure statement is useful to creditors in deciding whether to accept or reject the proposed reorganization plan. Generally, the debtor must file and obtain court approval before a vote on the reorganization plan can take place. To be approved, a disclosure statement must provide adequate information regarding the debtor’s affairs to enable the holders of claims to make an informed decision on the plan. Upon approval of a disclosure statement, the debtor must mail the following to the U.S. trustee and all creditors and equity security holders: (1) the plan; (2) the disclosure statement approved by the court; (3) notice of the time within which acceptances and rejections of the plan may be filed; and (4) such other information as the court may direct. In addition, the debtor must mail to the creditors and equity security holders entitled to vote on the plan or plans: (1) notice of the time fixed for filing objections; (2) notice of the date and time for the hearing on confirmation of the plan; and (3) a ballot for accepting or rejecting the plan and, if appropriate, a designation for the creditors to identify their preference among competing plans.
After the disclosure statement has been approved, the debtor may begin to solicit acceptances of the reorganization plan and creditors may solicit rejections of the plan.
The Bankruptcy Code requires the court to hold a hearing on confirmation of the plan after notice is given to all interested parties. If no objection to confirmation has been timely filed, the court must then determine if: (1) the plan is feasible; (2) it is proposed in good faith; and (3) the plan and the proponent of the plan are in compliance with the Bankruptcy Code. The feasibility requirement may be satisfied if the court determines the plan is not likely to be followed by liquidation or require further financial reorganization. Confirmation of the plan discharges the debtor from most debts existing on the date the petition was filed. The discharge gives the debtor a “fresh start,” but the debtor is still bound to the provisions of the plan of reorganization.
The post confirmation phase of the case begins with a signed federal court order approving the debtor company’s plan of reorganization. This phase marks the beginning of the implementation of the reorganization plan and disbursement to creditors. The DIP still has several duties to perform after confirmation, including consummating the plan, reporting on the status of consummation, and applying for a final decree. It is the policy of local bankruptcy courts to determine when the final decree is entered and the case closed.