Common Chapter 11 Questions

The Nellor Law Office provides legal services to debtors, committees and creditors in chapter 11 bankeruptcy cases and proceedings.

A general summary of chapter 11 can be found elswhere on this website. The following is a list of common questions about chapter 11 bankruptcy cases, together with answers to those questions. This list is not intended to be exhaustive. It is intended to provide a basic overview of chapter 11 bankruptcy relief.

1. What is chapter 11?

Chapter 11 is a part of the Bankruptcy Code that provides protection from creditors while a person or business attempts to reorganize, rehabilitate, or liquidate.

2. How does chapter 11 work?

A plan is presented to creditors and the court for the reorganization of business or personal financial affairs. The plan is binding on creditors once it is approved by the court. The debtor normally receives a discharge after the plan is approved.

3. Who may file for chapter 11 relief?

Anyone except a governmental agency, an estate, a non–business trust, a stockbroker, a commodity broker, an insurance company, or a bank, may legally file a chapter 11. An individual may not file a chapter 11 case if he or she has had another bankruptcy case dismissed on certain grounds within the last 180 days. There are no debt limitations or financial requirements, nor are there any restrictions as to the size or type of business that may file a chapter 11. A person does not even have to be engaged in business to file a chapter 11.

4. Can a person be forced to file a chapter 11?

Creditors can file an involuntary chapter 11 case in certain circumstances. An involuntary petition must be signed by three or more entities that hold undisputed, liquidated debts. . You can contest an involuntary petition. If you do not contest the petition, or if the court determines that you are insolvent, the court enters an order for relief that starts the chapter 11 case.

5. How does chapter 11 differ from chapter 7?

The entire focus of the two kinds of relief is different and the kinds of situations they are designed to cover are different. A chapter 7 always contemplates liquidation of a debtor’s property. A chapter 11 is designed to rehabilitate a debtor financially, which can involve property liquidation and many other, complex, programs designed to provide repayment to creditors.

6. How does chapter 11 differ from chapter 13?

The most visible difference is that a trustee is automatically appointed in a chapter 13 case. In chapter 11 the debtor normally serves the function of a trustee, although a trustee can be appointed. There are more subtle, but no less important distinctions. Chapter 13 is streamlined to reduce the cost of the common, consumer, cash–flow problem. For example, creditors get to vote on and approve a chapter 11 plan. There is no creditor voting in chapter 13. A debtor gets to keep his or her property in most chapter 13 cases, even if creditors are not paid in full. Chapter 11 is much larger in scope than chapter 13. It provides more alternatives to reorganizing than chapter 13. Chapter 11 is designed to handle much larger and more complex financial problems than normally found in a consumer situation. Chapter 11, for example, has no debt limitations for filing, but chapter 13 does. Creditors have much more control in chapter 11— they are entitled to vote on a debtors plan before the court considers approving it. In addition, debtors normally do not get to keep their property in chapter 11 unless all creditors are fully paid.

7. How does chapter 11 differ from chapter 12?

Chapter 12 and chapter 11 are very similar. The differences lie in the focus of the two different kinds of relief that each chapter provides. Chapter 12 is designed to provide financial relief to family farms. In chapter 12, you are entitled to keep family farm property even though the total debt may not be paid. That is not possible in chapter 11, unless the creditor consents.

8. What is chapter 11A?

There really is no such thing as chapter 11A. It exists as an idea to create a “fast track” chapter 11 for small business reorganizations. The idea is used in one form or another, by court rule (or unwritten rule), in several districts in the United States. Its purpose is to streamline chapter 11 so that the costs are not prohibitive to small businesses.

9. How long does a chapter 11 case last?

There are two different parts, or phases, to a chapter 11 case: (1) The phase prior to confirmation and; (2) The phase after confirmation.

The first phase involves creating a plan of reorganization, and lasts several months. The Bankruptcy Code contemplates about a 6 month time period for the first phase, although, in practice, that time period is rarely met. The second phase, performing the plan, can last several years. Most small business reorganizations are generally fit into a 3 to 6 year time period for performing the plan, although there are no legal time limitations as there are in a chapter 13 case.

10. What is the long term relief available under chapter 11?

There are two basic forms of chapter 11 relief: (1) An orderly liquidation, or; (2) A reorganization. If the business is to be continued, the debtor normally continues to operate the business and the creditors are required to satisfy their debts only in the manner provided for in the debtor’s plan. A reorganization plan may consist of anything from an extension of time to repay debts to a total restructuring of the business.

11. What is a chapter 11 plan?

A chapter 11 plan is a document that describes how a debtor will deal with debt.

12. What is a disclosure statement?

A disclosure statement is a document prepared by a someone proposing a plan that describes financial and other information about the debtor and the plan that is sufficient for the creditors and interest holders to make an informed decision about whether they should accept or reject the plan.

13. Who can propose a plan?

The debtor usually proposes a plan. However, the debtor has the exclusive right to propose a plan only during the first 120 days following the filing of the case. After that time any party in interest may propose a plan. In fact, more than one plan may be proposed at the same time.

14. How do creditors accept or reject a plan?

Creditors vote on a plan. Voting begins after the court approves the disclosure statement. Every eligible creditor is mailed a ballot. The ballot is accompanied by the disclosure statement, the plan, and an order that sets the bar date for voting and for confirmation of the plan. All voting is done by class. For a class of creditors to accept the plan 1/2 of the members of the class holding 2/3 in amount of the claims in that class must vote in favor of the plan.

15. What creditors vote on the plan?

A creditor must qualify both as a class and individually to vote on a plan. A class of claims qualifies if it is impaired by the plan. A class is impaired if any of the legal or equitable rights held by members of the class are modified by the plan. Creditors qualify individually if they hold an allowed claim.

16. What happens when a plan is confirmed?

All creditors and interest holders become bound by the terms of the plan. Creditors may receive only what the plan provides. Any attempt by a creditor to collect a different amount, or to collect the allowed claim in a different manner, than provided in the plan violates the discharge and may subject the creditor to court sanctions.

17. How is a plan approved?

The court holds a confirmation hearing after the time set for voting has expired. The party proposing the plan must present evidence establishing that the plan complies with chapter 11 law. There are two methods to confirm a plan: (1) The regular method, or; (2) A cram down.

The regular method is used when all creditors have voted to accept the plan. A cram down must be used when one or more classes of impaired claims has rejected the plan. The regular method requires evidence of twelve statutory requirements. A cram down requires, in addition to the evidence necessary for regular confirmation, that the plan is fair and equitable and that it does not discriminate unfairly against any class of claims that rejected the plan.

18. What happens if the plan is not approved?

The court will usually permit the party proposing the plan an opportunity to modify it so that it can be confirmed. This usually requires another confirmation hearing and may require another disclosure statement and vote. If no plan is confirmed the case will be dismissed or converted to a chapter 7 case.

19. What happens after the plan is confirmed?

The plan must be performed once it is confirmed. All of the steps set forth in the plan must be carried out. Once all of the steps are completed, the plan has been consummated.

20. How long can a chapter 11 plan run?

There is no time limitation or requirement. The practical limitation is feasibility—the longer the plan term the less feasible it is to perform.

21. What happens if the plan cannot be completed?

If the debtor, or its successor, cannot comply with the plan, the debtor can ask that the plan be amended or modified. A plan may be modified after it is confirmed in limited circumstances. Otherwise, the chapter 11 case may be dismissed or converted to a chapter 7 case. In addition, if the debtor fails to carry out the plan, creditors may use state court remedies to recover on their plan rights.

22. What happens when the plan is completed?

When all of the provisions of a chapter 11 plan have been carried out, the plan is said to have been consummated. Once a plan is consummated a final report and accounting must be filed with the court and the case is closed.

23. Does a chapter 11 debtor receive a discharge?

A discharge is normally granted when the plan is confirmed. The order issued by the court confirming a debtor’s plan is also the discharge order.

24. What debts are discharged by chapter 11?

The nature and extent of a chapter 11 discharge depends on whether the debtor is an individual or a business entity. An individual receives the same kind of discharge as in a chapter 7 case. The discharge received by a business entity depends on whether the business continues to operate after the plan is consummated. A debtor who does not continue to operate does not receive a discharge. A debtor that continues in business receives a discharge from all debts listed in the debtor’s schedules, without exception.

25. What happens to the discharge if the plan is not completed?

The validity of the chapter 11 discharge is not affected by the debtor’s failure to complete the plan. The discharge remains in full force and effect unless the order of confirmation is revoked.

26. How is a chapter 11 case started?

A chapter 11 case can be either voluntary (started by a debtor), or involuntary (started by creditors).

A voluntary chapter 11 case is started by filing a petition with the court clerk requesting relief under chapter 11. A number of other documents must be filed with the petition. If there is an emergency, most of the other documents required can be filed within fifteen days after the petition was filed. An involuntary case can be started by creditors in very limited situations. In each of those situations, a petition is filed, and the court holds a hearing to determine whether the debtor should be in a chapter 11 bankruptcy case. The debtor has the opportunity to show that he or she should not be in chapter 11. If the court decides that the debtor is insolvent, it enters an order for relief, and the case continues just like a voluntary chapter 11 case. If the court decides that the debtor is not insolvent, the petition is dismissed, and the debtor is entitled to a judgment against the creditors who filed the petition for any costs or damages that the debtor incurred because the petition was filed.

27. How much are the court costs to file chapter 11?

The filing fee that must be paid to the court clerk for chapter 11 relief is currently $1,717.00. In addition, there are quarterly fees that must be paid to the United States Trustee that are based on the amount of money disbursed by the debtor during the chapter 11 case until a plan is approved. The amount of the quarterly fees varies from $325.00 to $30,000.00 per quarter, depending on the amount of money the debtor has disbursed.

28. Where is the chapter 11 case filed?

The case must be filed in the judicial district where the debtor resides, has its principal place of business, or has its principal assets.

29. Will my name be published if I file chapter 11?

A chapter 11 case is a public record. The name of the debtor is not normally published by local newspapers.

30. What happens after a chapter 11 case is filed?

The debtor must file documents with the court that identify all of the debtor’s creditors, interest holders, property, and financial history. The debtor retains its property as a debtor in possession, which means that the debtor assumes the role of a trustee over its property and the operation of the business. The debtor then prepares a plan and a disclosure statement. The disclosure statement describes to all of the debtor’s creditors the details about the debtor’s financial situation and analyzes the debtor’s plan. The disclosure statement must be approved by the court before it may be used. Once approved, it is mailed to all creditors, together with a copy of the plan, a ballot, and an order from the court setting the dates for creditors to vote on the plan and for confirmation of the plan. The court conducts a hearing to determine whether the plan may be confirmed. The plan may be confirmed if one or more classes of claims has voted to accept the plan. If the court confirms the plan the debtor receives a discharge and the plan is performed. Once the plan is consummated a final report is submitted to the court and the case is closed.

31. Is there any immediate relief from filing a chapter 11?

A chapter 11 case immediately stops all foreclosures, collection actions, civil litigation, and creditor action, when the case is filed. This is known as the automatic stay. There are some actions not stayed, such as criminal proceedings or governmental actions for the enforcement of police or regulatory powers. The stay even prohibits telephone calls and collection letters. The automatic stay remains in effect until the case is dismissed, the plan is confirmed or until the court removes or modifies it.

32. Do I have to continue paying bills after I file chapter 11?

Chapter 11 debtors generally receive a moratorium on paying the debts they owed before the chapter 11 case was filed for the time between when the case was filed and confirmation of the plan. Some bills may have to be paid to continue using property, goods or services, so that the business can continue to operate.

33. Can I use my property during the chapter 11?

A debtor may use, sell, or lease property during a chapter 11 case, under certain restrictions. The most significant restrictions are on the use of property that constitutes cash collateral. Basically, a debtor may not use cash collateral unless it has the permission of the secured creditor or the permission of the court to do so. Otherwise, a debtor may use, sell or lease property, in the ordinary course of business, without prior notice or approval of the court. Use, sale or lease of property outside the ordinary course of business requires prior court approval.

34. What is cash collateral?

Cash collateral is cash, or property easily converted to cash, that is collateral for a debt. Bank accounts, checks, securities, and other cash equivalents are examples. Cash collateral is subject to special rules in chapter 11.

35. Can a debtor get credit during chapter 11?

Yes. A debtor may incur new debt and secure new, unsecured credit, in the ordinary course of business, without prior court approval. Secured credit, or unsecured credit outside of the ordinary course of business, requires prior court approval. Creditors who extend credit during the chapter 11 case are granted special priorities for the repayment of their debts.

36. What is a debtor in possession?

The debtor serves as a debtor in possession in all chapter 11 cases where no trustee has been appointed. The debtor in possession is a fiduciary to creditors and assumes many of the duties of a trustee.

37. What does a debtor in possession do?

A debtor in possession is legally obligated with the rights, duties and responsibilities of a trustee holding the debtor’s property and operating the debtor’s business for the benefit of creditors and interest holders. The debtor in possession must follow the rules relating to the administration of a chapter 11 case and abide by the orders of the court.

38. What is the United States Trustee?

The United States Trustee is an officer of the United States Department Of Justice. There are actually twenty–one [21] regional United States Trustees appointed by the Attorney General of the United States to serve five year terms. Each of these United States Trustees establishes an office within a particular region within the United States.

39. What does the United States Trustee do?

The function of the United States Trustee, in a chapter 11 case, is to monitor the case, appoint one or more creditor’s committees, call and preside over the meeting of creditors, appoint a trustee in the case if the court orders it to do so. and collect the quarterly fee. In “monitoring” the case, the United States Trustee usually requires the debtor to file periodic financial reports and will file motions or take other action that may be necessary to make sure there is no undue delay in administering the case.

40. Is the United States Trustee different than a trustee?

Do not confuse the United States Trustee with a trustee appointed in a chapter 11 case. In certain circumstances the court may order a trustee to be appointed to operate the debtor’s business and take possession of the debtor’s property. Chapter 11 is unique, however, in that the appointment of a trustee is the exception— usually the debtor serves the same role as a trustee under the name of debtor in possession.

41. When is a trustee appointed in chapter 11?

There are two grounds for the appointment of a trustee in a chapter 11 case. These are: (1) For cause, or; (2) If a trustee would be in the best interest of creditors. Cause includes, but is not limited to, fraud, dishonesty, incompetence, or gross mismanagement, either before or during the chapter 11 case.

42. What happens if a trustee is appointed in chapter 11?

A trustee assumes the management functions of the debtor’s business and assumes dominion and control cover the debtor’s property. The debtor ceases to be the debtor in possession.

43. What is a creditors committee?

The United States Trustee normally appoints a committee of creditors from a list that consist of those persons holding the twenty largest non–priority unsecured claims that are not in dispute to serve as a creditors committee in the chapter 11 case. The purpose of the creditors committee is to provide a convenient representation of the interests of all unsecured creditors in the case.

44. What is an interest holder?

An interest holder is a person who holds or owns an equity interest in the debtor. Examples are shareholders for a corporation, or limited partners in a limited partnership. These are commonly referred to as equity security interests.

45. How are interest holders treated in chapter 11?

Interest holders are treated in the same manner as creditors. They may file proofs of claim, vote to accept or reject the plan and participate in distributions under the plan. Equity security interests have a lower priority than do all other creditors.

46. What happens to contracts and leases in chapter 11?

A debtor may, at its option, assume, reject, or assign executory contracts or unexpired leases. There are special time limitations involving some kinds of leases and contracts that must be carefully followed or the contracts will be deemed to be rejected.

47. What is a secured creditor?

A secured creditor is a person who holds collateral for the payment of a debt. A secured creditor holds a lien on property the debtor owns or controls. Real estate mortgages or contracts, and installment contracts for cars or furniture where the creditor has retained a security interest are typical examples of situations where the creditor is secured.

48. What happens to secured creditors in chapter 11?

Secured creditors are entitled to special treatment in a chapter 11 plan. If the creditor is fully secured (the value of the collateral exceeds the debt owed), the secured creditor must be paid in full in cash or, if the plan is to repay the creditor in deferred cash payments, the creditor must retain collateral and receive interest.

A secured creditor that is only partially secured (the value of the collateral is less than the amount owed) can elect to be treated as if it is fully secured, in which case it must be treated as if fully secured except that interest does not usually have to be paid. If a partially secured creditor does not elect to be treated as fully secured, the secured portion of the claim is treated in the same manner as a fully secured claim and the remaining portions deemed to be an unsecured claim are paid in the same manner as other unsecured claims.

49. What is the difference between a partially secured and a fully secured claim?

A person who holds a secured claim is said to be fully secured if the value of the collateral securing the debt exceeds the amount due on the debt. A partially secured claim is a secured claim where the value of the collateral securing the debt is less than the amount owed on the debt. A creditor that holds a partially secured claim really holds two claims—a secured claim (to the value of the collateral) and an unsecured claim (for the deficiency).

50. What is an unsecured creditor?

A creditor that has no lien on the debtor’s property is an unsecured creditor.

51. What happens to unsecured creditors in chapter 11?

The treatment of unsecured claims depends on whether the particular unsecured claim is entitled to priority. A claim that is granted priority must be paid in full in cash in the chapter 11 plan. Most priority claims (with the notable exception of taxes) must be paid at or before the time the plan is confirmed. Tax claims that are entitled to priority may be paid in deferred cash payments over a period of time not to exceed six [6] years after the tax was assessed. The only requirement for other unsecured creditors is that they must receive at least what would have been distributed to them had the debtor filed a chapter 7.

52. What is the difference between priority and other unsecured claims?

A claim is given priority under the Bankruptcy Code based on the nature of the debt. The kinds of debts that receive priority are:

  • Costs and fees to administer the chapter 11 case;
  • Unsecured credit incurred before confirmation;
  • Wage claims of up to $2,000.00;
  • Employee benefit claims;
  • Consumer deposit for products or services up to a value of $900.00, and;
  • Most (but not all) tax claims.
53. What must a creditor do to be paid in chapter 11?

A creditor must have a claim allowed. A claim will be allowed if it is listed in the debtor’s schedules as undisputed. Otherwise the creditor must file a proof of claim within a time limit established by court order. The debtor (or trustee) examines claims and may object to any claim that is improper. The court will hold a hearing to determine whether the objection is valid. If the debtor (or trustee) does not object, the claim is allowed.

54. How much are attorney fees in a chapter 11 case?

There is no single, fixed, market price for bankruptcy cases. There is no standard fee, or even a standard way to set fees in chapter 11 cases. In business cases, the amount charged varies greatly depending on the size of the business, the type of business involved, the extent of the relief needed by the debtor, the attitude and aggressiveness of the creditors, the type of reorganization contemplated by the debtor and whether the business’ owners are in agreement or disagreement regarding the method of reorganization. Chapter 11 cases are, however, lawyer–intensive, and there are restrictions on how often a debtor’s attorney can ask the court to be paid. This often means that large retainers, or deposits, are necessary before legal work can be performed.