Corporate Bankruptcy and Debt Restructuring

If you are an individual or a small business owner (not a corporation or partnership), make sure to also check out the information for Chapter 7 and Chapter 13 and read the information here on business bankruptcy to better understand the difference between your personal liabilities and that of your business/corporation.

Chapter 11 of the bankruptcy code is a "reorganization".

and is primarily for businesses (small or large) such as corporations and partnerships, OR for individuals with large debts and assets who do not meet the strict asset/debt limitations of Chapter 13. Chapter 11 offers greater flexibility and options than other chapters and can be extremely useful even in lower debt cases. It is very useful in real estate cases where you are trying to find ways to catch up on past due payments, or buy some time for selling a piece of property that has equity, or for dealing with delinquent taxes, or any scenario where you need time to catch up on payments, but keep your business running.

For information on the requirements of the US Trustee's Office, including forms that will need to be completed and filed, time deadlines for initial compliance documents, etc. please visit http://www.usdoj.gov/ust/r16/forms.htm. Take a look at each of the publications and forms there.

Chapter 11 is unique.

Chapter 11 is unique in that the Debtor is a debtor-in-possession, meaning that he/she/it remains in possession of all its assets and its ongoing business. In other words, the Debtor itself (or himself or herself) is the Trustee for the estate. While this is a great advantage, it does not come without its costs and there are many fiduciary responsibilities.

There are great powers afforded to Chapter 11 Debtors, such as the ability to object to your creditors' claims, avoid liens, reject leases and contracts with no penalty, extend the time for repayment to your existing creditors or even reduce the amount owed or paid to them.

Often there is litigation associated with any Chapter 11 case, either with the Debtor attacking the creditors, or vice versa.

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Chapter 11 Expense.

Chapter 11 can be quite expensive and is always time consuming. There are constant administrative burdens which must be met. Regular reports must be filed with the court and the U.S. Trustee's Office, and fees must be paid. Since Chapter 11 cases can last from several months to several years, the professional fees (attorney, accountant, C.P.A.) can grow quite rapidly. The court filing fee is currently $830.00.

pre-bankruptcy planning.

The key to a successful Chapter 11 bankruptcy case is pre-bankruptcy planning. As is the case with Chapter 13 and, to an extent, with Chapter 7, very few Chapter 11 cases are successful when the Debtor arrives at the attorney's office needing to file the petition immediately. This is true with any chapter of the bankruptcy code, but is particularly true in a chapter 11. Why? Because the administrative burdens, time constraints, financial pressures, and other problems are so great, that a failure to plan ahead, and prepare as much documentation as possible prior to filing, will usually spell disaster. All you will end up doing is paying your attorney several thousand dollars for a few months' breathing room, only to end up where you were to begin with.

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Plan of Reorganization.

The ultimate purpose of a Chapter 11 case is to get a Plan of Reorganization (repayment) confirmed by the court. This is by no means a simple task and the requirements for doing this are rather complex (see links above) and will not be discussed here. The Plan is basically a contract with one's creditors as to how they will be repaid, and from what source. The creditors have to vote for the Plan in certain numbers, or if they do not vote in sufficient numbers for the Plan, they may be forced to accept the Plan if other requirements are met. There are many ways to formulate a Plan, subject to the requirements and limitations of the Bankruptcy Code, and the more skilled attorneys will explore all avenues to improve your business and financial position.

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How does a Chapter 11 work?

The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly.

The Chapter 11 plan.

In a large bankruptcy, committees of creditors and stockholders typically negotiate a plan with the company to relieve the company from repaying part of its debt so that the company can try to get back on its feet.

One committee that must be formed is called the "official committee of unsecured creditors." They represent all unsecured creditors, including bondholders. If the company has publicly held bonds, the "indenture trustee," often a bank hired by the company when it originally issued a bond, may sit on the committee.

Additional official committees may sometimes be appointed to represent stockholders. The U.S. Trustee may appoint another committee to represent a distinct class of creditors, such as secured creditors, employees or subordinated bondholders.

After the committees work with the company to develop a plan, the court must find that it legally complies with the Bankruptcy Code before the plan can be implemented. This process is known as plan confirmation. This takes a few months or a few years.

The debtor company develops a plan with the various committees. The company or its counsel usually prepares a disclosure statement and reorganization plan and files it with the court. If it is complete (if the company is publicly held, it is reviewed by the SEC), creditors (and sometimes the stockholders) vote on the plan. The Bankruptcy Court confirms the plan, and the company carries out the plan by distributing the securities and other payments called for by the plan.

Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the "debtor," might use Chapter 11 bankruptcy of the Bankruptcy Code to "reorganize" its business and try to become profitable again. Management continues to run the day-to-day business operations but a bankruptcy court must approve all significant business decisions. Some big Chapter 11 filings have included K-Mart, WorldCom, and Enron. A Chapter 11 case is extremely complicated and not a do-it-yourself filing. Consult with an attorney who is experienced in Chapter 11 filings to sort out the numbers, restructuring, etc. Under Chapter 7 bankruptcy, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.

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Companies Filing Corporate Bankruptcy Under Chapter 7

When a company files for bankruptcy under Chapter 7, the company ceases all operations and shuts itself down. Unlike Chapter 11 Bankruptcy, no reorganization plan is put into place and the company is not allowed to continue doing business. An appointed trustee is tasked with liquidating the business's assets to pay its debts. Secured creditors are paid off first, followed by unsecured creditors, and stockholders are only paid if the other creditors are paid off completely. The bankruptcy law regarding the scope of a chapter 7 discharge is complex, and debtors should consult a competent legal attorney prior to filing.

If you are filing for Chapter 7 bankruptcy protection, it is important that you understand your different options, and, should you choose to file, you will want to make sure that all your legal documents are in order so that your case does not get thrown out, certain assets are protected, and your debts will be taken care of.