Chapter 11 Bankruptcy Facts

Voluntary Chapter 11

A Chapter 11 petition can be filed for any business, from single owner entities to large corporations. Individuals can also file Chapter 11, but most people file Chapter 13 to manage debt under a plan. A Chapter 11 petition is filed by the debtor, along with schedules listing all the assets and liabilities of the business, a statement of the current financial situation, and any supporting documents. A plan to get out of debt is typically included. There is a $1,000 case fee and an administrative fee of $39 for Chapter 11, but per Rule 1006(b), the court can grant permission for the debtor to pay the fees in installments.

In certain situations, creditors can file an involuntary Chapter 11 petition for a business that owes the creditors money. For example, three or more creditors that each hold a claim can file an involuntary petition for the debtor business together if all of the following are true: the claims will definitely lead to a loss, the claims are not subject to a legal dispute, and the claims are $10,000 more than any other creditor who has a lien on the same asset. In involuntary cases, the debtor may lose control over the business to a court-appointed trustee.

In Chapter 11, a debtor generally is allowed to act as the trustee of the business. This is referred to as debtor in possession. Debtors in possession are given all the responsibilities of a court-ordered trustee except for the investigative duties. The debtor accounts for all assets, examines and objects to creditor claims, and files any reports required by the court, like monthly operating statements. A debtor in possession can also hire attorneys, appraisers, and other professionals to assist with the case if the court approves it.

A U.S. trustee is still assigned to a Chapter 11 case even if debtor in possession applies. The trustee monitors the debtor to ensure all reporting requirements are met and outlines the conditions of all reports and other paperwork that must be filed by the debtor during the proceedings. The trustee is also responsible for checking applications for payment of fees from any professional services used in the bankruptcy case and holding the creditor's meeting. If the debtor is not performing all the necessary duties, the trustee can file to have the case converted to a different chapter or dismissed.

The creditor committee is a panel of creditors appointed by the U.S. trustee that has a vital say in the bankruptcy proceedings. Typically, the committee is made up of seven or more creditors that have the largest unsecured debts, which is debt that does not have an asset behind it to ensure payment. This committee can discuss the way the case will proceed with the debtor, investigate the conduct of the debtor and the details of business operations, and is directly involved with the creation of the repayment plan.

In order to emerge from Chapter 11, a repayment plan must be created and approved by the court. This plan details how the business will repay its debts and how much each creditor will receive over time. It may involve selling assets or liquidating in order to pay claims. The debtor has the exclusive right to file the plan within 120 days of filing the Chapter 11 petition, but the court may extend this right for up to 18 months. If the debtor does not file a plan in time, other parties with an interest, like the creditor committee, can file one. If more than one plan is filed, the court will decide which plan is used. Once a repayment plan is accepted and confirmed by the court, it takes the place of all prior plans and contracts.

A repayment plan can be modified after it has been confirmed. The debtor, the trustee, and some other parties can file to have the plan altered. In cases where fraudulent information was presented on the plan, a creditor can file for the plan to be voided within 180 days after confirmation. When all the payments under the confirmed plan have been made, the debtor normally receives a discharge, releasing the debtor from most debts that existed before the petition was filed. Certain types of debt cannot be discharged in bankruptcy, like custom duties.