Chapter 11 – Reorganization
Chapter 11 of the Bankruptcy Code is called “reorganization” and is primarily for corporations, LLCs, 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, buy some time for selling a piece of property that has equity, for dealing with delinquent taxes, or any scenario where you need time to catch up on payments, but keep your business running.
In a Chapter 11 Reorganization, the Debtor typically remains in possession of all of its assets and its ongoing business. In other words, the Debtor serves as the Trustee for the estate. Debtors under this Chapter have the ability to object to their creditors’ claims, avoid liens, reject leases and contracts, 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 a Chapter 11 case, either with the Debtor attacking the creditors, or vice versa. Due to this, Chapter 11 cases can be more expensive and are often time consuming. There are administrative requirements which must be met. Regular financial and status reports must be filed with the court and the U.S. Trustee’s Office, and fees are paid quarterly. Since Chapter 11 cases can last from several months to several years, the professional fees (attorney, accountant, C.P.A.) can be substantial. The court filing fee is currently $1,717.
One very important key to a successful Chapter 11 Reorganization case is carefully preparing for the filing – something our attorneys do best! As is the case with Chapter 13 and, to a certain extent, with Chapter 7, very few Chapter 11 cases are as successful as desired 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 challenges are significant. Planning ahead and preparing as much documentation as possible prior to filing, will result in far more advantageous results.
Chapter 11 Debtors, through the attorney, prepare a Plan of Reorganization that explains how much the Debtor proposes to pay creditors, and how soon. The Bankruptcy Code does not specify a minimum amount or a maximum duration for a Chapter 11 Plan, so there can be a lot of flexibility. Chapter 11 Debtors are required to seek creditors’ votes to accept or reject the proposed Plan, but a Chapter 11 Plan can be approved by the Bankruptcy Court over creditors’ objection if certain statutory requirements are met.
A Chapter 11 Plan, for example, must pay creditors as much as they would receive if the Debtor filed a Chapter 7 Petition. The Chapter 11 Plan must also meet other tests to ensure it treats creditors fairly.
As in a Chapter 13 case, the Chapter 11 Debtor may convert its case to a Chapter 7 if the Plan proves unworkable. Also, the Chapter 11 Debtor can keep the property it chooses to keep, as long as it continues to make the payments required by the confirmed Plan and the creditors receive more than they would receive through a Chapter 7 liquidation.