A Chapter 11 bankruptcy reorganization plan lays out how the filer will pay their debt obligations moving forward. It gives the filer the chance to restructure and renegotiate the terms of paying back creditors.
Written by Attorney Karra Kingston.
Updated July 22, 2020
Chapter 11 bankruptcy helps individuals and businesses reorganize their debts and assets. Individuals with large businesses and small businesses that have large debts and assets can use the Chapter 11 process to keep their business running while restructuring their debts. Chapter 11 is the most complex chapter of bankruptcy. Many people have heard of Chapter 11 bankruptcy through well-known companies using the process. Some of the most well-known companies to file Chapter 11 bankruptcy are Sears, Pier 1 imports, General Motors, Toys-R-Us, and more recently, Neiman Marcus. Chapter 11 bankruptcy is similar to other types of bankruptcy, in that it helps individuals and business owners struggling with debt a way to reorganize their debts through a plan. The difference between Chapter 11 and the other types of bankruptcies lies within the debtor’s obligations and how the filer’s plan gets confirmed under the Bankruptcy Code. Below we will discuss an overview of the Chapter 11 process.
What is a Chapter 11 Bankruptcy Case?
A Chapter 11 bankruptcy case is similar to Chapter 7 and Chapter 13 in that it starts with the filing of a bankruptcy petition in Bankruptcy Court (11 U.S.C. §§ 301, 303). In both Chapter 11, 13 and 7 filers will submit bankruptcy forms that list all of their debts, assets, and financial information. They will also have to attend a court hearing where they will be questioned about their bankruptcy forms.
Generally, Chapter 11 cases are filed by corporations and large business owners. In some cases, individuals may be required to file Chapter 11 if they have too much debt and don’t qualify under other chapters of bankruptcy.
In a Chapter 11 bankruptcy, a filer’s business continues to operate during the bankruptcy while the individual remains a debtor in possession (“DIP”). Unlike other chapters of bankruptcy, in Chapter 11 cases no trustee is automatically appointed. Instead, the debtor is in charge. The debtor in possession is the filer who holds assets or property that creditors have an interest in. During the Chapter 11 bankruptcy process the debtor in possession continues to run the business as usual while the court restructures the business debt. In some cases, the bankruptcy court will appoint a trustee to take control over the financial affairs of the DIP if they suspect any fraud or incompetence.
Individuals who file Chapter 11 are given the same protections they would have under other bankruptcy chapters. One of the strongest protections that individuals who file bankruptcy get is the automatic stay. The automatic stay is initiated as soon as the filer submits their bankruptcy petition to the court. The automatic stay immediately stops debt collectors from calling or harassing filers for unpaid credit cards and other unsecured creditors. It also stops foreclosure and eviction proceedings from moving forward. The automatic stay provides individuals with a huge sense of relief.
Chapter 11 isn’t right for all business owners. When possible, filers should think about filing Chapter 7 or Chapter 13 bankruptcy before filing Chapter 11. Chapter 11 bankruptcy is much more costly and burdensome than other chapters of bankruptcy. Further, individuals have more obligations under Chapter 11. For example, the bankruptcy court requires filers to submit quarterly operating reports (11 U.S.C. §§ 1106, 1107) which can be time-consuming. Generally, these reports can’t be done in house and individuals must hire a CPA to generate the reports.
What is the Role of the U.S. Trustee
The U.S. Trustee plays a major part in overseeing the progression of a Chapter 11 case. Generally, in Chapter 11’s case trustees are not appointed. Instead, the U.S. Trustee oversees the debtor in possession’s activity. The U.S. Trustee monitors the businesses operating expenses, compensation disclosure statements, and the debtor’s compliance with the terms of their reorganization plan.
Additionally, the U.S. Trustee’s Office conducts the meeting of creditors. In Chapter 11 the U.S. Trustee takes a much more active role than in other chapters of bankruptcy. Aside from overseeing the case, the U.S. Trustee also imposes certain requirements on the debtor in possession to ensure they are opening new bank accounts, paying employees on time, and reporting their monthly operating expenses. Essentially, their job is to ensure that the business is running smoothly and the debtor is following the bankruptcy rules.
What is a Chapter 11 Reorganization Plan?
In Chapter 11, a plan is submitted, much like in a Chapter 13 case. The filer has 120 days to propose a reorganization plan. The reorganization proposal must provide structure as to how the business will continue to operate. Normally, the plan will include information about downsizing the business, negotiating debts, and liquidating assets within the business. The purpose of the plan is to show creditors how they will be repaid and how the business will be able to continue running.
Whether a reorganization plan will be confirmed lies within the discretion of the bankruptcy court and depends on whether one or more creditors approve of a filer’s plan as well as any objections to the plan. For a plan to be confirmed it must identify what business debts are outstanding, identify each class of creditors (priority, unsecured, secured), identify which creditors will be paid in full, and provide details explaining how the creditors will be repaid.
Generally, filers have an exclusive right to file a plan of reorganization for four months after the Chapter 11 case is filed. Filers may be given a chance to ask the court to extend the exclusivity period to file a Chapter 11 plan up to 18 months as long as a good-faith effort is shown.
Once the exclusivity period ends and the filer has not confirmed a reorganization plan, creditors may propose a plan of reorganization or liquidation plan to the bankruptcy court. Competing plans create litigation which can cause greater involvement of the U.S. Trustee. Generally, creditors don’t offer competing plans instead, creditors who are not satisfied with the plan will ask the court to dismiss or convert the case to a Chapter 7 bankruptcy.
In Chapter 11, unsecured creditors can form a creditor’s committee under 11 U.S.C. § 1102. The creditor’s committee will vote to approve or deny the filer’s reorganization plan. Sometimes, not all creditors are paid back in full according to the terms of their original contract. These creditors are usually referred to as “impaired.” For the plan to be confirmed it is required that at least one class of impaired creditors must vote to accept the plan.
To determine whether a plan will be confirmed a confirmation hearing will be held. A plan will only be confirmed by the bankruptcy court if it is feasible, proposed in good faith, in the best interest of the creditors, and meets the fair and equitable test. The fair and equitable test ensures that secured creditors will be paid the value of their collateral.
What if the Chapter 11 Plan Fails?
A Chapter 11 reorganization can fail just like any other bankruptcy case. Some of the most common reasons that a Chapter 11 case may fail are:
failure to obtain financing,
failure to file monthly operating reports,
failure to pay plan obligations to creditors, and
failure to pay quarterly fees.
When a Chapter 11 bankruptcy case fails, the U.S. Trustee will ask the court to dismiss the case. In some cases, the U.S. Trustee may move to convert the case to a Chapter 7 bankruptcy instead. When this happens any available business assets may be sold to pay creditors in a Chapter 7 liquidation. Individuals who wish to preserve the assets will need to make deals with the bankruptcy trustee and their outstanding creditors.
Generally, large and small businesses or persons with very complex financial affairs, that cannot file a Chapter 7 or 13 cases should consider Chapter 11. Most individuals and businesses that need debt relief will not need to file Chapter 11. In most cases, small businesses may find the Chapter 11 process unaffordable and burdensome. Typically, these businesses may find that shutting down the business and filing a Chapter 7 bankruptcy is a better and much more cost-efficient decision.
The Chapter 11 process is very complicated and requires the assistance of a very experienced bankruptcy attorney who can help create a feasible bankruptcy reorganization plan. Not all bankruptcy attorneys and law firms handle Chapter 11 cases. Thus, individuals who are considering filing a Chapter 11 bankruptcy should seek out a bankruptcy attorney who specializes in Chapter 11 to help them navigate this complex area of bankruptcy law.