Chapter 11 Bankruptcy Can Restructure A Distressed Business

Establish A New Balance Sheet And A New Beginning

Chapter 11 Bankruptcy Can Restructure A Distressed Business.

Under Chapter 11 bankruptcy, a business will typically continue ordinary course operations under court protection while a plan of reorganization is proposed to creditors.

Chapter 11 bankruptcy can also be filed to liquidate the assets of a business, in whole or in part, usually under the control of existing management.

What Is Chapter 11 Bankruptcy?

What is Chapter 11 bankruptcy? Chapter 11 bankruptcy describes the provision of the Bankruptcy Code that is typically used to reorganize a business as a going concern under court protection.

Upon filing, the debtor in Chapter 11 automatically becomes a “debtor in possession.”

As a debtor in possession, the business is typically authorized to operate without the appointment of a trustee until a plan of reorganization is confirmed, the case is dismissed or converted to a Chapter 7 bankruptcy.

The preparation, confirmation, and implementation of a plan of reorganization is at the heart of a Chapter 11 bankruptcy case.

A Chapter 11 plan often allows the debtor in possession to either restructure the operating business, or sell business assets under better circumstances than a chapter 7 liquidation.

Under Chapter 11 bankruptcy, the debtor and creditors can structure an orderly sale of assets, and provide for a quicker distribution of the sale proceeds than would occur under Chapter 7.

A Chapter 11 bankruptcy can be filed by almost any corporation, partnership or individual.

Individual Chapter 11 Bankruptcy Cases

A Chapter 11 case for an individual is similar to a case under a Chapter 13 bankruptcy.

Property of the estate for an individual debtor includes the debtor’s earnings and property acquired by the debtor after filing until the case is closed, dismissed or converted.

Funding of the plan may be from the debtor’s future earnings.  A plan cannot be confirmed over a creditor’s objection without committing all of the debtor’s disposable income over five years unless the plan pays the claim in full, with interest, over a shorter period of time.

Disclosure Statement and Plan of Reorganization

The debtor (other than a “small business debtor” as defined by the Bankruptcy Code) has a 120-day period during which it has an exclusive right to file a plan.

This exclusivity period may be extended or reduced by the court.  After the exclusivity period has expired, a creditor or the case trustee may file a competing plan.

A disclosure statement and a plan of reorganization must be filed with the court before the debtor may solicit confirmation of  a plan of reorganization.

The disclosure statement must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment regarding the plan.

After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan.

Under section 1126(c) of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class.

If there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims (i.e., claims that are not going to be paid completely or in which some legal, equitable, or contractual right is altered).

Holders of unimpaired claims are deemed to have accepted the plan.

Discharge of Debt Under A Chapter 11 Bankruptcy

Section 1141(d)(1) generally provides that confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation.

After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.

There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge.

Confirmation of a plan of reorganization discharges any type of debtor – corporation, partnership, or individual – from most types of pre-petition debts.

It does not, however, discharge an individual debtor from debts that cannot be discharged in a Chapter 7 or Chapter 13 case.

An individual debtor will continue to be liable for these types of debts to the extent that they are not paid in the Chapter 11 case. A discharge is also not available to an individual debtor unless and until all payments have been made under the plan.