Chapter 11 Frequently Asked Questions
1. What does Chapter 11 mean?
2. Does Chapter 11 mean bankruptcy liquidation?
3. Who can use Chapter 11?
4. How is the business protected (Automatic Stay)?
5. Who runs the day to-day operations of the business? (Debtor in Possession)
6. What role do Creditors play? (Creditors' Committees)
7. What is a Plan of Reorganization?
8. When do companies exit from Chapter 11?
9. Typically, how long do most companies take after entering Chapter 11 to present a plan of reorganization?
10. Have any other companies entered Chapter 11 and successfully emerged?
11. What is Fast Tracking for Small Businesses?
- What does Chapter 11 mean?
Chapter 11 is the reorganization provision of the U.S. Bankruptcy Court that enables companies to restructure past-due payments while they continue regular operations in order to emerge as profitable. Companies in Chapter 11 continue to provide employees with salaries and benefits and do business with suppliers and customers in a routine manner.
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Does Chapter 11 mean bankruptcy liquidation?
Chapter 11 means reorganization, not liquidation. The purpose of filing Chapter 11 protection is to reorganize and strengthen the company for the future.
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Who can use Chapter 11?
This Chapter of the Bankruptcy Code is available to a business suffering severe financial difficulty, but that can be viable if its debt repayments can be reduced or postponed. The business can be a corporation, partnership or sole proprietorship.
Chapter 11 can also be used to liquidate the assets of the business and pay the creditors from the realization. Chapter 11 liquidation often will obtain a greater realization for the creditors than a Chapter 7 bankruptcy.
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How is the business protected (Automatic Stay)?
The business is protected by an automatic stay that takes place upon the filing of the petition. No creditor can take any action against the debtor. The stay provides a breathing spell for the debtor during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
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Who runs the day to-day operations of the business? (Debtor in Possession)
The debtor retains control of the business by the fact that the Bankruptcy Code (section 1107) places the debtor in possession with the rights and powers of a Chapter 11 trustee.
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What role do Creditors play? (Creditors' Committees)
The creditors' committee can play a major role in chapter 11 cases. The United States trustee, a federal employee to be distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. The committee may consult with the debtor in possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan. 11 U.S.C. § 1103. A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties. The creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession.
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What is a Plan of Reorganization?
A plan of reorganization sets forth how the claims of creditors and interest holders will be treated.
After the order for relief, the debtor has 120 days to formulate and file a plan of reorganization with the bankruptcy court. If the debtor fails to submit a plan during the 120 day period, or if creditors fail to consent to the debtor's plan during the first 180 days, any of the creditors can submit a plan. The court is sometimes faced with conflicting plans.
A plan of reorganization must designate classes and interests under the plan and what these classes of creditors will receive under the plan. For example, secured creditors might be one class, unsecured trade creditors a second, and employees a third. The plan must be fair and equitable and must provide an adequate means for its own execution. Generally, all identified classes must accept the plan of reorganization by a majority vote in number of claims and at least 2/3 in dollar value, within each class. The bankruptcy court must approve the proposed reorganization plan after determining that it is in the best interests of the creditors.
Although each class of creditors must normally approve the reorganization plan, the bankruptcy court can still approve a plan over the objections of one or more classes of creditors. This power is called the "cram down" power.
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- When do companies exit from Chapter 11?
Companies exit Chapter 11 after the court approves the company's Chapter 11 plan of reorganization and the transactions and payments proposed in the plan have been completed. Companies develop these plans in conjunction with their creditors.
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Typically, how long do most companies take after entering Chapter 11 to present a plan of reorganization?
Most companies take several months to develop and present a Chapter 11 plan of reorganization. Your lawyer will give you a more accurate estimate after speaking with you and reviewing your documents.
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Have any other companies entered Chapter 11 and successfully emerged?
Yes. Many companies in Seattle and across the country have successfully utilized Chapter 11 protection to focus on streamlining and emerging as stronger enterprises. Some examples include Macy's, Toys "R" Us, and Pathmark. Your attorney can help show you how to rebuild your business.
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What is Fast Tracking for Small Businesses?
In Washington, a business with debt less than $2,000,000 can elect to be treated as a "small business". The case is then put on a fast track and is treated differently than is a regular Chapter 11 case: - A separate hearing to approve the disclosure statement is not mandatory. It may be combined with the confirmation hearing;
- The appointment of a creditors' committee is not mandatory;
- The debtor has a shortened period of time (100 days from the date of the order for relief, within which only the debtor may file a plan;
- After the 100 day period expires any party in interest may file a plan; however, all plans must be filed within 160 days from the date of the order for relief.
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