Bradley’s Bankruptcy Basics: Chapter 11 Bankruptcy – Reorganization – Insolvency / Bankruptcy / Restructuring


United States: Bradley Bankruptcy Basics: Chapter 11 Bankruptcy – Reorganization

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Chapter 11 bankruptcy cases are most often filed by businesses. However, some high-income individuals with debts above statutory debt limits to qualify for Chapter 13 may also apply for Chapter 11 relief. In Chapter 11 cases, the debtor retains control of its operations as a. that Debtor in Possession (DIP) and has the benefits and duties that are held by a Chapter 7 trustee. However, if the debtor acts in bad faith or does not handle the bankruptcy estate during the case, a Chapter 11 trustee can be appointed to operate the business in the future.

We have set up a high-level overview or ‘life cycle’ of a chapter 11 case, emphasizing concepts and milestones of particular importance to creditors. In addition, we have created a preliminary checklist this will help you navigate the early stages of Chapter 11 bankruptcy.

Chapter 11 Plan

In addition to filing their schedules and statements, Chapter 11 debtors also file a plan that proposes to repay creditors, as well as to restructure debts, reorganize business operations, and / or liquidate some or all of the debtor’s assets. The advantage of receiving a payment under a Chapter 11 plan, rather than a direct Chapter 7 liquidation, is that the debtor will pay more over the course of the plan due to continuing business activities than this. that he would otherwise pay creditors if they were. simply paid by the proceeds from the sale of the debtor’s assets. (In fact, this is a requirement for a Chapter 11 plan to be confirmed.)

Chapter 11 Plans generally replace previous contracts

A Chapter 11 plan is essentially a change in the terms of the agreement or an amendment that modifies the terms of previous contractual agreements that creditors have with the debtor or a proposal that provides for the payment of claims arising from judgments, fees or other non-contractual obligations. Chapter 11 plans may also “assume” or “reject” leases or other “enforceable contracts” (contracts that are not yet terminated) or “assume and assign” leases or enforceable contracts to third parties. Once a Chapter 11 plan is confirmed, the terms of the plan are binding on all parties and take precedence over any terms included in prior agreements to the extent that such agreements are not otherwise provided for and extended in the plan.

After a debtor files their proposed plan, creditors vote to accept or reject it. The debtor must get a certain number of votes accepting the plan for it to be confirmed. If one or more voting creditors reject the plan, the debtor can still “overwrite” the plan and have it confirmed despite the rejecting creditor’s objections. This may cause the debtor to enter into side agreements with certain creditors and give them better treatment in the plan than they might otherwise have received in return for the creditors’ agreement to vote in favor of the plan and hamper the plan. plan on dissenting creditors.

In order for their Chapter 11 plan to be confirmed, the debtor must also meet the legal requirements set out in Section 1129. More information on confirming the plan and objections to confirmation will be included in future blog posts.

Chapter 11 plans come in all shapes and sizes and often offer the most creative way to pay off as much as possible to as many creditors as possible. Plans may include reorganizing the debtor’s business operations to eliminate waste, accommodate bad business decisions, and achieve greater profits in the future; restructure debts to extend loan terms, change the amount or type of collateral, or change payments and interest rates; and the sale of the debtor’s assets and the distribution of the proceeds to creditors.

Motions of the first day

The cases in Chapter 11 often change very quickly. While things are not as bad for small Chapter 11 debtors as they are for debtors with millions or billions in debt, many Chapter 11 debtors will file “first day” claims, so called because they are filed almost immediately after filing for bankruptcy proceedings and hearings on them often take place within days of opening the bankruptcy case. Motions on the first day usually include motions to continue paying employees, motions to continue paying necessary vendors / suppliers, and motions to use cash collateral (i.e. cash on which creditors have collateral). The first day motions hearing usually takes place within the first few days of filing for bankruptcy. Creditors will want to pay close attention to any day one motions that are filed, especially motions to use cash collateral, and be prepared to raise objections if necessary. More information on cash collateral and adequate protection will be provided in future blog posts.

Subchapter V

The new subchapter V of chapter 11 is a unique way to relieve small business debtors. Only debtors with debts of less than approximately $ 2.7 million are eligible to file under subchapter V. However, the CARES law, which was passed in March 2020, temporarily increased this debt limit to 7. , $ 5 million. This increase is expected to end on March 27, 2021; however, Congress is currently considering a bill to further extend the subchapter V debt limit, as well as other changes to the Bankruptcy Code that were included in the CARES Act.

As in other Chapter 11 cases, the Subchapter V debtor retains control of its business operations as a DIP. However, subchapter V cases differ in some respects from other chapter 11 cases. For example, only the debtor can file a plan in subchapter V, while creditors can file plans that compete with the debtor’s plan. debtor in ordinary Chapter 11 cases. In addition, in ordinary Chapter 11 cases, a plan can only be confirmed if a dissenting class of unsecured creditors is paid in full before any payment is made to the creditor’s subordinate creditors. dissident. This is called the “top priority rule”. Plans in subchapter V do not need to meet the absolute priority rule to be confirmed. Subchapter V also provides for the modification of certain mortgages on the principal residence of the debtor when the proceeds of the mortgage have been used in the course of the debtor’s business.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.

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As a bankruptcy judge and appellate judge in the United States for over 26 years, I have been amazed at the number of disputes in adversarial proceedings and contested cases that should have been settled, but rather dealt with by. ..

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