Chapter 11 bankruptcy is most often used in situations where the debtor is a business, or an individual who is involved with a large number of real estate investment properties. There are large business Chapter 11 cases and a more streamlined type of Chapter 11 for small businesses. This blog post will be focused on the latter, the small business Chapter 11 case.
A small business Chapter 11 case requires the debtor to file a Voluntary Petition just like all other types of bankruptcy cases. The Voluntary Petition informs the U.S. Bankruptcy Court who the debtor is ( a corporation or an individual person), the debtor's address, and generally about the debtor's business, amount of debts, value of assets, etc. In the case of a corporation, the person filing the Chapter 11 bankruptcy must first be appointed by a resolution of the corporation, in accordance with its bylaws, granting the legal authority to this officer to file the Chapter 11 case.
The attorney for the corporation and any professionals involved with the case ( such as a Certified Public Accountant, Appraiser, Realtor, auctioneer, etc) must also be officially appointed by the corporation, and then the U.S. Bankruptcy Court.
Once a small business Chapter 11 case is filed in the Southern District of Alabama, the Office of the Bankruptcy Administrator appears in the case for the purpose of overseeing the administrative requirements of the United States Bankruptcy Code. The Debtor has a monthly obligation to have reports of the debtor's income, expenses and assets filed with the Court.
The debtor in Chapter 11 bankruptcy cases is initially referred to as the "debtor in possession." This designation applies because the debtor remains in control of the property of the corporation while working towards Bankruptcy Court approval of a Plan of Reorganization. The debtor is also required to file a disclosure statement.
The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization.
The Chapter 11 Plan of Reorganization must include a legal classification of the claims and how the creditors will be treated under the Plan. The Bankruptcy Code permits certain creditors ( namely the general unsecured creditors) to be paid less than what is required under the debtor's pre-bankruptcy contract with the creditor.
Paying less than required to a creditor in Ch 11 is referred to as "impairing" the claim. The main purpose of filing a Chapter 11 case is to enable the debtor to pay what the debtor can afford to pay creditors for a set period of time, and then at the completion of the Plan of Reorganization receive a discharge of the balance of the impaired claims.
Chapter 11 is a type of bankruptcy that can be very complex. It often requires the participation of several professionals ( lawyers, CPA's, realtor, auctioneer, etc). If you are considering the filing of a business bankruptcy, Call me. I'll be there for you.