Business Bankruptcy FAQs
Frequently Asked Questions
Contents
What chapters generally apply to a business?
What chapters generally apply to a business?
Typically a business (a partnership, LLC, corporation, or other non-natural persons) may file for bankruptcy protection under either Chapter 7 (liquidation) or Chapter 11 (reorganization). A non-natural person may not receive a discharge under Chapter 7 but may have certain debts discharged as a part of Chapter 11.
What is Chapter 11?
What is Chapter 11?
Chapter 11 is the chapter of the Bankruptcy Code that permits a person or business to reorganize while obtaining protection from its creditors. Other Chapters include Chapter 7 (liquidation), Chapter 9 (municipal reorganization), and Chapter 13 (individual reorganization).
Who may file under Chapter 11?
Who may file under Chapter 11?
Most persons or entities, including individuals and business entities (with certain exclusions), may file under Chapter 11. Chapter 11 is available to virtually any business or person able to afford the expenses of the case.
Are there any restrictions for filing under Chapter 11?
Are there any restrictions for filing under Chapter 11?
There are no “legal” restrictions unless your business is a type of entity that is not permitted to file under Chapter 11. The debtor could be very large, very small, or in between. A business may be a sole proprietorship, a partnership, a limited liability company, or a corporation. There are no financial or insolvency requirements for filing a voluntary Chapter 11 case other than the requirement that the case is filed in good faith primarily for purposes of reorganization. A voluntary Chapter 11 debtor may be solvent or insolvent, its assets may exceed its liabilities by any amount (or vice versa), and its income may be substantial or nonexistent. The only financial restriction is a practical one, namely, whether the benefits of the case to the debtor outweigh the cost of the case.
What is a small business debtor?
What is a small business debtor?
A debtor is a person or business who files a case under the Bankruptcy Code. A debtor may elect to be treated as a small business debtor in a Chapter 11 case if the debtor meets certain requirements, which are: (a) the debtor must be engaged in a commercial or business activity (other than one whose primary activity is the business of owning or managing real property), and (b) the total amount of the debtor’s non-contingent liquidated secured and unsecured debts must not exceed $2,190,000 at the time of the filing of the petition. Being treated as a small business debtor may increase efficiency and shorten the time needed for handling a Chapter 11 case. By electing treatment as a small business debtor, the debtor may avoid the appointment of a creditor’s committee, shorten the period for filing plans, and simplify the procedures for obtaining acceptance of a plan.
What is a voluntary and involuntary Chapter 11?
What is a voluntary and involuntary Chapter 11?
A voluntary Chapter 11 case is a Chapter 11 case filed by the debtor. An involuntary Chapter 11 case is a Chapter 11 case filed against the debtor by its creditors.
How is a Chapter 11 case commenced?
How is a Chapter 11 case commenced?
A voluntary Chapter 11 case is commenced by filing a “petition” with the clerk of the bankruptcy court which will include a number of other financial disclosures and materials. In certain circumstances, it may be permissible to file the case before the other documents can be prepared, in which case those other documents may be filed within 14 days after the filing of the petition.
What are the fees for filing a Chapter 11 case?
What are the fees for filing a Chapter 11 case?
The bankruptcy court is required to charge a $1,167 case filing fee and a $550 miscellaneous administrative fee. The filing fee must be paid to the clerk of the bankruptcy court when the case is filed. In addition, there is a quarterly fee payable to the U.S. Trustee or bankruptcy administrator based on the amount disbursed during the quarter by the debtor for so long as the Chapter 11 case is pending until a plan is confirmed. The amount of the quarterly fee varies greatly, depending on the amount of money or property that is disbursed under the plan.
What is a United States Trustee or Bankruptcy Administrator and what does it do in a Chapter 11 case?
What is a United States Trustee or Bankruptcy Administrator and what does it do in a Chapter 11 case?
The United States Trustee or the Bankruptcy Administrator (in Alabama and North Carolina) is an employee of the United States Department of Justice and serves independently of the bankruptcy court. The function of the United States Trustee in a Chapter 11 case is to monitor the case, appoint one or more creditors’ committees, call and preside at meetings of creditors, appoint a trustee in the case if ordered to do so by the bankruptcy court, and collect the quarterly fee. Generally, the United States Trustee takes appropriate action to ensure that all reports and documents are filed, that all fees are paid, and that there is no undue delay in the case. Most Chapter 11 debtors are required to make periodic financial and operating reports to the United States Trustee during the course of the case, at least until a plan is confirmed. The United States Trustee should not be confused with the trustee that is sometimes appointed in a Chapter 11 case to operate the debtor’s business and take possession of the debtor’s property. A trustee in a Chapter 11 case is appointed by the United States Trustee and is discussed in the answers to questions 28 and 29 below.
How much are the attorney’s fees in a Chapter 11 case?
How much are the attorney’s fees in a Chapter 11 case?
The amount charged by an attorney for handling a Chapter 11 case for a small business debtor varies greatly depending on such matters as the size of the business, the type and extent of relief needed by the debtor, the attitude of the debtor’s creditors, the type of reorganization needed or contemplated by the debtor, and whether the owners of the business are in agreement or disagreement as to how the business should be reorganized. Unless the case is a simple one, most attorneys charge on an hourly basis and require a retainer to be paid in advance. The total fee charged for handling a small business Chapter 11 case may vary from $15,000 or more for a simple case to many times that amount for a larger more complex case. All fees charged or collected by an attorney in connection with a Chapter 11 case, whether prior to or after the case is filed, must be approved by the bankruptcy court as being reasonable in amount.
What are the immediate benefits of filing under Chapter 11?
What are the immediate benefits of filing under Chapter 11?
The filing of a Chapter 11 case automatically stays all foreclosures, collection actions, civil litigation, and creditor action of any kind against the debtor or the debtor’s property. A creditor may not take any action to pursue a stayed act, claim, or proceeding without the approval of the bankruptcy court. The automatic stay typically provides a debtor with several months of relief from collection efforts by creditors and, potentially, on the payment of many of its debts.
What type of long-term relief may a debtor obtain under Chapter 11?
What type of long-term relief may a debtor obtain under Chapter 11?
Under Chapter 11, the debtor may reorganize the debtor’s business, including restructuring the terms of debt or shedding potentially costly or money-losing segments of the debtor’s business. If the debtor’s business is reorganized, it may continue to operate and satisfy the claims of pre-petition creditors according to the debtor’s plan. A reorganization could be anything from an extension of time for the repayment of debts to a total restructuring of the business.
How long does a Chapter 11 case last?
How long does a Chapter 11 case last?
A Chapter 11 case must be broken down into two phases: the pre-confirmation phase and the post-confirmation phase. The first phase, which is the phase prior to the confirmation of a plan, normally lasts from six to twelve months, although the time may vary depending on the condition of the debtor, the type of plan proposed by the debtor, and the reaction of creditors to the plan. The second phase, which is the phase where the confirmed plan is implemented and carried out by the debtor, normally lasts from three to five years, although it, too, may vary in duration.
When does the debtor receive a discharge in a Chapter 11 case?
When does the debtor receive a discharge in a Chapter 11 case?
A discharge is a court order relieving the debtor from liability for certain debts. A debt that is discharged is a debt for which the debtor is no longer liable, except as provided in the Chapter 11 plan.
In the Chapter 11 case filed by a corporation, limited liability company, or other non-individual, the debtor receives a discharge when a plan is confirmed by the court. The order of the court that confirms the plan also contains the debtor’s Chapter 11 discharge.
In a Chapter 11 case filed by an individual (i.e., a natural person), a discharge is granted by the court separately, after the completion of payments under the plan.
What debts are discharged by a Chapter 11 discharge?
What debts are discharged by a Chapter 11 discharge?
The debts discharged in a Chapter 11 case depend on whether the debtor is an individual (i.e., a natural person) or a non-individual (i.e., a corporation, partnership, etc.).
The discharge received by an individual debtor in a Chapter 11 case discharges the debtor from all pre-confirmation debts except those that would not be dischargeable in a Chapter 7 case filed by the same debtor.
The discharge received by a non-individual debtor in a Chapter 11 case depends on whether the plan confirmed is a plan of reorganization or a plan of liquidation. The discharge received in the confirmation of a plan of reorganization discharges a non-individual debtor from all scheduled pre-confirmation debts without exception. However, if the plan confirmed is a plan of liquidation and if the debtor does not engage in business after consummation of the plan, a non-individual debtor does not receive a discharge.
What notice is provided when a debtor files a Chapter 11 case?
What notice is provided when a debtor files a Chapter 11 case?
When a Chapter 11 case is filed, all of the debtor’s creditors, shareholders, partners, and other persons directly involved with the debtor are notified. Notice of a Chapter 11 case is not published in newspapers, but the filing itself is a public record (like any other litigation or lawsuit). Practically speaking, unless the debtor is a large or well-known company, only the creditors, owners, and employees of a small business debtor are aware that the debtor has filed a Chapter 11 case.
Does a person or business filing under Chapter 11 have to continue to pay its debts after the case is filed?
Does a person or business filing under Chapter 11 have to continue to pay its debts after the case is filed?
Most Chapter 11 debtors do not pay most of their unsecured debts for the period between the filing of the case and the confirmation of a plan. This period usually lasts for six to twelve months. During this period, however, it may be necessary to pay secured creditors and creditors whose property, goods, or services are needed to continue the debtor’s business.
How does a Chapter 11 case proceed after it has been filed?
How does a Chapter 11 case proceed after it has been filed?
After a Chapter 11 case has been filed, the debtor must file documents with the court listing the names and addresses of all of its creditors and owners, describing all of its property and other assets, and disclosing its financial condition. The debtor, as a “debtor in possession,” is usually permitted to continue to operate its business during the course of the case, but must comply with the requirements of Chapter 11 and the bankruptcy court.
A creditor whose collateral is threatened may apply to the court for relief from the automatic stay or for “adequate protection” of its security interest.
The debtor must prepare a Chapter 11 plan and file it with the court, usually within 180 days after the case is filed if the debtor is a small business debtor. The debtor must also prepare, file, and obtain court approval of a disclosure statement that adequately informs its creditors and interest holders of its financial condition and of its reorganizational plans. After the disclosure statement has been approved by the court, copies of the statement and the Chapter 11 plan are distributed to creditors and interest holders, who may then vote on whether to accept or reject the debtor’s plan. If the plan is accepted by at least one class of creditors whose claims are impaired (i.e., not paid in full) under the plan, the plan may be confirmed by the court over the objection of the other classes of creditors who did not vote to approve the plan (this is sometimes known as a “cram down”).
After the completion of voting, a confirmation hearing is held wherein the court must decide whether to confirm the plan. If the plan is confirmed by the court it becomes effective and must be carried out and consummated by the debtor. After the plan has been consummated, a final report is filed and the case is closed.
What is a “debtor in possession” and what is required of it in a Chapter 11 case?
What is a “debtor in possession” and what is required of it in a Chapter 11 case?
A “debtor in possession” is the debtor in a Chapter 11 case in which a trustee has not been appointed. As a debtor in possession, the debtor is legally charged with the rights, duties, and obligations of a trustee in dealing with the debtor’s property and operating the debtor’s business for the benefit of its creditors and interest holders. The failure of a debtor in possession to perform its obligations and duties may result in the appointment of a trustee, a court order terminating the debtor’s business, the conversion of the case to Chapter 7, or the dismissal of the case. A debtor ceases to be a debtor in possession when a plan is confirmed by the court.
What is cash collateral?
What is cash collateral?
Cash collateral is cash or property which serves as collateral for a creditor’s claim and that is easily converted to cash. Property such as bank accounts, checks, securities, and other cash equivalents may constitute cash collateral. Because it is easily disposed of, the use or sale of cash collateral is subject to strict rules in Chapter 11 cases.
What limitations are placed on the right of the debtor in possession to use, sell, or lease its property during a Chapter 11 case?
What limitations are placed on the right of the debtor in possession to use, sell, or lease its property during a Chapter 11 case?
For purposes of use, sale, or lease during a Chapter 11 case, a debtor’s property is divided into two categories: cash collateral and all other property. Until a plan is confirmed, the debtor, as a debtor in possession, may not use, sell, or lease cash collateral unless each creditor whose claim is secured by the cash collateral consents to the proposed use, sale, or lease, or unless the court approves the proposed use, sale, or lease. Unless the court orders otherwise, the debtor may use, sell, or lease any of its property except cash collateral in the ordinary course of business during the case without prior notice to creditors or court approval. The debtor may use, sell, or lease property other than cash collateral outside the ordinary course of business during the case only after notice to any affected creditors and a court hearing.
May a debtor incur new debts and obtain new credit during a Chapter 11 case?
May a debtor incur new debts and obtain new credit during a Chapter 11 case?
Yes. Unless the court orders otherwise, the debtor, as a debtor in possession, may obtain unsecured credit and incur unsecured debt in the ordinary course of business during a Chapter 11 case without court approval. This is sometimes called “post-petition debt,” “post-petition financing,” or “DIP financing.” Further, the unsecured credit or debt is payable as an “administrative expense” in the case. Classifying the post-petition financing as an “administrative expense” means that those creditors get paid ahead of all other unsecured creditors. Court approval is required prior to obtaining or incurring any other type of credit or debt during the case. Thus, secured credit or unsecured credit not in the ordinary course of business may be obtained during the case only with the prior approval of the bankruptcy court.
May a debtor break its contracts or leases in a Chapter 11 case?
May a debtor break its contracts or leases in a Chapter 11 case?
Yes. Under Chapter 11, the debtor, as a debtor in possession, may, at its option and without the consent of the other party, reject, assume, or assign most contracts or leases under which the debtor is obligated. This may be done either by motion during the Chapter 11 case or as part of a Chapter 11 plan.
What is a Chapter 11 plan?
What is a Chapter 11 plan?
A Chapter 11 plan is a written document that states the terms of how the debtor will deal with its creditors and, if necessary, interest (equity) holders. A Chapter 11 plan may be simple or complex, but it must comply with the legal requirements of Chapter 11. Most Chapter 11 plans are plans of reorganization, but a Chapter 11 plan may also be a plan of complete or partial liquidation if desired.
How are secured creditors dealt with in a Chapter 11 plan?
How are secured creditors dealt with in a Chapter 11 plan?
This depends primarily on whether a creditor is fully secured or undersecured.
The claim of a fully secured creditor must be paid in full in cash, and if deferred cash payments are made on the claim, interest must be paid to the creditor for not receiving its cash immediately.
An undersecured creditor may elect to have its claim treated as being fully secured, and if such an election is made the claim must be paid in full in cash, but if deferred cash payments are made, interest does not usually have to be paid on the claim. If an undersecured creditor does not elect to have its claim treated as being fully secured, the secured portion of its claim must be paid in the same manner as a fully secured claim, while the unsecured portion may be paid as an unsecured claim.
What is the difference between a fully secured creditor and an undersecured creditor?
What is the difference between a fully secured creditor and an undersecured creditor?
A fully secured creditor is the holder of a claim that is secured by property of a value that equals or exceeds the amount of the claim. An undersecured creditor is the holder of a claim that is secured by property of a value that is less than the amount of the claim.
For example, assume the debtor has a piece of equipment valued at $100,000. The equipment is subject to two liens. The first is an $80,000 first lien and the second is a $50,000 second lien. The holder of the first lien is fully secured since that creditor’s lien ($80,000) is less than the value of the equipment ($100,000) which is may also be known as the “collateral.” The holder of the second lien is undersecured since that creditor’s lien ($50,000) exceeds the remaining value of the equipment ($20,000) after hypothetical satisfaction of the first lien ($100,000 - $80,000 = $20,000).
An undersecured creditor is treated as having two separate claims, one secured and the other unsecured. In our example, the second creditor’s secured claim is $20,000 (the amount of value of the equipment after payment of the first lien holder) and the unsecured claim is $30,000 (the total lien of the second creditor of $50,000, less the $20,000 secured portion of the lien).
However, in a Chapter 11 case, an undersecured creditor may waive its unsecured claim and elect to have its claim treated as being fully secured by exercising what is called a Section 1111(b) election. This election has ramifications beyond the scope of these FAQs.
How are unsecured creditors dealt with in a Chapter 11 plan?
How are unsecured creditors dealt with in a Chapter 11 plan?
The answer depends on whether a creditor has a priority or a non-priority claim.
Priority claims must be paid in full in cash under a Chapter 11 plan unless a creditor agrees otherwise. Further, all priority claims except tax claims must be paid when the plan is confirmed or shortly thereafter, unless a particular creditor agrees to accept payments under the plan. Tax claims may be paid in regular cash payments with interest over a period not exceeding 5 years from the date the case is filed.
An unsecured creditor with a non-priority claim must be paid at least as much as the creditor would have received had the debtor filed under Chapter 7, and the payments need not be in cash. Non-priority claims may be paid in cash, property, or securities of the debtor or the successor to the debtor under the plan.
What is a priority unsecured claim?
What is a priority unsecured claim?
A priority unsecured claim is an unsecured claim that is given priority of payment under the Bankruptcy Code. Priority unsecured claims include the following types of claims: (1) the administrative expenses of the Chapter 11 case, (2) wage claims of up to $10,950 per employee, (3) wage benefit claims of employees up to certain limits, (4) consumer deposit claims of up to $2,425 each, (5) most divorce-related claims, and (6) tax claims.
Administrative expenses include the fees of the debtor’s attorney and unsecured debts incurred in the ordinary course of operating the debtor’s business during the case.
A non-priority unsecured claim, on the other hand, is a general unsecured claim incurred against the debtor prior to the filing of the Chapter 11 case (a “pre-petition claim”). The claims of most trade creditors are non-priority unsecured claims.
May someone other than the debtor file a Chapter 11 plan?
May someone other than the debtor file a Chapter 11 plan?
Yes, but only under certain conditions. If the debtor chooses to be treated as a small business debtor, only the debtor may file a plan for the first 180 days after the case is filed. After that exclusivity period, creditors then have 120 days in which to file a competing plan.
For a non-small business debtor, the debtor has the exclusive right to file a Chapter 11 plan for the first 120 days after the filing of the case, unless a trustee is appointed during that time. If the debtor files a plan during the 120-day exclusive period, the debtor must gain acceptance of its plan by creditors and interest holders within 180 days after the case is filed in order to retain the exclusive right to file a plan.
A party other than the debtor may file a plan if a trustee is appointed in the case, if the debtor fails to file a plan within the exclusive period, or if the debtor fails to gain acceptance of a plan within 180 days after the case is filed.
What is a creditors’ committee?
What is a creditors’ committee?
The creditors’ committee is a committee appointed by the United States Trustee (or Bankruptcy Administrator) to represent the interests of creditors in the case. A creditor’s committee must be appointed in a Chapter 11 case unless the debtor chooses to be treated as a small business debtor and requests that a creditors’ committee not be appointed. While other committees may be appointed upon request, the only committee, if any, appointed in most small business cases is the unsecured creditors’ committee, which represents the interests of non-priority unsecured creditors in the case. The unsecured creditors’ committee is usually composed of the seven largest unsecured creditors who are willing to serve on the committee.
What must a creditor do to become entitled to payment in a Chapter 11 case?
What must a creditor do to become entitled to payment in a Chapter 11 case?
For a creditor to be entitled to payment in a Chapter 11 case, the creditor’s claim must be filed and allowed by the court. If a creditor’s claim is listed in the schedules filed by the debtor in the case, and is not listed as being disputed, contingent, or unliquidated, then the claim is considered to be filed in the case in the amount and priority listed on the debtor’s schedules. Otherwise, a creditor must file a document called a “proof of claim” in order for its claim to be filed.
Once a claim is filed, either by virtue of being included in the debtor’s schedules or by the filing of a “proof of claim,” the claim is automatically allowed by the court unless someone files an objection to the allowance of the claim, in which case the court must hold a hearing to determine whether to allow the claim. If a creditor’s claim is correctly listed in the debtor’s schedules and if no one files an objection to the claim, the claim will automatically be allowed in the case, even if the creditor does nothing. It is the creditor’s responsibility to verify that its claim is correctly listed on the debtor’s schedules.
When do creditors vote on whether to accept or reject a Chapter 11 plan?
When do creditors vote on whether to accept or reject a Chapter 11 plan?
Voting on a plan begins after the court approves or conditionally approves a disclosure statement prepared by the party proposing the plan. Each eligible creditor is mailed a ballot for voting on the plan. The ballot is accompanied by a copy of the disclosure statement and a copy or summary of the proposed plan. The court sets a deadline for voting on the plan, and a creditor’s ballot must be filed with the court prior to the voting deadline in order to be counted. Whether a plan is accepted or rejected is based on the votes cast by the creditors. Those creditors who choose not to vote are not included in the determination.
What creditors are eligible to vote on the acceptance or rejection of a Chapter 11 plan?
What creditors are eligible to vote on the acceptance or rejection of a Chapter 11 plan?
Creditors must qualify both individually and by class in order to be permitted to vote on the acceptance or rejection of a plan. Individually, a creditor’s claim must be allowed by the court in order to be eligible to vote. The allowance requirements for claims for purposes of voting are the same as the allowance requirements for purposes of payment.
Except for certain priority claims, a Chapter 11 plan must put each claim in a class. To be eligible to vote on the acceptance or rejection of a plan, a class of claims must be “impaired” by the plan and must receive something under the plan. For a class of claims to be impaired by a plan, at least one claim in the class must be impaired under the plan. An “impaired claim” is a claim that is altered or reduced in some manner by the terms of a Chapter 11 plan. For example, a claim that is not paid in full under a plan is an impaired claim. But, even if a claim is paid in full under a plan, the claim is considered to be impaired if the original maturity date or any other obligation contained in the agreement between the debtor and the creditor (for example, the interest rate) is altered under the terms of the plan.
However, a debtor is permitted to cure a defaulted note, mortgage, or other obligation so that the creditor’s claim is no longer impaired. A defaulted obligation is deemed to be cured and not impaired by a plan if the obligation is made current, the creditor is compensated for any expenses incurred by reason of the debtor’s default, and the rights of the creditor under the obligation are thereafter unaltered.
Classes of unimpaired claims are presumed to have accepted the plan and classes of claims receiving nothing under the plan are presumed to have rejected the plan. Creditors in these classes of claims do not vote on the acceptance or rejection of a plan. Creditors with allowed claims in all other classes of impaired claims are eligible to vote on the acceptance or rejection of a plan.
How is it determined whether a plan is accepted or rejected by creditors?
How is it determined whether a plan is accepted or rejected by creditors?
All voting on the acceptance or rejection of a plan is by class. The creditors in each class of impaired claims vote on whether the plan will be accepted by that class of claims. To be accepted by a class of claims, a plan must be accepted by creditors holding at least two-thirds (2/3) in dollar amount and one-half (1/2) in the number of the claims in the class that actually vote on the acceptance or rejection of the plan. The claims of those creditors in a class that chooses not to vote are not counted toward either the total dollar amount of the voting class creditors or the total number of class creditors voting. At least one class of impaired claims must vote to accept a plan before the plan can be confirmed by the court.
How is a plan confirmed by the bankruptcy court?
How is a plan confirmed by the bankruptcy court?
A Chapter 11 plan must be confirmed by the bankruptcy court. A plan is confirmed by the bankruptcy court when the bankruptcy judge signs an order approving the plan and ruling that the debtor and all creditors and interest holders are bound by the provisions of the plan.
After creditors and interest holders have voted on whether to accept or reject a proposed Chapter 11 plan, the bankruptcy court will hold a hearing for the purpose of determining whether to confirm the plan. This hearing is called the “confirmation hearing.”
At the confirmation hearing, the party proposing the plan (typically the debtor), must present evidence showing that the plan complies with the Chapter 11 confirmation requirements. A plan may be confirmed by the court either through the regular confirmation method or through what is called a “cramdown.” The regular method of confirmation is used when the plan has been accepted by the holders of every class of impaired claims and interests. The cramdown method of confirmation is used when the plan has been rejected by the holders of one or more classes of impaired claims or interests but has been accepted by the holders of at least one class of impaired claims. A plan that has not been accepted by the holders of at least one class of impaired claims cannot be confirmed by the court.
What is a “cramdown” method of confirmation?
What is a “cramdown” method of confirmation?
When the holders of every class of impaired claims vote to accept a plan and confirmation is sought under the regular confirmation method, the plan will be confirmed by the court if the debtor proves that it has complied with the Chapter 11 confirmation requirements.
On the other hand, when confirmation of a plan is sought under a cramdown, the debtor must show that: (1) the plan satisfies the Chapter 11 confirmation requirements (other than approval by all classes of impaired claims); (2) the plan does not discriminate unfairly against any class of claims who have not accepted the plan; and (3) the plan is fair and equitable with respect to each class of claims that has not accepted the plan. Obviously, it will be more difficult for a debtor to confirm its plan under a cramdown than under the regular confirmation method.
What happens if the court does not confirm a Chapter 11 plan?
What happens if the court does not confirm a Chapter 11 plan?
If the court decides not to confirm a Chapter 11 plan, it will usually permit the party proposing the plan to modify the plan so that it can be confirmed. If a Chapter 11 plan is modified, it is usually necessary to hold another confirmation hearing on the modified plan. If the court refuses to confirm any plan, the Chapter 11 case must either be dismissed or converted to Chapter 7.
What happens after a Chapter 11 plan has been confirmed by the court?
What happens after a Chapter 11 plan has been confirmed by the court?
After a Chapter 11 plan is confirmed by the court, the plan must be implemented and carried out, either by the debtor or by the successor to the debtor under the plan. If the plan calls for the debtor to be reorganized or for a new corporation to be formed, this function must be carried out first. If the plan calls for property to be transferred or for liens to be created or modified, this must also be done. And, of course, the claims of creditors must be paid in the manner specified in the plan.
For how long a period may a Chapter 11 plan run?
For how long a period may a Chapter 11 plan run?
There are no specified limits on the length of a Chapter 11 plan. A Chapter 11 plan must be long enough to convince the court and creditors that the debtor is making a good faith effort to pay as much of its debt as is realistically possible. On the other hand, the plan must not be so long that it does not appear feasible to the court. Typically, it takes from three to five years to carry out and consummate the Chapter 11 plan of a small business debtor.
What happens if the debtor is unable to comply with or carry out the provisions of a plan after it has been confirmed by the court?
What happens if the debtor is unable to comply with or carry out the provisions of a plan after it has been confirmed by the court?
If the debtor, or the successor to the debtor under the plan, is unable to comply with the provisions of a confirmed plan, the plan may be amended so that it can be complied with, if sufficient grounds exist for such an amendment. Otherwise, the Chapter 11 case may be dismissed or converted to Chapter 7.
If the debtor, or the successor to the debtor under the plan, fails to carry out its obligations under the plan, creditors may sue, or foreclose on the property of, the debtor or its successor either in the bankruptcy court or in other courts.
What happens when all of the provisions and requirements of a Chapter 11 plan have been carried out?
What happens when all of the provisions and requirements of a Chapter 11 plan have been carried out?
When all of the provisions and requirements of a Chapter 11 plan have been fulfilled or carried out, the plan is said to have been “consummated.” When a plan has been consummated, a final report and accounting must be filed, and the case will be closed by the court.