Chapter 11 Bankruptcy
Chapter 11 bankruptcy is available for both individuals and businesses.
In a traditional Chapter 11 bankruptcy there are no debt limits or other eligibility requirements.
In chapter 11 bankruptcy, a debtor has the ability to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.
The commencement of a bankruptcy case creates a “bankruptcy estate” that is comprised of the debtor’s legal and equitable interests in property. The bankruptcy estate includes tangible and intangible property, debtor’s causes of action, property which is held by someone other than the debtor, inherited property, property acquired under a property settlement with a spouse, life insurance proceeds acquired within 180 days after filing of the petition, and all proceeds, products, offspring, rents, or profits of property of the estate.
In chapter 11 bankruptcy, property of the estate includes all post-petition property acquired, including the debtor’s post-petition income.
In a chapter 11 bankruptcy case, a debtor can reorganize and or liquidate.
In a traditional chapter 11 bankruptcy case, there is no trustee automatically appointed, and the debtor remains “in possession” of its assets and operations, and in control of the case. As a debtor in possession, the debtor has the ability touse, sell or lease such property, even outside the ordinary course of business upon Court approval.
In a traditional chapter 11 bankruptcy case, a creditors’ committee is generally appointed.
In every bankruptcy case, the debtor must attend a “meeting of creditors.” In chapter 11 bankruptcy, the United StatesTrustee presides at the meeting of creditors, and orally examines the debtor regarding, among other things, the acts, conduct, property, liabilities and financial affairs of the debtor.
The primary object of a chapter 11 bankruptcy case is to achieve court approval (aka “confirmation”) of a chapter 11 plan.
A chapter 11 plan is a document that separates creditors into different classes, and explains how the debtor is going to treat each class of creditors, and how the debtor is going to either reorganize and/or liquidate.
In a traditional chapter 11 case, there is no specific deadline to file a plan. And, a plan may be filed by the debtor or any party in interest. Although, the debtor has the exclusive right to file a plan in the first 120 days of the case.
Confirmation is the process by which a chapter 11 plan is approved by the court.
First, a disclosure statement must be approved by the court. A disclosure statement is a document separate from the plan itself. The disclosure statement provides information relating to the history of the case,the chapter 11 plan, and how the chapter 11 plan is going to impact each class of creditors.
Once the disclosure statement is approved, then the plan and disclosure statement are sent out to creditors along with a ballot that allows creditors to vote to either accept or reject the chapter 11 plan.
Notably though, even if a particular class of creditors votes against the plan, the plan can still be confirmed and approved by the court under certain circumstances.
More specifically, in a traditional chapter 11 bankruptcy, for a chapter 11 plan to be confirmed and approved by the court over the objection of creditors, the plan must:
- Be favored by at least one impaired class of creditors
- Be proposed in good faith
- Be feasible
- Not unfairly discriminate
- Pay priority unsecured claims in full
- Satisfy the “best interest test” by paying general unsecured claims at least what they would receive in a hypothetical chapter 7 case
- Satisfy the “best efforts test” by paying general unsecured creditors all of the debtor’s projected disposable income over the plan term
- Satisfy the “absolute priority rule” where equity interests are not retained unless general unsecured creditors are paid in full.
Once a chapter 11 plan is confirmed and approved by the court, the chapter 11 plan governs the relationship between the debtor and creditors going forward.
Finally, in a traditional chapter 11 bankruptcy, a business debtor will generally receive a discharge upon confirmation, and an individual debtor will receive a discharge after they complete all payments under the plan.