A Guide To Declaring Chapter 11 Bankruptcy
Individuals may seek debt relief by filing a petition for chapter 11 bankruptcy. People in business may also file for chapter 11 bankruptcy. In addition, corporations and partnerships may also file for chapter 11. Typically, chapter 11 bankruptcy is used by businesses to reorganize their debt, so that they may repay their creditors with a court-ordered plan that has more favorable repayment terms. Most people refer to a chapter 11 bankruptcy as a reorganization bankruptcy.
A business, partnership, corporation or individual has to file a petition with his/her/their local bankruptcy court. Once the petition is filed, be it per se or via an attorney, then the chapter 11 bankruptcy process begins. Your creditors may play an active role in your chapter 11 bankruptcy, especially if you drag your feet when making a reorganization plan. Creditors may have the power to force you into chapter 11 bankruptcy, or you may file a petition for chapter 11 bankruptcy voluntarily.
Automatic Denial Of Your Chapter 11 Petition
If you have filed for bankruptcy up to 180 days before you filed your chapter 11 petition, and your previous bankruptcy petition was denied because you couldn’t follow the court-ordered rules, then your chapter 11 petition will be automatically denied.
If your previous bankruptcy was voluntarily dismissed because your creditors ordered relief to recover property on which they have liens, then your chapter 11 petition will be automatically denied.
Your petition will be automatically denied if you are an individual and have not received credit counseling within the last 180 days from a bankruptcy court-approved credit counselor.
What You Need For Your Chapter 11 Bankruptcy Petition
The correct forms must be filled out, which most people do via electronic filing. The reason I have not linked directly to the page where you may download the forms is because the page will initiate a certificate warning if your web browser has high security settings. It is better if you sign in to the government website and download the e-paperwork from there.
As part of the many forms you must fill out, the debtor must also file:
[+] A list and a schedule showing all liabilities and assets
[+] A schedule showing all current expenditures and income
[+] A schedule showing executory contracts and any unexpired leases
[+] A statement of your financial affairs
If you are married, then you may both file separately, or you may file individually. If you are filing as an individual and/or a married couple, then you will also need to file, create or show:
[+] A certificate proving you have taken credit counseling
[+] A copy of any plans for debt repayment plan that you developed while taking credit counseling
[+] Evidence of any payment you received from your employer during the 60 days before you filed your petition
[+] A statement that shows your net monthly income
[+] Anticipated increases in expenses after you file
[+] Anticipated increases in income after you file
[+] A record showing the interest the debtor has paid in state qualified or federal tuition or education accounts
How Much Will It All Cost?
Costs will vary depending on your circumstances. Below is a quick rundown of how much you should expect to pay. Currently, in 2017, if you file jointly, then you only have to pay the court fees and miscellaneous fees once.
$1000 – $1500 – Attorney if required [$1000+ / 2017]
$1100 – $1300 – Case filing fee [$1167 / 2017]
$500 – $800 – Miscellaneous administrative fee [$550 / 2017]
$30 – $250 – Credit Counseling [$30 in District of Columbia / 2017]
Your filing and miscellaneous fees should be paid to the clerk of the court’s office, and it may be paid in installments if required. You may only make four installments and the last installment is required within 120 days from when you first file your petition for chapter 11 bankruptcy.
Other Information That All Petitioner Need To Give
You will have to give your name and tax identification number, which is usually your social security number. As a bankruptcy petitioner, you will have to give the location of your principal assets if you are a business, and you have to give your current address. You have to include your intention to file a repayment plan, or give your payment plan, plus you have to indicate which chapter of bankruptcy you are filing, which in this case is chapter 11.
You Now Become The Debtor In Possession
If you file voluntarily, then you are the, “Debtor in possession.” If you do not have a trustee, then you remain the debtor in possession until your reorganization is complete and confirmed by the bankruptcy court and judge. You stop being the debtor in possession if:
[+] Your reorganization plan is confirmed
[+] A trustee is appointed
[+] Your bankruptcy case is dismissed
[+] Your case is converted to a chapter 7 bankruptcy
A Disclosure Statement For Your Creditors
Filing a chapter 11 bankruptcy will mean your creditors need to be notified via a disclosure statement. If you run a small business, and your plan contains adequate information, then you may not need a separate disclosure statement.
Your disclosure statement is often filed at the same time as your reorganization plan, and your disclosure must show all your business affairs, liabilities and assets. It has to give your creditors enough information to make an informed decision about your plan and what they should do next.
A Classification Of Claims, Impaired Claims And A Creditor Ballot
Your plan must have a classification of claims (aka listing your debts), and your plan must show how those claims will be treated (how you will pay them off).
Your plan may include paying less to creditors than they are contractually entitled to. If this is the case, then the creditor is said to have his/her claim impaired. For example, if you signed up BillyBob Autos and you now owe them $90, but your plan states you will only repay $60, then BillyBob Autos is a creditor with an impaired claim.
Creditors with an impaired claim are allowed to vote on your repayment plan via a ballot. The judge then looks at your plan, your disclosure statement, and the impaired-creditor ballots and makes a decision about your bankruptcy petition (approval or dismissal). A confirmation hearing is where the decision is made.
Filing As An Individual Is Similar To Filing A Chapter 13
If you file as an individual for chapter 11 bankruptcy (aka a reorganization of your debts), then your case will have similarities to filing a chapter 13 bankruptcy petition. These similarities include things such as:
[+] Debtor’s earnings after filing until the bankruptcy case is dismissed, converted or closed
[+] Debtors property acquired after filing until the bankruptcy case is dismissed, converted or closed
[+] Funding the plan may come from the debtors current assets
[+] Funding the plan may come from the debtors future earnings
[+] All the debtors’ disposable income over the next five years will fund the plan
[+] A plan cannot be confirmed if a creditor objects unless all of the debtor’s disposable income over the five years is worked into the plan
Your U.S. Trustee
If one is appointed, then your U.S. Trustee will conduct the section 341 meeting where you meet your creditors. Your trustee is your overseer, a sort of half-guardian and half-parole officer. In Alabama and North Carolina, you will have bankruptcy administrators instead of trustees, but they do the same thing with regards to what is described below. Your trustee is also responsible for:
[+] Monitoring the debtor in possession’s operation of his/her/the business
[+] Submission of operating fees and reports
[+] Monitoring applications for reimbursement and compensation by professionals
[+] Overseeing and monitoring reorganization plans
[+] Monitoring disclosure statements filed with the creditors’ committees
[+] Monitoring disclosure statements filed with the court
The U.S. trustee will also oversee plan requirements. For example, the trustee may report your monthly income or your monthly operating expenses. Your trustee may oversee the establishment of new financial and money accounts. The trustee may also oversee paying taxes and paying current employee withholdings.
The trustee must be paid four times per year until the bankruptcy case is completed, converted or dismissed. The cost of a trustee may range from between $325 every quarter to $30,000 every quarter.
You are expected to report to your trustee and take all the required steps to bring your chapter 11 bankruptcy case to confirmation. If you do not do as the plan/court/trustee requires, then your case may be dismissed or you may be forced to convert your chapter 11 bankruptcy to another chapter.
Creditors Can Play A Big Role In Your Chapter 11 Case
The creditor committee will be appointed by your US trustee. In most cases, it is filled with unsecured creditors because your secured creditors have already had their slice of the pie through whatever they have liens on.
The creditor committee is usually filled the people you see during your section 341 meeting. They are the creditors who have the seven largest unsecured claims against you as the debtor. The creditors are allowed to examine your conduct, your plan, your operations and so forth, and are even allowed to add things or amend things in your reorganization plan. They may even hire professionals and attorneys to help them undertake their duties.
Creditors And Small Businesses
Smaller businesses may not have to see or interact with a creditor committee because many times the trustee is unable to find anybody willing to sit on the committee. A two-part test is administered to the small business, which includes verifying liquid assets and so forth. After plenty of administration (not going into detail because you don’t need it right now), the creditor requirement is altered/overlooked. However, the small business has to endure extra trustee involvement, which means more-than-average overseeing by the trustee.
Who Can File A Reorganization Plan?
The debtor is allowed 120 days to file an organizational plan, unless it is a small business debtor. It can be extended for up to a maximum of 18 months. Creditors may file plans that compete with the debtors plans. This potential conflict encourages debtors to complete and submit their plan quickly while the exclusivity period is still active. Wait too long to submit your plan, and before you know it, your creditors start calling the shots.
Remember that confirmation does not discharge the debtor if a chapter 11 reorganization plan is actually a liquidation plan–that is unless the debtor is a single person/individual.
With chapter 11 bankruptcy, your debt discharges (if any), should take place at the end of the five-year period because that is how long your plan lasts. However, if you are doing really well and you make your payments earlier than expected, then in most cases your debts will be discharged early. In other words, if you make your payments early, then your plan is considered to have come to fruition early and ergo any debts that were due to be discharged (wiped/erased) will be.
What Is An Automatic Stay?
When referring to chapter 11 bankruptcy, what it means is that your creditors cannot come after you if you have your bankruptcy case underway. There are times where creditors with secured debts are able to come after you in order to grab whatever it is you have secured your debt with.
Conclusion – Does It All End With A Discharge?
If you follow your plan all the way through, then whatever debts are left over may be discharged, but you have to remember that this is not the same as filing a chapter 13 petition. If you file a chapter 13 petition, then after five years your remaining debt is discharged (wiped), but that is not the case with a chapter 11. There is a chance that some of your debt will be discharged, but the main reason you have filed a chapter 11 is so you may reorganize your debt. If your chapter 11 bankruptcy case is successful, then by the end of the five-year period, you should be in significantly better financial shape.
You have essentially restructured the way your finances work, and you should have been able to remove some of your most burdensome debt, and you should have created a situation where you are now able to afford to keep living and maybe start thriving. The end goal is not to remove your debt, your goal is to change the way you pay and manage your debt so that you are no longer overwhelmed by it.
If you would like to know more about how bankruptcy works, then we have a broad-but-concise article on how to file for bankruptcy right here.