A Chapter 11 reorganization case allows a business or an individual with significant debts and assets to protect itself from its creditors while it concentrates on reorganizing its affairs. The initial filing of the Chapter 11 case immediately protects the business from its creditors. Afterwards the business goes through a period of supervised court administration during which it takes steps to improve its finances, shed unnecessary expenses, and negotiate with important creditors while continuing its protected status. Towards the end of the case, a Chapter 11 bankruptcy case requires the debtor to offer a plan of reorganization, which cures, extends, and reduces many of the debtor’s obligations.
A Chapter 11 case can be filed by a corporation, partnership, and limited liability company since these legal entities do not qualify to reorganize in Chapter 13 which is only available for individuals. Individuals (as a single individual, married couple or sole proprietorship) desiring to reorganize their debt can file in Chapter 11 and need to file in Chapter 11 (as opposed to Chapter 13) if the amount of the debt of an individual debtor either exceeds $465,275. in unsecured debt or $1,395,875. in secured debt (as of April 1, 2022). A Chapter 11 case is necessary when a business desires to continue its operations despite creditor activity – like bank restraints, repossessions, evictions, tax lien closures, and foreclosure sales – that would essentially force the business to close. If the business has the potential to reorganize its financial affairs, a Chapter 11 case is advantageous in allowing a business, that may have a good reputation, and which provides a good service or product, survive its hardships and potentially come out of Chapter 11 in a stronger position. Chapter 11 is also necessary for individuals where: debts exceed the above threshold amounts that are beyond the jurisdiction of Chapter 13 cases, or if the individual debtor is seeking a longer repayment period than five (5) years, which is available in a Chapter 11 plan and not in a Chapter 13 plan, or if the individual is not ready to offer an immediate reorganization plan and needs the additional time, opportunity and accommodation of complications that Chapter 11 allows. In the next, but separate Sub-section of this Website, Sub-Chapter V of Chapter 11 is discussed, which is a simpler and quicker Chapter 11 case for small businesses, and is a kind of amalgamation of elements of Chapter 13 and Chapter 11.
Starting a Chapter 11 case sets in motion a potentially involved case requiring financial disclosure, Court supervision, and Trustee and Court input as to important decision making for the business. Therefore, a client needs to have a goal and an exit strategy when they initiate a Chapter 11 case. The business’s budget needs to be carefully reviewed to determine the realistic expectations in terms of reorganizing debt. The bankruptcy petition and schedules, which are filed to start a bankruptcy case, give notice to all parties in interest of the debtor’s creditors and disclosure of the debtor’s financial affairs. Upon the filing of the bankruptcy petition with the bankruptcy court, an automatic stay goes immediately into effect to protect the client’s assets. The standard Chapter 11 case (unlike Chapter 13) allows a longer period for the debtor to file its plan of reorganization, and longer under a proposed plan of reorganization to pay pre-petition debt and arrears. However, the debtor in Chapter 11, despite some additional flexibility with the timing of the plan, is still required, during and after the case, to remain current with post-petition payments for secured debt – such as mortgages, vehicle payments and equipment loans – and current under lease or rent obligations. A secured creditor not getting regular post-petition payments, such as mortgage payments or equipment loan payments, or a landlord not receiving rent, can move for relief from the automatic stay, which in a Chapter 11 case would usually be contested, with the debtor seeking to quickly cure the post-petition amount in arrears.
Upon the filing of the Chapter 11 petition, the entity filing for Chapter 11 relief becomes a “debtor-in-possession” or a fictional new entity that is allowed to operate it’s business under Bankruptcy Court supervision. The business’s principals together with the business’s Chapter 11 attorneys must adhere to administrative requirements in the Chapter 11 case. They need to make sure that the debtor files monthly operating reports, shows up at creditor meetings and court status conferences, and files motions when it seeking permission to engage in actions outside of the ordinary course for that business. The business also needs to have all of its finances be put through a Debtor-in-Possession bank account, including the escrow of taxes and regular deposits and payments of expenses. Because such requirements are potentially involved, the business is required to be represented by a retained by an attorney experienced in Chapter 11 cases and usually seeks to have its accountant retained in the case. The Chapter 11 administrative requirements allow post-petition oversight and disclosure, so that the Bankruptcy Court and the Office of the U.S. Trustee, who oversee the case, can monitor the progress of the reorganization and the likelihood that the debtor could offer a feasible plan of reorganization.
During the Chapter 11 case the client will on a monthly basis go back to making post-petition mortgage payments and otherwise keep up with its on-going post-petition financial obligations. However, the client is prohibited from curing pre-petition debts during the Chapter 11 case, until a plan of reorganization is approved. Certain creditors or creditor groups are important in a case and the debtor may have to negotiate and reach an accommodation with such creditors in order to successfully reorganize as follows:
a) Secured creditors having an interest in cash collateral, rents, inventory and/or other assets need to be given “adequate protection” under a cash collateral agreement, so that the debtor is given permission to use cash and/or other collateralized assets.
b) Mortgage holders need to receive monthly post-petition mortgage payments.
c) Landlords and equipment lessors need to receive post-petition monthly payments.
d) Unsecured creditors may potentially be represented by an official committee of unsecured creditors if there are enough interested unsecured creditors.
Leases and executory contracts can be assumed or rejected in a Chapter 11 bankruptcy case, thereby allowing the debtor to “cherry-pick” among its agreements and keep the ones that work and reject the ones that are not economically viable. There are deadlines in a Chapter 11 case in terms of the time that the debtor has to assume or reject certain leases, the time for the debtor to have exclusivity in offering a reorganization plan and the time by which the plan must be filed and approved. If a debtor meets the administrative requirements in a case and the case appears economically viable, the court will next require the debtor to offer a plan of reorganization. However, if the debtor has trouble meeting the administrative requirements and/or if the case appears not to be economically viable, the court could dismiss the case, which would cause the debtor to lose bankruptcy court protection, or in the alternative the court could convert the case to a Chapter 7 liquidation case, where the business would be closed and its assets sold to satisfy the claims of creditors.
In the case of an individual debtor, often the debt that requires reorganization in Chapter 11 is a mortgage that is in arrears. One way of dealing with mortgage arrears is to offer a plan where the debtor will “catch up” or cure mortgage arrears under a traditional Chapter 11 plan which typically seeks to cure the arrears over five (5) to eight (8) years. However, now that many foreclosures are based on arrears of many years, and therefore the arrears are very high, a “catch up” plan would not always work, since it may be too expensive on a monthly basis for many debtors to pay both the post-petition monthly mortgage payment directly to the Lender and a separate “catch-up” payment, designed to cure all debts and secured debt arrears. This is especially true where mortgages are for higher amounts as is generally true in Chapter 11 cases filed by individual debtors. Therefore, in recent years seeking a mortgage loan modification, through Loss Mitigation programs adopted by most Bankruptcy Courts and Judges, has become a standard way to proceed for individual debtors in Chapter 11. Loss Mitigation is the pursuit of a mortgage modification by the debtor overseen and encouraged by the Bankruptcy Court so that the Court is able to pressure both the debtor’s and lender’s attorneys to coordinate over documents and information in order to determine if the debtor qualifies and should get a modification of their mortgage.
THE SEQUENCE FOR LOSS MITIGATION IN CHAPTER 11 – The sequence, in terms of seeking Loss Mitigation, is that the debtor in the initial part of the Chapter 11 case makes a motion in front of the Bankruptcy Court for Loss Mitigation where it tries to show that it has the financial ability to sustain a potential modification of the the defaulted mortgage loan, if a hypothetical modification was offered. The Lender’s attorneys have the right to oppose that motion and to try to show that the debtor would not be able to sustain a modification economically or that the Lender has otherwise decided already to deny the debtor for other factors. Assuming that the motion for Loss Mitigation is granted, the debtor and the lenders attorney’s are required to attend regular Loss Mitigation conferences to determine if the the efforts to obtain a modification are still viable. During this time, while applying for Loss Mitigation, the Chapter 11 debtor pays a hypothetical “adequate protection” payment to the Lender, usually similar to their former mortgage payment, to demonstrate an ability to pay the monthly estimated amount if the modification was approved and to prevent the Lender’s secured position from deteriorating while the potentially long reorganization continues.
THE MECHANICS OF LOSS MITIGATION IN CHAPTER 11 – If the the Loss Mitigation efforts are still viable, and have hope of a modification agreement being ultimately realized, the Bankruptcy Court will keep adjourning the conferences. But if the Loss Mitigation efforts look like they are failing, and if reapplication or appeal options on the modification are not realistic, the Bankruptcy Court will end Loss Mitigation and eventually ask the Trustee overseeing the case to move for dismissal of the Chapter 11 case. On the other hand, if the opposite happens and the Loss Mitigation efforts result in a trial modification that the debtor accepts and pays regularly directly to the Lender, from anywhere from three (3) months to a year, the Lender will eventually offer the debtor a permanent modification agreement. Assuming the debtor wishes to accept the permanent modification agreement, it is subject to Bankruptcy Court approval, after a motion to the Court. Once the permanent modification agreement is approved by the Court, the loan modification may be part of an overall Chapter 11 Plan under which the debtor can now seek to reorganize all of their debts and needs to be confirmed by the Court. Although the confirmed Chapter 11 plan only generally lasts an average of five (5) to eight (8) years, and mortgage modifications are usually from thirty (30) to forty (40) years in duration, the majority of the modification would continue past the end of the Chapter 11 plan. Alternatively, if the defaulted mortgage was the only debt the debtor needed to address, and an overall plan reorganizing several/many debts is unnecessary, the debtor can also decide to voluntarily dismiss the case, since the case many not be needed once the permanent modification is obtained and approved. However, if the defaulted mortgage was only one of many debts or other major debt for the Debtor, the loan modification should be part of an overall Chapter 11 Plan that seeks to reorganize all of the debtor’s debts and needs to be voted on by the debtor’s creditors and approved by the Court.
The Chapter 11 debtor must offer a plan of reorganization and a disclosure statement within a certain amount of time as dictated by law and by the bankruptcy court. The Chapter 11 plan is a potentially complex plan that divides the debtor’s creditors into groups of “classes” that vote on the plan. The amounts due to creditors are either scheduled by the debtor or are asserted by creditors in proofs of claim that are filed prior to a proof of claim bar date that is set by the court. To the extent the debtor disagrees with a filed proof of claim, it can move by motion to object to the claim. The plan is usually proposed and potentially approved within a year in a small business reorganization case filing a standard Chapter 11 case (not in Sub-chapter V) and usually proposes to pay creditors over a period of time, that may vary between different cases, but is often between 5 to 8 years. Under the plan, secured debt arrears and priority tax arrears need to be cured in full over the plan repayment period, but unsecured debts are often paid at a small pro-rata percentage. By giving the debtor time to propose the plan and time to make plan payments, which may be at a reduced rate, the plan may allow a debtor the “breathing spell” necessary to reorganize. To confirm a plan, the debtor needs its creditors vote for the plan by certain margins in each class, that hold at least two thirds in amount and more than one half in number. Alternatively the debtor could “cram down” a rejecting class of creditors if a class below it votes in favor of the plan.
Accompanying the proposed plan, is a disclosure statement, under which the debtor is required to give creditors certain information to help them decide whether to vote on the proposed plan. Under the disclosure statement the debtor must give certain financial information about the debtor’s finances, including projections, that explain to the court and to its creditors what the debtor anticipates from its finances if it reorganizes, and a liquidation analysis, that explains the alternatives if the debtor liquidates. Usually after the debtor offers one or more proposed plans of reorganization and disclosure statements, the disclosure statement must be approved by the court and the plan must be approved by a vote of the creditors. Assuming that the plan is approved, the debtor must begin to pay its pre-petition creditors as agreed under the plan. If the plan is not approved, the debtor can try to amend the plan and offer it again for a vote. However, if the debtor cannot successfully confirm a plan, or if the case does not appear to be economically feasible, the court can dismiss the case or convert it into a Chapter 7 case.
Various motions can be made by the U.S. Trustee overseeing the Chapter 11 case or by the debtor’s creditors where the case is delayed, adrift, and appears to lack feasibility and/or prospects for a reorganization as follows:
a) Motions to Dismiss and/or Convert the Case – Motions to dismiss the Chapter 11 case or to convert the case to Chapter 7, can be made by the U.S. Trustee overseeing a Chapter 11 case where the case is drifting and a reorganization seems delayed and/or problematic. Such motion less often can be made by a creditor or by the Court, on its own. Such motion is not unusual in the early pre-confirmation part of a Chapter 11 case, where an attorney from U.S. Trustee’s office can make such motion to dismiss or convert based on any administrative, procedural, financial or documentary deficiency in the case. The following can be reasons for a motion to dismiss and/or convert: a) Payment arrears on vital payments, such as post-petition taxes, secured creditor adequate protection payments and basic operational expenses; b) Lack of feasibility of the Chapter 11 plan given the proofs of claim by creditors filed in the case; c) Lack of compliance with the production of financial documents requested by the Trustee; d) Problems/delays with the filing of the bankruptcy schedules, Chapter 11 plan or credit counseling certificate etc.; e) non-attendance at critical court meeting hearing dates, such as the creditors meeting; f) unreasonable delays or impossibility in getting a modified loan in a loss mitigation case. Essentially any problem in the early part of a Chapter 11 case gives reason for a motion to dismiss or convert. Once the Chapter 11 plan is confirmed, there are less reasons for a motion to dismiss or convert, except for payment arrears on Chapter 11 plan payments and other critical payment matters.
If a motion to dismiss is granted, the case is over and to overcome such order one would need to vacate the dismissal order or start a new Chapter 11 case where possible. If a motion to convert is granted, the case continues but as a Chapter 7 case where a Chapter 7 trustee is appointed to administer the case and to liquidate and marshal assets for creditors. Debtors having difficulty reorganizing usually prefer to have a case dismissed rather than converted, however the choice of what to do with an unsuccessful reorganization is made by the Court. If a debtor can show that there is no advantage to creditors in conversion of the Chapter 11 case after the unsuccessful reorganization effort, the case would be dismissed rather than converted.
b) Motions for Relief from the Stay – Motions for relief from the automatic stay (or to lift or to modify or to vacate the automatic stay) are made by secured creditors where the debtor has fallen into arrears with post-petition mortgage payments or other post-petition secured creditor payments, which are often considered to be a”adequate protection” for their secured positions. Any secured creditor expecting regular monthly post-petition, mortgage, HELOC, vehicle, tax or other post-petition secured payment, can make a motion for relief from the automatic stay if such payments are not being made timely and motion practice becomes necessary to protect the rights of the secured creditors. Other creditors who potentially can move for and have granted relief from stay motion are contested creditors in litigation with the debtor over liability/damage issues in tort, matrimonial/family, surrogates and other litigation matters not involving financial obligations created by credit and lending. Once relief from the stay is granted, the creditor can pursue the litigated matter as if there was no pending bankruptcy case.
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act which was passed by the United States Congress in the early part of the 2020 Coronavirus pandemic and signed into law by the President, on March 27, 2020, included not only emergency assistance to families and businesses affected by the pandemic but also some substantive changes to the Bankruptcy Laws, as follows:
The CARES Act, passed by Congress and signed by the President at the end of March 2020, included changes to the U.S. Bankruptcy Code which were intended to help deal with the Covid-19 pandemic. One of the major changes was the temporary expansion of the use of Subchapter V (otherwise referred to as Subchapter 5) of Chapter 11 of the Bankruptcy Code, which was already part of the Small Business Reorganization Act of 2019, by vastly raising the debt cap from $2,725,625. million to $7.5 million (which is a temporary measure which is in force until March 2022, unless further extended by additional legislation), thereby expanding the applicability of a statue which was passed to make the reorganization of small businesses more expeditious, efficient and affordable. The most innovative change in subchapter 5 was having a businessman, rather than attorneys from the United States Trustee’s Office, operate as the trustee over the Subchapter V Chapter 11 cases. The oversight of the case by a trustee with business experience, as opposed to an attorney from or appointed by the United States Trustees Office, would potentially shift the expertise and and interests of the trustee in a direction which focuses on the businesses’ financial health, as opposed to a more traditional Chapter 11 trustee’s focus on strict technical compliance with administrative requirements.The other improvements under Subchapter 5 are a streamlined and shorted process of getting Chapter 11 Plan approval by dispensing with the requirement for a disclosure statement and allowing for a shortened and less complex Chapter 11 plan and approval process.
Even prior to the changes that Subchapter V of Chapter 11 brought to reorganization cases for small business, there was attention on the idea of having a more expeditious type of Chapter 11 case available for small businesses. While the standard Chapter 11 case was appropriate to larger businesses, it was not optimal for small business debtors who needed a more efficient way to reorganize. The provisions for Small Business Chapter 11 cases, which were enacted earlier, and for Subchapter V, which were enacted just recently, both tried to make the process more efficient and less burdensome for the small business debtor looking to reorganize in bankruptcy. However the flip side to simplifying the process, was shorter deadlines in the case, to make the process mover faster. Thus in order from the most complex and having the longest, least rigid deadlines, to the most efficient and having the tightest deadlines, we can arrange the Chapter 11 choices as follows: a) Standard Chapter 11 (“Standard- 11”) with the longest and least strict deadlines, b) Small Business Chapter 11 (“SB-11″) with short and strict deadlines, and c) Subchapter V Chapter 11 (V-11”) with shorter deadlines than SB-11, but less strict than the deadlines of SB-11.
We shall below compare and contrast in terms of history, eligibility, requirements, deadlines, advantages/disadvantages and strategy the following types of chapter 11 cases: a) Standard-11, b) SB-11, and c) V-11:
Many Chapter 11 bankruptcy cases are filed on an emergency basis and as a last resort for a debtor needing protection from creditors. Often, just prior to filing the Chapter 11 case, the debtor does not have an immediate solution to their financial difficulties and is hoping to find a solution during the Chapter 11 reorganization process. While a Chapter 11 case is useful in giving a debtor an immediate automatic bankruptcy, such protection is inherently temporary since most Chapter 11 cases last 6 months to 2 years, and there is pressure on the debtor from the start to lay out, enunciate and take steps toward an “exit strategy” or a general road map to improve, repair and/or turn around the business. Therefore the faster a debtor can show the trustee and the creditors in the case a feasible exit strategy, the more the debtor is given the time and leeway to proceed further with its resolution efforts. The initiation and implementation of the “exit strategy”comes before the formal filing by the debtor of the Chapter 11 disclosure statement and plan of reorganization and if it is successful could be the basis by which the debtor ultimately reorganizes. Methods of reorganization can be and include:
Essentially the Chapter 11 case, because it stays creditors and gives the debtor time, allows the debtor to take initial steps to implement the exit strategy. If the debtor has no exit strategy or has trouble implementing the exit strategy there will be pressure by creditors and the trustee. If the case drifts and the debtor lacks direction and hope of a reorganization, the trustee will move to convert the case to Chapter 7 or to alternatively to dismiss the case and creditors will move to lift the automatic stay. To avoid this kind of pressure the debtor needs to anticipate this pressure and be forthcoming with a feasible exit strategy which it tries to implement.
After the Chapter 11 plan is confirmed, the Debtor needs to initiate its payments to creditors under the plan. Assuming that the Debtor has been making for several months the initial payments to its creditors under the Chapter 11 plan, the Debtor needs to apply to the court for a “final decree” by demonstrating that it has successfully begun to implement the plan. Upon the issuance of the final decree, the court closes the Chapter 11 case but keeps jurisdiction over the plan, if disputes arise as to the plan terms and as to whether the debtor is making its payments as required under the plan. Essentially the debtor’s protection from its creditors continues while it is making payments under the Chapter 11 plan, but if the debtor defaults on the plan, its creditors do have the right to relief by showing non-payment to the court. Assuming that the debtor is still a viable business, Chapter 11 cases are often highly effective in giving the business an opportunity to reorganize and reduce debt over a protracted time while being protected from its creditors.
The Law Office of Ronald D. Weiss, P.C. has often represented businesses seeking to reorganize before the United States Bankruptcy Court in Chapter 11 cases, including in the filing and amending of numerous documents and the plan needed to proceed in Chapter 11. The Law Office of Ronald D. Weiss, P.C. represents Chapter 11 bankruptcy clients in the Eastern District of New York (which has jurisdiction over Suffolk County, Nassau County, Queens County, Brooklyn, and Staten Island) and in the Southern District of New York (which has jurisdiction over Manhattan, Bronx and Westchester County). Chapter 11 cases, like other types of bankruptcy cases can effectively help a client deal with its debt, however, a Chapter 11 case can be complex, and to effectively proceed in a Chapter 11 case a business is required to be represented by a bankruptcy attorney. The Law Office of Ronald D. Weiss, P.C. can discuss and advise you about Chapter 11 bankruptcy and how and whether it can help your particular circumstances.
A Chapter 11 reorganization is an involved and potentially lengthy bankruptcy case and requires special knowledge and expertise. The Law Office of Ronald D. Weiss, P.C. has represented many businesses and individuals in the greater Long Island and New York areas in Chapter 11 reorganization cases and can review with you issues relevant to a potential Chapter 11 case.
Our consultations are free, the advice may be invaluable.
Please call us at (631) 271-3737, or e-mail us at email@example.com for a free consultation at our Melville, Long Island law office, to discuss with an attorney whether a Chapter 11 case may help your business deal with its financial obligations.