What Is a Chapter 11 Bankruptcy Case?

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A Chapter 11 case is used to reorganize business entities or the finances of individuals with larger amounts of debt and is a longer, more complex, but also more flexible case than Chapter 13 which only reorganizes the finances of individuals with lesser debt 

• The Qualifications for a Chapter 11 Case
• Advantages of a Chapter 11 Bankruptcy Case
• The Mechanics of a Chapter 11 Case
• Risks and Potential Issues in Chapter 11
• Subchapter V of Chapter 11
• How Our Office Can Represent You in Chapter 11

For a more detailed discussion of the laws, practice and strategy involving Chapter 11 bankruptcy cases, please also the Chapter 11 Bankruptcy section in this website.

Advantages of a Chapter 11 Bankruptcy Case

A Chapter 11 case can be advantageous when a business entity or an individual with larger amounts of debts (which are not eligible for Chapter 13 relief) needs to protect themselves from their creditors and to restructure their finances in a manner where they can go forward during and after the case and function better economically and in a more sustaining manner. Chapter 11 like every bankruptcy case gives a debtor safety through the automatic bankruptcy stay which stops all creditor collection activity against the debtor. During the case, while protected from creditors, the debtor has the time and space to take initial steps to reorganize – either by shrinking expenses, reducing debt, increasing income and/or selling assets. These initial steps taken during the case would hopefully allow the debtor to function more profitably and would lay the groundwork for the more formal Chapter 11 plan of reorganization and the disclosure statement that accompanies the Chapter 11 plan. The plan and disclosure statement together give the terms for the debtor’s proposed reorganization, which the debtor’s creditors need to vote on and the Court needs to approve.

Besides the fact that a Chapter 11, rather than a Chapter 13 case, is the appropriate chapter for reorganizing businesses and individuals with larger amounts of debt, there are other advantages to Chapter 11 that are only present in Chapter 11, as follows:

1) Flexibility with the Term of the Plan – Unlike a Chapter 13 plan, a Chapter 11 plan does not have a maximum five (5) year term and may be as long as the creditors and court allow, usually six (6) to ten (10) years. 

2) Flexibility with the Methods of the Plan – A Chapter 11 plan can get very creative, and is not just based on a catching up on secured debt arrears, as per a traditional Chapter 13 plan, or based on a mortgage modification, as per a loss mitigation Chapter 13 plan. A Chapter 11 plan can be based on a sale of assets, on distribution of shares in the business corporation, on rejecting the leases/ contracts for equipment or properties that are not profitable, on the refinancing of the business or acquiring funding from an investor, on obtaining a mortgage modification for a mortgage loan in default and/or other methods that are creative, unique and potentially complex. 

3) The Ability to Operate While Shielded from Creditors – A Chapter 11 case, through the automatic bankruptcy stay, allows the debtor to continue its day to day business, protected from its creditors, while seeking to put together possible options that may allow an ultimate reorganization. The debtor would not have this same ability to seek solutions if it were vulnerable to its creditors. 

4) The Ability During the Case and Under the Plan to Keep and Acquire What Works, While Shedding What Does Not Work – The debtor is able to more freely cherry-pick among the parts of its business that work while in an affordable manner being able to end relationships with parts of its business that do not work in order to gain greater profitability and end certain losses. The debtor can reject leases and contracts that are not profitable and to minimize its damages for ending such agreements. The debtor is also able to more freely seek to acquire necessary additions to the business in terms of consultants, brokers, executives and professionals who would help increase the business’s profitability.

The Mechanics of a Chapter 11 Case

A Chapter 11 case, starts like any bankruptcy case with the filing of the debtor’s bankruptcy petition and schedules. However, in Chapter 11, as opposed to Chapter 7, the debtor remains in charge of its assets and finances as a “debtor in possession”. The automatic stay immediately protects the debtor upon the filing and the case is assigned a bankruptcy case number and a bankruptcy judge to oversee the case. The case is overseen by the Office of the United States Trustee and the bankruptcy court through regular hearings including a creditor’s meeting, status conferences and motion practice. In a regular Chapter 11 case the trustee is an attorney from the  U.S. Trustee’s office charged with overseeing the case. In a Subchapter V case the trustee is a private business person, overseen by the U.S. Trustee’s Office.

During the case the debtor operates its business, engages in activity that may help it reorganize and gives constant disclosure as to its ongoing efforts and finances through monthly debtor in possession operating reports and regular hearings before the Court. In order to allow Court supervision of the debtor it must start a new bank account called the debtor in possession (“D.IP.”) account and give regular updates at Court status conferences.

Typically the debtor not only asks the Court to approve the official retaining of the bankruptcy attorney representing it in the case, but also asks for the retention of its accountant so that the debtor can engage in the necessary disclosure in the operating reports. Typically the debtor during the case is required to stop paying its creditors for pre-petition debt and would have to wait to pay pre-petition debt under the plan. However, post-petition expenses do have to be paid on a current basis by the debtor.

In a regular small business Chapter 11 case the debtor has a 120 day exclusivity period to file its plan. If the debtor is unable to get the plan confirmed by within 180 days, the debtor loses its exclusivity and the creditors can also file a competing plan. In a regular small business Chapter 11 case the overall deadline to file plan and disclosure statement is 300 days. Once the plan is filed, it needs to be confirmed within 45 days, although it is routine for a debtor to ask for and receive several extensions of that deadline. In a Subchapter V Chapter 11 case has a shorter time to file a plan – 90 days, but there is no exclusivity period for the debtor to file a plan, no deadline to confirm the plan.The plan is effectuated on the “effective date of the plan” which is 30 days after the entry of the order confirming the plan.

Obligations, Risks and Potential Issues in Chapter 11

1) Reporting Obligations in Chapter 11 Ensuring Disclosure, Transparency and Control – A Chapter 11 case is usually filed in an emergency situation to obtain the benefit of the automatic bankruptcy stay when a business has had financial difficulty that defies other solutions. While the Chapter 11 bankruptcy filing allows the business or individual debtor protection from its creditors, it also pressures the debtor to engage in disclosure in the bankruptcy schedules and monthly operating reports that would allow the trustee overseeing the case and creditors to assess the progress and feasibility of a proposed reorganization. While the debtor has leeway with ordinary business decisions, for larger, non-ordinary decisions it must ask for court permission by motion on notice to creditors. The administrative requirements in a case – – operating reports, debtor-in-possession bank account and regular court status conferences — are mostly to allow: transparency, disclosure and control while the debtor seeks to reorganize its financial affairs.

2) The Debtor’s Proposed “Exit Strategy” – Does it Appear Feasible? – The debtor needs to present the court, the trustee and creditors with an “exit strategy” that will ultimately be part of an anticipated plan of reorganization. The exit strategy is one that if successful may satisfy the debtor’s creditors under a plan of reorganization. The creditors will ultimately vote on the plan of reorganization and the court will need to approve of the plan. The plan of reorganization in a standard Chapter 11 case is accompanied by a disclosure statement, that is a longer document designed to give more information to creditors, to enable them to make an informed decision when they vote on the plan. The “exit strategy” therefore needs to feasible enough for the debtor to gain time to reorganize and to try to seek its implementation so that the “exit strategy”, as more finished, detailed and realistic, can be presented as the debtor’s plan of reorganization.

3) Payment Obligations in Chapter 11 – Ensuring Creditors are Not Prejudiced While the Debtor Reorganizes – While the debtor is in the process of reorganizing and prior to the potential approval and confirmation of its plan of reorganization, the debtor is not allowed to pay its pre-petition debts, but is generally required to keep up with its post-petition obligations such as mortgage payments, secured vehicle/equipment payments, rent payments, payroll, taxes and regular expenses like utilities and daily operating overhead. The obligations to secured creditors are specifically focused on ensuring that they are “adequately protected” and that their secured position is not prejudiced. If the debtor is not able to keep up with some of these items, it can make strategic decisions, subject to notice and court approval to reject contracts/leases, to return secured/rented vehicles/equipment, to reduce its expenses by cutting some staff, closing unprofitable locations, selling unnecessary real estate and generally doing what is necessary to survive and hopefully reorganize. However if the debtor is really hurting financially it may start to fall behind and not be able to pay critical post-petition obligations and expenses.

4) Relief From Stay, and/or Dismissal or Conversion – as the Risks When a Chapter 11 Case Cannot Reorganize – To the extent that the debtor is unable to meet its post-petition obligations or to the extent the “exit strategy” it offers appears not to be feasible, the debtor will be under pressure from the trustee overseeing the case, the court and creditors. When creditors do not believe that the Chapter 11 case will satisfy their claims, and can show the court that they are being prejudiced while the case proceeds, they may file a motion seeking relief from the automatic stay. The goal of such motion is to vacate the bankruptcy stay specifically for that creditor, so the creditor is able to proceed in pursuit of its debt in state court as if the bankruptcy case had not been filed. When the trustee overseeing the case and/or the court do not believe that the Chapter 11 case will result in a reorganization, they will eventually move for dismissal of the Chapter 11 case or its conversion to Chapter 7. A dismissal of the Chapter 11 case will cause the bankruptcy case to end with a termination of all the protections the debtor had received through the automatic bankruptcy stay completely ceasing. Upon dismissal the debtor would be returned to its non-bankruptcy status, as an entity which owes obligations to its creditors, but is without the benefit of bankruptcy protections to protect it from such creditors. Conversion, on the other hand is a different remedy that the trustee and/or court can seek when the Chapter 11 case is not going well. Conversion to Chapter 7, causes the case to move from Chapter 11 where the debtor is “in-possession” (or in control) to a Chapter 7 case where the debtor loses control of its assets. In Chapter 7, a Chapter 7 trustee is appointed to liquidate any of the debtor’s assets deemed to have potential value. In most Chapter 7 cases the business operations of the debtor have already ceased or the Chapter 7 trustee usually closes the business, given that the trustee is usually able to liquidate the assets of the business but not to operate business. Also a business owned by debtor converted to Chapter 7 is usually undergoing extreme hardship and may be worth more for its parts than as an ongoing entity which, while in Chapter 11, was unable to correct its problematic finances.

5) Confirming the Chapter 11 Plan – The confirmation process for the plan of reorganization is a process where creditors have an opportunity to vote on the plan, parties in interest have an opportunity to be heard, and both the trustee overseeing the case and the court weigh into the process to assure all parties that it is fair and statutorily correct per the Bankruptcy Code. Assuming that the creditors vote to confirm the plan and that the court approves of the plan, the confirmation process moves forward and the plan is now officially regarded as an enforceable guiding document that all parties need to follow. However, even after the Final Decree is issued, which ends the Chapter 11 case, the bankruptcy court’s presence is still potentially revivable because the plan usually has provisions that subject the parties to ongoing court jurisdiction to enforce the plan’s terms where there is a default in implementing the plan or where there is disagreement over the plan, allowing the court to settle disputes related to the plan.

Subchapter V of Chapter 11

Subchapter V of Chapter 11 was a relatively recent statutory creation in 2019, under the Small Business Reorganization Act that was enlarged in terms of jurisdiction in March 2020 under the CARES Act to allow for a more efficient method to reorganize small businesses under Chapter 11 of the Bankruptcy Code. Small businesses faced too many requirements and expenses trying to reorganize under the standard provisions of Chapter 11 which were not resolved by previous legislation which tried to address the issue with a statutory formula for small business that was part of earlier legislation in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act. Currently the jurisdictional limit of Subchapter V encompasses businesses with up to $7.5 million in debt (non-contingent, liquidated secured and unsecured debt) where at least half of the debt originates from business activity. After March 27, 2022 the ceiling for Subchapter V will again go down to $2,725,625.

There are many advantages for small businesses to reorganize under Subchapter V of Chapter 11 as follows:

• The debtor can file a shorter plan of reorganization (which resembles the simpler Chapter 13 plan more than the traditional, complex and longer Chapter 11 plan) without a disclosure statement and never loses exclusivity to file the plan.
• While the debtor needs to file the plan in a shorter amount of time, 90 days, there is no sharp deadline to confirm the plan, as there was under previous provisions for small businesses which needed to confirm their plan in 45 days.
• Furthermore, there is no absolute priority rule in Subchapter V.
• The trustee overseeing the case is private business person and not an attorney from the U.S. Trustee’s Office and there are reduced expenses in that there are no quarterly fees.

Both the statute for Subchapter V and the courts interpretation of Subchapter V’s terms are much more sympathetic to the debtor since these terms originated by statutes created when there was sympathy for small business, as opposed to the less debtor-friendly climate when a previous statutory scheme, for small businesses, was enacted as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, when the main effort in the earlier statutory change was to prevent potential abuse by debtors in terms of delay and bad faith filings.

For a more detailed discussion of Subchapter V of Chapter 11, please see the Subchapter V of Chapter 11 section in this website.

How Our Office Can Represent You in Chapter 11

Chapter 11 of the Bankruptcy Code allows a debtor in economic hardship the ability to reorganize its financial affairs by giving the debtor the time and space needed to concentrate on the reorganization effort, as opposed to being distracted by having to survive and fend off aggressive creditors. Chapter 11 allows the debtor to reorganize through: 1) protective and complex bankruptcy laws, and 2) through remedial actions usually helped by non-bankruptcy law – litigation, negotiation, modification, real estate law, surrogates courts matters, foreclosure defense and/or landlord tenant law – which is what usually aids in and what ultimately may allow the debtor’s reorganization. Our law office practices bankruptcy law at a high level and is familiar with the Bankruptcy Code, Bankruptcy Rules and bankruptcy case law that has evolved over the years. From that perspective we are very effective in filing cases, advising clients of ongoing administrative requirements in the bankruptcy case, and otherwise keeping the case going procedurally by correctly advising our clients and advocating for their rights in front of the bankruptcy court. However, it is usually our non-bankruptcy skills which are called upon to actually take legal steps to reorganize the debtor’s financial affairs. A debtor’s ultimate reorganization may be based on any one of the following:

• Selling real estate or another asset;
• Modifying or negotiating a resolution to a mortgage in arrears;
• Defending a foreclosure proceeding or another legal matter ;
• Negotiating a reduction or compromise on other debt or negotiating a resolution to a dispute or litigation;
• Litigating successfully an adversary proceeding or other litigation by the debtor against others; or defending the debtor in such an adversary proceeding or litigation, initiated by others;
• Defending an eviction proceeding against our client; or removing tenants from a property owned by our client and negotiating with the tenants so that they leave;
• Helping deal with a Surrogates Court matter that may affect the debtor’s rights and ability to proceed in the Chapter 11 case;

The above non-bankruptcy skills are held by various departments in our Law Office that have expertise in and concentrate in: mortgage modification, debt negotiation, foreclosure defense, landlord-tenant proceedings, surrogate court proceedings and/or real estate deals. It is our skills and resources in these non-bankruptcy areas, in addition to our bankruptcy expertise, that allow us to succeed where others may fail.

Therefore, for a law firm to properly help a debtor reorganize, it must have expertise in bankruptcy law and well developed skills with non-bankruptcy law, so as to both be able to protect AND reorganize the debtor. Our law firm has all of these skills and can help debtors successfully reorganize under Chapter 11 of the Bankruptcy Code.

For a more detailed discussion of the laws, practice and strategy involving Chapter 11 bankruptcy cases, please also the Chapter 11 Bankruptcy section in this website.