There are some U.S. Statutes that are designed to provide relief to individuals or to businesses that are experiencing financial or economic difficulties. These laws and other related to them are referred to as the U.S. Bankruptcy Code. This particular segment concerns one Chapter of the U.S. Bankruptcy Code that is most often used by businesses or individuals who are sole proprietorships, Chapter 11.
Chapter 11 is often referred to as the reorganization Chapter. There can be two types of Chapter 11 cases: one in which the business or individual seeks to reorganize and to propose a Plan of repayment or reorganization; and second, wherein the business or individual=s assets are liquidated in an orderly fashion.
A Chapter 11 case begins when the debtor (also referred to as the ADebtor-In-Possession@) files a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. At the point of filing the petition an AAutomactic Stay@ goes into effect that serves as a Court Order protecting the debtor form their creditors and other legal proceedings. There are some exceptions to the Automatic Stay coverage. This Automatic Stay may be lifted or modified by Order of the Court after parties have had a chance to be heard by the bankruptcy judge. The Automatic Stay also automatically expires once the case has been dismissed or conclude in a satisfactory fashion.
Shortly after the filing of the petition, within 15 days, the Debtor-In-Possession must file a statement of affairs describing in a general sense the business history and transactions of the company, a schedule of all assets, a schedule of all liabilities, a list of executory contracts (such as leases, contracts that are yet to be performed and other such contracts), and a list of equity holders. Other statements and schedules may be required. Unless the Court orders otherwise, the Debtor-In-Possession must also file a monthly financial report with the Court showing all receipts and disbursements that have occurred in the prior month. The petition, statements, schedules and monthly reports are all public records available for viewing by the public during normal hours of operation, unless otherwise restricted due to a large demand. Within 20 to 60 days after the petition is filed, a First Meeting of Creditors will be held. An employee of the Office of the U.S. Trustee presides, the Debtor-In-Possession appears and answers questions that creditors may have. The debtor must also pay quarterly fees to the
Untied States Trustee based upon the amount of the monthly disbursement.
Under Chapter 11, a business can operate as normal without the day to day supervision of the Court. If the company seeks to do something that is outside the normal course of business, such as sell off a major asset or enter into an extraordinary contract, then they must provide notice that they seek to perform such a function to all of their creditors or to other groups that the Court may direct, and if someone objects, or if the Court deems it necessary, then a hearing will be held on the proposed sale of property or proposed extraordinary function which the company seeks to perform.
In Chapter 11 there is no trustee appointed unless the Court feels that one is necessary and orders that one be appointed; the appointment is made by the office of the U.S. Trustee.
During the first 120 days from the date that the case is filed, the debtor enjoys an exclusive period in which the Debtor-In-Possession may file a Plan or reorganization. After the 120 days, unless the Court orders otherwise, any creditor or party in interest may file its Plan of reorganization. The Debtor-In-Possession may still file a plan of reorganization after the 120 day period.
The Plan of reorganization must be accompanied by a Court approved Disclosure Statement. The Disclosure Statement must provide enough information so that a disinterested investor can make an informed decision as to whether to approve or disapprove the plan of reorganization. Generally speaking, a hearing would be held on the Disclosure Statement, and if this Disclosure Statement is approved, then the Disclosure Statement and the Plan are sent to all creditors along with a ballot. The creditors have a certain period of time in which to vote for or against the Plan of reorganization.
Once all of the ballots have been cast, then a confirmation hearing to decide the issue of whether or not the plan should be approved is
held. Under certain circumstances the Court may confirm or approve a plan of reorganization that may not have been completely approved by the creditors or even approved by a majority of the creditors. It will be up to the judge to decide what is equitable and in the best
interest of all parties. There are a variety of motions or adversary actions that may be brought within the context of Chapter 11. An unsecured creditors committee is usually organized by the Office of the U.S. Trustee, drawn form the list of the 20 largest unsecured creditors. The committee ordinarily has 3 and 7 members. With the leave of the Court, the creditors committee may be able to hire an attorney or other professionals at the expense of theDebtor-In-Possession. There is no limitation on how long a Chapter 11 case may remain open.