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Basic Questions and Answers on Chapter 11 Bankruptcy (Small Business Reorganization) (Part 2)

Chapter 11 Bankruptcy (Small Business Reorganization)

This post continues our questions and answer to Chapter 11 bankruptcy for small businesses.  More information is available in Argyle Publishing’s The Attorney’s Handbook on Small Business Reorganization Under Chapter 11.  The 2012 version was just published.  This is an incredible value at $45.

QUESTIONS AND ANSWERS ABOUT CHAPTER 11

9. Does a person have to be engaged in business to qualify for Chapter 11 relief?
A person does not have to be engaged in business in the traditional sense to obtain Chapter 11 relief. A consumer is legally eligible to file under Chapter 11. As a practical matter, however, the person filing under Chapter 11 must have something to reorganize, rehabilitate, or liquidate before Chapter 11 relief can be granted. A debtor with substantial personal investments or assets may use Chapter 11 to reorganize or liquidate his or her investments or assets, even if he or she is not engaged in business in the traditional
sense.

From $45

10. What are the court costs in a Chapter 11 case?
The Chapter 11 filing fee is $1046, which must be paid to the clerk of the bankruptcy court when the case is filed. In addition, there is a quarterly fee payable to the U.S. Trustee that is based on the amount disbursed during the quarter by the debtor during the Chapter 11 case until such time as a plan is confirmed. The amount of the quarterly fee varies from $250 to $10,000 per quarter, depending on the amount of money or property that is disbursed under the plan.

11. What is a United States Trustee and what does it do in a Chapter 11 case?
The United States Trustee is an employee of the United States Department of Justice and serves independently of the bankruptcy court. The function of the United States Trustee in a Chapter 11 case is to monitor the case, appoint one or more creditors’ committees, call and preside at meetings of creditors, appoint a trustee in the case if ordered to do so by the bankruptcy court, and collect the quarterly fee. Generally, the United States Trustee takes appropriate action to insure that all reports and documents are filed, that all fees are paid, and that there is no undue delay in the case. Most Chapter 11 debtors are required to make periodic financial and operating reports to the United States Trustee during the course of the case, at least until a plan is confirmed. The United States Trustee should not be confused with the trustee that is sometimes appointed in a Chapter 11 case to operate the debtor’s business and take possession of the debtor’s property. A trustee in a Chapter 11 case is appointed by the United States Trustee, and is discussed in the answers to questions 28 and 29 below.

12. How much are the attorney’s fees in a Chapter 11 case?
The amount charged by an attorney for handling a Chapter 11 case for a small business debtor varies greatly depending on such matters as the size of the business, the type and extent of relief needed by the debtor, the attitude of the debtor’s creditors, the type of reorganization needed or contemplated by the debtor, and whether the owners of the business are in agreement or disagreement as to how the business should be reorganized. Unless the case is a simple one, most attorneys charge on an hourly basis and require a retainer to be paid in advance. The total fee charged for handling a small business Chapter 11 case may vary from $7,500 or less for a simple case to several times that amount for a complex case. All fees charged or collected by an attorney in connection with a Chapter 11 case, whether prior to or after the case is filed, must be approved by the bankruptcy court as being reasonable in amount.

13. What type of relief from creditors may a debtor obtain by filing under Chapter 11?
The filing of a Chapter 11 case automatically stays all foreclosures, collection actions, civil litigation, and creditor action of any kind against the debtor or the debtor’s property. The only significant proceedings not stayed by the filing of a Chapter 11 case are criminal proceedings against the debtor, divorce-related proceedings, and proceedings by governmental agencies to enforce police or regulatory powers. All other proceedings and acts against the debtor or the debtor’s property, whether in or out of court, are stayed. Even telephone calls or the sending of letters or bills to the debtor, if for the purpose of collecting a prepetition debt, are precluded by the automatic stay. An act or proceeding that is stayed is held in abeyance, and no further action may be taken in the matter without the approval of the bankruptcy court. The automatic stay that accompanies the filing of a Chapter 11 case normally gives the debtor a
moratorium of several months on the payment of many of its debts.

14. What type of long-term relief may a debtor obtain under Chapter 11?
Long term relief in the form of either a reorganization of the debtor’s business or an orderly, debtor controlled liquidation of the debtor’s assets may be obtained under Chapter 11. If the debtor’s business is reorganized, it may continue to function either in its present form or in a revised form, and its present creditors will be permitted to satisfy their claims only to the extent provided in the debtor’s plan of reorganization. A reorganization may consist of anything from an extension of time for the repayment of debts to a total restructuring of the business.

15. How long does a Chapter 11 case last?
A Chapter 11 case must be broken down into two phases: the pre-confirmation phase and the postconfirmation phase. The first phase, which is the phase prior to the confirmation of a plan, normally lasts from six to twelve months, although the time may vary depending on the condition of the debtor, the type of plan proposed by the debtor, and the reaction of creditors to the plan. The second phase, which is the phase where the confirmed plan is implemented and carried out by the debtor, normally lasts from three to five years, although it, too, may vary in duration. See the answer to question 52 below.

16. When does the debtor receive a discharge in a Chapter 11 case?
In the Chapter 11 case filed by a corporation, limited liability company, or other nonindividual, the debtor receives a discharge when a plan is confirmed by the court. The order of the court that confirms the plan also contains the debtor’s Chapter 11 discharge. In a Chapter 11 case filed by an individual (i.e., a natural person), a discharge is granted by the court separately, after the completion of payments under the plan. A discharge is a court order relieving the debtor from liability for certain debts. A debt that is discharged is a debt for which the debtor is no longer liable, except as provided in the Chapter 11 plan.

More information is available in the Attorney’s Handbook on Small Business Reorganization Under Chapter 11.