Basic Questions and Answers on Chapter 11 Bankruptcy (Small Business Reorganization) (Part 3)

This post continues Argyle’s questions and answers about small business bankruptcy.  More information is available in the 2012 version of Argyle Publishing’s The Attorney’s Handbook on Small Business Reorganization Under Chapter 11.

The 2012 Version; From $45



17. What debts are discharged by a Chapter 11 discharge?
The debts discharged in a Chapter 11 case depend on whether the debtor is an individual (i.e., a natural person) or a nonindividual (i.e., a corporation, partnership, etc.). The discharge received by an individual debtor in a Chapter 11 case discharges the debtor from all pre-confirmation debts except those that would not be dischargeable in a Chapter 7 case filed by the same debtor. The discharge received by a nonindividual debtor in a Chapter 11 case depends on whether the plan confirmed is a plan of reorganization or a plan of liquidation. The discharge received in the confirmation of a plan of reorganization discharges a nonindividual debtor from all scheduled pre-confirmation debts without exception. However, if the plan confirmed is a plan of liquidation and if the debtor does not engage in business after consummation of the plan, a nonindividual debtor does not receive a discharge.

18. Is a Chapter 11 discharge valid if the debtor later fails to carry out the plan?
The validity of a Chapter 11 discharge granted to a nonindividual debtor is not affected by the subsequent failure of a debtor to carry out the plan. As long as the order of confirmation is not revoked by the court (which seldom happens), the discharge received by a debtor of this type is valid even if the debtor later fails to fulfill its obligations under the Chapter 11 plan. As explained in the answer to question 16 above, an individual debtor does not receive a discharge until the completion of payments under the plan. However, under certain circumstances an individual debtor who has not completed payments under the plan may also receive a Chapter 11 discharge.

19. How is a Chapter 11 case commenced?
A voluntary Chapter 11 case is commenced by filing a voluntary petition with the clerk of the bankruptcy court requesting relief under Chapter 11 of the Bankruptcy Code. A number of other
documents are usually filed with the petition. However, if it is necessary to file the case before the other documents can be prepared, most of the other documents may be filed within 14 days after the petition is filed. The filing fee must usually be paid when the petition is filed, although an individual debtor may pay the filing fee in installments. As a practical matter, however, debtors who are unable to pay the filing fee when a Chapter 11 case is filed seldom succeed under Chapter 11.

20. Where is a Chapter 11 case filed?
A Chapter 11 case is filed with the clerk of the bankruptcy court in the district where the debtor either resides, has its principal place of business, or has its principal assets.

21. Is the public informed of the filing of a Chapter 11 case?
When a Chapter 11 case is filed, all of the debtor’s creditors, shareholders, partners, and other persons directly involved with the debtor are notified. Notice of a Chapter 11 case is not normally published in newspapers or trade journals unless the filing of the case is considered newsworthy by the newspaper or journal. Generally, only the creditors, owners, and employees of a small business debtor are aware that the debtor has filed a Chapter 11 case.

22. Does a person or business filing under Chapter 11 have to continue to pay its debts after the case is filed?
Most Chapter 11 debtors receive a moratorium on the payment of most of their general unsecured debts for the period between the filing of the case and the confirmation of a plan. This period usually lasts for six to twelve months. During this period, however, it may be necessary to pay secured creditors and creditors whose property, goods, or services are needed to continue the debtor’s business.

23. How does a Chapter 11 case proceed after it has been filed?
After a Chapter 11 case has been filed, the debtor must file documents with the court listing the names and addresses of all of its creditors and owners, describing all of its property and other assets, and disclosing its financial condition. The debtor, as a “debtor in possession,” is usually permitted to continue to operate its business during the course of the case, but must comply with the requirements of Chapter 11 and the bankruptcy court in so doing. A creditor whose collateral is threatened may apply to the court for relief from the automatic stay or for adequate protection of its security interest. The debtor must prepare a Chapter 11 plan and file it with the court, usually within 180 days after the case is filed if the debtor is a small business debtor. The debtor must also prepare, file, and obtain court approval of a disclosure statement that adequately informs its creditors and interest holders of its financial condition and of its reorganizational plans. After the disclosure statement has been approved by the court, copies of the statement and the Chapter 11 plan are distributed to creditors and interest holders, who may then vote on whether to accept or reject the debtor’s plan. If the plan is accepted by at least one class of creditors whose claims are impaired (i.e., not paid in full, see question 45 below) under the plan, the plan may be confirmed by the court. After the completion of voting, a confirmation hearing is held wherein the court must decide whether to confirm the plan. If the plan is confirmed by the court it becomes effective and must be carried out and consummated by the debtor. After the plan has been consummated, a final report is filed and the
case is closed.
24. What is an interest holder and what is its role in a Chapter 11 case?
An interest holder is the holder of an equity interest in the debtor. In Chapter 11 cases interest holders are often referred to as equity security holders. A shareholder is an interest holder of a corporation and a member is an interest holder of a limited liability company. If the rights of interest holders are dealt with in a Chapter 11 plan, interest holders are treated like creditors and are permitted to file proofs of their interests, vote on the acceptance or rejection of a plan, and participate in distribution under the plan. However, most plans in small business Chapter 11 cases deal only with creditors and do not deal with the rights of interest holders.
25. What is a “debtor in possession” and what is required of it in a Chapter 11 case?
A “debtor in possession” is the debtor in a Chapter 11 case in which a trustee has not been appointed. As a debtor in possession, the debtor is legally charged with the rights, duties, and obligations of a trustee in dealing with the debtor’s property and operating the debtor’s business for the benefit of its creditors and interest holders. As a debtor in possession, the debtor must abide by the rules and standards of Chapter 11 and the orders of the bankruptcy court. The failure of a debtor in possession to perform its obligations and duties may result in the appointment of a trustee, a court order terminating the debtor’s business, the conversion of the case to Chapter 7, or the dismissal of the case. A debtor ceases to be a debtor in possession when a plan is confirmed by the court.

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

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