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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.
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
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.