Business Bankruptcy FAQ

1. Who may file a Chapter 11 Case?

An individual, a corporation, a partnership or a similar business entity burdened with debt may commence a Voluntary Chapter 11 case by filing a petition for relief under Chapter 11 of the Bankruptcy Code. Also, in some cases, creditors who seek to enforce their rights against such a debtor may commence an Involuntary Chapter 11 case.

Chapter 11 is most often utilized by businesses seeking to continue operations while attempting to restructure the debt acquired prior to bankruptcy (their "prepetition" debts). It is also frequently utilized by individuals carrying significant amounts of business related debt, like guarantees of corporate obligations.

2. May a party who seeks Chapter 11 relief remain in business?'

Provided that a Chapter 11 Debtor pays the obligations arising after filing the petition (its "post-petition" debts), including its taxes, payroll, and trade debts, and provided that it remains properly insured and regularly reports on its operations to the United States Trustee, the Bankruptcy Court usually permits a party seeking chapter 11 relief to continue its business for a reasonable time. This allows the party the opportunity to address its prepetition debts by continuing to operate while negotiating with its creditors or proposing a plan of reorganization.

3. Who monitors a Chapter 11 Debtor's operation?

The primary responsibility for supervising the post-petition performance of a Chapter 11 Debtor is the business' management - just as management had the duty to guide the business prior to bankruptcy. However, after the Debtor seeks bankruptcy relief, management must regularly report on its operations to all of its creditors and to the United States Trustee - which is a division of the United States Department of Justice. If management fails to report, or if the reports reveal that the Debtor is not honoring its post-petition obligations, the creditors or the US Trustee may ask the Court to convert the case to a chapter 7 liquidation or to appoint a Chapter 11 Trustee to replace management.

4. Who may propose a Chapter 11 Plan?

Chapter 11 plans are most frequently proposed by Chapter 11 Debtors. Generally, the Bankruptcy Code provides that for the first few months after the filing of a chapter 11 petition, only the Debtor may propose a plan.

But if the Court grants the request of a creditor or other party for authority to propose a plan, or if the debtor fails to propose a plan within the time permitted by the Bankruptcy Code, a creditor or other party may propose a plan.

5. What does a Chapter 11 Plan provide?

A Chapter 11 Plan usually provides for a proposal to "reorganize" the debtor (to repay a portion of its debts out of future operating income); to liquidate the debtor (to sell its property and to distribute the sales proceeds) or some combination of these two alternatives.

A plan must provide for the full payment of certain types of obligations - including the administrative expenses of the bankruptcy case, post-petition trade debts, most prepetition tax debts and certain other "priority" obligations of the debtor. A plan must also provide for the satisfaction of claims secured by mortgages and other liens covering the debtor's property, either by the surrender of the property or payment of the property's value over time.

A plan often provides for payment of a pro-rated portion of the general unsecured creditors' claims. A plan must provide that unsecured creditors receive at least as much as they would receive if the Debtor's property was liquidated under chapter 7.

6. How does a Chapter 11 plan become effective?

After a party proposes a plan, the various classes of creditors are permitted to vote to accept or reject the proposed plan. If the creditors accept the proposed plan, the Bankruptcy Court may determine whether the plan should be "confirmed." Once confirmed, the plan becomes effective and binding on all parties.

7. What happens if a plan is not confirmed?

Not all proposed Chapter 11 Plans are confirmed. Creditors may elect to reject a proposed plan, or the Court may determine that a proposed plan does not satisfy the other requirements of the Bankruptcy Code. Under such circumstances, if the Debtor has honored its post-petition obligations and provided the US trustee and creditors with all required reports, the Court may permit the Debtor a further opportunity to continue its operations while the parties seek to propose an alternative plan.

However, if the Debtor has not paid its post-petition obligations or maintained its reports, or if it appears to the Court that the parties are unable to agree upon an acceptable, confirmable plan, the court may determine to convert the chase to Chapter 7. If this happens, the Debtor is normally required to cease operating and to surrender its property to a Trustee.