Chapter 11 Debtor/Creditors

Chapter 11 For Creditors:

As with all other chapters, Chapter 11 cases have a meeting of creditors where a creditor, or its representative, may examine the debtor or debtor’s representative regarding the contents of the bankruptcy petition and schedules. The US Trustee will typically review the schedules prior to the creditor meeting. A Chapter 11 creditor meeting will last approximately an hour as opposed to the much shorter meetings in Chapter 7 and Chapter 13. Chapter 11 creditors do not have to file claims so long as they are listed on the schedules and don’t object to the way they are being treated. Without filing any claim, the creditor are still eligible to receive a distribution if they are listed on the debtor’s schedules. If a creditor is omitted from the schedules or if they disagree with how they are being classified and treated on the schedules, a creditor must file a claim.

Chapter 11 Operations from the Owner’s Perspective:

The main difference in a Chapter 11 for the owner of the debtor business, as opposed to other chapters, is that the owner typically stays in charge of the business and the business remains in operation. If the owner has been implicated in fraud or gross mismanagement, the owner would most likely not remain in charge. Subject to court approval, Chapter 11 permits a bankrupt business to pay the owner a reasonable salary. The court will typically look at how much the debtor was paying the owners prior to filing. If the owner has not been taking a salary prior to filing, the Court will probably not allow a salary to be paid once the filing occurs. If the business has not been paying enough money to pay its bills, the court will probably not allow the owner to take payments or to accrue wages. If the business does not generate enough money to pay all of its post-filing debt with some left over, the owner’s wages will be forfeited and not paid in future months even if money is available.

In a Chapter 13 reorganization for individuals, there is a general rule that all payments have to be paid to the Chapter 13 Trustee and paid through the plan. Once a Chapter 11 plan is approved, the debtor takes the role of supervising the business and is responsible for paying the creditors directly in accordance with the plan. In Chapter 13, payments are made to creditors beginning in the month after filing. In Chapter 11, there may be certain payments made for adequate protection of secured creditors (for example, rent or mortgage payments). Otherwise, payments to other creditors typically don’t begin until after plan confirmation and the plan will dictate when and how the payments are to be made. In Chapter 11, it could be five to ten months, or even a year, after filing before plan payments start flowing to the creditors. A secured creditor, landlord, or some other creditor who has a lien on collateral may receive payments prior to confirmation, but for the most part, the majority of payments don’t get made until after plan confirmation.

Chapter 11 proceedings increase the monthly administrative expenses the business debtor has to incur. The Chapter 11 debtor is required to provide monthly financial statements to the court and many on-going disclosures and informational filings. The bankruptcy administrative costs are a significant burden that the reorganizing business does not incur outside of bankruptcy. Therefore, in addition to all of the hard work the owner is going through to resurrect his business, there are many demands made by the bankruptcy court including preparation of the monthly reports, reviewing the reports with the debtor’s attorney, and meetings with the debtor to talk about how creditors are being treated. The Chapter 11 process is very time consuming, demanding, and expensive for the business owner.

Although the business owner continues to control the operation of the business in Chapter 11, he must get court approval for outside the ordinary course of business including incurring new debt.

Chapter 11 Liquidations:

Chapter 11 plans may provide for the liquidation of assets. A typical situation for a liquidation would be one where a business has relatively little value as a going concern but there are sufficient assets so it makes sense to sell off the assets to pay the creditors. In Chapter 11 bankruptcy, there is a liquidating “trust” where assets are sold individually and the proceeds are put in the trust for distribution to creditors. Unlike a Chapter 7 liquidation where the trustee gathers and sells non-exempt assets, Chapter 11 liquidations are controlled by the business owner. The theory is that the business owner is in a better position to get the most value for the sale of business assets. A Chapter 11 can convert to a Chapter 7 for liquidation, but there are many reasons why a Chapter 11 debtor prefers the liquidating trust. The debtor may be able to do a better job liquidating the assets because it knows the market for his assets and believes that it will get more money through a gradual asset sale than could a Chapter 7 trustee who is not familiar with the business or the market for business assets. If there is any money left after liquidation and payments to creditors, that money would go back to the debtor business or its equity holders.

Individual Chapter 11:

Individuals who do not qualify for Chapter 13 because they exceed the debt limits ($1,081,400 secured, $360,475 unsecured) but who still want to reorganize their finances may need to file Chapter 11 to get protection from their creditors. Individuals have a very difficult time in Chapter 11 and for that reason most individual Chapter 11 bankruptcies fail. Chapter 11 for an individual can be successful where the goals are limited. For examples, if an individual is a few payments behind on secured debt and needs a limited amount of time to catch up, Chapter 11 could buy the individual enough time to make up past due payments and emerge rather quickly with a completed and successful Chapter 11 plan. More complicated individual financial situations are not typically solved in a Chapter 11 because of the complexity of Chapter 11 and its related high costs and fees. Individuals who are seeking protection but do not qualify for Chapter 13 are better off finding solutions outside the bankruptcy court.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.