Bankruptcy

Bankruptcy Chapter 11

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In a Chapter 11 bankruptcy, reserved for businesses, which is often referred as “reorganization bankruptcy” because it allows the business to remain open even when they are restructuring their business debts and assets so that they can repay creditors. Chapter 11 is not for individuals or couples who are attempting to file bankruptcy, only for businesses. In addition, no individual may be a debtor under chapter 11 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.

How Does a Chapter 11 Work?

A chapter 11 case begins when a business files a petition with the bankruptcy court serving the area where the debtor has a home.

Unless the court orders otherwise, the debtor also must file with the court:

  1. schedules of assets and liabilities
  2. a schedule of current income and expenditures
  3. a schedule of executory contracts and unexpired leases
  4. a statement of financial affairs.

The courts are required to charge a $1,167 case filing fee and a $550 miscellaneous administrative fee. The fees must be paid to the clerk of the court upon filing or may, with the court’s permission, be paid in installments but limits them to four installments for the filing fee. The final installment must be paid not later than 120 days after filing the petition. 

It is possible that the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. The administrative fee of $550 may be paid in installments just like the filing fee. Only one filing fee and one administrative fee will be charged if a joint petition is filed. Debtors need to know that failure to pay these fees may result in dismissal of the case.

A written disclosure statement and a plan of reorganization must be filed with the court. The document must contain information concerning the assets, liabilities, and business affairs of the debtor adequate enough to enable a creditor to make an informed judgment about the debtor’s plan of reorganization. If the case is deemed a “small business case” the debtor might not need to file a separate disclosure statement if the court determines the plan has adequate information. The plan must include a classification of claims and must describe how each class of claims will be treated under the plan.

In the case of individuals, a Chapter 11 bears some similarities to Chapter 13. For instance, property of the estate for an individual debtor includes the debtor’s earnings and property acquired by the debtor after filing until the case is closed, dismissed, or converted. If the funding of the plan pays the claim in full, with interest, over a shorter period it may be from the debtor’s future earnings. The plan will commit all of the debtor’s disposable income over the next five years.

Converting the Chapter 11 case to Chapter 7

A debtor in a case under chapter 11 has a one-time absolute right to convert the chapter 11 case to a case under chapter 7 unless:

  1. the debtor is not a debtor-in-possession. (Only companies who have filed for bankruptcy protection under Chapter 11 can access debtor-in-possession financing, which usually happens at the start of a filing. DIP financing is used to enable the reorganization of the debtor-in-possession (the status of a company that has filed for bankruptcy) by allowing the company to raise capital to fund its operations as its bankruptcy case continues through completion. DIP financing is distinctive from other funding methods because it has priority over existing debt, equity, and other claims.
  2. the case originally was commenced as an involuntary case under chapter 11
  3. the case was converted to a case under chapter 11 other than at the debtor’s request. 11 U.S.C. § 1112(a).

A debtor in a chapter 11 case does not have an absolute right to have the case dismissed upon request.

If you are considering a bankruptcy Chapter 11, Freedom to Dream Financial can help you get your credit back on track. Contact us today. We can help!

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