Bankruptcy - Chapter 11 | Consumer Debt Group


Chapter 11 - Reorganizations
The creditors and debtor formulate a plan under which the debtor pays a portion of the debts, is discharged of the rest, and continues in business.

A. Who is eligible for relief under Chapter 11? Any debtor (except a stockbroker or a commodities broker) who is eligible for Chapter 7 relief. Used most commonly by corporate debtors. The same principles apply that govern liquidation (automatic stay, etc.).

B. Why a case may be dismissed? Creditors may prefer a workout (a privately negotiated settlement) to bankruptcy proceedings, or there may be other reasons (inability to effect a plan, unreasonable delay by the debtor that is prejudicial to creditors, etc.).

C. Debtor in possession On entry of an order for relief, the debtor continues to operate his or her business as a debtor in possession (DIP). If Gross Mismanagement Is Shown The court may appoint a trustee (or receiver) to operate the business. This may also be done if it is in the best interests of the estate. DIP's Role Is Similar to That of a Trustee in a Liquidation The DIP can avoid pre-petition preferential payments and fraudulent transfers and decide whether to cancel pre-petition executory contracts. Strong-Arm Clause A DIP can avoid any obligation or transfer that could be avoided by (1) a creditor who extended credit at the time of bankruptcy and who consequently obtained (a) a lien or (b) a writ of execution that was returned unsatisfied; and (2) a bona fide purchaser of real property, if the transfer was perfected at the time of the bankruptcy.

D. Collective bargaining agreements Can be rejected if the debtor first proposes modifications to the union and the union fails to adopt them without good cause. The debtor must (1) provide the union with information needed to evaluate the proposal and (2) confer in good faith to attempt a mutually satisfactory agreement.

E. Creditors' Committees A committee of unsecured creditors is appointed to consult with the trustee or DIP. Other committees may represent special-interest creditors. Some small businesses can avoid creditors' committees.

F. The Reorganization Plan Who Can File a Plan? Only debtor within the first 120 days (100 days in some cases) after date of the order for relief. Any other party, if debtor does not meet the deadline or fails to obtain creditor consent within 180 days (or 160 days). What the Plan Must Do? Conserve and administer the debtor's assets in the hope of a return to solvency; be fair and equitable ("in the best interests of the creditors"); designate classes of claims and interests; specify the treatment to be afforded the classes; and provide an adequate means for execution. The Plan Is Submitted to Creditors for Acceptance Each class adversely affected by a plan must accept it (two-thirds of the total claims must approve). If only one class accepts, the court may confirm it under the Code's cram-down provision if the plan does not discriminate unfairly against any creditors. The plan is binding on confirmation-the debtor is given a discharge from all claims not within the plan (except those that would be denied in a liquidation).