Chapter 11 of the Bankruptcy Code allows you to propose a plan of reorganization to keep your business alive and pay creditors over time. Individuals can also seek relief in Chapter 11. But typically, Chapter 11 is filed with the purpose of reorganizing a business, which may be a corporation, sole proprietorship, or partnership. The Chapter 11 bankruptcy case of a corporation (as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company. A bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners as debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case (partnership as debtor), however, the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case. Or the partners, themselves, may be forced to file for bankruptcy protection.

A Chapter 11 case begins with the filing of either a voluntary petition by you, or an involuntary petition by your creditors, where your domicile or residence is located. Unless ordered otherwise by the court, you must file the following documents:

• Schedules of your assets and liabilities
• A schedule of your current income and expenditures
• A schedule of your executory contracts and unexpired leases
• A statement of your financial affairs

If you file as an individual (or husband and wife*), these additional documents are required:

• A certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling
• Evidence of payment from your employers, if any, received sixty days before filing
• A statement of your monthly net income and any anticipated increase in your income or expenses after filing
• A record of any interest you have in federal or state qualified education or tuition accounts

A case filing fee and a miscellaneous administrative fee are required by the court. You must pay the fees to the clerk of the court upon filing or, with the court’s permission, you may pay in at most four installments within 120 days of filing. If you file a joint petition, only one filing fee and one administrative fee are charged. Be aware that failure to pay these fees may result in dismissal of your case.

Upon filing a voluntary petition for relief under Chapter 11 or, in an involuntary case, the entry of an order for relief, you automatically assume an additional identity as the “debtor in possession.” This term refers to a debtor that keeps possession and control of his assets while undergoing reorganization. You will remain a “debtor in possession” until your plan of reorganization is confirmed, your case is dismissed or converted to Chapter 7, or a Chapter 11 trustee is appointed. The appointment or election of a trustee occurs only in a small number of cases. Generally you, as “debtor in possession,” will operate the business and perform many of the functions that a trustee performs in cases under other Chapters.

You are required to file a written disclosure statement and a plan of reorganization with the court. The disclosure statement is a document that contains sufficient information concerning your assets, liabilities, and business affairs to enable a creditor to make an informed judgment about your plan of reorganization. The information required is decided by the judge involved and by the circumstances of the case. In a “small business case” you may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan. The plan must include a classification of claims, and must specify how each class of claims will be treated under the plan. Creditors who will be paid less than the full value of their claims, vote on the plan by ballot. After the disclosure statement is approved by the court and the ballots are tallied, the court will conduct a hearing to determine whether to confirm the plan.

The Bankruptcy Code requires you to perform all but the investigative functions and duties of a trustee. These duties and responsibilities, set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, include:

• accounting for property;
• examining and objecting to claims;
• filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator, such as monthly operating reports;
• hiring attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during his bankruptcy case;
• filing tax returns and reports which are either necessary or ordered by the court after confirmation, such as a final accounting; and
• monitoring the compliance of the debtor in possession with the reporting requirements.

A creditors’ committee can play a large role in a Chapter 11 case. The committee, appointed by the U.S. trustee, consists of unsecured creditors who hold the seven largest unsecured claims against you. Among other things, the committee: consults with the “debtor in possession” on the administration of the case; investigates your conduct and operation of the business; and participates in formulating a plan. A creditors’ committee can be important in safeguarding the proper management of the business by the “debtor in possession.”

I’ve tried to give you a helpful overview of some of the issues involved in Chapter 11. Please feel free to contact me with any of your questions: 303-955-7570, at help@cobankruptcyhelp.com, or fill out the free consultation form.

* A husband and wife may file a joint petition or individual petitions.

To learn about the stay of creditor’s action and terms for small business see part 2 in tomorrow’s blog.