Salisbury Law Firm, The Law Firm of Shaw & Crowson, P.A.

What is a Chapter 11 bankruptcy?

Chapter 11 provides for “debt reorganization.” It is most often used by corporations and LLC’s. However, sometimes individuals can also file under Chapter 11. The debtor proposes a plan that treats outstanding debt in different ways depending upon the type of debt. The plan typically involves payments over time, usually 60 months, but may also provide for the sale of property. In a Chapter 11, a disclosure statement is also prepared. The disclosure statement provides creditors with information about the debtor and the details of the plan so that they can accept or reject the plan. And if a certain number of creditors accept the plan, the Bankruptcy Court will confirm the plan.

What are the advantages of a Chapter 11?

A major advantage of a Chapter 11 is the debtor remains in control of its property and still operates its business as an ongoing concern, subject to court supervision. The debtor acts as a trustee during the bankruptcy and submits monthly operating reports that disclose the debtors ongoing financial condition. Another advantage is that, while some secured debts may need to be paid post-petition, the debtor does not have to start paying on its pre-petition debts until the plan of reorganization is confirmed. This time between the filing and the confirmation of the plan gives the debtor substantial breathing room to negotiate with creditors and restructure debts while still operating the business.

What are the disadvantages of a Chapter 11?

For individual debtors, a disadvantage of a Chapter 11 bankruptcy is that there is no discharge unless the debtor makes all of the plan payments. Cost is another factor to consider. Chapter 11 bankruptcies can be expensive and time consuming because of the complexities involved. Chapter 11 cases can also end up being converted into Chapter 7 if the debtor cannot propose a confirmable plan. There is also the issue of “adequate protection.” This means that either 1) the debtor has to make post-petition payments to secured creditors to protect their interest in any collateral secured by their loan or 2) there is enough equity in the collateral secured by their loan that payments are not required, at least so long as there in an “equity cushion.”

What details need to be in a Chapter 11 Plan?

The plan must place creditors that are similarly situated into a “class” (e.g. unsecured creditors are usually placed in the same class). The plan then sets forth the “treatment” of each class. Each creditor is then allowed to accept or reject the plan but the votes are counted within each class. For example, a debtor may have three classes of creditors: one class for secured creditors (such as mortgage lenders and vehicle loan lenders), another for tax debt (such as the IRS and state), and a third for unsecured debt (such as personal loans or credit cards). Even if some creditors within each class reject the plan, the class is deemed to accept the plan if there are enough votes from creditors holding a substantial amount of debt in that particular class. Moreover, only one class of creditors who accept the plan is need to obtain confirmation of the plan from the Bankruptcy Court.

Do my company have to be in business to file Chapter 11?

No. Chapter 11 is designed to preserve the value of assets. Even if there is no ongoing business, preserving the value of assets is a perfectly acceptable reason to file Chapter 11.

What is a single asset real estate case in a Chapter 11 bankruptcy?

The term “single asset real estate” means real property that constitutes a single property or project. Also, the single asset generates substantially all of the income of the debtor and no substantial business is conducted by the debtor other than the business of operating the real property. In a single asset Chapter 11, the time for submitting a disclosure statement and plan is shortened because the case is deemed to be not as complex as one where there are multiple assets and, probably, more creditors.

Can the debtor spend money to pay employees or vendors without court approval?

The debtor cannot use cash collateral in a Chapter 11 without the consent of the creditor who has a lien on the cash collateral. Even so, if the use of “cash collateral” is going to be an issue, a motion to use cash collateral is filed just after the Chapter 11 petition so that the debtor can seek court approval to use cash to pay its vendors and employees as part of keeping the business going. As a way of balancing the needs of the debtor with the rights of the creditor, the order authorizing the use of cash collateral will generally contain provisions protecting the creditor’s position as to any cash collateral. To this end, the order usually grants a replacement lien in any after acquired property and future cash collateral.

This information is intended to provide basic answers to commonly asked questions about Chapter 7 Bankruptcy in Maryland. It is not intended to be individual legal advice nor is it intended to be the practice of law. This information does not substitute for the advice of your own attorney. You need to consult with your own attorney regarding your own specific legal questions. No attorney-client relationship is established through this presentation.