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Texas Bankruptcy - About Chapter 11 Bankruptcy

Chapter 11 is the most complex and time-consuming of all bankruptcy proceedings. Even though Chapter 11 Bankruptcies constitute less than 5 percent of all bankruptcies filed, it is estimated that as much as 90 percent of all time expended by the Bankruptcy Court involves Chapter 11 bankruptcy proceedings. Certain Chapter 11 matters which include relief from stay motions, matters of the use or sale of property which also include the use of cash collateral, assumption or rejection of executory contracts, and the obtaining of credit by the bankruptcy estate, are all issues involved in Chapter 11 bankruptcy proceedings. These issues must be dealt with independently, however the resolution of each individual issue often involves one or more evidentiary hearings. Also, one or more of these issues may affect the outcome of the others. The resolution of one or more of these critical issues may be essential in determining whether the Chapter 11 bankruptcy proceeding will be given an opportunity for a potentially successful outcome or be a conversion to Chapter 7 liquidation. Most often, a resolution to any or all of the above bankruptcy issues may required at the inception of a Chapter 11 filing.

Like Chapter 13, the goal of Chapter 11 is for a debtor to successfully reorganize its financial affairs so that it may repay its debt, retain assets, and usually remain in business. Additionally like Chapter 13, this is accomplished by a debtor or in Chapter 11 a debtor-in-possession proposing a plan of reorganization and obtaining its confirmation. Unlike Chapter 13 Bankruptcy confirmation, the Chapter 11 plan confirmation process is complex and very lengthy in comparison. At least two court hearings are required to obtain a Chapter 11 confirmation. A further important difference is that creditors in a Chapter 11 are given the opportunity to vote for or against the plan. It usually takes a minimum of four to six months to obtain confirmation of a typical Chapter 11 plan. Like a confirmed Chapter 13, a confirmed Chapter 11 plan is nothing more or less than a Court or judicially approved composition agreement.

Because a Chapter 11 Bankruptcy can oftentimes remain pending for an indefinite period of time prior to a confirmation of a plan and because the debtor or debtor-in-possession acts as its own trustee, a number of rules governing the continued operation have been created to monitor a debtor-in-possession's compliance with the Bankruptcy Code and Rules. These operating rules are usually implemented by guidelines published by the local or regional United States Trustee as well as local rules as published by the particular Bankruptcy Court in which the case is prosecuted. In Texas there are four Bankruptcy Court Districts; Northern, Southern, Western, and Eastern Districts. Each District has its own local operating rules and procedures which may extend to the different divisions of each District.

A Chapter 11 bankruptcy filing has no initial qualifying requirements in terms of the amount of debt that a debtor is required to owe or the type of entity that the debtor needs to be. However a Chapter 13 Debtor must file a Chapter 11 if debt is more than $336,900.00 in unsecured debt and $1,010,650.00 in secured debt pursuant to 11 U.S.C. § 109(e). In essence any entity that is qualified to file a Chapter 7 Bankruptcy may file a Chapter 11 Bankruptcy. Chapter 11 Bankruptcy was intentionally designed in this way. Both a large corporation or an individual debtor owing just slightly in excess of the Chapter 13 debt limits may each file a Chapter 11 Bankruptcy. This is a unique feature of Chapter 11 Bankruptcy and is designed to work for small individual debtors as well as large corporate debtors. When a large corporation files Chapter 11 bankruptcy, the filing is usually reported in the news media. There are numerous Texas companies and famous corporations that have filed bankruptcy.

Sometimes a Chapter 11 bankruptcy filing will involve a partnership with a single piece of real property that is in foreclosure. These single asset real estate Chapter 11 Bankruptcy filings tend to have relatively few problematic issues because most often all the debtor seeks to do is to refinance or sell the property so as to avoid foreclosure and realize some profit. Usually not much happens in such a proceeding until a secured creditor moves for relief from the stay or the debtor can propose a plan of reorganization.

Most Chapter 11 bankruptcy debtors or debtors-in-possession are operating businesses. The filing of a Chapter 11 proceeding makes the debtor a debtor-in-possession. A debtor-in-possession is the functional equivalent of a bankruptcy trustee. The debtor-in-possession is empowered and authorized to conduct ordinary business affairs without court approval except as required by Sections §363, §364, or §365 of the United States Bankruptcy Code.

There are various benefits that a debtor gains from a Chapter 11 bankruptcy filing. A business in serious financial difficulty may continue to operate without danger of immediate closure by its creditors via lawsuits, enforcement of judgments, liens as well as turnover orders. This breathing spell is supposed to provide the debtor with an opportunity to attempt the successful reorganization of its financial affairs. The debtor's breathing spell lasts until the statutory time to propose a plan of reorganization which is usually 120 days or until the automatic stay if lifted by a creditor.

There are burdens that a debtor-in-possession must accept along with the benefits of filing a Chapter 11 proceeding. The largest burden is that a debtor is required to comply with the various court rules and the scrutiny of the creditors and other parties in interest. The simplest meaning of these rules is that by filing a Chapter 11 bankruptcy, the debtor effectively becomes an involuntary partner with its creditors. The financial affairs and of the debtor will no longer be private. The debtor's affairs will be subject to the constant monitoring of its individual creditors, the United States Trustee, the creditors committee if one is appointed, and the Bankruptcy Court.

If the bankruptcy proceeding fails as a Chapter 11 Bankruptcy reorganization or if the debtor-in-possession fails to comply with the operating rules, the Chapter 11 Bankruptcy reorganization can be converted to a Chapter 7 Bankruptcy liquidation or in the alternative dismissed.

Recent Changes in Chapter 11 Bankruptcy

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256), also known as the Bankruptcy Reform Act (the Act), which amends Title 11 of the United States Code. Although most of the provisions were primarily for Consumer Bankruptcy there were some changes to Chapter 11;

  • Expedited Chapter 11 created for small businesses — Businesses with less than $2 million in debts can file an expedited form of Chapter 11 reorganization.
  • Chapter 11 exclusivity period shortened — A Chapter 11 Bankruptcy Debtor now has only 18 months to propose a reorganization plan before creditors are allowed to propose their own plans. Before the Act, creditors were barred from making proposals indefinitely due to the debtor's ability to obtain extensions.

Chapter 11 bankruptcy tends to be very complex and time consuming. Businesses considering seeking bankruptcy relief under Chapter 11 must utilize an attorney who is experienced in handling Chapter 11 Bankruptcy cases. If you or your company have questions about corporate or business bankruptcy please contact The Law Offices of R.J.Atkinson,LLC at 800-436-9056 for a free initial consultation to discuss your company's legal options in bankruptcy.

 

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