Are you inquiring about Chapter 11 bankruptcy? Have you consulted an experienced bankruptcy attorney in Arizona regarding Chapter 11?

Chapter 11 Bankruptcy usually involves a business such as a corporation or partnership.1 It is similar to Chapter 13 Bankruptcy in a number of ways. For one, it involves a reorganization plan to keep your business active so you can pay creditors over a time period.2 Moreover,  the plan may be from the debtor’s future earnings. 11 U.S.C. § 1123(a)(8).

While many small businesses try to avoid Chapter 11 bankruptcy because of the cost and complexity, it is the only option for small business partnerships, LLCs, or corporations that seek to restructure and continue operation.3 This is a broad overview of Chapter 11 bankruptcy.

How does Chapter 11 work?

A Chapter 11 bankruptcy may start because you filed for it voluntarily or it could be involuntary because creditors filed it as long as they meet certain requirements. 11 U.S.C. §§ 301, 303. Most Chapter 11 bankruptcy cases are fact-sensitive and many rules and deadlines depend on the nature of the business. For example, there generally is not a deadline for a Chapter 11 plan unless you are a small business.4 In that case, the debtor has 300 days to propose a Chapter 11 reorganization plan.5

Voluntary petitions must adhere to specific forms provided by the Judicial Conference of the United States.6 Involuntary petitions are followed by an entry of an order for relief.7

How do I qualify for Chapter 11?

There are some requirements you should be aware of before filing for Chapter 11 bankruptcy. First, you will not be able to file for Chapter 11 if another bankruptcy petition was dismissed 180 days prior because of your willful failure to appear in court or if it was dismissed after creditors sought relief in bankruptcy court to recover property encumbered by liens. 11 U.S.C. §§ 109(g), 362(d)-(e).

If you filed bankruptcy under Chapter 11 or another section of the Bankruptcy Code, you may not file for Chapter 11 again unless 180 days before filing you completed credit counseling with an appropriate agency. 11 U.S.C. §§ 109, 111.

Since Chapter 11 cases are highly complex and fact specific, it is important that you contact a Phoenix bankruptcy attorney to discuss how this would work in your situation.

What documents do I need to file?

For voluntary petitions, a business will need to file:

  1. A schedule 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 affairs8

There may be additional document requirements for individuals.9 The voluntary petition also includes debtor names, social security number and tax identification number, the debtor’s plan, a request for relief under the Bankruptcy Code, location of principal assets, and residence address.10

Usually the court will require a written disclosure statement and plan of reorganization. 11 U.S.C. §§ 1121, 1125. This statement needs a disclosure of assets, liabilities, and business affairs to enable a creditor to make an informed judgment about your reorganization plans. 11 U.S.C. § 1125.

As a general rule, books and records should be closed as of the date of petition for a Chapter 11 business debtor.11 The same is true for bank accounts, which must be closed immediately upon filing.12

What happens after I file?

If you filed a voluntary petition, you will be identified as a “debtor in possession” because you retain control over your assets while undergoing reorganization.13 A debtor in possession is a fiduciary who has the rights and powers of a Chapter 11 trustee.14 This means as a debtor in possession you will have duties to investigate, account for property, file informational reports required by the U.S. trustee and bankruptcy administrator, and examine objections to claims.11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a).  This identity is removed until your plan of reorganization is confirmed, your case is dismissed, or your case is converted to a Chapter 7 bankruptcy.15

The kinds of assets that are included in a Chapter 11 bankruptcy depend on the nature of the business. If the entity filing for bankruptcy is a corporation, Chapter 11 bankruptcy does not put the stockholder’s personal assets at risk except for the value of investment in company stock.16 In contrast, if the business is a sole proprietorship the personal assets of the owner-debtor are included.17

How much will this cost me?

Currently, courts charge a $1,000 case filing fee and a $46 administration fee that must be paid upon filing or, with court permission, in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b). There are a series of rules that govern whether or not installments will be granted and which fees can be paid in installments. For example, the $46 administrative fee could be paid in four installments maximum. Fed. R. Bankr. P. 1006(b).

There are also quarterly fees that all Chapter 11 cases are subject to unless dismissed, converted to another chapter, or closed by the court.18

What about discharge?

A Chapter 11 bankruptcy typically discharges debt that existed before the date of confirmation when the debtor receives confirmation of a reorganization plan.19 There are multiple exceptions to this general rule, especially in the case of an individual debtor as opposed to a business entity debtor or if the plan is a liquidation instead of a reorganization plan.20

Further, debts that are nondischargable under § 523 of the Bankruptcy Code for individuals cannot be discharged. Some examples include debt for certain educational expenses, child support, and certain taxes.21

[1] Reorganization Under the Bankruptcy Code, USCourts.gov, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter11.aspx (last visited Mar. 5, 2014).

2 Id.

3 Bret A. Maidman, Bankruptcy Options for Small Business Debtors, Nolo.com, http://www.nolo.com/legal-encyclopedia/chapter-11-bankruptcy-small-business-owners.html (last visited Mar. 5, 2014).

4 Id.

5 Id.

6 Reorganization Under the Bankruptcy Code, supra note 1.

7 Id.

8 Fed. R. Bankr. P. 1007(b).

9 Reorganization Under the Bankruptcy Code, supra note 1.

10 Id.

11 United States Trustee Operating Guidelines and Reporting Requirements for Chapter 11 Cases, azb.uscourts.gov, http://www.azb.uscourts.gov/Documents/UST_Guidelines.pdf (last updated May 5, 2008).

12 Id.

13 Reorganization Under the Bankruptcy Code, supra note 1.

14 Id.

15 Id.

16 Id.

17 Id.

18 United States Trustee Operating Guidelines and Reporting Requirements for Chapter 11 Cases, supra note 11.

19 Reorganization Under the Bankruptcy Code, supra note 1.

20 Id.

21 Id.