The “Basics” of Chapter 11 Bankruptcy—According to the U.S. Courts
If you search for information about the Chapter 11 bankruptcy process online, one of the first resources you’ll likely find is a resource published by the U.S. Courts called “Chapter 11 – Bankruptcy Basics.” But, if you click on this resource, you’ll find that it is anything but basic. It is long and dense, and if you are new to the concepts of bankruptcy and reorganization, it can be overwhelming. With this in mind, in this article, a Miami bankruptcy litigation attorney at Edelboim Lieberman breaks down what company owners and executives really need to know to start framing their thoughts about the process.
“How Chapter 11 Works” – The Bankruptcy Petition
In a section titled “How Chapter 11 Words,” the U.S. Courts begin by discussing the steps involved in initiating a business bankruptcy under Chapter 11. While the U.S. Courts discuss both voluntary and involuntary petitions, if you are considering a business bankruptcy, you only need to familiarize yourself with the voluntary filing process.
A bankruptcy petition is a formal legal document, and it must meet all of the requirements outlined in Chapter 11. When filing a bankruptcy petition under Chapter 11, a business must also generally file:
- Schedule of assets and liabilities
- Schedule of income and expenditures
- Schedule of executory contracts and unexpired leases
- Statement of financial affairs
Additionally, as the U.S. Courts note, “[g]enerally, a written disclosure statement and a plan of reorganization must [also] be filed with the court.” The timing and substance of these filings—and, in the case of a disclosure statement, whether it is needed at all—will depend on the specific nature of a company’s filing (i.e., whether the company pursues a traditional Chapter 11 bankruptcy or a “small business” bankruptcy under Subchapter V). The rest of this section focuses on definitions, details and exceptions that your company’s Miami bankruptcy litigation attorney can explain if you decide to move forward with filing under Chapter 11.
The Chapter 11 Debtor in Possession
A key aspect of Chapter 11 is that it allows the company (or “debtor”) to continue operating during the bankruptcy process in most cases. A debtor that continues to operate during its Chapter 11 bankruptcy is referred to as a “debtor in possession.”
As the U.S. Courts explain, Chapter 11 “places [a] debtor in possession in the position of a fiduciary, with the rights and powers of a chapter 11 trustee, and it requires the debtor to perform . . . all but the investigative functions and duties of a trustee. These duties . . . include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator . . . .” Thus, while securing designation as a debtor in possession can be essential for mitigating the costs and risks associated with filing under Chapter 11, it is also critical that company owners and executives have a clear understanding of the responsibilities (and potential liabilities) this entails. Here, too, an experienced Miami bankruptcy litigation attorney can help—and ensuring that you have a clear and comprehensive understanding of all relevant benefits and drawbacks is essential to making an informed decision about whether to file a petition under Chapter 11.
The U.S. Trustee’s (Limited) Role in a Chapter 11 Bankruptcy
One of the most misunderstood aspects of the Chapter 11 bankruptcy process is the role of the U.S. trustee. As we have discussed previously, the U.S. trustee’s role is not to take over the business during the bankruptcy process. Rather, the U.S. trustee’s role is generally to monitor the proceedings and to intervene if, and only if, doing so is necessary to protect assets in the bankruptcy estate.
Thus, while the U.S. Courts’ statement that “[t]he U.S. trustee plays a major role in monitoring the progress of a Chapter 11 case and supervising its administration” is true to an extent, it is important not to overstate the U.S. trustee’s role. From the debtor’s perspective, far more important is the role that creditors will play in the process. The business’s creditors will be focused on protecting their right to payment to the fullest extent possible, and they may assert various types of claims and defenses in order to do so. While creditors will seek the U.S. trustee’s involvement to help protect their interests in some cases, it is more common for them to initiate adversary proceedings directly.
The Creditors’ Committee
While the creditors’ committee plays an important role in traditional Chapter 11 bankruptcy cases, there is no creditors’ committee in a small business bankruptcy under Subchapter V. This is all that most company owners and executives need to know, as a “small business” is defined as a company with no more than $7.5 million in secured and unsecured debts (with at least 50 percent of its total debt load attributable to business and commercial activities).
The lack of a creditors’ committee in small business bankruptcies under Subchapter V is a significant benefit, and this factor alone helps make Subchapter V a viable option for companies that might not otherwise have the financial resources needed to pursue a Chapter 11 filing. Today, the majority of companies that reorganize their debts under Chapter 11 file under Subchapter V.
Acceptance of the Reorganization Plan and Discharge
In “Chapter 11 – Bankruptcy Basics,” the U.S. Courts devote a substantial amount of time to discussing the acceptance and discharge procedures in Chapter 11 bankruptcy cases. For company owners and executives who are considering reorganization, the key takeaway is that acceptance is a key stage in the process. By taking an informed and proactive approach to the process, they can minimize the risk of encountering roadblocks while also maximizing the benefits of their filings—ensuring that they are putting their companies in the best possible position for long-term growth and success.
Speak with an Experienced Miami Bankruptcy Litigation Attorney for Free
If you are considering a Chapter 11 bankruptcy, it is important to ensure that you are making informed decisions with your company’s best interests in mind. To speak with an experienced Miami bankruptcy litigation attorney at Edelboim Lieberman in confidence, please call 305-768-9909 or request a complimentary consultation online today.
