Bankruptcy Attorney in Michigan  

Walter A. Metzen, Michigan Bankruptcy Attorney

Board Certified Consumer Bankruptcy Specialist

American Board of Bankruptcy Certification

 


 

 Bankruptcy Basics: The Discharge in Bankruptcy
 

Chapter 11
Reorganization Under the
Bankruptcy Code
BACKGROUND

A case filed under chapter 11 of the United
States Bankruptcy Code is frequently referred
to as a “reorganization” bankruptcy.
An individual cannot file under chapter 11 or
any other chapter if, during the preceding 180
days, a prior bankruptcy petition was
dismissed due to the debtor’s willful failure to
appear before the court or comply with orders
of the court, or was voluntarily dismissed after
creditors sought relief from the bankruptcy
court to recover property upon which they
hold liens. 11 U.S.C. 109(g), 362(d)-(e). In
addition, no individual may be a debtor under
chapter 11 or any chapter of the Bankruptcy
Code unless he or she has, within 180 days
before filing, received credit counseling from
an approved credit counseling agency either in
an individual or group briefing. 11 U.S.C.
109, 111. There are exceptions in
emergency situations or where the U.S. trustee
(or bankruptcy administrator) has determined
that there are insufficient approved agencies to
provide the required counseling. If a debt
management plan is developed during
required credit counseling, it must be filed
with the court.
HOW CHAPTER 11 WORKS
A chapter 11 case begins with the filing of a
petition with the bankruptcy court serving the
area where the debtor has a domicile or
residence. A petition may be a voluntary
petition, which is filed by the debtor, or it may
be an involuntary petition, which is filed by
creditors that meet certain requirements. 11
U.S.C. 301, 303. A voluntary petition must
adhere to the format of Form 1 of the Official
Forms prescribed by the Judicial Conference
of the United States. Unless the court orders
otherwise, the debtor also must file with the
court: (1) schedules of assets and liabilities;
(2) a schedule of current income and
expenditures; (3) a schedule of executory
contracts and unexpired leases; and (4) a
statement of financial affairs. Fed. R. Bankr.
P. 1007(b). If the debtor is an individual (or
husband and wife), there are additional
document filing requirements. Such debtors
must file: a certificate of credit counseling and
a copy of any debt repayment plan developed
through credit counseling; evidence of
payment from employers, if any, received 60
days before filing; a statement of monthly net
income and any anticipated increase in income
or expenses after filing; and a record of any
interest the debtor has in federal or state
qualified education or tuition accounts.11
U.S.C. 521. A husband and wife may file a
joint petition or individual petitions. 11 U.S.C.
302(a). (The Official Forms are not
available from the court, but may be
purchased at legal stationery stores or
downloaded from the internet at:
http://www.uscourts.gov/bkforms/index.html.)
The courts are required to charge an $1,000
case filing fee and a $39 miscellaneous
administrative fee. The fees must be paid to
the clerk of the court upon filing or may, with
the court’s permission, be paid by individual
debtors in installments. 28 U.S.C. 1930(a);
Fed. R. Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. Fed. R.
Bankr. P. 1006(b) limits to four the number of
installments for the filing fee. The final
installment must be paid not later than 120
days after filing the petition. For cause shown,
the court may extend the time of any
installment, provided that the last installment
is paid not later than 180 days after the filing
of the petition. Fed. R. Bankr. P. 1006(b). The
$39 administrative fee may be paid in
installments in the same manner as the filing
fee. If a joint petition is filed, only one filing
fee and one administrative fee are charged.
Debtors should be aware that failure to pay
these fees may result in dismissal of the case.
11 U.S.C. 1112(b)(10).
The voluntary petition will include standard
information concerning the debtor’s name(s),
social security number or tax identification
number, residence, location of principal assets
(if a business), the debtor’s plan or intention
to file a plan, and a request for relief under the
appropriate chapter of the Bankruptcy Code.
Upon filing a voluntary petition for relief
under chapter 11 or, in an involuntary case,
the entry of an order for relief, the debtor
automatically assumes an additional identity
as the “debtor in possession.” 11 U.S.C.
1101. The term refers to a debtor that keeps
possession and control of its assets while
undergoing a reorganization under chapter 11,
without the appointment of a case trustee. A
debtor will remain a debtor in possession until
the debtor’s plan of reorganization is
confirmed, the debtor’s 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, the debtor, as “debtor in
possession,” operates the business and
performs many of the functions that a trustee
performs in cases under other chapters. 11
U.S.C. 1107(a).
Generally, a written disclosure statement and
a plan of reorganization must be filed with the
court. 11 U.S.C. 1121, 1125. The
disclosure statement is a document that must
contain information concerning the assets,
liabilities, and business affairs of the debtor
sufficient to enable a creditor to make an
informed judgment about the debtor’s plan of
reorganization. 11 U.S.C. 1125. The
information required is governed by judicial
discretion and the circumstances of the case.
In a “small business case” (discussed below)
the debtor may not need to file a separate
disclosure statement if the court determines
that adequate information is contained in the
plan. 11 U.S.C. 1125(f). The contents of the
plan must include a classification of claims
and must specify how each class of claims
will be treated under the plan. 11 U.S.C.
1123. Creditors whose claims are
“impaired,” i.e., those whose contractual
rights are to be modified or who will be paid
less than the full value of their claims under
the plan, vote on the plan by ballot. 11 U.S.C.
1126. After the disclosure statement is
approved by the court and the ballots are
collected and tallied, the court will conduct a
confirmation hearing to determine whether to
confirm the plan.11 U.S.C. 1128.
In the case of individuals, chapter 11 bears
some similarities to chapter 13. For example,
property of the estate for an individual debtor
includes the debtor’s earnings and property
acquired by the debtor after filing until the
case is closed, dismissed or converted;
funding of the plan may be from the debtor’s
future earnings; and the plan cannot be
confirmed over a creditor’s objection without
committing all of the debtor’s disposable
income over five years unless the plan pays
the claim in full, with interest, over a shorter
period of time. 11 U.S.C. 1115,
1123(a)(8), 1129(a)(15).

THE CHAPTER 11 DEBTOR IN
POSSESSION

Chapter 11 is typically used to reorganize a
business, which may be a corporation, sole
proprietorship, or partnership. A corporation
exists separate and apart from its owners, the
stockholders. The chapter 11 bankruptcy case
of a corporation (corporation as debtor) does
not put the personal assets of the stockholders
at risk other than the value of their investment
in the company’s stock. A sole proprietorship
(owner as debtor), on the other hand, does not
have an identity separate and distinct from its
owner(s). Accordingly, a bankruptcy case
involving a sole proprietorship includes both
the business and personal assets of the
owners-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.
Section 1107 of the Bankruptcy Code places
the 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 of all but the investigative functions
and duties of a trustee. These duties, set forth
in the Bankruptcy Code and Federal Rules of
Bankruptcy Procedure, 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 (discussed below), such as
monthly operating reports. 11 U.S.C. 1106,
1107; Fed. R. Bankr. P. 2015(a). The debtor in
possession also has many of the other powers
and duties of a trustee, including the right,
with the court's approval, to employ attorneys,
accountants, appraisers, auctioneers, or other
professional persons to assist the debtor
during its bankruptcy case. Other
responsibilities include filing tax returns and
reports which are either necessary or ordered
by the court after confirmation, such as a final
accounting. The U.S. trustee is responsible for
monitoring the compliance of the debtor in
possession with the reporting requirements.
Railroad reorganizations have specific
requirements under subsection IV of chapter
11, which will not be addressed here. In
addition, stock and commodity brokers are
prohibited from filing under chapter 11 and
are restricted to chapter 7. 11 U.S.C. 109(d).
THE U.S. TRUSTEE OR BANKRUPTCY
ADMINISTRATOR

The U.S. trustee plays a major role in
monitoring the progress of a chapter 11 case
and supervising its administration. The U.S.
trustee is responsible for monitoring the
debtor in possession’s operation of the
business and the submission of operating
reports and fees. Additionally, the U.S. trustee
monitors applications for compensation and
reimbursement by professionals, plans and
disclosure statements filed with the court, and
creditors’ committees. The U.S. trustee
conducts a meeting of the creditors, often
referred to as the “section 341 meeting,” in a
chapter 11 case. 11 U.S.C. 341. The U.S.
trustee and creditors may question the debtor
under oath at the section 341 meeting
concerning the debtor’s acts, conduct,
property, and the administration of the case.
The U.S. trustee also imposes certain
requirements on the debtor in possession
concerning matters such as reporting its
monthly income and operating expenses,
establishing new bank accounts, and paying
current employee withholding and other taxes.
By law, the debtor in possession must pay a
quarterly fee to the U.S. trustee for each
quarter of a year until the case is converted or
dismissed. 28 U.S.C. 1930(a)(6). The
amount of the fee, which may range from
$250 to $10,000, depends on the amount of
the debtor’s disbursements during each
quarter. Should a debtor in possession fail to
comply with the reporting requirements of the
U.S. trustee or orders of the bankruptcy court,
or fail to take the appropriate steps to bring
the case to confirmation, the U.S. trustee may
file a motion with the court to have the
debtor’s chapter 11 case converted to another
chapter of the Bankruptcy Code or to have the
case dismissed.
In North Carolina and Alabama, bankruptcy
administrators perform similar functions that
U.S. trustees perform in the remaining fortyeight
states. The bankruptcy administrator
program is administered by the Administrative
Office of the United States Courts, while the
U.S. trustee program is administered by the
Department of Justice. For purposes of this
publication, references to U.S. trustees are
also applicable to bankruptcy administrators.
CREDITORS’ COMMITTEES
Creditors’ committees can play a major role in
chapter 11 cases. The committee is appointed
by the U.S. trustee and ordinarily consists of
unsecured creditors who hold the seven largest
unsecured claims against the debtor. 11 U.S.C.
1102. Among other things, the committee:
consults with the debtor in possession on
administration of the case; investigates the
debtor’s conduct and operation of the
business; and participates in formulating a
plan. 11 U.S.C. 1103. A creditors’
committee may, with the court’s approval,
hire an attorney or other professionals to assist
in the performance of the committee’s duties.
A creditors’ committee can be an important
safeguard to the proper management of the
business by the debtor in possession.
THE SMALL BUSINESS CASE AND
THE SMALL BUSINESS DEBTOR

In some smaller cases the U.S. trustee may be
unable to find creditors willing to serve on a
creditors’ committee, or the committee may
not be actively involved in the case. The
Bankruptcy Code addresses this issue by
treating a “small business case” somewhat
differently than a regular bankruptcy case. A
small business case is defined as a case with a
“small business debtor.” 11 U.S.C.
101(51C). Determination of whether a
debtor is a “small business debtor” requires
application of a two-part test. First, the debtor
must be engaged in commercial or business
activities (other than primarily owning or
operating real property) with total noncontingent
liquidated secured and unsecured
debts of $2,190,000 or less. Second, the
debtor’s case must be one in which the U.S.
trustee has not appointed a creditors’
committee, or the court has determined the
creditors’ committee is insufficiently active
and representative to provide oversight of the
debtor. 11 U.S.C. 101(51D).
In a small business case, the debtor in
possession must, among other things, attach
the most recently prepared balance sheet,
statement of operations, cash-flow statement
and most recently filed tax return to the
petition or provide a statement under oath
explaining the absence of such documents and
must attend court and the U.S. trustee meeting
through senior management personnel and
counsel. The small business debtor must make
ongoing filings with the court concerning its
profitability and projected cash receipts and
disbursements, and must report whether it is
in compliance with the Bankruptcy Code and
the Federal Rules of Bankruptcy Procedure
and whether it has paid its taxes and filed its
tax returns. 11 U.S.C. 308, 1116.
In contrast to other chapter 11 debtors, the
small business debtor is subject to additional
oversight by the U.S. trustee. Early in the case,
the small business debtor must attend an
“initial interview” with the U.S. trustee at
which time the U.S. trustee will evaluate the
debtor’s viability, inquire about the debtor’s
business plan, and explain certain debtor
obligations including the debtor’s
responsibility to file various reports. 28 U.S.C.
586(a)(7). The U.S. trustee will also monitor
the activities of the small business debtor
during the case to identify as promptly as
possible whether the debtor will be unable to
confirm a plan.
Because certain filing deadlines are different
and extensions are more difficult to obtain, a
case designated as a small business case
normally proceeds more quickly than other
chapter 11 cases. For example, only the debtor
may file a plan during the first 180 days of a
small business case. 11 U.S.C. 1121(e). This
“exclusivity period” may be extended by the
court, but only to 300 days, and only if the
debtor demonstrates by a preponderance of the
evidence that the court will confirm a plan
within a reasonable period of time. When the
case is not a small business case, however, the
court may extend the exclusivity period “for
cause” up to 18 months.
THE SINGLE ASSET REAL ESTATE
DEBTOR

Single asset real estate debtors are subject to
special provisions of the Bankruptcy Code.
The term “single asset real estate” is defined
as “a single property or project, other than
residential real property with fewer than four
residential units, which generates substantially
all of the gross income of a debtor who is not
a family farmer and on which no substantial
business is being conducted by a debtor other
than the business of operating the real
property and activities incidental.” 11 U.S.C.
101(51B). The Bankruptcy Code provides
circumstances under which creditors of a
single asset real estate debtor may obtain relief
from the automatic stay which are not
available to creditors in ordinary bankruptcy
cases. 11 U.S.C. 362(d). On request of a
creditor with a claim secured by the single
asset real estate and after notice and a hearing,
the court will grant relief from the automatic
stay to the creditor unless the debtor files a
feasible plan of reorganization or begins
making interest payments to the creditor
within 90 days from the date of the filing of
the case, or within 30 days of the court’s
determination that the case is a single asset
real estate case. The interest payments must be
equal to the non-default contract interest rate
on the value of the creditor’s interest in the
real estate. 11 U.S.C. 362(d)(3).
APPOINTMENT OR ELECTION OF A
CASE TRUSTEE

Although the appointment of a case trustee is
a rarity in a chapter 11 case, a party in interest
or the U.S. trustee can request the
appointment of a case trustee or examiner at
any time prior to confirmation in a chapter 11
case. The court, on motion by a party in
interest or the U.S. trustee and after notice and
hearing, shall order the appointment of a case
trustee for cause, including fraud, dishonesty,
incompetence, or gross mismanagement, or if
such an appointment is in the interest of
creditors, any equity security holders, and
other interests of the estate. 11 U.S.C.
1104(a). Moreover, the U.S. trustee is
required to move for appointment of a trustee
if there are reasonable grounds to believe that
any of the parties in control of the debtor
“participated in actual fraud, dishonesty or
criminal conduct in the management of the
debtor or the debtor’s financial reporting.” 11
U.S.C. 1104(e). The trustee is appointed by
the U.S. trustee, after consultation with parties
in interest and subject to the court’s approval.
Fed. R. Bankr. P. 2007.1. Alternatively, a
trustee in a case may be elected if a party in
interest requests the election of a trustee
within 30 days after the court orders the
appointment of a trustee. In that instance, the
U.S. trustee convenes a meeting of creditors
for the purpose of electing a person to serve as
trustee in the case. 11 U.S.C. 1104(b).
The case trustee is responsible for
management of the property of the estate,
operation of the debtor’s business, and, if
appropriate, the filing of a plan of
reorganization. Section 1106 of the
Bankruptcy Code requires the trustee to file a
plan “as soon as practicable” or, alternatively,
to file a report explaining why a plan will not
be filed or to recommend that the case be
converted to another chapter or dismissed. 11
U.S.C. 1106(a)(5).
Upon the request of a party in interest or the
U.S. trustee, the court may terminate the
trustee’s appointment and restore the debtor in
possession to management of bankruptcy
estate at any time before confirmation.11
U.S.C. 1105.
THE ROLE OF AN EXAMINER
The appointment of an examiner in a chapter
11 case is rare. The role of an examiner is
generally more limited than that of a trustee.
The examiner is authorized to perform the
investigatory functions of the trustee and is
required to file a statement of any
investigation conducted. If ordered to do so by
the court, however, an examiner may carry out
any other duties of a trustee that the court
orders the debtor in possession not to perform.
11 U.S.C. 1106. Each court has the authority
to determine the duties of an examiner in each
particular case. In some cases, the examiner
may file a plan of reorganization, negotiate or
help the parties negotiate, or review the
debtor’s schedules to determine whether some
of the claims are improperly categorized.
Sometimes, the examiner may be directed to
determine if objections to any proofs of claim
should be filed or whether causes of action
have sufficient merit so that further legal
action should be taken. The examiner may not
subsequently serve as a trustee in the case. 11
U.S.C. 321.
THE AUTOMATIC STAY
The automatic stay provides a period of time
in which all judgments, collection activities,
foreclosures, and repossessions of property are
suspended and may not be pursued by the
creditors on any debt or claim that arose
before the filing of the bankruptcy petition. As
with cases under other chapters of the
Bankruptcy Code, a stay of creditor actions
against the chapter 11 debtor automatically
goes into effect when the bankruptcy petition
is filed. 11 U.S.C. 362(a). The filing of a
petition, however, does not operate as a stay
for certain types of actions listed under 11
U.S.C. 362(b). The stay provides a breathing
spell for the debtor, during which negotiations
can take place to try to resolve the difficulties
in the debtor’s financial situation.
Under specific circumstances, the secured
creditor can obtain an order from the court
granting relief from the automatic stay. For
example, when the debtor has no equity in the
property and the property is not necessary for
an effective reorganization, the secured
creditor can seek an order of the court lifting
the stay to permit the creditor to foreclose on
the property, sell it, and apply the proceeds to
the debt. 11 U.S.C. 362(d).
The Bankruptcy Code permits applications for
fees to be made by certain professionals
during the case. Thus, a trustee, a debtor’s
attorney, or any professional person appointed
by the court may apply to the court at intervals
of 120 days for interim compensation and
reimbursement payments. In very large cases
with extensive legal work, the court may
permit more frequent applications. Although
professional fees may be paid if authorized by
the court, the debtor cannot make payments to
professional creditors on prepetition
obligations, i.e., obligations which arose
before the filing of the bankruptcy petition.
The ordinary expenses of the ongoing
business, however, continue to be paid.
WHO CAN FILE A PLAN
The debtor (unless a “small business debtor”)
has a 120-day period during which it has an
exclusive right to file a plan. 11 U.S.C.
1121(b). This exclusivity period may be
extended or reduced by the court. But, in no
event, may the exclusivity period, including
all extensions, be longer than 18 months. 11
U.S.C. 1121(d). After the exclusivity period
has expired, a creditor or the case trustee may
file a competing plan. The U.S. trustee may
not file a plan. 11 U.S.C. 307.
A chapter 11 case may continue for many
years unless the court, the U.S. trustee, the
committee, or another party in interest acts to
ensure the case’s timely resolution. The
creditors’ right to file a competing plan
provides incentive for the debtor to file a plan
within the exclusivity period and acts as a
check on excessive delay in the case.
AVOIDABLE TRANSFERS
The debtor in possession or the trustee, as the
case may be, has what are called “avoiding”
powers. These powers may be used to undo a
transfer of money or property made during a
certain period of time before the filing of the
bankruptcy petition. By avoiding a particular
transfer of property, the debtor in possession
can cancel the transaction and force the return
or “disgorgement” of the payments or
property, which then are available to pay all
creditors. Generally, and subject to various
defenses, the power to avoid transfers is
effective against transfers made by the debtor
within 90 days before filing the petition. But
transfers to “insiders” (i.e., relatives, general
partners, and directors or officers of the
debtor) made up to a year before filing may be
avoided. 11 U.S.C. 101(31), 101(54), 547,
548. In addition, under 11 U.S.C. 544, the
trustee is authorized to avoid transfers under
applicable state law, which often provides for
longer time periods. Avoiding powers prevent
unfair prepetition payments to one creditor at
the expense of all other creditors.
 

CASH COLLATERAL, ADEQUATE
PROTECTION, AND OPERATING
CAPITAL

Although the preparation, confirmation, and
implementation of a plan of reorganization is
at the heart of a chapter 11 case, other issues
may arise that must be addressed by the
debtor in possession. The debtor in possession
may use, sell, or lease property of the estate in
the ordinary course of its business, without
prior approval, unless the court orders
otherwise. 11 U.S.C. 363(c). If the intended
sale or use is outside the ordinary course of its
business, the debtor must obtain permission
from the court.
A debtor in possession may not use “cash
collateral” without the consent of the secured
party or authorization by the court, which
must first examine whether the interest of the
secured party is adequately protected. 11
U.S.C. 363. Section 363 defines “cash
collateral” as cash, negotiable instruments,
documents of title, securities, deposit
accounts, or other cash equivalents, whenever
acquired, in which the estate and an entity
other than the estate have an interest. It
includes the proceeds, products, offspring,
rents, or profits of property and the fees,
charges, accounts or payments for the use or
occupancy of rooms and other public facilities
in hotels, motels, or other lodging properties
subject to a creditor’s security interest.
When “cash collateral” is used (spent), the
secured creditors are entitled to receive
additional protection under section 363 of the
Bankruptcy Code. The debtor in possession
must file a motion requesting an order from
the court authorizing the use of the cash
collateral. Pending consent of the secured
creditor or court authorization for the debtor
in possession’s use of cash collateral, the
debtor in possession must segregate and
account for all cash collateral in its
possession. 11 U.S.C. 363(c)(4). A party
with an interest in property being used by the
debtor may request that the court prohibit or
condition this use to the extent necessary to
provide “adequate protection” to the creditor.
Adequate protection may be required to
protect the value of the creditor’s interest in
the property being used by the debtor in
possession. This is especially important when
there is a decrease in value of the property.
The debtor may make periodic or lump sum
cash payments, or provide an additional or
replacement lien that will result in the
creditor’s property interest being adequately
protected. 11 U.S.C. 361.
When a chapter 11 debtor needs operating
capital, it may be able to obtain it from a
lender by giving the lender a court-approved
“superpriority” over other unsecured creditors
or a lien on property of the estate. 11 U.S.C.
364.
MOTIONS
Before confirmation of a plan, several
activities may take place in a chapter 11 case.
Continued operation of the debtor’s business
may lead to the filing of a number of contested
motions. The most common are those seeking
relief from the automatic stay, the use of cash
collateral, or to obtain credit. There may also
be litigation over executory (i.e., unfulfilled)
contracts and unexpired leases and the
assumption or rejection of those executory
contracts and unexpired leases by the debtor in
possession. 11 U.S.C. 365. Delays in
formulating, filing, and obtaining
confirmation of a plan often prompt creditors
to file motions for relief from stay, to convert
the case to chapter 7, or to dismiss the case
altogether.
ADVERSARY PROCEEDINGS
Frequently, the debtor in possession will
institute a lawsuit, known as an adversary
proceeding, to recover money or property for
the estate. Adversary proceedings may take
the form of lien avoidance actions, actions to
avoid preferences, actions to avoid fraudulent
transfers, or actions to avoid post-petition
transfers. These proceedings are governed by
Part VII of the Federal Rules of Bankruptcy
Procedure. At times, a creditors’ committee
may be authorized by the bankruptcy court to
pursue these actions against insiders of the
debtor if the plan provides for the committee
to do so or if the debtor has refused a demand
to do so. Creditors may also initiate adversary
proceedings by filing complaints to determine
the validity or priority of a lien, revoke an
order confirming a plan, determine the
dischargeability of a debt, obtain an
injunction, or subordinate a claim of another
creditor.
CLAIMS
The Bankruptcy Code defines a claim as: (1)
a right to payment; (2) or a right to an
equitable remedy for a failure of performance
if the breach gives rise to a right to payment.
11 U.S.C. 101(5). Generally, any creditor
whose claim is not scheduled (i.e., listed by
the debtor on the debtor’s schedules) or is
scheduled as disputed, contingent, or
unliquidated must file a proof of claim (and
attach evidence documenting the claim) in
order to be treated as a creditor for purposes of
voting on the plan and distribution under it.
Fed. R. Bankr. P. 3003(c)(2). But filing a
proof of claim is not necessary if the creditor’s
claim is scheduled (but is not listed as
disputed, contingent, or unliquidated by the
debtor) because the debtor’s schedules are
deemed to constitute evidence of the validity
and amount of those claims. 11 U.S.C. 1111.
If a scheduled creditor chooses to file a claim,
a properly filed proof of claim supersedes any
scheduling of that claim. Fed. R. Bankr. P.
3003(c)(4). It is the responsibility of the
creditor to determine whether the claim is
accurately listed on the debtor’s schedules.
The debtor must provide notification to those
creditors whose names are added and whose
claims are listed as a result of an amendment
to the schedules. The notification also should
advise such creditors of their right to file
proofs of claim and that their failure to do so
may prevent them from voting upon the
debtor’s plan of reorganization or participating
in any distribution under that plan. When a
debtor amends the schedule of liabilities to
add a creditor or change the status of any
claims to disputed, contingent, or
unliquidated, the debtor must provide notice
of the amendment to any entity affected. Fed.
R. Bankr. P. 1009(a).
EQUITY SECURITY HOLDERS
An equity security holder is a holder of an
equity security of the debtor. Examples of an
equity security are a share in a corporation, an
interest of a limited partner in a limited
partnership, or a right to purchase, sell, or
subscribe to a share, security, or interest of a
share in a corporation or an interest in a
limited partnership. 11 U.S.C. 101(16), (17).
An equity security holder may vote on the
plan of reorganization and may file a proof of
interest, rather than a proof of claim. A proof
of interest is deemed filed for any interest that
appears in the debtor’s schedules, unless it is
scheduled as disputed, contingent, or
unliquidated. 11 U.S.C. 1111. An equity
security holder whose interest is not scheduled
or scheduled as disputed, contingent, or
unliquidated must file a proof of interest in
order to be treated as a creditor for purposes of
voting on the plan and distribution under it.
Fed. R. Bankr. P. 3003(c)(2). A properly filed
proof of interest supersedes any scheduling of
that interest. Fed. R. Bankr. P. 3003(c)(4).
Generally, most of the provisions that apply to
proofs of claim, as discussed above, are also
applicable to proofs of interest.
CONVERSION OR DISMISSAL
A debtor in a case under chapter 11 has a onetime
absolute right to convert the chapter 11
case to a case under chapter 7 unless: (1) the
debtor is not a debtor in possession; (2) the
case originally was commenced as an
involuntary case under chapter 11; or (3) the
case was converted to a case under chapter 11
other than at the debtor’s request. 11 U.S.C.
1112(a). A debtor in a chapter 11 case does
not have an absolute right to have the case
dismissed upon request.
A party in interest may file a motion to
dismiss or convert a chapter 11 case to a
chapter 7 case “for cause.” Generally, if cause
is established after notice and hearing, the
court must convert or dismiss the case
(whichever is in the best interests of creditors
and the estate) unless it specifically finds that
the requested conversion or dismissal is not in
the best interest of creditors and the estate. 11
U.S.C. 1112(b). Alternatively, the court may
decide that appointment of a chapter 11
trustee or an examiner is in the best interests
of creditors and the estate. 11 U.S.C.
1104(a)(3). Section 1112(b)(4) of the
Bankruptcy Code sets forth numerous
examples of cause that would support
dismissal or conversion. For example, the
moving party may establish cause by showing
that there is substantial or continuing loss to
the estate and the absence of a reasonable
likelihood of rehabilitation; gross
mismanagement of the estate; failure to
maintain insurance that poses a risk to the
estate or the public; or unauthorized use of
cash collateral that is substantially harmful to
a creditor.
Cause for dismissal or conversion also
includes an unexcused failure to timely
comply with reporting and filing
requirements; failure to attend the meeting of
creditors or attend a Fed. R. Bankr. P. 2004
examination without good cause; failure to
timely provide information to the U.S. trustee;
and failure to timely pay post-petition taxes or
timely file post-petition returns. Additionally,
failure to file a disclosure statement or to file
and confirm a plan within the time fixed by
the Bankruptcy Code or order of the court;
inability to effectuate a plan; denial or
revocation of confirmation; inability to
consummate a confirmed plan represent
“cause” for dismissal under the statute. In an
individual case, failure of the debtor to pay
post-petition domestic support obligations
constitutes “cause” for dismissal or
conversion.
Section 1112(c) of the Bankruptcy Code
provides an important exception to the
conversion process in a chapter 11 case.
Under this provision, the court is prohibited
from converting a case involving a farmer or
charitable institution to a liquidation case
under chapter 7 unless the debtor requests the
conversion.
THE DISCLOSURE STATEMENT
Generally, the debtor (or any plan proponent)
must file and get court approval of a written
disclosure statement before there can be a vote
on the plan of reorganization. The disclosure
statement must provide “adequate
information” concerning the affairs of the
debtor to enable the holder of a claim or
interest to make an informed judgment about
the plan. 11 U.S.C. 1125. In a small business
case, however, the court may determine that
the plan itself contains adequate information
and that a separate disclosure statement is
unnecessary. 11 U.S.C. 1125(f). After the
disclosure statement is filed, the court must
hold a hearing to determine whether the
disclosure statement should be approved.
Acceptance or rejection of a plan usually
cannot be solicited until the court has first
approved the written disclosure statement. 11
U.S.C. 1125(b). An exception to this rule
exists if the initial solicitation of the party
occurred before the bankruptcy filing, as
would be the case in so-called “prepackaged”
bankruptcy plans (i.e., where the debtor
negotiates a plan with significant creditor
constituencies before filing for bankruptcy).
Continued post-filing solicitation of such
parties is not prohibited. After the court
approves the disclosure statement, the debtor
or proponent of a plan can begin to solicit
acceptances of the plan, and creditors may
also solicit rejections of the plan.
Upon approval of a disclosure statement, the
plan proponent must mail the following to the
U.S. trustee and all creditors and equity
security holders: (1) the plan, or a court
approved summary of the plan; (2) the
disclosure statement approved by the court;
(3) notice of the time within which
acceptances and rejections of the plan may be
filed; and (4) such other information as the
court may direct, including any opinion of the
court approving the disclosure statement or a
court-approved summary of the opinion. Fed.
R. Bankr. P. 3017(d). In addition, the debtor
must mail to the creditors and equity security
holders entitled to vote on the plan or plans:
(1) notice of the time fixed for filing
objections; (2) notice of the date and time for
the hearing on confirmation of the plan; and
(3) a ballot for accepting or rejecting the plan
and, if appropriate, a designation for the
creditors to identify their preference among
competing plans. Id. But in a small business
case, the court may conditionally approve a
disclosure statement subject to final approval
after notice and a combined disclosure
statement/plan confirmation hearing. 11
U.S.C. 1125(f).
ACCEPTANCE OF THE PLAN OF
REORGANIZATION

As noted earlier, only the debtor may file a
plan of reorganization during the first 120-day
period after the petition is filed (or after entry
of the order for relief, if an involuntary
petition was filed). The court may grant
extension of this exclusive period up to 18
months after the petition date. In addition, the
debtor has 180 days after the petition date or
entry of the order for relief to obtain
acceptances of its plan. 11 U.S.C. 1121. The
court may extend (up to 20 months) or reduce
this acceptance exclusive period for cause. 11
U.S.C. 1121(d). In practice, debtors typically
seek extensions of both the plan filing and
plan acceptance deadlines at the same time so
that any order sought from the court allows
the debtor two months to seek acceptances
after filing a plan before any competing plan
can be filed.
If the exclusive period expires before the
debtor has filed and obtained acceptance of a
plan, other parties in interest in a case, such as
the creditors’ committee or a creditor, may file
a plan. Such a plan may compete with a plan
filed by another party in interest or by the
debtor. If a trustee is appointed, the trustee
must file a plan, a report explaining why the
trustee will not file a plan, or a
recommendation for conversion or dismissal
of the case. 11 U.S.C. 1106(a)(5). A
proponent of a plan is subject to the same
requirements as the debtor with respect to
disclosure and solicitation.
In a chapter 11 case, a liquidating plan is
permissible. Such a plan often allows the
debtor in possession to liquidate the business
under more economically advantageous
circumstances than a chapter 7 liquidation. It
also permits the creditors to take a more active
role in fashioning the liquidation of the assets
and the distribution of the proceeds than in a
chapter 7 case.
Section 1123(a) of the Bankruptcy Code lists
the mandatory provisions of a chapter 11 plan,
and section 1123(b) lists the discretionary
provisions. Section 1123(a)(1) provides that a
chapter 11 plan must designate classes of
claims and interests for treatment under the
reorganization. Generally, a plan will classify
claim holders as secured creditors, unsecured
creditors entitled to priority, general unsecured
creditors, and equity security holders.
Under section 1126(c) of the Bankruptcy
Code, an entire class of claims is deemed to
accept a plan if the plan is accepted by
creditors that hold at least two-thirds in
amount and more than one-half in number of
the allowed claims in the class. Under section
1129(a)(10), if there are impaired classes of
claims, the court cannot confirm a plan unless
it has been accepted by at least one class of
non-insiders who hold impaired claims (i.e.,
claims that are not going to be paid
completely or in which some legal, equitable,
or contractual right is altered). Moreover,
under section 1126(f), holders of unimpaired
claims are deemed to have accepted the plan.
Under section 1127(a) of the Bankruptcy
Code, the plan proponent may modify the plan
at any time before confirmation, but the plan
as modified must meet all the requirements of
chapter 11. When there is a proposed
modification after balloting has been
conducted, and the court finds after a hearing
that the proposed modification does not
adversely affect the treatment of any creditor
who has not accepted the modification in
writing, the modification is deemed to have
been accepted by all creditors who previously
accepted the plan. Fed. R. Bankr. P. 3019. If it
is determined that the proposed modification
does have an adverse effect on the claims of
non-consenting creditors, then another
balloting must take place.
Because more than one plan may be submitted
to the creditors for approval, every proposed
plan and modification must be dated and
identified with the name of the entity or
entities submitting the plan or modification.
Fed. R. Bankr. P. 3016(b). When competing
plans are presented that meet the requirements
for confirmation, the court must consider the
preferences of the creditors and equity security
holders in determining which plan to confirm.
Any party in interest may file an objection to
confirmation of a plan. The Bankruptcy Code
requires the court, after notice, to hold a
hearing on confirmation of a plan. If no
objection to confirmation has been timely
filed, the Bankruptcy Code allows the court to
determine whether the plan has been proposed
in good faith and according to law. Fed. R.
Bankr. P. 3020(b)(2). Before confirmation can
be granted, the court must be satisfied that
there has been compliance with all the other
requirements of confirmation set forth in
section 1129 of the Bankruptcy Code, even in
the absence of any objections. In order to
confirm the plan, the court must find, among
other things, that: (1) the plan is feasible; (2)
it is proposed in good faith; and (3) the plan
and the proponent of the plan are in
compliance with the Bankruptcy Code. In
order to satisfy the feasibility requirement, the
court must find that confirmation of the plan
is not likely to be followed by liquidation
(unless the plan is a liquidating plan) or the
need for further financial reorganization.
THE DISCHARGE
Section 1141(d)(1) generally provides that
confirmation of a plan discharges a debtor
from any debt that arose before the date of
confirmation. After the plan is confirmed, the
debtor is required to make plan payments and
is bound by the provisions of the plan of
reorganization. The confirmed plan creates
new contractual rights, replacing or
superseding pre-bankruptcy contracts.
There are, of course, exceptions to the general
rule that an order confirming a plan operates
as a discharge. Confirmation of a plan of
reorganization discharges any type of debtor –
corporation, partnership, or individual – from
most types of prepetition debts. It does not,
however, discharge an individual debtor from
any debt made nondischargeable by section
523 of the Bankruptcy Code.1 Moreover,
except in limited circumstances, a discharge is
not available to an individual debtor unless
and until all payments have been made under
the plan. 11 U.S.C. 1141(d)(5).
Confirmation does not discharge the debtor if
the plan is a liquidation plan, as opposed to
one of reorganization, unless the debtor is an
individual. When the debtor is an individual,
confirmation of a liquidation plan will result
in a discharge (after plan payments are made)
unless grounds would exist for denying the
debtor a discharge if the case were proceeding
under chapter 7 instead of chapter 11. 11
U.S.C. 727(a), 1141(d).
POSTCONFIRMATION
MODIFICATION OF THE PLAN

At any time after confirmation and before
“substantial consummation” of a plan, the
proponent of a plan may modify the plan if the
modified plan would meet certain Bankruptcy
Code requirements. 11 U.S.C. 1127(b). This
should be distinguished from preconfirmation
modification of the plan. A modified
postconfirmation plan does not automatically
become the plan. A modified postconfirmation
plan in a chapter 11 case becomes the plan
only “if circumstances warrant such
modification” and the court, after notice and
hearing, confirms the plan as modified. If the
debtor is an individual, the plan may be
modified postconfirmation upon the request of
the debtor, the trustee, the U.S. trustee, or the
holder of an allowed unsecured claim to make
adjustments to payments due under the plan.
11 U.S.C. 1127(e).
POSTCONFIRMATION
ADMINISTRATION

Notwithstanding the entry of the confirmation
order, the court has the authority to issue any
other order necessary to administer the estate.
Fed. R. Bankr. P. 3020(d). This authority
would include the postconfirmation
determination of objections to claims or
adversary proceedings, which must be
resolved before a plan can be fully
consummated. Sections 1106(a)(7) and
1107(a) of the Bankruptcy Code require a
debtor in possession or a trustee to report on
the progress made in implementing a plan
after confirmation. A chapter 11 trustee or
debtor in possession has a number of
responsibilities to perform after confirmation,
including consummating the plan, reporting
on the status of consummation, and applying
for a final decree.
REVOCATION OF THE
CONFIRMATION ORDER

Revocation of the confirmation order is an
undoing or cancellation of the confirmation of
a plan. A request for revocation of
confirmation, if made at all, must be made by
a party in interest within 180 days of
confirmation. The court, after notice and
hearing, may revoke a confirmation order “if
and only if the [confirmation] order was
procured by fraud.” 11 U.S.C. 1144.
THE FINAL DECREE
A final decree closing the case must be
entered after the estate has been “fully
administered.” Fed. R. Bankr. P. 3022. Local
bankruptcy court policies generally determine
when the final decree is entered and the case
closed.
NOTES
1. Debts not discharged include debts for
alimony and child support, certain taxes, debts
for certain educational benefit overpayments
or loans made or guaranteed by a
governmental unit, debts for willful and
malicious injury by the debtor to another
entity or to the property of another entity,
debts for death or personal injury caused by
the debtor’s operation of a motor vehicle
while the debtor was intoxicated from alcohol
or other substances, and debts for certain
criminal restitution orders.11 U.S.C. 523(a).
The debtor will continue to be liable for these
types of debts to the extent that they are not
paid in the chapter 11 case. Debts for money
or property obtained by false pretenses, debts
for fraud or defalcation while acting in a
fiduciary capacity, and debts for willful and
malicious injury by the debtor to another
entity or to the property of another entity will
be discharged unless a creditor timely files
and prevails in an action to have such debts
declared nondischargeable. 11 U.S.C.
523(c); Fed. R. Bankr. P. 4007(c).


 

 

   
  •   Driver's License or State ID & Social Security card
  •   Pay Stubs for the past 2 months
  •   Copies of all Bills, Summons or Judgments against you by creditors
  •    Divorce Judgments or Decrees
  •   Real Estate Documents, Deeds, Recorded Mortgages, mortgage balance statements
  •   Property Tax Bills (SEV)
  •   Bank Statements for 3 months
  •   Recorded Mortgage and Deed
  •   Car Titles
  •   Income Tax Returns & W2 forms
    for the last 2 years

  •