These businesses may file a chapter 11 bankruptcy case:
- Sole proprietorships
If you own stock in a corporation, the corporation exists separate and apart from you as its stockholder. Since you're also an owner of the corporation, your personal assets aren't at risk when the corporation files a chapter 11 case. However, you risk the value of the corporate stock you own when it files for bankruptcy.
If you're a partner in a partnership, the partnership also exists separate and apart from you as an individual partner. However, unlike a corporation, your personal assets may be used to pay creditors under certain circumstances. You may also have to file your own individual bankruptcy case to protect your personal assets.
If you own a sole proprietorship, you are the debtor. Unlike a corporation, you don't have a separate identity from your business. Therefore, both the business and your personal assets are involved in a chapter 11 case.
Chapter 11 Filing Requirements
Chapter 11 begins by filing a petition with the bankruptcy court. Filing a petition may be voluntary or involuntary. A voluntary petition is filed by you, while an involuntary petition is filed by your creditors.
You must also file additional documents containing information about your finances, including income, assets and debts. If you are filing for yourself, you must also prove that you completed credit counseling.
Presently, the fees for filing a chapter 11 petition include a $1,000 filing fee and a $39 miscellaneous administrative fee. You must pay the fees when you file the bankruptcy petition unless the court allows you to pay the fees in installments.
After filing the bankruptcy petition, the bankruptcy clerk notifies all of your creditors and sets up a meeting, known as a Section 341 Meeting. During the meeting, the US trustee and your creditors question you under oath about any matter related to your finances.
The Automatic Stay
One of the main reasons you would file a chapter 11 bankruptcy petition is to obtain an automatic stay order. While the stay is in effect, creditors are not allowed to collect on any debt that existed before the petition was filed, unless they have a court order. The automatic stay goes into effect as soon as you file the bankruptcy petition.
Debtor in Possession
If you file for chapter 11 bankruptcy, you are known as a debtor in possession, which means that you keep possession of the bankruptcy estate assets while reorganizing your debts.
You remain in possession until one of the following occurs:
- Your reorganization plan is confirmed;
- Your case is dismissed;
- Your case is converted to a chapter 7 bankruptcy case; or
- A bankruptcy trustee is appointed
It is rare for a bankruptcy trustee to be appointed in a chapter 11 case unless the court determines that you are incompetent or dishonest, have committed fraud or have mismanaged the bankruptcy estate.
You would perform many of the duties that a bankruptcy trustee would perform in cases filed under other bankruptcy chapters, such as filing required documents with the court. You also have many of the rights of a bankruptcy trustee, such as the right to hire professionals to assist you, and the right to use, sell or lease property of the bankruptcy estate.
The US Trustee
The US trustee plays a major role in overseeing a chapter 11 case and making sure the debtor submits the required reports and quarterly fees. The US trustee also monitors other documents filed with the court, such as compensation applications submitted by hired professionals, and debt reorganization plans.
If you do not submit the required reports, pay the quarterly fees, or fail to follow any of the bankruptcy court orders, the US trustee may file a motion with the court to either have your case dismissed, or convert the chapter 11 case to chapter 7.
Disclosure Statement and Debt Reorganization Plan
You are also required to file a written disclosure statement and a debt reorganization plan with the bankruptcy court. The disclosure statement lists your assets, liabilities, and your other business or financial affairs. The purpose of the disclosure statement is so your creditors can decide whether the debt reorganization plan is fair. The debt reorganization plan must explain how your creditors will be paid.
If the bankruptcy court approves your disclosure statement, your creditors will vote on the debt reorganization plan. The bankruptcy court will then hold a hearing to determine whether the plan should be approved.
If there are no objections to approval, the bankruptcy court will review your debt reorganization plan and determine:
- Whether the plan complies with bankruptcy law;
- Whether you proposed the plan in good faith; and
- Whether the plan is likely to succeed without the need for further financial reorganization
Once your reorganization plan has been confirmed, you'll receive a discharge from any debt that existed before the bankruptcy petition was filed. This means that you're no longer responsible for the debt. Of course, you must make all of the payments set forth in the debt reorganization plan. Once you satisfy all of the conditions in the reorganization plan, the bankruptcy court will issue a final decree closing the bankruptcy case.
Additional information and official forms are available on the US Bankruptcy Court Web site.
Questions for Your Attorney
- How long does a chapter 11 bankruptcy take, from start to close?
- How often do creditors challenge a reorganization plan?
- Are all my business debts eligible for discharge?