Chapter 11 Bankruptcy in California
Chapter 11 is a reorganization proceeding, usually for corporations or partnerships because of its complexity, but individuals can file too. The debtor usually keeps his or her assets and continues to operate the business and tries to work out a reorganization plan to pay off the creditors. A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy.
An individual cannot file bankruptcy 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. 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. 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.
Chapter 11 Process
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. 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 bankruptcy court orders otherwise, the debtor also must file with the court:
- Schedules of assets and liabilities;
- A schedule of current income and expenditures;
- A schedule of executory contracts and unexpired leases; and
- A statement of financial affairs.
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.
A husband and wife may file a joint petition or individual petitions. (The Official Forms can be downloaded from the Internet at www.uscourts.gov/bkforms/index.html.)
The courts are required to charge a $1,000 case filing fee and a $46 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. Bankruptcy Court Miscellaneous Fee Schedule 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. The $46 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.
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.” 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.
Generally, a written disclosure statement and a plan of reorganization must be filed with the court. 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. 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. 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. 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. 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.
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.
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. 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.