Chapter 11

Chapter 11 is the business reorganization section of the United States Bankruptcy Code. It is used to restructure the debt of Corporations, Partnerships, LLC’s and that of individual business debtors. On June 21, 2022, President Joe Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act. This Act increases the eligibility limits for small business debtors or individuals under chapter 11 Subchapter V. Under the two-year extension until June 2024 individuals or small businesses with debts up to $7,500,000.00 can file under Sub-Chapter V and are eligible for a less costly and streamlined method of reorganization under Chapter 11. This limit is set to revert to $2,725,625 if congress does not grant an extension of the law.

The filing of a Chapter 11 petition places the debtor in possession in the position of a fiduciary, with the rights and powers of a Chapter 11 trustee. The debtor can continue to operate the business within the constraints imposed by the Bankruptcy Code and present a plan of reorganization for the court to approve. The operation of the business is supervised by the U.S. trustee who is responsible for monitoring the compliance of the debtor in possession with the reporting requirements.

While the confirmation, and implementation of a plan of reorganization is at the center of a Chapter 11 case, other issues may arise that must be addressed by the debtor in possession. These include use of cash collateral usually secured by a lender and adequate protection payments required to be made to secured creditors. Additionally, the debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval. However, the sale or use outside the ordinary course of its business requires court approval.

The debtor has an exclusive right to file a plan of reorganization during the first 120-day period after the petition is filed. This period may be extended by the court. 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. This plan may compete with a plan filed by the debtor for approval.

Most plans require that the debtor 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. The court may also allow a plan of liquidation which allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a Chapter 7 liquidation.

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. Once a plan is confirmed, the debtor will be required to make all required payments under that plan.

The attorneys at Urban & Burt, Ltd. have successfully represented debtors in Chapter 11 cases of many varied types including individual reorganizations, manufacturing, trucking, retail sales, professional corporations, real estate and transportation companies. Annual incomes of those businesses range from modest annual incomes to companies with a gross annual income of over $20,000,000. Because each case is different, you should seek individual advice in determining whether a Chapter 11 will be helpful.