Businesses: If you own, control, or manage a corporation, limited liability company, partnership, joint venture, or limited partnership, or if you own a business as its sole proprietor, and the business you own or control is burdened by debt that it cannot currently service, or needs time to implement plans for increasing profitability, you would do well to consider reorganizing under chapter 11.

Individuals: If you, as an individual consumer or a married couple, have debts from which you need relief, but those debts exceed the eligibility requirements for filing a chapter 13 case under § 109, then you may need to file for such relief under chapter 11.

The Bankruptcy Code is divided into a number of chapters, almost all of which are odd-numbered. Chapters 1, 3, and 5 contain definitions and general provisions that relate to all the higher-numbered chapter. They include, for instance, (a) the definition of a “debtor” and a “small business”; (b) the explanation of the “automatic stay” and the powers of a trustee and a “debtor in possession” in chapter 11; and (c) the scope of such terms as “property of the estate” and rules relating to such property. The higher-numbered chapters provide for different kinds of bankruptcy, including (a) chapter 7—a “straight bankruptcy” involving the potential liquidation of all non-exempt property of the estate; (b) chapter 13—a consumer reorganization; and (c) chapter 11—the reorganization of a business or of individuals who either have business interests or whose debts exceed the limits allowed for eligibility for a chapter 13 case.

Each year, thousands of businesses and individuals file “petitions for relief” under the United States Bankruptcy Code. They are looking for relief – relief from a slumping economy, or from prior bad choices, or from toxic liabilities, or from the financial hole they are in as a result of job loss, business failure, medical bills, or other negative circumstances. In short, relief from debt. People and businesses dying under the weight of their debts have little heart to undertake new ventures, to purchase new products, to engage in creative enterprises with energy. That’s why bankruptcy is labeled: a “fresh start.”

When a company or an individual files chapter 11, that fact creates an “estate” made up of all the assets of the debtor. The debtor does not, however, turn over to anyone else the management of his/her/its affairs. Rather, the debtor is given most of the powers of a trustee to administer the estate, and is given a new title: “Debtor in Possession.” Thus, the debtor maintains possession of his/her/its assets and continues to conduct business as before filing.

When an entity or individual files for relief under chapter 11, thus becoming a “debtor in possession” who continues to possess all of its assets and to conduct its business, all efforts by creditors to pursue that entity for unpaid bills that became due before the date of filing (the “petition date”) are automatically stayed. Any act by a creditor to pursue its claim outside of the chapter 11 case is prohibited by federal law and would subject the creditor to sanctions. That gives the debtor breathing room to put together a plan by which it can restructure its debt and redirect its energies toward profitability.

First, you must meet with your attorney and review all the financial information. You must tell you attorney what the company intends to achieve, what its prospects and goals are, and how it intends to achieve its goals. With your attorney, you must then prepare schedules to be filed with the court. These include:

• A – real property
• B – personal property
• D – secured creditors
• E – priority creditors
• F – unsecured creditors
• G – executory contracts and unexpired leases
• H – codebtors

Corporate debtors do not file Schedules C, I, or J, but individual chapter 11 debtors do:

• C – exemptions
• I – income of debtor and spouse
• J – expenses of debtor and spouse

Both corporate and individual debtors must also complete the “Statement of Financial Affairs” (or “SOFA”). Questions include yearly income for two prior years, recent payments to creditors, suits filed by or against the debtor, and such like. The principal of the debtor must sign a “Declaration of Electronic Filing” to establish the signature of the individual who vouches for the accuracy of the information in the schedules and who will subject himself or herself to examination by the trustee and the debtor’s creditors.

Shortly after filing, you will receive a letter from the office of the U.S. Trustee setting two dates: one for the “Initial Debtor Interview” (“IDI”), the other for the “First Meeting of Creditors” (“341 Meeting”). The IDI is an informal meeting with an employee of the trustee’s office to find out if you have satisfied the requirements for a debtor in possession set forth in the trustee’s initial letter. Such requirements include: filing schedules, establishing a debtor-in-possession bank account (“DIP account”), acknowledging receipt of information about trustee’s fees and monthly operating reports, and the like. The 341 Meeting is a more formal examination by an attorney with the office of the U.S. Trustee, in the presence of any creditors who wish to attend the examination. The representative of the debtor will be accompanied by the debtor’s attorney for both the IDI and the 341 Meeting.

The U.S. Trustee will then oversee the case to make sure that the debtor in possession fulfills its duties under the Bankruptcy Code and Rules. The trustee assigned to the case will examine the debtor’s motions and determine whether to object to or support such motions. The trustee will also analyze the debtor’s disclosure statement and plan and make a judgment as to whether the plan is feasible, given the debtor’s financial strength, as evidenced by the operating reports.

There are two forms for operating reports: the standard one for businesses generally and the shorter one for small businesses. Your attorney will tell you whether your company qualifies as a small business. The report details the income the company has received during the last month and the expenses that the company has paid during that month. The report for one month is due on the 21st day of the following month.

• Employment of Professionals: The debtor’s bankruptcy professionals need to be formally approved by the court to represent the debtor and debtor in possession. Such professionals usually include bankruptcy attorneys and accountants, and may sometimes include brokers, auctioneers, and special counsel.
• Obtaining Use of Cash Collateral: Frequently, debtors have borrowed money from lenders whose loan is secured by assets of the debtor, including cash and accounts receivable, as well as inventory. The debtor must negotiate with the lender and file a motion to use cash collateral. The motion needs to specify how the debtor will protect the lender’s interest in cash collateral, such as providing a “replacement lien” on any cash obtained from the future operation of the business.
• Setting Up DIP Accounts: The debtor in possession (“DIP”) must report once a month on cash income and cash expenses. To that end, the debtor sets up DIP accounts and reports each month in “Operating Reports” filed with the court what monies came in and went out during that month. The debtor’s checks should clearly state, under the debtor’s name, “Debtor in Possession.”
• Providing Proof of Insurance: The debtor in possession, as trustee for the debtor’s estate, must provide proof to the U.S. Trustee that it has appropriate insurance to protect the estate against unforeseen, financially devastating expenses. For some, that will mean real estate insurance, for others workman’s comp or general liability. The U.S. Trustee must be listed on the policy as a necessary party to be notified in case any claim is made against the policy.
• Financing: Often to survive and reorganize, a debtor will need an injection of money into the business to increase inventory, repair real property, and the like. There are numerous lenders and private investors who assert that they stand ready to lend money to a debtor in possession on certain conditions. Those conditions often include: an upfront due diligence payment, a hefty interest rate; an exit strategy; a super-priority lien.
• Objections to Claims: Creditors are given a certain period of time to file proofs of their claims. The debtor’s attorneys analyze those claims and determine with the debtor to which claims objections need to be filed. Objections can be based on numerous grounds, for instance, that the claimant asserts a security interest when there is none, or inflated the amount owed, or filed the proof of claim after the deadline, or failed to attach necessary documentation. Creditors with claims to which the debtor objects are not allowed to vote on the plan unless they have their claim estimated for the purpose of voting. Only creditors with allowed claims are entitled to vote on the debtor’s plan.
• Sale of Assets: A debtor in possession must consider whether there are assets that should be disposed of because they are too burdensome for the debtor to maintain or would inject needed cash into the business. In some instances, the debtor may sell all of its assets as a strategy for dealing with its debts. In that case, the debtor may wish to file a liquidating plan, rather than a plan of reorganization. In so doing, the debtor remains in control of its assets while liquidating them.

It means to give priority to what is necessary and discard, in whole or in part, what is not. The Bankruptcy Code allows debtors to modify the debts they owe. During a chapter 11 case, debtors may reaffirm necessary debts, sell burdensome assets, incur new indebtedness, modify union contracts, reject leases and unexpired contracts, and satisfy unsecured claims in full by paying a small percentage of what is owed. The order confirming a chapter 11 plan becomes a new road map for the individual or the business, and a new contract between the debtor and its pre-petition creditors, modifying the terms of previous obligations.

Central to the reorganization process is the filing of a disclosure statement and the confirming of a plan of reorganization. The plan must be sent to all creditors entitled to vote, and will be confirmed if the debtor obtains at least at least 51% of all the votes cast, and 67% of the total amount of the claims of impaired creditors who vote. If there is only one class of impaired creditors, and only one vote is cast, the plan will be confirmed by 100% of the votes cast and 100% of the amount of the claims held by voting creditors.

The essential elements of a plan are: (a) categorizing all one’s creditors into secured, priority, and unsecured, and then (b) stating how one will deal with the debts owed to the creditors in each category.

A disclosure statement is a complex document that contains summaries of:

• the debtor’s assets,
• the debtor’s liabilities;
• the history of events that led to the debtor needing chapter 11 relief; and
• the treatment of claims under the plan.

It also contains details about what claims are included in each class of creditors and how the debtor intends to deal with the claims in each class. A disclosure statement will also typically contain:

• a liquidation analysis, informing creditors of how much money might be available to general unsecured creditors if the debtor had filed chapter 7 and the trustee had liquidated all the assets and paid amounts due to professionals, taxing bodies, and secured creditors first;
• a projection of the debtor’s income and expenses over the next three to five years;
• a projection of the payments the debtor can afford to make to creditors in the various classes from disposable income over the next three to five years;and
• a copy of the debtor’s most recent operating report, showing monthly income and expenses.

The trustee, creditors, and interested parties may raise matters in motions and adversary cases to which the debtor will have to respond. If a trustee believes the case was filed in bid faith, he can be expected to file a motion to dismiss or convert the case. Creditors may also file such motions. Adversary proceedings may be initiated by the debtor or creditors. Typical grounds for such adversaries are set forth in Bankruptcy Rule 7001, and include such matters as cases to determine the dischargeability of a debt, or to determine the extent, priority, or validity of a lien. Contested motions may also be brought under Bankruptcy Rule 9014. There are numerous grounds for such motions. Adversaries and contested motions may result in exchanges of discovery and conducting of an evidentiary hearing. Depending on the intensity of the argument and the unwillingness to settle, such matters may be costly and may result in an appeal.

An entity seeking relief through chapter 11 must realize that the process will be time-consuming and costly, and could be quite exhausting as well. How much each case will cost depends on its complexity, the number and belligerence of creditors, and the willingness of adverse parties to negotiate reasonable settlements. Therefore, no attorney can guess, with any accuracy, the total amount of time and energy he would have to expend to reach the goal: a confirmed feasible chapter 11 plan. After reviewing the facts with the debtor, an attorney will generally estimate how much time will be needed during the first four months in order to achieve the stability required to give the debtor a strong chance of succeeding in its efforts to reorganize. That is the amount, plus the filing fee, that the attorney will require upfront as a retainer.

An entity can expect to confirm a plan if:

• its principals and agents are thoughtful, energetic, and resourceful;
• it is diligent in seeking debtor-in-possession financing;
• it cooperates with its attorneys to develop a feasible plan;
• it complies with all the requirements of the Code, Rules, Court, and Trustee;
• it is flexible in its negotiations and creative in seeking solutions to problems.
• its professionals work hard to present the company’s achievements and dreams to the trustee, the creditors, and the court.

Typically, the potential debtor enters into an Engagement Agreement with the attorneys who will represent the debtor in the chapter 11 case. The attorney typically requests a retainer roughly equivalent to the fees expected to be earned during the first four months of the case. If the funds come from the debtor, they are deposited into a client fund account by the attorneys, and drawn upon as follows:

• fees earned before the filing of the chapter 11 are drawn from the account after they are earned but before the chapter 11 case is filed;
• fees earned after the case is filed cannot be withdrawn from the trust fund until after they are approved by the court on application by the attorneys with notice to the debtor and all creditors. As the attorneys continue to represent the debtor, they file additional applications to have their fees approved by the court. Any fees allowed by the court become an administrative priority obligation of the debtor to be paid from the ongoing operation of the business or from the sale of assets, as approved by the court.

Businesses or individuals may liquidate their assets either through a chapter 11 liquidating plan or through chapter 7. In the chapter 11, the debtor in possession organizes, directs, and controls the liquidation. In a chapter 7, an interim trustee appointed by the office of the U.S. Trustee, conducts the liquidation.