A chapter 11 may be filed by a debtor that seeks to continue to operate or reorganize its affairs, typically a corporation, partnership or sole proprietorship. A debtor in chapter 11 is known as the debtor in possession who is in a position of a fiduciary with all the rights and powers of a chapter 11 trustee.
A trustee is not typically appointed in chapter 11 except in cases involving fraud or gross mismanagement. The duties of a chapter 11 debtor in possession include accounting for property, examining and objecting to claims and providing monthly operating reports to the U.S. Trustee, which is the government agency responsible for monitoring the debtor in possession’s compliance with the reporting requirements. The debtor in possession must pay quarterly fees to the U.S. Trustee.
A debtor in possession may also need to obtain approval to use cash collateral which are cash-like equivalents as defined under the bankruptcy laws subject to a creditor’s security interest prior to the use, sale or lease of such cash collateral in the debtor’s business. Continued operation of the debtor’s business may also result in the need to assume or reject executory contracts or unexpired leases.
A debtor in possession may also need to seek to incur credit to continue operating its business with the approval of the Court or grant of superpriority liens to creditors. Creditors can also demand adequate protection, seek relief from the automatic stay or dismissal or conversion of the case, which can occur with delays in filing and obtaining approval for a plan.
A debtor (other than a small business debtor) has a 120-day period during which it has an exclusive right to file a plan of reorganization, unless the period is extended. Together with the plan, a debtor must file and obtain court approval of a written disclosure statement which provides information to creditors on the proposed plan to solicit the approval of creditors for the plan who will be allowed to vote. To obtain approval of a plan, the plan must be accepted by creditors that hold at least two-thirds in amount and more than one-half in the number of allowed claims in the class.
A chapter 11 case for a business is a complex and costly process, which should only be undertaken if no better alternatives exists after a careful assessment of the potential costs and risks against the benefits.
Under the recent amendments to chapter 11 by the Small Business Reorganization Act, if you qualify, you may be able to file chapter 11 with considerably less cost.