Business Bankruptcy FAQ’s
What protection do I get from the Court if I file Chapter 11?
As soon as the appropriate paperwork is filed with the Court the automatic stay goes into effect. The automatic stay is like an injunction and orders all creditors to stop any collection activity (including lawsuits) they have started.
How will I be able to finance my inventory and accounts receivable in Chapter 11?
Almost all businesses finance (factor) their inventory and accounts receivable. The cash that you collect from the accounts receivable is called “cash collateral” and may not be used without a Court Order or an agreement with the lender. In most situations a “Motion to Use Cash Collateral” will be filed with the Court and heard within several days after the case is filed. In most instances, an agreement is reached with the lender (because the lender is also at risk of losing its future lien on inventory and new accounts receivable). This agreement is reduced to writing in the form of an Order approved by the Bankruptcy Court. If there is a dispute with the lender, financing will continue on the same terms and conditions as before. Alternatively, there is typically other financing available.
What supervision do I have to look forward to by the court or the United States Trustee?
Neither the Court nor the Office of the United States Trustee is going to supervise your business. Most businesses in Chapter 11 operate as a DIP (Debtor in Possession). This means that the business will remain in possession of all its property and will conduct its business as usual.
What reports do I have to file with the Bankruptcy Court after filing a Chapter 11?
The business will have to file a monthly operating report with the Court, using the Court’s form by the 20th day of each succeeding month.
What is an Initial Debtor’s Conference and 341 meeting?
Besides the schedules of assets and liabilities filed with the Court, the Debtor will have to fill out a set of forms furnished by the Office of the United States Trustee. An Initial Debtor’s Conference will be scheduled, usually at your lawyer’s office, with the accountant for the United States Trustee via a teleconference. This is a very informal meeting at which time your schedules will be reviewed and you will receive certain instructions. The 341 Meeting is a meeting conducted by one of the attorneys for the United States Trustee. It is not held in the courtroom but rather in an office building. Creditors can attend but usually, unless yours is a large case, rarely does a creditor show up. The attorney will place you under oath and will review the schedules and statements that you have filed with the Court and ask you how you intend to turn your business around and get out of Chapter 11.
Will I have to make any payments to creditors while I am in Chapter 11?
A creditor who is secured by depreciating property is entitled to receive adequate protection payments. These payments are made on a monthly basis and are usually equal to the depreciation incurred. If there is equity (the property is worth more than the debt) you will likely have to pay interest at the contract rate.
What can and what can I not do while the Chapter 11 case is pending?
Although there is a long involved explanation the test is really simple. If it is something that you do every day you can continue to do it without asking the Court for permission. If it is something that you do not do on a regular basis you must file a Motion with the Court asking for authority to undertake the transaction.
How do I get out of Chapter 11?
You get out of Chapter 11 by filing a Plan of Reorganization and a Disclosure Statement. The Plan becomes a contract between the Debtor and its creditors. Usually secured lenders, up to the value of the collateral have their debt re-amortized and the interest rate adjusted to current market conditions and unsecured creditors receive a portion of their debt over time. The Disclosure Statement explains the Plan of Reorganization.
What supervision is my business under once a Plan of Reorganization is confirmed?
Once the Plan is confirmed and all loose ends are tied up a Motion is filed to Close the Case. The Court will no longer be involved in the business of the Debtor. The Debtor is responsible for making all payments under the plan.
What if my business has simply failed and cannot be reorganized?
A business that is failing has the option of filing a Chapter 7. The same initial paperwork is filed, however, as soon as it is filed the business must cease operations and turn over all assets to the Chapter 7 Trustee. The Debtor must appear at the 341 Meeting which is usually the concluding hearing as far as the Debtor is concerned.
Is there an alternative to Chapter 11?
If the business is a sole proprietorship and meets the debt limits set out in the Bankruptcy Code a Petition under Chapter 13 can be filed. Chapter 13 is more restrictive than Chapter 11 and the first Plan payment is due 30 days after the petition date. Payments are made to a Chapter 13 Trustee who disperses the money set out in a Chapter 13 plan which is usually filed with the schedules and statements. Unlike Chapter 11 all payments, where the debt is altered, must be paid within 60 months.