Bankruptcy Law: New Laws for Chapter 7,11, 13

Chapter 11 Bankruptcy is not for everyone. The debt requirements are higher. Although some individuals and sole proprietor small business may qualify, it is generally reserved for partnerships and corporations that have a massive amount of debt, but they want to restructure the debt and try to keep the business doors open.

For example, some of these big businesses on the news that are restructuring their companies probably had to file under chapter 11 bankruptcy, because the amount owed to creditors is more than chapter 13 bankruptcy allows.

Bankruptcy Court

The court wants to be assured that actions have already been taken to resolve the debt, before taking the court’s time. In addition, if a debt repayment plan has been set up through the counseling session(s), the court will want a copy of the agreement that was reached. Unless it is a justifiable emergency situation, the court will not hear your case, if you have not taken this step. Also the court will not hear your case, if you have tried to file in the last 6 months and had the case dismissed for one reason or another. For example, the court does not look kindly upon failing to comply with the terms of your bankruptcy.

In order to make sure your chapter 11 bankruptcy is successful; the court will require certain documents to be filed with the federal bankruptcy court. You will also have to provide proof that the documents are accurate. If you have a business partner(s) or a spouse, he/she/they will have to also file the necessary paperwork with the court to verify that the petition for chapter 11 bankruptcy is valid.

You will have to provide the following forms with the court :

1. Statement of Assets and Liabilities
2. Current Income and Expenditures
3. Executory Contracts and Unexpired Leases
4. Statement of Financial Affairs

Just as in chapter 7 or chapter 13 bankruptcy, the court will basically want you to lay bare all of the financial information either persona or related to the business. They want to know everything, in order to make a fair determination.

According to www.uscourts.gov some cases will require: 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.

Your failure to provide any of the required information will likely result in the dismissal of your case. The best advice is to make sure you have acquired the services of a good bankruptcy attorney, so everything is completed and nothing is left to chance.

Bankruptcy Costs

Today, you cannot even file for bankruptcy without it costing you money. In addition to your attorney fees, you will have to pay the court a $1000 file fee and a $39 administrative fee. You will have up to 120 days to pay these fees, if installment payments are needed. In extenuating circumstances, the court will allow the fees to be paid in 180 days. If you fail to pay the fees, you case will likely be dismissed.

Like any other person or business filing bankruptcy, credit counseling is required within 60 days before filing chapter 11 bankruptcy. So, make sure you seek professional advice and do whatever the court requires, if you chapter 11 bankruptcy is going to be successful.

Debt Administrator or Trustee

When you have an approved repayment plan through chapter 11 bankruptcy, it is not totally up to you, to make sure the money is used to pay your debts. You will be assigned a debt administrator or trustee. It will be his/her job to make sure each payment is distributed according to the plan. But, it might be a good idea to have the payment to the trustee automatically taken out of future earnings or the business checking account. Failure to make the payments can automatically result in the dismissal of your case, or have it go into chapter 7 bankruptcy.

Usually, the creditors committee consists of the 7 creditors to whom you owe the most money. The committee is set up by the trustee. Do not take this meeting lightly. The creditors have the power to hire their own lawyer and investigators to make sure that you really have legitimate cause for filing chapter 11. Of course, their main interest will be to get the most they can in repayment. In fact, they will have to agree with the repayment plan. If it is felt that you have the ability to pay more, or have an alternative to bankruptcy they have the right to contest the judgment.

If anything important is in question about your chapter 11 bankruptcy, a case trustee may be appointed or elected to oversee your case. The person is not the same as the trustee appointed by the court. Your case trustee may be appointed or elected, possibly from some of the creditors you owe

In any bankruptcy case, it is not all about you getting out of financial trouble. The creditors you owe deserve to be heard and be paid as much as possible. After all, these people have businesses and families of their own.

The court, on motion by a party in interest or the U.S. trustee and after notice and hearing, shall order the appointment of a case trustee for cause, including fraud, dishonesty, incompetence, or gross mismanagement, or if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate.

Moreover, the U.S. trustee is required to move for appointment of a trustee if there are reasonable grounds to believe that any of the parties in control of the debtor "participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor's financial reporting."

The trustee can appoint anyone needed to investigate your financial matters. In addition, they can take over the daily operations of your business, if it is determined that you are not doing what is necessary to run your enterprise, so that you can pay the money back that you owe. At such a time it does not seem beneficial, your business affairs can be put back into your own hands.

In rare cases, you may have an examiner appointed to your chapter 11 bankruptcy. The examiner is just that. He/she will investigate your case. In some instances, it may also be recommended that your repayment plan be adjusted. Although an examiner does not have the same clout as a federal bankruptcy court trustee, the court can ask the person to carry out the duties of the trustee. But, part of their job will also be to verify if the creditor complaints and claims have any merit or should be dismissed.

Allowances

If you are a small business debtor, allowances is in place to treat your case a little differently than a bigger business or corporation.

For example, the trustee might not find enough people to sit on a creditors committee. In fact, the trustee will likely need to take a more hands on approach to your case. Of course, there are specific criteria for qualification under this category of debtor.

Determination of whether a debtor is a "small business debtor" requires application of a two-part test. First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,190,000 or less.

Second, the debtor's case must be one in which the U.S. trustee has not appointed a creditors' committee, or the court has determined the creditors' committee is insufficiently active and representative to provide oversight of the debtor. You will still have to provide all of the necessary financial information, like your cash flow, a balance sheet, a statement of operations, and your most recent tax returns.

Automatic Stay

In all case of bankruptcy, an automatic stay is put into place, the moment someone files. Immediately, anyone seeking a court action like repossession or foreclosure is put on hold, until the case can be heard. However, do not get too comfortable. When you file for chapter 11 bankruptcy, there are exceptions to the rule.

For example, if you are in possession of a piece of property, and you have very little equity established, the creditor can ask for repossession, so it can be resold to satisfy some of the debt. Of course, it cannot be something that is vital to your business and make it impossible to earn money and restructure your payments.

In a Timely Manner

As you have figured out by now, chapter 11 bankruptcy can be very complicated. A lot of rules and regulations must be waded through. Even if you have the services of a bankruptcy lawyer, the process can drag on for years. So, now there are limitations on the time you can take to create a repayment plan for your creditors.

If you take too long, your creditors can also file repayments plans for the courts approval. Thus, it adds some incentive to get the job done. Sometimes, businesses will try anything to drag the process out, because it gives them more time to get all of their affairs in order, and come up with some sort of plan to save their business. But, efforts are now being made to make sure businesses do not abuse the court’s time and patience in the matter.

For some, this particular point in the law may be difficult to understand. In essence, if you have a piece of property or money that has been transferred to you in the last 90 days, you can give it back to the business from which it came. Then, you can use the freed up finances to pay the other creditors. On the other hand, if you got money or property from a friend or family member, you can basically give it back within a year of filing for bankruptcy, and use what you would be paying them back to work on paying other debts.

Collateral In Bankruptcy

Collateral is a big deal when you are a business filing chapter 11 bankruptcy. You cannot simply use assets, unless they are necessary for the normal operation of the business. In the event you actually have cash collateral, you will probably have to ask permission of the court to spend it.

In other words, if you have cash available to spend, then you might be able to use it to pay your creditors back first. Remember, bankruptcy is not all about you and your needs. The court is also concerned about the people and businesses that are adversely affected by your financial troubles. For you, it simply means the opportunity to reorganize your debt into a manageable payment plan, so hopefully you can save your business and be as fair as possible to your creditors.

Adversary Proceedings

You, the business filing bankruptcy, are also known as the debtor in possession. As such, you can also file lawsuits to stop legal actions that will negatively affect your ability to satisfy creditors. Maybe it is a lien, a fraudulent action, or a post-petition transfer. Of course, not everyone is willing to take this course of action, for one reason or another. So, the law provides for forcing the debtor to do something.

According to www.uscourts.gov: “These proceedings are governed by Part VII of the Federal Rules of Bankruptcy Procedure. At times, a creditors' committee may be authorized by the bankruptcy court to pursue these actions against insiders of the debtor if the plan provides for the committee to do so or if the debtor has refused a demand to do so”.

In addition, creditors can also file an adversary proceeding, if they feel another creditor has an unfair advantage over another. So, when filing bankruptcy for your business, it can get very complicated and convoluted.

A Vested Interest

Do you have anyone that has a share in your business, is a limited partner, or has some sort of equity in your enterprise? Then, these people are considered equity security holders. They also will be adversely affected in the filing of chapter 11 bankruptcy.

The holders will lose money, if you file bankruptcy. Thus, they can file papers to seek some sort of return on their investment, basically to soften the blow of their losses: “An equity security holder whose interest is not scheduled or scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it”. Then, it basically works the same as it does for a creditor that has filed a claim.

Exist for Dismissal

Sometimes, chapter 11 bankruptcy does not truly answer the problems of a business. Nothing will solve the problems that the business is suffering, and it will only delay the inevitable. Any interested party can file a cause for conversion to chapter 7 or dismissal of the case entirely, if there is not sufficient reason for filing bankruptcy in the first place.

For example, the moving party may establish cause by showing that there is substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation; gross mismanagement of the estate; failure to maintain insurance that poses a risk to the estate or the public; or unauthorized use of cash collateral that is substantially harmful to a creditor.

Many reasons also exist for dismissal. But, one of the most egregious causes is simply not doing what the federal bankruptcy court requires in a timely manner. If you want this case to go through, in order to restructure your debt and save your business, do not mess around. Do not try to withhold or embellish any information for the court. You will be investigated, found out, and in a lot more legal trouble than trying to save your business through bankruptcy.

Your Statement

As part of chapter 11 bankruptcy proceedings, larger business will need to file a disclosure statement. It basically states why you feel your business qualifies for bankruptcy. Anyone who has an interesting in your bankruptcy will receive all of the necessary paperwork. The court trustee, your creditors, and the equity security holders all have the right to know that your business is going bankrupt and why.

Among the paperwork all of the interested parties should receive, according to www.uscourt.gov, you will have to provide:

1. the plan, or a court approved summary of the plan;
2. the disclosure statement approved by the court;
3. notice of the time within which acceptances and rejections of the plan may be filed; and
4. such other information as the court may direct, including any opinion of the court approving the disclosure statement or a court-approved summary of the opinion.

Once all of the interested parties have received all of the necessary information, there are several reasons why they can choose to reject or accept your payment restructuring plan. Of course, there will be a hearing to give the interested parties a chance to contest the plan and speak their piece. It is definitely not all cut and dried, simply because you went through the process of filing and send out the paperwork. It is simply one step in the process.

Chapter 11 Bankruptcy Filling Complete

Once the plan has been accepted by the court, it is confirmed. You have finally reached the point where your debts are discharged, you can begin repayment, and you can concentrate on trying to get your business back in the black.

Unfortunately, confirmation of your plan does not necessarily mean the end of your case. In fact, for just cause your plan can be modified after confirmation and then go through the confirmation process all over again. Again, the debtor in possession or a trustee will have to also show that the plan is being successfully implemented.

In addition the order for confirmation can also be revoked in the next six months. If an interested party files a petition, based on suspicion of fraud, the court may deny confirmation, if they find the request is justified. Once again, it is so important to do everything by the book, be honest and forthcoming with all pertinent information, and consider all of the people and businesses that will be affected by your decision to file bankruptcy.

A chapter 11 action can drag on forever and keep you from getting that fresh start for your business, so you can hopefully turn the tide and ultimately see success replace economic frustration. The ultimate goal is to see the estate fully administered, so the court can issue the final decree and the case is closed. Whether you want to file, or at least what you lawyer is talking about as he/she prepares you for filing of chapter 11 bankruptcy.