by: Kathleen Michon, J.D.
Using a Chapter 11 bankruptcy to reorganize your or your company’s finances can be a complex, lengthy process. Here's a general outline of what is required in a typical Chapter 11 case.
(To learn more about Chapter 11, see our overview article on Chapter 11 Bankruptcy.)
If you are filing for Chapter 11 as an individual (not for your business), you must complete a credit counseling course by an approved agency prior to filing your case. If you are filing the Chapter 11 to reorganize the debts of a business, you do not have to take this counseling.
You must prepare your petition by completing a list of all of your (or your company’s) assets, debts, income, and expenses along with a summary of your financial affairs. Once you have completed this task and reviewed all of the documents for accuracy, you can file your petition with bankruptcy clerk’s office. In most circumstances, the filing of the petition triggers what is referred to as an “automatic stay.” This stay prohibits most creditors from continuing collection efforts against you or your assets unless the bankruptcy judge gives them permission to do so.
During your Chapter 11 bankruptcy case, you must prepare and file with the court monthly operating reports. These reports reflect your income and expenses for that particular month. The reports are available to your creditors, the court, and the United States Trustee. The reports allow these entities to assess whether or not they think your proposed plan of reorganization will be feasible. Since feasibility is required to get your plan approved by the judge, you should pay close attention to your monthly operating reports. Most debtors find it advantageous to obtain court permission to pay an accountant to complete these.
Many debtors will be required to attend an initial debtor interview. This is an opportunity for the United States Trustee to meet with the debtor to learn some preliminary information about the case and make sure the debtor understands its responsibilities.
After that, you must attend the 341 meeting of creditors. This is scheduled about thirty to forty-five days after the filing of your case. This is a public hearing that will give your creditors an opportunity to question you under oath regarding your bankruptcy petition. In Chapter 11 cases it generally lasts one to two hours.
You must file a disclosure statement along with a proposed plan of reorganization and mail these documents to every party in interest, including all of your creditors. The disclosure statement explains how creditors may participate in the bankruptcy and provides information about how the creditor’s rights may be adversely affected.
There will be a hearing on the disclosure statement where parties in interest can object to the statement’s language. These disclosure statements are typically approved on a regular basis and the hearing is a formality.
The plan of reorganization states how you propose to treat each of your creditors. The creditors are placed in classes according to whether they are a priority debt creditor, a secured debt creditor, or an unsecured debt creditor. If a creditor doesn't like how it's treated in your plan, you can file a motion asking the judge to force the creditor to accept the plan. If the judge does force the creditor to accept the plan, this is called a cramdown.
At your confirmation hearing, you ask the judge to approve your plan of reorganization. Unless you have obtained votes of acceptance from each of your creditor classes, the judge will not approve your plan. At that point, you can file a motion for cram down of the non-accepting classes and the court will reschedule the confirmation hearing. If the creditor doesn't respond to a motion for cram down, it will be deemed to accept the plan. If the creditor does respond, you can negotiate with the creditor to try to get it to accept plan treatment. If you cannot agree, then the judge will decide at a hearing.
Once the judge has approved your plan, you will start making payments to the creditors according to how they are treated in the confirmed plan. This constitutes a new contract with each of your creditors. If you default on payments, then the creditor may sue you on that basis and you will have little recourse. Depending on what type of debts you reorganized through the bankruptcy, your payments may continue for many years. Debts like mortgages or car notes typically get re-amortized over an extended period.
Once you make all required payments to your unsecured creditor class, you can ask the court for a discharge of the remainder of your unsecured debts. The discharge prevents any of these creditors from collecting on any of the debts in the plan. The discharge is usually the main objective of filing the Chapter 11 bankruptcy and is the end of your case.