Lester and Associates: Bankruptcy Chapter 11, New York
Chapter 11 cases begin with the filing of a petition in bankruptcy court. Individuals opting for Chapter 11 are almost always business debtors.
Chapter 11 Basics
Chapter 11 bankruptcy is most often used by corporations, partnerships, and limited liability companies. Most debtors file Chapter 11 where their primary place of business is located, although some business debtors file where the business is incorporated or domiciled. Individuals are also allowed to file under Chapter 11 if they have too much debt or too much income to qualify under Chapter 7 or Chapter 13. That said, most individuals will do everything possible to file under Chapter 7 or Chapter 13, as Chapter 11 proceedings are lengthy, and can include a higher cost than the others. Most Chapter 11 cases take between six months and two years to complete, significantly longer than Chapter 7 or Chapter 13.
Business as Usual During Chapter 11
In most Chapter 11 cases, no trustee is appointed, and the debtor continues to operate the business normally, as the “debtor in possession.” A trustee can be appointed by the bankruptcy court, however, for sufficient cause, including fraud, dishonesty, incompetence, or gross mismanagement. Even though it is business as usual, once Chapter 11 proceedings have been initiated, the bankruptcy court has control over any major business decisions, such as the sale of any assets (minus retail inventory), entering into or breaking a lease of real or personal property, entering into secured financing arrangements, closing or expanding business operations, entering into new agreements with vendors, unions, or other contractors, and retaining and paying attorneys and other professionals.
The Basics of Chapter 11 Reorganization Plans
You have the exclusive right to propose a reorganization plan within the first four months following the filing of Chapter 11. Ordinarily, the debtor has the exclusive right for four months after it files Chapter 11 to propose a reorganization plan, and with good cause shown, the court can extend this period for up to 18 months after the petition is initially filed. If you do not file a reorganization plan within the period of exclusivity, then other parties can propose competing reorganization plans (although this is rare). When creditors are dissatisfied with the debtor’s progress or plan, then normally they will move to dismiss your case or have it converted to a Chapter 7 case.
A Chapter 11 plan allows you to restructure your financial affairs. Most plans include some amount of downsizing of the debtor’s operations to free up assets and reduce expenses going forward. Sometimes liquidation plans are proposed which require a total shutdown of debtor operations and a sale of remaining property to pay debts. No matter what the plan looks like, creditors are entitled to vote on whether they accept a proposed Chapter 11 plan. To be approved by the bankruptcy court, at least one class of “impaired” claims (those that will not be paid in full upon plan confirmation), must vote in favor of the plan.
Does Chapter 11 Work?
Studies show only about 10 to 15% of Chapter 11 cases result in successful reorganizations. Most cases are dismissed (many times by agreement of the parties) or converted to Chapter 7 bankruptcies, both of which require the approval of the bankruptcy court. There are special provisions in the bankruptcy code which allow streamlined and expedited Chapter 11 cases that involve small business debtors and single-asset real estate debtors.
If you are in Long Island and considering filing for Chapter 11 bankruptcy and would like to discuss whether it is the right option for you, call the experienced Chapter 11 bankruptcy attorneys at Lester and Associates. We are ready to help you get your life back on track and to help you achieve financial health, so call (516) 357-9191 or fill out a contact form today for a no-obligation consultation.