FAQs

Chapter 11 FAQ’s

 

Who Operates a Company That Has Filed Chapter 11?

Typically the company’s management continues business as usual in a Chapter 11 case.  The debtor assumes the status of a so-called Debtor in Possession (DIP) and continues to run the business in that capacity until confirmation of the Chapter 11 plan.  The US Trustee may try to appoint a third party trustee to run the company, but only in cases where there has been some wrongdoing by the DIP or gross mismanagement.

During the Chapter 11, the DIP is generally also responsible for accounting for property, examining and objecting to claims, filing required reports with the bankruptcy court, employing attorneys, accountants, appraisers, auctioneers, and other professionals to assist with the case, and filing tax returns.

 

How Can I Operate My Business During a Chapter 11?

With some exceptions, a business can run as it normally did prior to the filing.  In general, a debtor cannot use pre-petition lines of credit to fund ongoing business operations and must rely on ongoing cash flow from post-petition operations and new extensions of credit to finance post-petition business operations.  The Debtor cannot pay any pre-petition debts during the case without approval from the court and must pay all post-filing debts as they accrue.  “Cash collateral” (cash in which a creditor has an secured interest and cash derived from property in which a creditor has an interest) may not be used by the debtor without prior consent of the creditor or approval from the Court.  Typically a debtor will work out the terms of its proposed cash collateral use with its lender prior to filing, so there will be continuity in its business operations.  The debtor may borrow money after filing; such debtor in possession financing (“DIP financing”) is subject to the limitations and requirements provided in the Bankruptcy Code.

 

Who Can File a Chapter 11 Plan?

Usually only the debtor may file a Chapter 11 plan during the first 120 days after the filing of the petition, and if the debtor files a plan within 120 days, no other plan may be filed for the first 180 days after the filing of the petition.  This 120- or 180-day period is called the exclusivity period. After the debtor’s exclusivity period has expired, any creditor or the trustee may file a plan. More than one plan may be filed and accepted, but only one plan may be confirmed by the court.  I find the best way to approach a plan is to draft the essential documents before we file so that I know that a plan is feasible and likely to get approved.

 

What do I need to Get a Plan Confirmed by the Court?

Plan acceptance is determined by a vote of creditors with allowed claims and shareholders with allowed interests. A plan is accepted by a class of claims if it is approved by more than 1/2 of the total claims and at least 2/3 of the claims actually voting.  A Chapter 11 plan cannot be confirmed (i.e. approved) by the court unless at least one class of creditors votes in favor of the plan.  Creditors are grouped into classes based on their type of debt.  Typically secured creditors are each in their own class and in many cases, all of the unsecured creditors are in a single class.

 

What is “Cram Down?”

Cram down is a process by which the court may confirm a plan that has not been accepted by every class of creditors.  In general, a court may “cram down” a class and order confirmation if at least one class of claims impaired under the plan has accepted the plan, the plan does not discriminate unfairly, and the plan is “fair and equitable.”

 

Can I Reduce My Level of Secured Debt?

Yes, this is often the single largest motivation for filing a Chapter 11.  Under a plan, secured debt can be reduced to the value of the collateral securing such debt.  For instance if a debtor owes a bank $1.5mm secured by real estate that is only worth $1mm, the Debtor can have the debt lowered to $1mm.  The remaining $500k will then become an unsecured claim that is treated like all other unsecured claims, and paid a small percentage of their claims over time.

 

What is a Chapter 11 Creditors’ Committee?

A creditor’s committee is committee of unsecured creditors appointed by the U.S. Trustee in a Chapter 11 case. The committee’s role is generally to protect the rights of unsecured creditors in the bankruptcy case, and ensure that the debtor properly manages the bankruptcy estate throughout the proceeding. The committee will often provide input on the reorganization plan, then work with the debtor throughout the case to ensure that the plan is implemented properly.  Creditors’ committees may seek the court’s approval to hire professionals such as attorneys and accountants to assist them.  Unfortunately, the debtor is frequently obligated to pay for the professionals of the creditors’ committee.

 

What Happens if a Debtor Cannot Get Their Plan Approved?

With certain exceptions, debtors may convert a Chapter 11 case to a Chapter 7 case. This provides debtors a chance to try to reorganize under Chapter 11 before deciding whether liquidation under Chapter 7 is necessary. In other words, most debtors do not forfeit their right to liquidate under Chapter 7 by filing Chapter 11 bankruptcy.

 

 

Chapter 7 FAQ’s 

 

How a Chapter 7 Can Help You

Millions of Americans file a Chapter 7 bankruptcy every year. It is an easy and quick way to eliminate unsecured debts like credit cards, medical bills, payday loans and some personal loans.  Contrary to popular belief, you will likely be able to keep all of your personal property and real estate and the case can be over in as little as three months.

 

Who Is Eligible to File Chapter 7 Bankruptcy 

Unlike Chapter 13, there is no maximum amount of secured and unsecured debt to file a Chapter 7.  However, to be eligible you have to pass the so-called “means test.”  This looks at your income and compares the state’s medium income, taking into account your level of secured debt, like mortgages or auto loans.  With a few simple pieces of data from you we can quickly determine whether you are eligible for a Chapter 7.

 

What Property Can You Keep If You File Bankruptcy?

Many people avoid bankruptcy out of the misconception that they would lose their house, their automobile or other personal property.  Generally speaking, if you are current on your mortgage or auto loans, then you will keep that property.  There are certain types of exempt properties that the bankruptcy trustee cannot touch.  In fact, most of everything the typical middle class family owns will be exempt, and you will able to keep it in a bankruptcy.

If you are significantly behind in your auto payments or mortgage, a Chapter 13 is a better option for you than a Chapter 7, as under a Chapter 13 plan you can repay these arrearage amounts you owe over time.

 

What is a Discharge and What Debts Survive Bankruptcy?

Under the federal bankruptcy law, a discharge releases you from personal liability for certain specified types of debts.  That is the main reason most people file bankruptcy – to erase debts.  In other words, you are no longer required by law to pay any debts that are discharged. The discharge operates as a permanent order directed to your creditors that they refrain from taking any form of collection action on discharged debts, including legal action and communications with you, such as telephone calls, letters, and personal contacts.  There are, however, some types of debts that bankruptcy cannot erase.  These include the following:

  • Money owed for child support or alimony;
  • Fines;
  • Some taxes;
  • Most Student Loans;
  • Debts you fail to list on your bankruptcy petition;
  • Loans you obtained by knowingly giving false information to a lender who reasonably relied on it in making you the loan;
  • Debts resulting from “willful and malicious” harm or fraud; and
  • Mortgage or other secured debts where you decide to keep the property.

 

What Happens When I File a Chapter 7 Bankruptcy?

First and foremost, your creditors are required to stop calling or communicating with you.  All collection efforts, including lawsuits, are automatically stopped as soon as the creditors get notice of the filing.  The court will then appoint a Chapter 7 trustee for your case and schedule a so-called 341 meeting, also known as a meeting of creditors.  At that meeting, the trustee will review your petition and schedules and ask you questions about them.  I will attend that meeting with you, and all your creditors are entitled to attend as well, although it is rare for a creditor to actually show up.  Sixty days after that you will  receive a discharge, which is a release from personal liability for certain specified types of debts. In other words, you are no longer required by law to pay any debts that are discharged. The debts are essentially gone, and your creditors must refrain from taking any form of collection action on discharged debts. Although you will be relieved of personal liability for all debts that are discharged, a valid lien, such as a mortgage or a car loan, will remain after the bankruptcy case.

 

Can I keep My Home or Automobile When I file Chapter 7?

Generally speaking, if you are current on your mortgage or car loan, then you will be able to keep those properties and simply continue to pay on them.  However, if your mortgage or car loan are simply too expensive, the Chapter 7 affords you an excellent opportunity to walk away from any such secured loan.

If you are behind on your car loan or mortgage, you should consider filing a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy. In a Chapter 13 plan you will be required to pay at least the equivalent of the non-exempt equity you have in your home or car and any amount you are behind on your home or car loan over the course of the three-to-five year plan. You also will be required to continue making the regular monthly payments.

 

Will Creditors Stop Calling Me When I File?

Yes, immediately.  Once a creditor or bill collector becomes aware of a filing for bankruptcy protection, they cannot communicate with you at all.  As soon as we file your case, the court mails a notice to all of your creditors.  You can also tell creditors you have filed, and they must stop calling you.  If you have a lawsuit pending against you, we will notify the court and the case will be stayed – essentially frozen. If a creditor continues to call or harass you after they learn of the bankruptcy, they may be liable for court sanctions and attorney fees.

 

Will Filing Bankruptcy Affect My Credit?

Generally speaking, a bankruptcy won’t affect your credit as much as your prior credit history will.  So if your credit is poor prior to filing, there will not be much of an effect.  However, if you have good credit prior to filing – and many folks do – then you may not see that much of a drop in your score.  This is true particularly if you have a good job. The fact that you filed bankruptcy, if properly explained, may be less damaging than a history of unpaid accounts.  Your filing will appear on your credit record for ten years, but since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit. The best way to restore your credit is to obtain new credit and make the payments on the new debt on time.

 

Does My Spouse Have to File if I do?

No, but your spouse will still be liable for any joint debts.  If you file together, you will be able to double your exemptions. In some cases where only one spouse has debts, or one spouse has debts that cannot be discharged, then it probably makes sense for only one spouse to file. If the spouses have joint debts, the fact that one spouse discharged the debt may show on the other spouse’s credit report.

 

Do I Have to Go to Court?

Only very rarely will a Chapter 7 debtor have to go to court.  In most cases, you only go to a proceeding called a “meeting of creditors” or a “341 meeting” to speak with the bankruptcy trustee and any creditor who chooses to come.  Most clients tell me afterwards that the meeting was not as stressful as they had feared.  I will prepare you for this meeting and attend with you.  This meeting will take place about 20 – 30 days after the bankruptcy filing. The trustee is not a judge but an independent party, usually a bankruptcy lawyer, appointed by the United States Trustee to oversee your case.   These meetings are typically a short and simple procedure where you are asked a few questions about your bankruptcy schedules and your financial situation. Occasionally, if a creditor or the trustee files a motion or an adversary action, or if you choose to dispute a debt, you may have to appear before a judge at a hearing. If you need to go to court, you will receive notice of the court date and time from the court and/or from us.  I will attend your 341 meeting with you.

 

Can I Repay a Debt After My Bankruptcy if I Choose to?

Yes.  Even though you received a discharge of all your debts, there is no prohibition from repaying any creditors you decide to.  A debtor may repay a discharged debt even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family member or because it represents an obligation to an individual for whom the debtor’s reputation is important, such as a family doctor.

 

Must I List All of My Debts and Assets

Absolutely, and the penalty for failing to do so may be severe – from a denial of discharge to prosecution by the US Attorney General.  Even if you intend to repay a debt after you obtain your bankruptcy discharge, you must list that creditor on your petition.  Likewise, you must list all of your assets.  Failing to do so can also result in criminal prosecution.