Chapter 11 is a complex, time consuming and expensive process. However, it offers powerful protections and rights to a troubled business to allow the Debtor to reorganize its business affairs and endeavor to emerge as a viable business. The debtor in a Chapter 11 bankruptcy case is referred to as a debtor-in-position because the business maintains control over the daily operations. In most cases, a trustee is not appointed to represent the bankruptcy estate.
A business may voluntarily commence a formal bankruptcy filing by filing a petition in federal bankruptcy court. In New Jersey there are three United States Bankruptcy Courts, in Newark, Trenton, and Camden. The petition should be filed in the court which serves the geographic area (called a “vicenage”) in which the debtor has its principal place of business.
Filing a petition automatically stops all actions to collect pre-bankruptcy debts and enforce prepetiton obligations. It provides a safe haven to reorganize the financial affairs and operations of the business. This is called the “automatic stay”. A creditor that disregards the automatic stay may be held to be in contempt of court and may face sanctions.
During the pendency of the case, the Debtor is under the supervision of one assigned bankruptcy judge. One or more committees may be appointed to represent constituencies such as unsecured creditors, bond holders or other groups of creditors or equity holders of particular classes. Each such committee is permitted to retain its own professionals at the expense of the bankruptcy estate.
The United States Bankruptcy Code affords a debtor enormous latitude and powers while it is endeavoring to restructure its affairs, while nonetheless providing creditors and other parties in interest the opportunity to monitor the proceedings and to be heard on major issues. Among other things, Debtors are given the ability to reject leases and other executory agreements that are disadvantageous, compromise debts by means of a plan of reorganization (without the necessity of obtaining a settlement with each creditor), to recover certain prepetition payments that were made, and many other extraordinary rights and powers.
The goal of a Chapter 11 case is confirmation of a plan of reorganization. The Chapter 11 plan must address each category of creditors. The plan, among other things, sets forth the distributions to each class of creditors and equity holders. It is sent to each creditor entitled to vote thereon with a disclosure statement. The disclosure statement must include enough information for creditors to determine whether they should vote for or against the plan. If enough creditors do not vote in favor of the Chapter 11 plan, the court generally will not confirm the plan. Therefore, many Chapter 11 cases involve intense negotiations with creditors to secure their approval of the plan. The plan process can be highly complex and contentious. Obviously, this summary is intended only as a brief overview, and for a true understanding of this complex process you should speak with a New Jersey bankruptcy attorney.
A plan of reorganization may propose to reject leases and contracts in addition to reducing the debt owed to certain creditors. In addition, the Chapter 11 plan may call for some debts to be satisfied in full by surrendering the collateral to the creditor.
Even though a Chapter 11 plan may receive overwhelming approval from creditors, the confirmation of the plan rests with the bankruptcy court. The court must find that the Chapter 11 bankruptcy plan meets all requirements under the Bankruptcy Code for a Chapter 11 plan under Section 1129 of the Bankruptcy Code.
If the court does not believe the plan satisfies all the requirements, it will not confirm the plan. The debtor may be required to revise or amend the plan before the court confirms the plan. It is important to understand that creditors and other parties in interest may file competing Chapter 11 plans once the exclusive time expires for the debtor to file a proposed plan. The plan process can often be contentious and may engender litigation. The plan, if confirmed by the court, provides for the treatment of various classes of creditors, and may provide a roadmap for the debtor’s successful reorganization.