Although a Chapter 11 filing can be an option of last resort for most businesses, being proactive and exploring options at the earliest opportunity can reap great rewards. Using a targeted Chapter 11 filing can work wonders, especially where asset sales are concerned. One recent example illustrates this principle very clearly. Business owners should understand that the Chapter 11 process is their friend in a crisis, not something to be avoided.
Category Archives: Business Bankruptcy in Kansas City
Selling Bankruptcy Estate Property In A Chapter 11 Case
Business bankruptcy cases can be different from personal cases, in that assets will often need to be sold off soon after a petition is filed. This can happen in personal cases as well, of course, but businesses cases can sometimes carry with them a special sense of urgency. Cash often needs to be raised, or the business may need to shed itself of unwanted assets.
Real estate cases see this issue with some frequency, where closing and sale dates are negotiated in advance. Assets can be sold before, during, and after confirmation of a Chapter 11 plan. Sections 363 and 1123 of the Bankruptcy Code govern preconfirmation and postconfirmation sales of estate assets, respectively.
Secured Debts In Bankruptcy
When a bankruptcy case is filed, the various types of debts are classified into various categories: secured, priority unsecured, general unsecured, or administrative claims. This post will discuss secured debts and how they are often treated in a bankruptcy case. What is a secured debt? A secured debt is a debt in which the lender has some sort of collateral as a “security” for a loan.
In other words, the lender has the ability to repossess some collateral if the debt is not paid. Typical secured debts are home loans, car loans, boat loans, and furniture loans. In order for a creditor to claim secured status, they are required to do certain technical things, such as record their lien, and do a few other things.
Business Bankruptcy And Chapter 11: Explaining The General Principles To Clients
A Chapter 11 petition can be filed for an individual or a business. In either situation, there are significant responsibilities that a debtor has in the progress of a case. When the petition is filed, an entity called a “debtor in possession” is created. The debtor is the “debtor in possession” unless a trustee is appointed in the case.
Technically, the debtor-in-possession is considered a separate legal entity. And unless a trustee is appointed, the debtor-in-possession has all of the rights, powers, and duties of a trustee. The debtor is his or her own trustee. This can be a tremendous advantage that Chapter 11 gives debtors over other types of bankruptcy cases (Chapter 7 and Chapter 13). A Chapter 11 debtor can avoid liens, set aside transfers, file adversary proceedings, and do many other things to expedite the reorganization process.
A debtor will need to use his or her “cash collateral” during the course of the case. What is cash collateral? It’s defined as cash, negotiable instruments, documents of title, deposit accounts, securities, or other cash equivalents. A Chapter 11 debtor also is required to open up a special “debtor-in-possession” bank account that will be used during the course of the case. When monthly operating reports are filed, the bank account statement is attached as part of the monthly operating report.
Local courts also have a lot of authority in deciding on the general guidelines for cases. Bankruptcy Rule 9029 permits local courts to set up rules as they deem necessary, provided they don’t conflict with the federal rules of bankruptcy procedure.
An attorney is required in a Chapter 11 case. Your attorney will help you file your monthly operating reports, comply with court orders, submit information as requested to the US Trustee, and perform a myriad of other duties in your case. But what is especially important is that your Chapter 11 attorney be an explainer. Being able to explain complicated concepts and procedures to someone who likely has never participated in a bankruptcy case before is a critical skill, and one that is often underappreciated.
At Phillips & Thomas LLC, we take pride in our ability to be great explainers and conveyers of information. Bankruptcy cases, and especially Chapter 11 business or personal cases, are participatory in nature. It’s a collaborative process. For a case to be successful, the debtor needs to participate and show interest in the case. And this comes with understanding fully what is going on. At Phillips & Thomas, we know how to explain in detail the following things:
1. Accounting for the property of the estate in monthly operating reports.
2. Examining proofs of claim filed in a case, and objecting as needed or necessary.
3. Providing information as required or requested to the US Trustee, such as insurance information or tax records.
4. Making a final report and accounting to the court regarding the estate and the completion of the Chapter 11 plan.
Being able to explain and convey these concepts is a critical skill for the Chapter 11 attorney to have. Far too often, clients overlook the need for having an attorney who can explain these and many other involved concepts. We make sure that clients understand all of the key duties and responsibilities that come with being in a Chapter 11 case.
Read More: Converting A Chapter 11 Bankruptcy Case in Kansas City
Creditor Claims In A Bankruptcy Case
When a bankruptcy case is first filed, notices are mailed out to all of the listed creditors. The notices contain information about deadines for filing “proofs of claim”, and lists objection deadlines for issues a creditor may have with a case, or for the filing of an adversary proceeding (these are not common).
It is the creditor’s responsibility to see that its proof of claim is filed on time and in the right format with the bankruptcy court. Its failure to do so can mean that it will not share in any assets of the bankruptcy estate. If a claim is not timely filed, a creditor would have to show the court that its failure to file on time was due to some “excusable neglect.” This is not easy to show.
Chapter 7 Discharge In Bankruptcy In Kansas City
Overland Park Bankruptcy Lawyer
When a Chapter 7 bankruptcy is filed, the trustee’s responsibility is to see if there are any assets to administer for the benefit of the creditors. In the typical Chapter 7 case, there are no assets to administer. If there are, the case will remain open until all the approved claims are paid. Typically, the bankruptcy court clerk will mail out notices of discharge in a Chapter 7 case about 4 or 5 months after the case has been filed. Keep in mind that this is just a rough time frame. There is no rigid rule on this.
Cramdowns In A Chapter 13 Bankruptcy In Kansas City
In a Chapter 13 bankruptcy, secured and unsecured loans are treated differently. In a Chapter 13 bankruptcy, secured debts (i.e., loans with a security interest, such as a loan on a house, car, boat, trailer, etc.) are treated in different ways.
In some circumstances, a debtor will not have to pay the full loan balance of the asset in question, such as a car, boat, or piece of investment real estate. In these circumstances, a debtor would only have to pay what the the collateral is worth, not what is owed on it (unless, of course, what is owed is less than the value of the collateral).
Converting A Chapter 11 Bankruptcy Case In Kansas City
Not every Chapter 11 case ends with completion of the Chapter 11 plan. Sometimes, cases are converted to a different chapter of the bankruptcy code. This can happen for a variety of reasons, but most often the issue hinges on what is in the best interests of the debtor. Sometimes the circumstances that existed at the initial filing or at confirmation no longer exist. In these situations, dismissal of the case or conversion to another chapter can be an appropriate remedy.
As a matter of right, a Chapter 11 debtor can convert his or her case to a case under Chapter 7 in many situations. For other situations, court permission must be sought. Court permission would be needed if: (1) The debtor is not a debtor in possession; (2) The case was originally an involuntary Chapter 11 case (this is rare); (3) The case was previously converted to Chapter 11 from another chapter at the debtor’s request.
As a case progresses, sometimes it becomes clear that conversion to another chapter of the bankruptcy code will be necessary. If a feasible plan can’t be proposed or implemented, administrative costs are not paid, the confirmation order is revoked, the plan is in default, or some other unforseen circumstances intervenes, it is good to know that conversion is an option. In some situations, a dismissal of a case followed by a refiling under another chapter is also an appropriate remedy. Everything depends on the circumstances.
Read More: Executory Contracts And Unexpired Leases In Chapter 11 Bankruptcy In Kansas City
The Order Of Priority Of Claims And Interests In A Chapter 11 Case In Kansas City
When a Chapter 11 case is filed (business or personal), the debtor’s schedules will list all of the debts and assets. Debts are categorized by priority, in the sense that some debts are accorded more favorable treatment than others. When the debtor’s plan of reorganization is filed, the plan will describe the proposed treatment of the different categories of debt. In a Chapter 11 disclosure statement and Chapter 11 plan, the different categories of debt will be specified with some particularity.
The two main objectives of the Bankruptcy Code are to give the debtor a fresh start and to distribute equally to unsecured creditors what is available of the debtor’s property in a liquidation, or to pay each creditor a pro rata share of their debt according to a payment plan under Chapter 11, 12, or 13. Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than their claim, then the claim is bifurcated into a secured claim covered by the collateral and an unsecured claim for the remaining portion. The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.
We have found that creditors often do not properly understand the nature of their debt and their treatment in the plan of reorganization, and this can on occasion lead to unnecessary disputes over plan confirmation. The priority of claims and interests carries importance if a “cramdown” type of plan is being proposed. A debtor must be mindful of the absolute priority rule in these situations.
Under the Bankruptcy Code, claims and interests are entitled to payment in the following ranking of priority:
1. Secured Claims. These are claims where the creditor has a lien on some collateral.
2. Priority Unsecured Claims. These are given explicit rankings in detail in the Bankruptcy Code (11 U.S.C. 507(a)). Basically we have here: expenses of administration, maintenance and support claims, unsecured tax claims of the government, and some other uncommon categories.
3. Nonpriority Unsecured Claims. These are general unsecured claims, such as medical bills, deficiencies on repossessions or foreclosures, unsecured lines of credit, payday loans, credit card debts, and private loans. They are often grouped into subcategories in a plan of reorganization.
4. Interests of Equity Security Holders. These are not often encountered, and comprise the interests of shareholders or stockholders. Examples would be holders of preferred stock or common stock.
There are some claims that have priorities above the priority claims listed above that mostly apply to business debtors. Some higher priorities, called super priorities, are listed elsewhere in the Code. For instance, Section 507(b) gives a higher priority to a secured claimant for any lack of adequate protection given by the trustee or the court so that the debtor or trustee could use the creditor’s property contingent on the promise by the trustee or the court that the creditor will not lose any value from its use. If the adequate protection turns out to inadequate, then the difference will be paid as a super priority claim.
A proper understanding of these categories and their priority is important for both debtors and creditors in a Chapter 11 case. Each of these categories will have a hierarchy of rights and privileges in a Chapter 11 plan, and voting rights associated with their position. Not understanding the nature of these rights can lead to unnecessary confusion, and may even impact the ability of a creditor to receive any distribution in a plan of reorganization.
Read More: The Appointment Of A Trustee In A Chapter 11 Case in Kansas City
Appointment Of A Trustee In A Chapter 11 Bankruptcy In Kansas City
In the vast majority of Chapter 11 bankruptcy cases, there is no Trustee as in a Chapter 7 or Chapter 13 case. The debtor is called a “debtor in possession” because he in effect acts as his own “trustee”, to state it one way. He retains control of the assets and business operations during the course of the case. However, there are some situations (described in 11 U.S.C. 1104(a)) where a trustee can actually be appointed after a case is filed:
1. For good cause, such as seriously derelict management of assets before or during the pendency of a case, or
2. If the appointment of a trustee is in the best interests of the estate.
Of course, these situations are not often encountered. In deciding whether to appoint a trustee under the “best interests” rule, the court would have to weigh a number of factors. The final analysis would have to balance the expense of appointing a trustee against the possible savings of the assets of the estate. As a practical matter, the appointment of a trustee in a Chapter 11 bankruptcy case is only going to happen in unusual circumstances. But it does happen, and it is interesting to note the legal effect of such a development:
1. The trustee can now have an active role in running the company, if this is a corporate Chapter 11 case.
2. The debtor’s exclusive right to file a plan is now replaced by the possibility of a proposing his own plan of reorganization.
3. The trustee is vested with the authority to bring actions (adversary proceedings) against other parties on behalf of the business.
4. The debtor loses his exclusive right to convert to a Chapter 7 case (11 U.S.C. 1112(a)).
Because the incidence of a trustee being appointed in a Chapter 11 case is rare, this is not the type of issue that is commonly encountered. However, it is important to be mindful that it does exist. A party seeking such an outcome would have to make a strong showing that a trustee appointment would be to the estate’s benefit, and this is normally an uphill battle.
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