Filing of Chapter 11 petition
A Chapter 11 filing is a voluntary action taken by a company to protect its ongoing business from legal and financial claims while it continues day-to-day operations without interruption.
During a chapter 11 proceeding, the company reorganizes its finances so that it can meet its repayment obligations. A chapter 11 filing immediately freezes all legal and financial claims against the company prior to the filing date, stops lawsuits against the company, and prevents creditors from exercising control over the company’s property.
Companies commonly file for Chapter 11 voluntarily because it provides a process for the company to shed excess debt and emerge as a healthier business.
During a Chapter 11 case, a company can maintain its normal business operations and continue to provide employees with salaries and benefits. The company is also able to do business in its usual manner so that it can continue to generate funds that will support ongoing operations and satisfy creditors.
First Day Motions
First day motions are requests by the filing company to pay certain creditors so that the company can continue to operate without interruption. This usually includes a motion to continue to pay employees in the normal payroll cycle and a motion to pay what is owed to suppliers.
Appointment of Official Committee of Unsecured Creditors
After the filing, the Office of the U.S. Trustee (a government agency) appoints an official Committee of Unsecured Creditors (the Creditors’ Committee). The Creditors’ Committee will include three to eleven of the largest creditors that have financial claims against the company.
The U.S. Trustee will usually try to include several types of creditors (e.g. trade creditors, banks, bondholders) so that it is a representative body. This Committee then becomes involved in the court-supervised process to ensure that creditors are treated fairly.
Notice of Commencement and Meeting of Creditors
The Notice of Commencement of the case is mailed to all creditors within the first few weeks of the filing. This will include notice of the “341 meeting”.
The 341 meeting is a joint meeting of company representatives and people who believe the company owes them money (called the 341 meeting because it is required under section 341 of the U.S. Bankruptcy Code). It typically occurs approximately 30-45 days after a chapter 11 filing.
Notice of Bar Date
Notice is given to people with potential claims alerting them that they must file a “proof of claim” by a certain date - the “bar date”. Once the Court has gathered all of the claims that resulted from the bar date notice, hearings are held to determine the value of any claims that are disputed. As a matter of practice, many disputed claims are settled out of court.
Development of Plan of Reorganization
Once a company has filed for chapter 11, they will begin to develop a business plan and negotiate a reorganization plan with its creditors. The company has the exclusive right by law to propose a Plan of Reorganization during the first 120 days of the chapter 11 process. If the company is proceeding in good faith, the exclusive period may be, and usually is, extended by the Court.
Once the Plan of Reorganization is formulated and documented, it will be filed with the Bankruptcy Court. Often with “prearranged” chapter 11 cases, the Plan of Reorganization is filed with the court at or near the beginning of the case.
Presentation of Disclosure Statement to Bankruptcy Court
Along with the Plan of Reorganization, a Disclosure Statement with detailed financial information is presented to the court. The Disclosure Statement also explains the company’s proposed plan for paying its creditors. The Bankruptcy Court must determine if the Disclosure Statement contains enough information for the creditors to decide whether to accept or reject the Plan of Reorganization.
If the Disclosure Statement is approved by the court, it will be sent with the proposed Plan of Reorganization to all creditors and stakeholders in the company. These parties will then vote on whether to accept or reject the plan.
The company will then seek Bankruptcy Court approval of its Plan of Reorganization. If the Plan of Reorganization is confirmed by the court, creditors’ claims will be satisfied as laid out in the Plan of Reorganization. At this point, the company emerges from chapter 11 as a reorganized company and can operate its business as described in the Plan of Reorganization.
Terms & Definitions
Administrative Claim: An "Administrative Claim" is generally a Claim that arises after the Filing Date, which is granted priority treatment under the Bankruptcy Code and such claims are required to be paid in full in order to confirm a plan of reorganization.
Automatic Stay: The "Automatic Stay" is an injunction that takes effect immediately upon the filing of a chapter 11 petition. It generally prohibits, among other things, collection actions against a Debtor and actions to exercise control over property of a Debtor. The Automatic Stay also affects lawsuits commenced prior to the date of filing, preventing them from moving forward until the chapter 11 case is over or as otherwise authorized by the Bankruptcy Court.
Bankruptcy Judge: The "Bankruptcy Judge" presides over the administration of a bankruptcy case and decides contested aspects of that case related to the reorganization of a Debtor.
Bankruptcy Petition: The "Bankruptcy Petition" is the legal document that is filed with the Bankruptcy Court and initiates a bankruptcy case. The Bankruptcy Petition is, in most cases, filed with a variety of other supporting documents that contain information on the Debtor.
Bar Date: The "Bar Date" is the last date on which a "Proof of Claim" (see below) can be filed. The Bankruptcy Court will establish the Bar Date and then notice of the Bar Date will be announced and sent to creditors.
Business Plan: A "Business Plan" is a strategic plan prepared by management that sets forth the company's objectives as well as the specific steps that will be taken to achieve those goals.
Cash Collateral: "Cash Collateral" means cash in which an entity other than the Debtor has an interest, e.g., a lien.
Chapter 11: The chapter of the U.S. Bankruptcy Code that contains the provisions relating to a court-supervised reorganization of a company.
Claim: A "Claim" is generally a right to payment, whether that right is fixed, liquidated, potential, or contingent (i.e. based on the outcome of litigation). Claims can fall into different categories, for example: priority, secured, unsecured, contingent, non-contingent, liquidated, un-liquidated or disputed.
Confirmation: "Confirmation" is the official approval of the Plan of Reorganization by the Bankruptcy Court.
Creditor: A "Creditor" is generally an entity, to whom a debt is owed by the Debtor and therefore has a Claim against the Debtor.
Creditors’ Committee: The "Creditors' Committee" is appointed by the U.S. Trustee (see below) and is composed of representatives of the unsecured creditors. This Creditors’ Committee represents the unsecured creditors, consults with the Debtor-in-Possession (see below), reviews and gathers information about the Debtor-in-Possession's activities and financial condition, and participates in the formulation and negotiation of a chapter 11 Plan of Reorganization.
Debtor: A "Debtor" is a person or company who files a voluntary petition under the Bankruptcy Code.
Debtor-in-Possession: In most Chapter 11 cases, a Debtor is a "Debtor-in-Possession" meaning that it continues to operate its business while retaining possession of its assets and property. In other words, no trustee is appointed to operate the business or manage the property of a Debtor-in-Possession.
Debtor-in-Possession (DIP) Financing: "DIP Financing" is special financing available only to companies in chapter 11 and is used to fund post-petition trade and employee obligations, as well as the ongoing operating needs of the company during the reorganization process.
Disclosure Statement: The "Disclosure Statement" is a document that is presented to the Bankruptcy Court, and ultimately to creditors, that discloses the terms of the Debtor's Plan of Reorganization, as well as sufficient information about the company and other matters so that holders of Claims against or interests in the company can make an informed decision as to whether to vote for or against the Plan.
Discharge: "Discharge" is the legal term for the elimination of the Debtor's liabilities or its debt through the Chapter 11 process.
Filing Date: The "Filing Date" is the date on which the chapter 11 petition is filed.
First Day Motions: "First Day Motions" are motions typically filed on the same day that the chapter 11 petition is filed which are designed to provide the Debtor with narrow relief to ensure operations continue without interruption. First Day Motions are intended to provide support to the company's employees, vendors and customers.
First Day Orders: "First Day Orders" are the Orders entered by the Bankruptcy Court granting the requests made by the Debtor in the First Day Motions.
Plan of Reorganization: The "Plan of Reorganization" is the formal plan setting forth in detail how the Claims of each class of Creditors and interest holders will be treated. The Plan must be voted on and approved by a certain percentage of Creditors and then be approved or "Confirmed" by the Bankruptcy Court in order to become effective.
Pre-petition: "Pre-petition" refers to the period of time preceding a chapter 11 filing. It is also typically used to identify Claims that existed prior to the Filing Date.
Post-petition: "Post-petition" refers to the period of time following a chapter 11 filing. It is also typically used to identify business transactions that occur on or after the Filing Date.
Priority Claim: Certain classes of claims are given priority by the Bankruptcy Code, such as certain claims for unpaid wages, up to a certain amount or taxes. Claims generally must be paid in order of priority.
Proof of Claim: The "Proof of Claim" is the form filed with the Bankruptcy Court that provides the details of a Creditor's pre-petition Claim.
Reorganized Debtor: After the Debtor receives Bankruptcy Court approval of a Plan of Reorganization, the Plan becomes effective and the company emerges from chapter 11. The company is then considered "reorganized."
Schedule of Assets and Liabilities: A Debtor's Schedule of Assets and Liabilities lists its assets (what it has or owns) and its liabilities (what it owes). Every Debtor is required to file a Schedule of Assets and Liabilities with the Bankruptcy Court.
Secured Claim: A "Secured Claim" is a Claim that is based on a debt or obligation that is secured by a lien on certain assets. A mortgage is an example of a debt that is secured by a lien on certain assets (i.e., real property).
United States Trustee: The "U.S. Trustee" is part of the U.S. Department of Justice and supervises all bankruptcy cases filed in a particular district. The role of the U.S. Trustee is to interview the Debtor shortly after the filing of the case, to schedule the first meeting of Creditors (the "341 Meeting"), to inform the Debtor of its duties and responsibilities, to ensure that the Debtor complies with its duties and responsibilities, to appoint Creditors', bondholder and equity holder committees, to apply to the Bankruptcy Court for appropriate relief and to make recommendations to the Bankruptcy Court.