CHAPTER 11 BASICS
A Chapter 11 bankruptcy is a reorganization case, generally for business but also for individuals. There is a filing fee, a lot of paperwork and motions which need to be filed, followed fairly quickly by the filing of the reorganization “plan”. The plan explains how creditors will be paid (the sources of funding and the timing of payments) and how much they are to be paid. Creditors get to vote to accept or to reject the plan. Creditors can object to confirmation of the plan and the bankruptcy court may “confirm” the plan, in effect, creating a new contract between the debtor and creditors.
If the plan is approved, the debtor makes payments to creditors usually for a period of years and the debtor gets a discharge of debts. If the plan is not approved, the case could be dismissed or converted to a Chapter 7 liquidation case. In a Chapter 11 case and a plan, liens on property may be removed and loan payments and interest rates can be reduced. Lawsuits and collection activities generally stop. In reorganizations for individuals, non-dischargeable debts, such as certain taxes and unpaid child support, can be paid over time through the plan.
A CAUTIONARY TALE
Verifiable statistics show that most Chapter 11 cases fail. About 70% of the Chapter 11 cases filed between 1989 and 1995 were either dismissed or converted to Chapter 7, according to a study done for the Executive Office of the United States Trustees. This study found that only 26% of the Chapter 11 filings during that same period resulted in a confirmed reorganization plan. Since the 2005 amendments to the Bankruptcy Code, similar U.S. Trustee statistics show that 33% of Chapter 11 cases resulted in a confirmed plan of reorganization (through February 2009). See “Chapter 11 Filing Trends in History and Today”, Flynn, Crewson, Et. al., (2010).
THE RIGHT LAWYER WILL DEVELOP AN EXIT STRATEGY AT THE OUTSET
Each Chapter 11 reorganization must have its own exit strategy, developed before a case is filed and clearly understood between attorney and client. Of course a strategy is no guaranty of a successful case, but it allows the attorney, the debtor and others to work toward the same goal.
Mr. Fox understands from experience that there are reasons why certain cases succeed, largely due to the planning done in advance. Many failed cases were just not appropriate for Chapter 11 in the first place. Your successful exit strategy must be developed before your case begins or your case will be one of the two-thirds or so that fails.
In developing an exit strategy, you’ll want your attorney to be highly experienced in successful cases and to consider the important factors the will lead to success in your case. So it is absolutely essential that you choose the right attorney—one that has successfully confirmed reorganization plans like the one your business needs.
If you are thinking of filing a Chapter 11 case in the Los Angeles area, contact us. Mr. Fox is prepared to evaluate your case for success and to answer your questions without hesitation. Don’t just call the lawyer who filed your friend’s Chapter 7 case. Seek out an experienced Chapter 11 lawyer that understands what will make your reorganization a success.