Litigation & Bankruptcy

Darnell Law Offices

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Chapter 11​​

Chapter 11 of the Bankruptcy Code allows businesses and individuals to stop collections, levies, and lawsuits and to form a plan to reorganize debts and to modify other obligations.  In most cases the Debtor has 180 days to negotiate with its creditors and file a plan of reorganization.  Other than taxes and penalties, there is no limitation to the term of the plan of reorganization.  


The case starts with the filing of a Bankruptcy Petition, Schedules, and Statement of Financial Affairs, and a filing fee of $1717.  To complete these required filings, we collect and review information about the business, including typical financial data, tax returns, profit and loss statements, cash flow statements, and a balance sheet.  Occassionaly clients in need of reorganization do not have perfect records.  We understand that and work with the client to gather adequate information required to comply with the Bankruptcy Code requirements.  


Upon filing the case, the automatic stay immediately suspends judgments, collections activities, levies, foreclosures, and repossessions of property on any debt that arose before the filing of the bankruptcy petition, including debts owed to government entities such as the IRS, State treasuries, and local property taxing authorities.  


Security Interests: In nearly every instance, a creditor such as a bank, or even the IRS, has a security interest in "cash collateral."  Cash Collateral is defined by the Bankruptcy Code as "cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents."  In other words, a creditor with an interest in cash collateral has in a security interest in the cash receipts of the business.  A Chapter 11 debtor may not use that cash collateral without permission from the creditor or the court.  As one might guess, the Chapter 11 debtor's inability to use its cash receipts can quickly bring business operations to a halt, as the business is unable to use its cash income to pay for inventory, wages, and utilities.  

Permission to Use Cash Collateral: In any Chapter 11 case with a cash collateral issue, it is imperative to file a motion to request to use cash collateral with the filing of the case.  This motion is called a "first day motion."  Ideally, the Chapter 11 debtor is ready to file this motion (and any other first day motions) on the same day as the case is filed.  Bankruptcy Judges understand the extreme importance of the Chapter 11 debtor's request to use cash collateral and paying employees, and the Courts typically schedule hearings on first day motions within a week of the Chapter 11 petition date / first day motion filing. Motions to use cash collateral are complicated and include such information as a history of the business and is principals, detail of operations, the business's monthly budget, a description of collateral, and the debtor's offer of adequate protection. Adequate protection to the creditor may be offered to the creditor in the form of continued liens, an equity cushion, or interest payments, for example.  


The different formulations of a Chapter 11 plan of reorganization are as varied as the very businesses that file Chapter 11 bankruptcy petitions.  What all Chapter 11 debtors have in common are that a proposed plan must conform to 11 USC 1129 - meaning that any plan must comply with the United States Bankruptcy Code, in good faith, that each impaired class accepts the plan or will receive the value that they would have received if the debtor had filed a Chapter 7 liquidation, that at least one impaired class has accepted the plan, that the plan is feasible or will work, that the plan is "fair and equitable," and finally that the plan does not violate the absolute priority rule (more on that later).  A Chapter 11 plan can be for any term, but it has to be a minimum of five years for an individual.  


It is not uncommon for a Chapter 11 debtor to have unpaid taxes, often in real property, income taxes, and wage withholding taxes.  These debts are often referred to as "priority claims" because they have priority over other unsecured claims.  


Once a business or an individual confirms a Chapter 11 plan, the Chapter 11 case is closed and the business exists bankruptcy.  After the case is closed the business or person is no longer under court supervision.  The Chapter 11 plan is thereafter a contract between the reorganized business / person and its creditors.