Bankruptcy court gets final approval over the reorganization plan, as well as any major business decisions that take place during bankruptcy. It also matters why a company needs to file for bankruptcy. They track sales for stores that have been open for at least a year, a number that excludes the inflationary effect of newly opened locations and indicates which direction sales are moving in. Is the product assortment tailored properly to the local shopper base? Are there too many or too few staffers on the floor?
While Chapter 11 bankruptcy is focused on a company reorganizing and paying off its debt, it has a variety of possible outcomes. It was hoping for a buyout by a private equity firm, but the deal fell through, and in an absence of other buyers, the company announced its liquidation plans that July , shuttering its nearly remaining stores. Why not just file for Chapter 7 bankruptcy then? Well, liquidation might not have been the hoped-for outcome, but even if it was, Chapter 11 allows management to choose its own liquidation firms and to sell off other assets, like intellectual property.
In Chapter 7, everything would be liquidated by an appointed case trustee. Indeed, many Chapter 11 cases these days end with a company selling off its intellectual property — in essence, its brand name and assets like its customer database — to a private equity firm or a competitor, especially in the retail world.
When American Apparel filed for bankruptcy in the fall of , closing all of its stores, Gildan Activewear bought its intellectual property and relaunched it with some tweaks to its infamous marketing style. Nasty Gal was acquired out of bankruptcy by the British fast fashion brand Boohoo in February , though its resuscitation came with complaints of poor customer service.
At its clumsiest, this can create a sort of zombie effect, where things just seem off. When a brand name like that goes on the market, Toubassy sets about figuring out where and how long ago its revenue peaked, and how much affinity and awareness the brand has among potential shoppers — indicators of whether it would be worth the time, capital, and risk involved in a relaunch.
In the case of Wet Seal, Toubassy took notes from the success of the hyper-popular fashion e-commerce site Fashion Nova , which is known for its collaborations with Cardi B, cloning everything the Kardashians wear , and releasing clothing in a mind-melting 24 hours.
Has it been successful? There are certain advantages to building a new company around an existing brand name, rather than starting fresh: Though it may have been tarnished somewhat by bankruptcy, customers are already familiar and, ideally, friendly with it. Under BAPCPA, retailers now get a maximum of days a day deadline, plus a single day extension to make that decision. The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit.
There may also be litigation over executory i. Delays in formulating, filing, and obtaining confirmation of a plan often prompt creditors to file motions for relief from stay, to convert the case to chapter 7, or to dismiss the case altogether. Frequently, the debtor in possession will institute a lawsuit, known as an adversary proceeding, to recover money or property for the estate.
Adversary proceedings may take the form of lien avoidance actions, actions to avoid preferences, actions to avoid fraudulent transfers, or actions to avoid post-petition transfers. At times, a creditors' committee may be authorized by the bankruptcy court to pursue these actions against insiders of the debtor if the plan provides for the committee to do so or if the debtor has refused a demand to do so.
Creditors may also initiate adversary proceedings by filing complaints to determine the validity or priority of a lien, revoke an order confirming a plan, determine the dischargeability of a debt, obtain an injunction, or subordinate a claim of another creditor. The Bankruptcy Code defines a claim as: 1 a right to payment; 2 or a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment.
Generally, any creditor whose claim is not scheduled i. But filing a proof of claim is not necessary if the creditor's claim is scheduled but is not listed as disputed, contingent, or unliquidated by the debtor because the debtor's schedules are deemed to constitute evidence of the validity and amount of those claims.
If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim. It is the responsibility of the creditor to determine whether the claim is accurately listed on the debtor's schedules. The debtor must provide notification to those creditors whose names are added and whose claims are listed as a result of an amendment to the schedules.
The notification also should advise such creditors of their right to file proofs of claim and that their failure to do so may prevent them from voting upon the debtor's plan of reorganization or participating in any distribution under that plan.
When a debtor amends the schedule of liabilities to add a creditor or change the status of any claims to disputed, contingent, or unliquidated, the debtor must provide notice of the amendment to any entity affected.
An equity security holder is a holder of an equity security of the debtor. Examples of an equity security are a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a share, security, or interest of a share in a corporation or an interest in a limited partnership. An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim.
A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled as disputed, contingent, or unliquidated. An equity security holder whose interest is not scheduled or is scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it. A properly filed proof of interest supersedes any scheduling of that interest.
Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest. A debtor in a case under chapter 11 has a one-time absolute right to convert the chapter 11 case to a case under chapter 7 unless: 1 the debtor is not a debtor in possession; 2 the case originally was commenced as an involuntary case under chapter 11; or 3 the case was converted to a case under chapter 11 other than at the debtor's request.
A debtor in a chapter 11 case does not have an absolute right to have the case dismissed upon request. A party in interest may file a motion to dismiss or convert a chapter 11 case to a chapter 7 case "for cause. Alternatively, the court may decide that appointment of a chapter 11 trustee or an examiner is in the best interests of creditors and the estate.
Section b 4 of the Bankruptcy Code sets forth numerous examples of cause that would support dismissal or conversion. For example, the moving party may establish cause by showing that there is substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation; gross mismanagement of the estate; failure to maintain insurance that poses a risk to the estate or the public; or unauthorized use of cash collateral that is substantially harmful to a creditor.
Cause for dismissal or conversion also includes an unexcused failure to timely compliance with reporting and filing requirements; failure to attend the meeting of creditors or attend an examination without good cause; failure to timely provide information to the U.
Additionally, failure to file a disclosure statement or to file and confirm a plan within the time fixed by the Bankruptcy Code or order of the court; inability to effectuate a plan; denial or revocation of confirmation; inability to consummate a confirmed plan represent "cause" for dismissal under the statute. In an individual case, failure of the debtor to pay post-petition domestic support obligations constitutes "cause" for dismissal or conversion.
Section c of the Bankruptcy Code provides an important exception to the conversion process in a chapter 11 case. Under this provision, the court is prohibited from converting a case involving a farmer or charitable institution to a liquidation case under chapter 7 unless the debt or requests the conversion. Generally, the debtor or any plan proponent must file and get court approval of a written disclosure statement before there can be a vote on the plan of reorganization.
The disclosure statement must provide "adequate information" concerning the affairs of the debtor to enable the holder of a claim or interest to make an informed judgment about the plan. In a small business case, however, the court may determine that the plan itself contains adequate information and that a separate disclosure statement is unnecessary. A disclosure statement is not required in a subchapter V case unless otherwise ordered by the court for cause.
After the disclosure statement is filed, the court must hold a hearing to determine whether the disclosure statement should be approved. Acceptance or rejection of a plan usually cannot be solicited until the court has first approved the written disclosure statement. An exception to this rule exists if the initial solicitation of the party occurred before the bankruptcy filing, as would be the case in so-called "prepackaged" bankruptcy plans i.
Continued post-filing solicitation of such parties is not prohibited. After the court approves the disclosure statement, the debtor or proponent of a plan can begin to solicit acceptances of the plan, and creditors may also solicit rejections of the plan. Upon approval of a disclosure statement, the plan proponent must mail the following to the U. In addition, the debtor must mail to the creditors and equity security holders entitled to vote on the plan or plans: 1 notice of the time fixed for filing objections; 2 notice of the date and time for the hearing on confirmation of the plan; and 3 a ballot for accepting or rejecting the plan and, if appropriate, a designation for the creditors to identify their preference among competing plans.
As noted earlier, only the debtor may file a plan of reorganization during the first day period after the petition is filed or after entry of the order for relief, if an involuntary petition was filed.
The court may grant extension of this exclusive period up to 18 months after the petition date. In addition, the debtor has days after the petition date or entry of the order for relief to obtain acceptances of its plan.
The court may extend up to 20 months or reduce this acceptance exclusive period for cause. In practice, debtors typically seek extensions of both the plan filing and plan acceptance deadlines at the same time so that any order sought from the court allows the debtor two months to seek acceptances after filing a plan before any competing plan can be filed.
If the exclusive period expires before the debtor has filed and obtained acceptance of a plan, other parties in interest in a case, such as the creditors' committee or a creditor, may file a plan.
Such a plan may compete with a plan filed by another party in interest or by the debtor. If a trustee is appointed, the trustee must file a plan, a report explaining why the trustee will not file a plan, or a recommendation for conversion or dismissal of the case. A proponent of a plan is subject to the same requirements as the debtor with respect to disclosure and solicitation.
In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a chapter 7 liquidation.
It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case. Section a of the Bankruptcy Code lists the mandatory provisions of a chapter 11 plan, and section b lists the discretionary provisions.
Section a 1 provides that a chapter 11 plan must designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders. Under section c of the Bankruptcy Code, an entire class of claims is deemed to accept a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class.
Under section a 10 , if there are impaired classes of claims, the court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims i. Moreover, under section f , holders of unimpaired claims are deemed to have accepted the plan. Under section a of the Bankruptcy Code, the plan proponent may modify the plan at any time before confirmation, but the plan as modified must meet all the requirements of chapter When there is a proposed modification after balloting has been conducted, and the court finds after a hearing that the proposed modification does not adversely affect the treatment of any creditor who has not accepted the modification in writing, the modification is deemed to have been accepted by all creditors who previously accepted the plan.
If it is determined that the proposed modification does have an adverse effect on the claims of non-consenting creditors, then another balloting must take place. Because more than one plan may be submitted to the creditors for approval, every proposed plan and modification must be dated and identified with the name of the entity or entities submitting the plan or modification.
When competing plans are presented that meet the requirements for confirmation, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm. Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on confirmation of a plan. If no objection to confirmation has been timely filed, the Bankruptcy Code allows the court to determine whether the plan has been proposed in good faith and according to law.
Before confirmation can be granted, the court must be satisfied that there has been compliance with all the other requirements of confirmation set forth in section of the Bankruptcy Code, even in the absence of any objections.
In order to confirm the plan, the court must find, among other things, that: 1 the plan is feasible; 2 it is proposed in good faith; and 3 the plan and the proponent of the plan are in compliance with the Bankruptcy Code.
In order to satisfy the feasibility requirement, the court must find that confirmation of the plan is not likely to be followed by liquidation unless the plan is a liquidating plan or the need for further financial reorganization. Section d 1 generally provides that confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization.
The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. There are, of course, exceptions to the general rule that an order confirming a plan operates as a discharge. Confirmation of a plan of reorganization discharges any type of debtor — corporation, partnership, or individual — from most types of prepetition debts.
It does not, however, discharge an individual debtor from any debt made nondischargeable by section of the Bankruptcy Code. Confirmation does not discharge the debtor if the plan is a liquidation plan, as opposed to one of reorganization, unless the debtor is an individual. When the debtor is an individual, confirmation of a liquidation plan will result in a discharge after plan payments are made unless grounds would exist for denying the debtor a discharge if the case were proceeding under chapter 7 instead of chapter At any time after confirmation and before "substantial consummation" of a plan, the proponent of a plan may modify the plan if the modified plan would meet certain Bankruptcy Code requirements.
This should be distinguished from preconfirmation modification of the plan. A modified postconfirmation plan does not automatically become the plan. A modified postconfirmation plan in a chapter 11 case becomes the plan only "if circumstances warrant such modification" and the court, after notice and hearing, confirms the plan as modified. If the debtor is an individual, the plan may be modified postconfirmation upon the request of the debtor, the trustee, the U. Notwithstanding the entry of the confirmation order, the court has the authority to issue any other order necessary to administer the estate.
This authority would include the postconfirmation determination of objections to claims or adversary proceedings, which must be resolved before a plan can be fully consummated. Sections a 7 and a of the Bankruptcy Code require a debtor in possession or a trustee to report on the progress made in implementing a plan after confirmation.
Chapter 11 Bankruptcy: An Overview. Chapter 11 bankruptcy is designed to allow struggling businesses to restructure their finances and maximize the return to their creditors and owners. In this article, you'll learn: how Chapter 11 bankruptcy works other bankruptcy options for individuals and small businesses, and how to get started filing for Chapter 11 bankruptcy.
How Does Chapter 11 Bankruptcy Work? Collection Actions Stop All bankruptcy chapters work by stopping the collection process. For instance, the stay will temporarily stop: payment requests an eviction or foreclosure a collections trial bank levies, till taps, property seizure, and other collection processes.
Filer Retains Control of the Business Unlike other bankruptcy chapters, a bankruptcy trustee isn't put in charge of the business and other bankruptcy property. Debt Relief Through a Payment Plan The goal of Chapter 11 is to create a financial plan that the filer, creditors, and the court agree will enable the company to remain open and prosper. Chapter 7 for individuals. People who file for Chapter 7 keep the things they need to maintain a household and employment.
All other property gets sold for the benefit of creditors. In exchange, qualifying debt gets discharged without the need to pay into a repayment plan. Chapter 7 for small business owners. It's unusual for a small business to file for Chapter 7.
Not only will Chapter 7 close most companies, but business entities other than sole proprietors aren't entitled to a debt discharge. Plus, a business owner can discharge more debt—business and personal alike—by personally filing an individual Chapter 7 case after the business closure. But Chapter 7 can make sense in some cases. For instance, sole proprietors with service-only businesses often do well filing for Chapter 7 bankruptcy because they can discharge personal and business debt without jeopardizing the service-focused business.
Explore the differences between Chapter 7 and 11 bankruptcy. Chapter 13 for individuals and small business owners. Companies can't file a Chapter 13 case; however, sometimes stakeholders find that it's cheaper to file Chapter 13 individually if reorganizing personal finances provides enough financial relief to keep the company afloat. For instance, paying a reduced amount toward personal credit cards and other debt will often allow the filer to draw less from the business.
Learn more about Chapter 13 vs. Chapter 11 bankruptcy. Chapter 11 for individuals and small business owners. Sometimes Chapter 11 bankruptcy is the only option available for a small business. In that case, Chapter 11, Subchapter V includes special provisions to streamline and expedite Chapter 11 bankruptcy for small business owners. Starting a Chapter 11 Bankruptcy A Chapter 11 case begins with the filing of a petition in bankruptcy court.
Decisions Made by the Bankruptcy Court While the debtor ordinarily continues running the business as a debtor in possession, the bankruptcy court must approve: any assets the debtor wouldn't sell in the ordinary course of business, such as real property entering into or breaking a lease mortgage or other secured financing arrangements that allow the debtor to borrow money shutting down or expanding business operations entering into or modifying union, vendor, licensing, and other contracts and agreements, and the retention of, and payment of fees and expenses to, attorneys and other professionals.
Creditors and the Creditor Committee Creditors, shareholders, and other parties in interest may support or oppose actions that require bankruptcy court approval. The Disclosure Statement The filer must fully disclose background information so that a creditor can make an informed decision about the feasibility of the proposed plan. Chapter 11 Reorganization Plans Ordinarily, the debtor has the exclusive right to propose a reorganization plan for the first four months; however, the court can extend the debtor's "exclusivity period" for to up 18 months after the petition date.
Chapter 11 Plan Confirmation In reality, the debtor and creditors can agree to any plan that they choose. If a creditor objects to the plan, however, the court will consider factors, including: Feasibility. A creditor with a lien against real estate or personal property such as inventory or equipment is secured. The debtor's owners cannot retain anything on account of their equity interests unless all obligations are paid in full, either immediately upon plan confirmation or over time and with interest.
The bankruptcy court can allow equity holders to retain ownership interests in the debtor in exchange for "new money" contributed to pay reorganization expenses. Otherwise, however, equity holders lose all ownership rights upon plan confirmation. Talk to a Bankruptcy Lawyer Need professional help? Start here. Practice Area Please select
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