EMERGING FROM CHAPTER 11

If the Debtor obtains the creditors' approval and Court's approval of the Plan, the Debtor "emerges" from Bankruptcy and its debts are discharged, except as provided for in the Plan.

FIDUCIARY RESPONSIBILITIES

The Debtor and any officer or partner of the Debtor, owes the estate a duty to act in the utmost good faith.  That means following the Court’s order at all times, getting legal advise as to any estate assets and treating estate assets as if the assets were held in trust for the creditors and equity owners of the Debtor entity.

 CASH COLLATERAL

 When a Debtor goes into Chapter 11, it is important to determine whether there is any secured creditor who has security in “cash collateral.” Cash collateral issues most often arise is such things as a UCC-1 in receivables or a trust deed on rental property.  If a creditor has such collateral, the Debtor needs either the creditor explicit approval to use the cash collateral or a court order.  Otherwise, the Debtor must segregate all proceeds and not use the money proceeds for any purpose.

Winters Law Firm is a Bankruptcy firm located at 23046 Avenida de la Carlota, Suite 600 Laguna Hills, California 92653. (714) 836-1381, e-mail:winterslawfirm@cs.com

Monitoring the Debtor

 Because the Debtor is allowed to retain possession of the business assets and run the business, the Bankruptcy Code has certain procedures in place to assure that the assets are being protected and the Debtor is not going to fall further into debt. The Bankruptcy Court has broad powers over the Debtor and can dismiss the Chapter 11 or force a closing of the business and a liquidation if it believes that is in the best interest of the creditors or if it believes the Debtor is not acting honestly. It is the role of the United States Trustee's Office, a unit of the U.S. Justice Department, to monitor the Debtor and its operations for this purpose and make recommendations to the Court regarding these issues.

Initially, the U.S. Trustee requires certain procedures and disclosures within 7 days of the filing of the Chapter 11. This includes closing all bank accounts and opening new accounts with a reference on each check to the Debtor's bankruptcy status. Debtors are also required to provide certain documentation on the Debtor's assets and reports on anticipated operations during Chapter 11.

  Thereafter, the U. S. Trustee requires regular reports on the Debtor's ongoing operation and details on all transactions, including a listing of every check written. The most common reason a Chapter 11 proceeding dismissed or converted to Chapter 7 prematurely is the failure to properly comply with the requirements of the U. S. Trustee.

  In some cases (except Sub-Chapter V cases), one or more committees of creditors are also appointed to monitor the Debtor.

REORGANIZE A BUSINESS

THROUGH CHAPTER 11

DISCLAIMER

 This is only intended to be a brief summary of the Chapter 11 procedure. It  is not possible in this short space to explain all the complexities of Reorganization. Chapter 11 simply cannot be successfully accomplished without competent and experienced counsel. Contact Mr. Winters if you need further information on this procedure.

Chapter 11

A Chapter 11 Reorganization is a type of Bankruptcy filing primarily used by businesses and persons who own businesses for the purpose of adjusting the business's debt structure while obtaining a breathing spell from creditor demands. During the process, the Debtor proposes a Plan, to be voted on by creditors, that provides for repayment of creditors. The advantage of Chapter 11 is that it allows the Debtor to retain control of the Debtor's property and the day to day operations of the business. It is a complicated and expensive procedure that must be handled carefully to be successful. There are two types of Chapter 11, the normal Chapter 11 for large businesses and the so-called "Sub-chapter V" Chapter 11 for smaller businesses and indiviual business owners.

WINTERS LAW FIRM

The Cost

Because of the complexity of a Chapter 11 and the difficult procedure an attorney goes through to get fees approved by the Bankruptcy Court, all experienced Chapter 11 counsel require a considerable retainer before starting representation, which can range from $20,000.00 to over $100,000.00. Clerk’s fee is $1046.00. There is also an ongoing fee paid the U.S. Trustee on a quarterly basis that varies based on the amount of disbursements, but with a minimum of $350.00 per quarter. Sub-Chapter V Debtors are not required to pay the fee. Attorney fees and retainer would be less.

FILING CHAPTER 11

At the time of filing, certain documents must be filed immediately or at least within 15 days of the filing of the petition. Those documents include the following. Bankruptcy papers consist of a "Petition", a  Statement of Financial Affairs, and the following Schedules:

ASSETS

A/B. Real Property an. Personal Property.

C. Property Claimed as Exempt.

DEBTS

D. Creditors Holding Secured Claims.

E. Creditors Holding Unsecured Priority Claims(Taxes, etc.)

F. Creditors Holding Unsecured Non Priority Claims.

G. Executory Contracts and Unexpired Leases.

H. Co debtors.

In addition, a Chapter 11 Debtor needs to file a list of the 20 largest unsecured creditors, including the creditor's name, address and telephone number.

The filing of the Petition creates an automatic stay against virtually any action to pursue any claim against the Debtor or any assets without first obtaining Court approval.

GETTING THE PLAN APPROVED

The end purpose of Chapter 11 is to come up with a Plan of Reorganization. The Debtor initially has the exclusive right to propose a Plan. If the debtor does not propose a Plan or fails to have it approved, creditors or other parties in interest can file their own Plan.  Under present law, generally, the Debtor needs to file a Plan no later than 4 months after the filing, unless the Court for cause, extends that date. The Plan splits the creditors into classes based on what security, if any, the creditor has, and the priority of the creditor class. Such as, taxes and wages have priority over general unsecured creditors. Basically, the Plan has to pay priority classes in full before paying anything to classes without priority. The Plan can provide for full or part payment to general unsecured creditors. It can provide for a long-term payment plan, or a sale or liquidation of assets and payment of the proceeds to creditors.    Creditors get to vote on the Plan. Each class has to vote in favor of the Plan if the Debtors, or the Debtor's shareholders in the case of a corporation, want to keep control. In order for the creditors to cast an informed vote, the Debtor must obtain approval of a Disclosure Statement that explains the voting procedure, details the Debtor's operations before and during the Chapter 11, summarizes the Plan and provides a detailed analysis of what the creditors will receive and compares that to the alternatives to the Plan, including a liquidation of the assets.

SUB-CHAPTER V

Sub-Chapter V for smaller businesses and indiviuduals business owners (presently, those having less than $7 million unsecured, non-insider debt), provides less onerous plan approval process. Plans can be approved without an accepting class if the plan is fair and reasonable.  No Disclosure Statement is required. However, a Trustee is appointed to review the Debtor's operations and review the Plan, which normally must be filed within 90 days after the case is filed.