Chapter 11 bankruptcy proceedings are usually commenced by business entities (corporations or limited liability companies), or individuals who do not qualify for Chapter 7 or Chapter 13 bankruptcy.
As a general rule we do not recommend Filing Chapter 11 Bankruptcy in Arizona for individuals because of the expense and difficulty involved in the proceedings. The court fees and attorney’s fees are significantly higher in a Chapter 11 bankruptcy than in Chapter 13 bankruptcy proceedings. A brief outline of Filing Chapter 11 Bankruptcy in Arizona concepts follows:
Features of Chapter 11 Bankruptcy in Arizona reorganization
In Chapter 7, the business ceases operations, a trustee sells all of its assets, and the trustee distributes the proceeds to the business creditors. Any residual amount is returned to the owners of the company. In Chapter 11 Bankruptcy in Arizona, in most instances the Debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight of the court. The debtor in possession can be paid a salary for management of the business.
Chapter 11 Bankruptcy in Arizona retains many of the features present in all, or most, bankruptcy proceedings. However, it provides additional tools for Debtors as well. Filing Chapter 11 Bankruptcy in Arizona affords the Debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business’s earnings. The court may also permit the debtor in possession to reject and cancel existing contracts. Debtors are also protected from other litigation against the business through the imposition of an “automatic stay”. While the automatic stay is in place, all collection attempts are halted and most litigation against the Debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
If the business’s debts exceed its assets, the bankruptcy restructuring typically results in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganized company.
The Chapter 11 plan
Filing Chapter 11 Bankruptcy in Arizona usually results in reorganization of the Debtor’s business or personal assets and debts, but can also be used as a mechanism for liquidation. Unfortunately, most small business filing Chapter 11 Bankruptcy in Arizona cases do not succeed and result in either conversion to a Chapter 7 liquidation or dismissal of the bankruptcy case. For those who succeed, Debtors may “emerge” from filing Chapter 11 Bankruptcy in Arizona within a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. Interested creditors are entitled to vote on the plan, which is not the case in Chapter 13 Bankruptcy.
Debtors filing Chapter 11 Bankruptcy in Arizona have the exclusive right to propose a plan of reorganization for a period of time (in most cases 120 days). After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be “confirmed” by the bankruptcy court. If the judge approves the reorganization plan, and if the creditors all agree, the plan can be confirmed. If at least one class of creditors votes against the plan and thus objects, the plan may nonetheless be confirmed if the requirements of “cramdown” met. In order to be confirmed over the objection of creditors, the plan must not discriminate against that class of creditors and the plan must be “fair and equitable.” Upon its confirmation, the plan becomes binding and establishes the treatment of debts and operations of the business for the duration of the plan. If a plan cannot be confirmed, the court may either convert the case to a Chapter 7 liquidation, or, if it is in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims. Sometimes a company will liquidate under filing Chapter 11 Bankruptcy in Arizona, in which the pre-existing management may be able to help get a higher price for divisions or other assets than a Chapter 7 liquidation would be likely to achieve.
Some existing contracts, known as “executory contracts,” may be rejected if canceling them would be financially favorable to the company and its creditors. Such contracts may include labor union contracts, supply or operating contracts (with both vendors and customers), real estate leases, etc. In the event of a contract rejection, the remaining parties to the contract become unsecured creditors of the debtor.
The Butler Law Office has over thirty three years of experience and can help you determine if filing Chapter 11 Bankruptcy in Arizona is best for you or your business!