If your debtor is a business, such as a company, an LLC, or a partnership, there is a good chance they filed Chapter 11 rather than Chapter 7 or 13. Chapter 11 is the reorganization chapter for businesses, and it works very differently from the consumer bankruptcy cases most people have heard of.
The stakes are usually higher, the cases last longer, and if you are not paying attention, you can lose rights that are very hard to get back.
What Chapter 11 Is
In Chapter 11, the debtor continues to operate its business while it negotiates with creditors and proposes a plan of reorganization. The goal, at least in theory, is for the debtor to restructure its debts, emerge from bankruptcy as a going concern, and pay creditors more than they would receive in a liquidation.
Chapter 11 cases vary enormously. Some result in genuine reorganizations. Others end in an orderly liquidation of the business’s assets. Some convert to Chapter 7. The path the case takes matters a great deal to creditors.
The Claims Bar Date
Unlike Chapter 7 and Chapter 13 cases, where the deadline to file a proof of claim is set by the bankruptcy rules, in a Chapter 11 case the court sets the claims bar date by separate court order.
This order is sent to all known creditors. If you do not file your proof of claim by the court-set deadline, your claim may be disallowed, and you may receive nothing from the case regardless of what the debtor owes you.
We monitor every Chapter 11 case involving our clients and make sure claims are filed on time. A missed bar date can wipe out your claim, so we never leave the deadline to chance.
Voting on the Plan
When the debtor proposes a plan of reorganization, creditors get to vote. Each creditor’s vote is proportional to the size of their allowed claim. A plan is accepted by a class of creditors if two-thirds of the dollar amount and more than half of the number of creditors voting in that class vote yes.
If your class votes to reject the plan, the debtor can still try to get the plan confirmed, but it must satisfy additional requirements, including that the plan is “fair and equitable” to your class. This process is called cramdown.
We review every plan that affects our clients and advise them whether to vote for or against it. Sometimes accepting a plan with a negotiated modification is the better outcome. Sometimes objecting and forcing a cramdown fight is the right move. Every case is different.
Adequate Protection During the Case
While the Chapter 11 case is pending, which can be months or years, the automatic stay is in effect and the debtor is using or managing the collateral that secures your debt. If that collateral is declining in value and the debtor is not making payments, you are losing ground.
We file for adequate protection in these situations. The debtor can be required to make cash payments to compensate you for the declining value of your collateral, or to provide additional collateral as security. Letting this slide is a mistake.
How Chapter 11 Differs from Consumer Cases
Chapter 11 practice is significantly more complex than Chapter 7 or Chapter 13 work. The filings are larger, the procedural requirements are more demanding, and the strategic decisions are more consequential. We handle Chapter 11 creditor representation on a regular basis and understand how these cases move.
If your borrower or commercial counterpart has filed for Chapter 11, contact us promptly. The earlier we get involved, the more options you have.
In this section: Bankrupt Debtors · Automatic Stay Relief · Plan Negotiation · Proof of Claim
Frequently Asked Questions
How long do Chapter 11 cases typically last?
It varies widely. A small business Chapter 11 under the Subchapter V streamlined process can be resolved in several months. A mid-size commercial Chapter 11 typically takes one to two years from filing to plan confirmation. Large complex cases can last much longer. Throughout that entire period the automatic stay is in effect and the creditor must actively monitor the case to protect its rights.
What is a Subchapter V Chapter 11 and does it affect my rights?
Subchapter V is a streamlined Chapter 11 process available to small business debtors below a certain debt threshold. It has shorter deadlines, a standing trustee, and somewhat different confirmation standards. For secured creditors, the basic protections are similar to a standard Chapter 11, but the faster timeline means bar dates and objection deadlines arrive more quickly. If your debtor has filed a Subchapter V, contact us promptly.
Should I join the official creditors' committee if I am invited?
In larger Chapter 11 cases, an official committee of unsecured creditors is formed and the committee's counsel is paid by the bankruptcy estate. If you are a significant unsecured creditor, serving on the committee gives you more information and influence over the case. As a secured creditor, committee membership is less important. Your rights are tied to your lien, not to committee participation. We advise clients on whether committee involvement makes sense in their specific case.
What if the debtor tries to sell the business or the collateral property during the Chapter 11 case?
A debtor in Chapter 11 can sell assets outside the ordinary course of business only with bankruptcy court approval under an expedited sale process. Secured creditors have the right to credit bid their claim at a sale of their collateral, meaning you can bid the amount you are owed without paying cash, just as in a foreclosure sale. We protect our clients' credit bid rights and review the terms of any proposed sale of collateral before it is approved.