Bankruptcy is commenced by the filing of a bankruptcy petition. Fed.R.Bankr.P. 1002. A petition may be a voluntary petition filed by the debtor or it may be an involuntary petition filed by the creditors that meet certain requirements. 11 U.S.C. ? ? 301, 303.
A written disclosure statement and a plan of reorganization must be filed with the court. 11 U.S.C. ? 1121. The disclosure statement must contain information concerning the assets, liabilities, and affairs of the debtor sufficient to enable a creditor to make an informed judgment about the plan. 11 U.S.C. ? 1125. Judicial discretion and the circumstances of each case govern the information required. The plan must include a classification of claims and must specify how each class of claims will be treated under the plan. The plan may be voted upon by those creditors whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan. 11 U.S.C. ? 1126.
The Chapter 11 Debtor in Possession
Section 1107 of the Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a Chapter 11 trustee, and requires the performance of all but the investigative functions and duties of a trustee. These duties are set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure and include examining and objecting to claims, accounting for property, and filing informational reports as required by the court and the United States trustee. 11 U.S.C. ? 1106, 1107; Fed. R. Bankr. P. 2015(a). The debtor in possession also has many of the other powers and duties of a trustee. The debtor in possession also has other responsibilities including filing tax returns and filing such reports as are necessary or as the court orders after confirmation, such as a final accounting. The United States trustee is responsible for monitoring the compliance of the debtor in possession as it pertains to the reporting requirements.
The Small Business Debtor
The Small Business Debtor is a person engaged in commercial or business activities (not including a person who owns and operates real property) that has aggregate noncontingent liquidated secured and unsecured debts that do not exceed $2,190,000.00. 11 U.S.C. ? 101(51C). If a debtor qualifies and chooses to be considered a small business under 11 U.S.C. ? 1121(e), the case is put on a "fast track" and treated differently than a regular Chapter 11 case under the Code. In a small business debtor bankruptcy a creditor's committee and separate hearing to approve the disclosure statement are not mandatory. 11 U.S.C. ? 1102(a)(3). Solicitation of votes for acceptance or rejection of the plan may proceed based on the conditional approval of the disclosure statement. Thereafter, the disclosure statement may be combined with the confirmation hearing. 11 U.S.C. ? 1125(f).
The Single Asset Real Estate Debtor
A single asset real estate debtor is another type of debtor that has special provisions under the Bankruptcy Code. Single asset real estate is defined as a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debtor other than operating the real property. 11 U.S.C. ? 101 (51B). The Code provides circumstances under which creditors of a single asset real estate debtor may obtain relief from the automatic stay. 11 U.S.C. ? 362(d). On request of a creditor with a claim secured by the real estate and after notice and a hearing, the court will grant relief from the automatic stay to the creditor, within 90 days from the date of the order for relief, unless the debtor files a feasible plan of reorganization or begins making payments to the creditor.
The Automatic Stay
The automatic stay provides for a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued on any debt or claim that arose before the filing of the bankruptcy petition. 11 U.S.C. ? 362(a). The stay provides a period during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
Under certain circumstances, such as when the debtor has no equity in the particular property and that property is not necessary for an effective reorganization, the secured creditor can obtain an order from the court granting relief from the automatic stay to foreclose on the property, sell it and apply the proceeds to the debt. 11 U.S.C. ? 362(d). A secured creditor is one which has a lien against or interest in certain property of the debtor to secure payment of a debt or performance of an obligation. See 11 U.S.C. ? 101(37).
The debtor in possession, or the trustee, has an "avoiding power." These powers may be used to undo a transfer of property or money made during a certain period of time prior to the filing of the bankruptcy petition. By invoking the power and avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return of the payments or property which then are available to pay all creditors rather than only one or otherwise be used in its efforts to reorganize. The power to avoid transfers is generally effective against transfers made 90 days prior to the filing of the petition. Transfers made to insiders (relatives, general partners, and directors or officers of the debtor) made up to a year prior to filing can be undone. 11 U.S.C. ? ? 101(31), 101(54), 547, 548. Additionally, under 11 U.S.C. ? 544, the trustee is given the authority to avoid transfers under applicable state law, which often provides for longer time periods.
Cash Collateral, Adequate Protection, and Operating Capital
A debtor in possession may not use cash collateral i.e., collection of accounts subject to security interests or proceeds from the sale of pledged inventory or equipment, without the consent of the secured party or authorization by the court which must first examine whether the interest of the secured party is adequately protected. 11 U.S.C. ? 363.
A motion requesting an order from the court authorizing the use of the cash collateral must be filed by the debtor in possession. After notice of the hearing, the debtor in possession must segregate and account for cash collateral pending consent of the secured creditor or court authorization. 11 U.S.C. ? 363(c)(4). A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide adequate protection to the creditor.
Conversion or Dismissal
Under Chapter 11, a debtor has a one-time absolute right to convert from a Chapter 11 to a Chapter 7 unless (1) the debtor is not a debtor in possession, (2) the case originally 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. 11 U.S.C. ? 1112(a). A Chapter 11 debtor does not have an absolute right to have the case dismissed. Upon request of a party in interest or the United States trustee, after notice and hearing and "for cause," the court may convert a Chapter 11 case to a case under Chapter 7 or dismiss the case, whichever is in the best interest of creditors of the estate. 11 U.S.C. ? 1112(b). The Court may convert or dismiss a case for cause.
A disclosure statement must be filed before the voting on a plan of reorganization and 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. 11 U.S.C. ? 1125. After filing the statement, the court must hold a hearing to determine whether approval should be granted. Acceptance or rejection of a plan cannot be solicited without prior court approval of the written disclosure statement. 11 U.S.C. ? 1125(b). Once the disclosure statement has been approved, the debtor can begin to solicit acceptances of the plan, and creditors may also solicit rejections of the plan.
Acceptance of the Plan of Reorganization
The debtor-in-possession has the exclusive right to file a plan of reorganization (which also acts as the order of relief) during the first 120-day period after the filing of a voluntary bankruptcy petition. The debtor-in-possession has 180 days after the filing of the voluntary petition, or in the case of an involuntary petition, after the order for relief, to obtain acceptances of the plan. 11 U.S.C. ? 1121. This exclusive period may be extended or reduced by the court for cause. 11 U.S.C. ? 1121 (d).
A plan is "confirmed" when accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims of the class held by creditors that have accepted or rejected the plan according to ? 1126(c) of the Code. The court cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims. 11 U.S.C. ? 1129(a)(10).
Section 1141 (d)(1) specifies that the confirmation of a plan discharges the debtor from any debt that arose before the date of the 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.
The Final Decree
A final decree closing the case must be entered after the estate has been "fully administered." Fed.R.Bankr.P. 3022. Local bankruptcy court policies may determine when the final decree should be entered and the case closed.
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