Common Chapter 11 Terms
“341” Meeting: also called the meeting of creditors, it is a meeting required by section 341 of the Bankruptcy Code during which the debtor is questioned under oath about the debtor’s financial matters by any creditors and parties-in-interest (including equity security holders of the debtor) who choose to show up. The U.S. Trustee will also ask a series of questions to ensure compliance with the bankruptcy code.
Automatic stay: a type of injunction that automatically arises when a Chapter 11 is filed preventing creditors from pursuing any collection remedies against the debtor.
Cash Collateral: any cash, negotiable interests, deposit accounts, or other cash equivalents (including rents due from a debtor’s tenants) in which a creditor has a security interest. Cash Collateral is usually the first contested matter in the bankruptcy, and the creditor’s interest in the debtor’s cash collateral must be balanced with the debtor’s need to use its cash to operate its business. Under Section 363 of the Bankruptcy Code, a creditor must receive adequate protection of its interests if the debtor is going to use such cash collateral. Typically, the debtor and secured creditor will come to an agreement on what constitutes adequate protection of the creditor’s interest in the cash collateral.
Chapter 11 bankruptcy: a case filed under Chapter 11 of the Bankruptcy Code where a business or individual will propse a repayment plan that essentially amounts to a new contract between the filing business and its creditors. A Chapter 11 can be filed by almost any type of business (sole proprietor, LLC, S-orporation, Corporation) with the exception of a stock broker.
Claim: a right to payment from the debtor as of the petition date, whether or not such right is liquidated, matured, or contingent on another event occurring.
Confirmation: the Bankruptcy Court’s approval of a debtor’s Plan of Reorganization in a Chapter 11 bankruptcy case.
Debtor in possession: a confusing term that simply means the debtor will remain in possession and control of all its property after the case is filed. In other words, the debtor has all the powers AND duties of a trustee in bankruptcy. The debtor-in-possession has a fiduciray duty to act in the best interest of its creditors.
Discharge: a case filed under Chapter 11 is discharged by the court when the plan of reorganization is confirmed by the court. The debtor is released from all liability for debts filed under the plan in return for following the repayment plan. In individual cases, the debtor must complete all payments under the plan or ask for an early discharge after making payments for 5 years.
Disclosure statement: this is the statement that practically mirrors the plan of reorganization. The statement will include even more information, such as the debtor’s financial history, officer compensation, and projected profits and losses. The Disclosure Statement must contain enough information to allow a hypothetical investor holding claims of the kind present in the case to make an informed decision on whether to vote on the plan.
Feasability: one requirement of confirming a Chapter 11 Plan is to show the court that the Plan is feasible and will not likely result in the liquidation of the debtor. Feasbability is a factor the court can inquire about on its own with no request from a creditor, so it is one of the most important factors in confirming a plan of reorganization.
Initial Debtor Interview: an interview conducted by a financial analyst with the U.S. trustee’s office to prepare the staff attorney assigned to the debtor’s case for the 341 meeting. This meeting is also used to gather certain documents from the debtor such as tax returns, rent-roll, pension plans, officer compensation, list of employees, and bank statements.
Liquidation analysis: to confirm a Chapter 11 plan, the debtor must show that creditors will receive as much under the plan or reorganization as they would under a liquidation in a Chapter 7.
Monthly operating report: Chapter 11 debtors are required to file monthly reports showing all receipts and disbursements of money. Small business debtors file a truncated version of the monthly operating report. These reports must have the DIP bank statements attached, and the ending balance on the debtor’s bank statements must match the amount on the oeprating report or you’ll be hearing from the U.S. Trustee. Debtors also use reports to verify payments to lessors and secured creditors and to verify insurance coverage.
Plan: the document setting out the new terms of repayment between the debtor and its creditors. Unlike a Chapter 13 Plan, a Chapter 11 plan must be approved (through a vote), by at least one class of impaired creditors. Since secured creditors are usually put into their own class, coming to favorable terms with at least one secured creditor goes a long way toward getting a plan confirmed.
Small business debtor: a business debtor with less than $2,000,000.00 in liquidated liabilities. Small business debtors have increased repoting requirements, and the U.S. Trustee’s monitor these cases a bit closer than larger cases. The drawbacks of a small business case are countered by the fact that a disclosure statement can be conditionally approved by the court without a need for a hearing, so once a plan is filed, only one hearing is needed to get to confirmation. Small business debtors must file a plan within 300 days of filing their case and must confirm a plan within 45 days of filing. The 45-day deadline is easily extended.
Unsecured Creditors Committee: appointed by the U.S. Trustee’s office and typically includes the seven largest unsecured creditors of the business or individual filing bankruptcy. Committees are rare in small businesses cases. Committees work with the Chapter 11 debtor to come up with a fair and equitable plan.
U.S. Trustee: an oficer of the United States Department of Justice tasks with overseeing Chapter 11 cases. The U.S. Trustee ensures that the debtor is performing its duties and is staying in compliance with the bankruptcy code. The U.S. Trustee monitors the debtor’s monthly operating reports for any irregularities, reviews the debtor’s plan or disclosure statement, and oversees fee applications for the debtor’s professionals (including the debtor’s Chapter 11 attorney).