Checkett & Pauly, P.C.

Chapter 11 Basics

Chapter 11 is an important alternative for individuals and businesses in financial need. A business can streamline its operations, reduce liabilities and refinance debt. In addition, Chapter 11 provides powers and protections to make your business continue and hopefully prosper.

How it Works

Everything and everyone in Chapter 11 is subject to scrutiny by the creditors, the U.S. Trustee and the bankruptcy court. Let's take a quick look:

United States Trustee. The Department of Justice administers and oversees the bankruptcy system. The U.S. Trustee supervises all Chapter 11 cases to be sure you are in legal compliance and the rights of creditors are protected.

Meetings of Creditors. You must file with the court an accurate and thorough list of all assets and liabilities. The U.S. Trustee schedules a meeting of your 20 largest unsecured creditors to learn what the case is about and select a creditors committee. A creditor committee is the exception and not the rule in smaller Chapter 11 proceedings.

A meeting of creditors will be held within 30 to 40 days of filing for Chapter 11. You must attend and creditors may appear and ask questions. At the meeting of creditors, the U.S. Trustee will ask about your financial problems and plans for the future.

Automatic Stay. When a person or a business files in any bankruptcy chapter, the court issues the automatic stay and stops collection efforts, foreclosures, and lawsuits.

The Plan. The Chapter 11 business and no one else has the right to file its reorganization plan within the first 120 days. Counsel will help you prepare a plan which must be based on past performance and solid projections. The plan will include how and when creditors will be paid.

An Open Book. While in Chapter 11, the entire case is subject to inspection by creditors, the U.S. Trustee and the court. You must account for income received and funds disbursed. Monthly operating reports are filed with the court and U.S. Trustee by the 15^th of each month for the preceding month and are available for the inspection of your creditors. In the Western District of Missouri these reports are available on line for creditors to review.

Record Keeping. Some businesses are in financial trouble because of poor record keeping. For that reason, the U.S. Trustee requires stringent accounting, and it has its own set of books you must maintain. Failure to keep good records during the Chapter 11 is a good way to have your case dismissed.

Utilities. Within 20 days of filing, you must provide adequate assurance to all utilities that you will continue to pay your bills. If you don't, you risk loss of service. The court will set a deposit amount if an agreement cannot be reached with the utility.

Tax withholding and returns. As always, file all tax returns required, and pay all post Chapter 11 taxes. Any Chapter 11 business must withhold and timely remit taxes on wages, salaries, and commissions. Upon failure to do so, the court will appoint a Chapter 11 trustee to run your business or convert your case to Chapter 7 liquidation.

Contracts and leases. A company in Chapter 11 has the right to accept or reject any unperformed contract or lease. For someone in a very expensive lease, this right can be a substantial benefit. However, there are important deadlines, such as an absolute requirement that you either assume or reject any lease in non-residential (that is, business) real estate within 60 days of the Chapter 11 filing.

Proofs of claim. Creditors will file proofs of claim with the court stating the amount owed. You can object to any incorrect or disputed claim.

Fees. Nothing is free. The U.S. Trustee, based on disbursements, gets a quarterly fee from $250.00 to $10,000. Those fees are required until the court closes or dismisses your case.

Cash. Whether a business makes it may depends on whether it has cash to operate. That means the use of the sale proceeds of any asset that is subject to a creditor's lien or security interest. For example, inventory and accounts receivable, the assets regularly sold to generate the cash flow. You may use cash collateral only with the consent of the secured party or by court order.

Key Concepts to Remember:

• Understand all of your Chapter 11 duties.
• Consult with bankruptcy counsel before doing anything outside the ordinary course of business.
• Keep accurate and up to date accounting records.
• Comply with all tax withholding, segregating, reporting and payment requirements laws.
• Promptly file all reports required by the court.
• Get your business in shape for a practical new start.

And in Conclusion:

Chapter 11 is expensive and complicated, but at the same time Chapter 11 has many powerful advantages to help a business get a fresh start.