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Chapter 11 Bankruptcy Attorneys in Santa Clarita

Attorneys Serving Santa Clarita

Chapter 11 is a reorganization of debt. All types of business entities - corporations, LLCs, partnerships, and business trusts - as well as individuals are eligible for Chapter 11 and there are no asset, debt, or income limitations. However, Chapter 11 is labor-intensive and therefore expensive.

Most individuals can use Chapter 13 instead, and businesses contemplating Chapter 11 should make a realistic assessment of their inherent profitability before filing Chapter 11. Moreover, negotiations with major creditors, with Chapter 11 as the explicit alternative, can often yield a positive outcome, eliminating the need for filing under Chapter 11 or allowing the formulation of a "pre-packaged" plan that key creditors will support.

What is Chapter 11?

The beginning of a Chapter 11 case - which we call the "launch phase" - always involves the assembly of significant business data and its submission to the Court and to the United States Trustee. Sometimes, emergency motions to be authorized to use "cash collateral" or to pay key suppliers or employees must be filed immediately after the case is commenced.

Throughout the Chapter 11 case, the debtor is required to file monthly reports detailing its business activity, accounting on both a cash (every penny in, every penny out) and accrual basis, and summarizing significant business and legal developments.

In Chapter 11, a repayment plan is proposed - usually by the debtor, but sometimes by a creditor or group of creditors. The plan must be accompanied by a disclosure statement that provides creditors with certain required information, and specifies the classes by which creditors and shareholders will vote on the plan. Once the disclosure statement is approved by the Court, it is served on all creditors and shareholders, along with the plan itself and a ballot.

Benefits of Chapter 11

Chapter 11 plans can incorporate many features: the term and interest rate on secured debt can be modified; payments can be made from future operating profits, new financing, or sales of capital assets; pre-bankruptcy leases and contracts can be assumed (maintained) or rejected (cancelled); monies paid to some unsecured creditors over the last year, and property transferred within four years, can sometimes be recovered; and creditors can be compelled to accept payments of far less than 100%, or even to receive equity interests, in cancellation of their debt.

In the last 5 years, Young & Williams LLP has confirmed Chapter 11 plans for businesses in which the total payments to unsecured creditors ranged from 13% to 40%, made in installments over 2 to 5 years. Designing and confirming a Chapter 11 plan is a complex process, which requires that the interests of many competing stakeholders are addressed.

A class of creditors which approves the plan by a majority vote representing 2/3 of the dollar amount owed to that class is deemed a "consenting class." If all classes are consenting classes, the plan is confirmed upon proof of the required vote. If not all classes consent, a contested evidentiary hearing (often called a "cram-down") is held to determine if the plan is "fair and equitable"; cram-downs can be complex multi-day trials, including financial and industry-specific expert testimony.

Once a Chapter 11 plan is confirmed and payments begin, the debtor can seek entry of a final decree. Entry of this decree marks the successful completion of the case - subject to the case being re-opened if there is a default in plan payments.

Who should consider Chapter 11?

Chapter 11 can be effectively used by:

  • A business that has too much debt due in the short term to survive, but which is inherently profitable if the debt is restructured
  • A business that needs a "breathing spell" to realize additional income from a new source, or conduct a controlled partial liquidation while remaining in operation
  • An individual who is in jeopardy of losing a house or other property, or having assets seized due to judgment levies or garnishments, but who does not qualify for Chapter 13 due to the debt limitations or regular income requirements applicable to Chapter 13.

Call Young & Williams LLP to consult with an experienced Santa Clarita bankruptcy attorney regarding whether Chapter 11 is the right option for you and/or your business.