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Chapter 11

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Chapter 11
A chapter 11 bankruptcy is commonly known as a corporate reorganization. It is called chapter 11, because it is derived from chapter 11 of the United States Bankruptcy Code. The United States Bankruptcy Code is found in Title 11 of the United States Code. As in all types of bankruptcy, the most important facet in the beginning of a case is the "automatic stay" that is immediately invoked upon the filing of a bankruptcy case. The case commences with the filing of a petition, and the "automatic stay" prohibits creditors from taking action against the debtor in bankruptcy, and deprives most courts of jurisdiction over that debtor. This enables the debtor to have some "breathing room", and not be bothered with daily collection calls, and threats of law suits. Once a bankruptcy of any type is filed, the United States Bankruptcy Court with its federal jurisdiction takes precedence over all matters involving the corporation. Therefore, law suits that had already begun must stop, and no new law suits can commence. Shortly thereafter, the debtor and its bankruptcy lawyer compile documentation for the preparation of the bankruptcy schedules. The schedules reflect the debtor's assets, liabilities, income, expenses and include some financial history of the debtor corporation. This provides the Court and creditors with vital information to allow them to understand the debtor's financial situation. After all, we are asking the Court and the debtor's creditors to work with us in our attempts at restructuring all or most of the corporation's debts. We also strive to find ways to increase gross income and reduce expenses. It's what I call "cutting the fat off of the budget." Other types of businesses can also file chapter 11, such as partnerships and limited liability companies. Most people are surprised to know that individuals too can file for chapter 11. This is commonly done by individuals who have an enormous amount of personal debt, and/or have signed personal guarantees for business debt, promising to pay if the business does not.
EXAMPLE OF A CHAPTER 11 REORGANIZATION
Total monthly net "take home? pay $5,833
Home mortgage payment $1,200 (debtors are 4 months behind)
Equity line mortgage payment $400 (debtors are 6 months behind)
One car payment $425
Other car payment $475
Furniture payments $100
Unsecured debt payments $800 (total credit card and medical debt $92,000)
Monthly payments toward arrearage $300 (creditor insists on catching up in 24 months)
Total monthly debt obligations $3,700
Williams Brothers Trucking Corporation owes the following:
in a chapter 11 reorganization we have at least the opportunity and the Court has the authority to "cram down" the total debt owed to each secured creditor by reducing that total "debt" to the "value" of the collateral, and to then restructure the monthly payments with new terms that will provide relief to the chapter 11 debtor. Therefore, the total debt of $429,000 secured by the six pieces of collateral above would be reduced to the total value of $314,000 secured by that collateral. The proposal to the Court would then be to reduce each of the monthly payments to provide further relief. The total contractual payments shown above equal $8,415 per month, and are stated individually. The payments would be reduced as follows starting at the top: Commercial Bank: $1,370; Bank of America: $1,470; Wells Fargo Bank: $1,605; First Savings Bank: $685; Bank of America: $590; and Wells Fargo: $431. The total new monthly payments would, therefore, be $6,151 per month. Therefore, besides saving $115,000 off the principal, the debtor saves $2,264 per month off the monthly payments. Both equate to a 27% reduction in a chapter 11 that the debtor would not be able to force upon its creditors without filing for chapter 11.
WHAT ABOUT UNSECURED CREDITORS?
Moreover, this same corporate debtor owes $375,000 to its unsecured creditors. The monthly contractual payments toward that debt equals $6,250. Unsecured creditors are such things as credit cards, medical bills, signature loans, etc. for which no collateral (i.e. property) has been placed to secure the debts. Based upon an analysis conducted by the debtor's bankruptcy attorney, its average surplus after "cutting the fat off the budget" is $9,000 per month. This is, of course, after all overhead, including payroll, rent, etc. is paid. We know that we must pay $6,151 to the secured creditors as stated above, and this leaves only $2,849 per month with which to pay the unsecured creditors their contractual $6,250 per month. Therefore, we have just justified to the Federal Bankruptcy Court why we should be allowed to "cram down" on the unsecured creditors by paying them only $2,849 per month, instead of the $6,250 per month. This results in an additional savings of $3,410 per month, and results in our paying only $170,400 of the total contractual $375,000 the debtor corporation owes. This is a 55% savings in unsecured debt, which equals a $204,600 savings in unsecured debt. Moreover, the debtor will pay absolutely no interest whatsoever toward the $170,400 unsecured debt. It is important to note that a $204,600 reduction in unsecured debt actually equates to a $600,000 savings, because the debtor would have paid that much on the $204,600 that is now being eliminated, due to the elimination of interest on unsecured debt in the chapter 11.
BUT WHAT IF
WE ALSO OWE TAXES?
In his analysis the bankruptcy attorney discovered that the corporate debtor owes the IRS the sum of $60,000 in tax debt, and the state of South Carolina the sum of $15,000. Therefore, the plan now changes. Because the debtor has an average surplus of $9,000 per month as stated above, and it must pay the secured creditors their new total payments of $6,151 per month, this leaves only the $2,849 per month we had previously proposed to pay to the unsecured creditors. However, because the taxing authorities take priority over general unsecured creditors, we must reduce our monthly payments to the unsecured creditors, so that we can pay the taxing authorities. We would pay the taxing authorities the sum of $1,350 per month. This would include a reasonable rate of fixed interest as they are entitled to that under the bankruptcy laws. The IRS would receive $1,080 per month with the state being paid $270 per month. By simple math this $1,350 per month to the taxing authorities subtracted from our $2,849 per month, previously proposed to be paid to the unsecured creditors, now leaves only $1,499 per month to the unsecured creditors. Since we would pay unsecured creditors the $1,499 per month for five years under this scenario, they would receive only $89,940 of their total $375,000 contractual debt. This means they would receive only 24% of their total contractual debt with no interest.

Although a chapter 11 repayment plan is not limited to five years, the scenario I have laid out above does in fact pay all secured creditors, tax creditors, and unsecured creditors in 60 months. The debtor would write the checks each month according to the new terms, and pay those for 60 months. The balance of the debt would be discharged (i.e. forever forgiven), which means it would be legally eliminated, and the creditors would never be able under federal law to demand payments of any of the balance as long as the debtor has complied with the repayment plan. This is because the repayment plan, once approved by the Federal Bankruptcy Court becomes a new set of contracts, substituting itself for the old set of contracts.

Please understand that 99% of judges and lawyers know little or nothing about bankruptcy law, and 99% of bankruptcy lawyers know nothing about chapter 11. We have reorganized just about every type of business that exists over the last 22 years, and Court statistics reflect that we file more individual chapter 11 cases than any other law firm in the entire state of South Carolina. Because we are facing perhaps the worst economic conditions in the last 50 years, we are seeing more and more businesses, and individuals turn to chapter 11 to help them survive. We conduct a free initial consultation, and if you feel that you or your business is struggling to pay bills each month, we encourage you to call and schedule an appointment. Should you need a chapter 11 reorganization, be advised that I handle those personally. I will give you the benefit of my experience, conduct an analysis of your business or personal finances, tell you what I see, and assist you by preparing a plan of repayment structured to your business or personal finances specifically.
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