Filing Bankruptcy in Colorado
What is a Chapter 11 Reorganization?
What is a Chapter 11 Reorganization? What is Chapter 11, Subchapter V? Return to Main Bankruptcy Page
Chapter 11 Bankruptcy in Colorado
“Chapter 11” is a bankruptcy that conforms with Chapter 11 of the Code. Generally, small business might find Chapter 11 expensive, risky, time consuming, and complex. Except as noted with Subchapter V below, Chapter 11 is the only bankruptcy option for a small business seeking to restructure and continue in operation if it is a company. Chapter 11 is also the only bankruptcy option for individuals who want to reorganize but owe too much money to meet the Chapter 13 eligibility requirements (see below).
Unlike a Chapter 7 liquidation, the purpose of a Chapter 11 bankruptcy is to reorganize the business's debts such that the business will be able to continue operations.
A Chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor is incorporated, has its principal place of business or the majority of its assets. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by unsecured creditors that meet certain requirements. There are specific forms and documents that need to be included as part of the petition.
The business debtor usually remains in possession of the bankruptcy estate and is known as the "debtor-in-possession" until either the debtor's plan of reorganization is confirmed, the debtor's case is dismissed or converted to Chapter 7, or a Chapter 11 trustee is appointed for cause. The appointment or election of a trustee occurs only in a small number of cases.
The four main actors in a Chapter 11 bankruptcy:
The debtor (also known as the “debtor in possession”);
The U.S. trustee (or in the alternative, a “bankruptcy administrator”);
Any holder of claims secured by assets of the debtor; and
the creditors’ committee.
The "debtor in possession" operates the business and performs many of the functions that a trustee performs in cases under other chapters. The debtor in possession is a fiduciary, with the rights and powers of a chapter 11 trustee, and must perform all of the duties of a trustee, except the oversight, investigative, and other functions outlined below. These duties include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the trustee, such as monthly operating reports. The debtor in possession also has many of the other powers and duties of a trustee, including the right, with the court's approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during its bankruptcy case. Other responsibilities include filing tax returns and reports which are either necessary or ordered by the court after confirmation, such as a final accounting.
A U.S. trustee is responsible for monitoring the debtor in possession's operation of the business and the submission of operating reports and fees. Additionally, U.S. the trustee monitors applications for compensation and reimbursement by professionals, plans and disclosure statements filed with the court, and creditors' committees. The U.S. trustee conducts a meeting of the creditors, often referred to as the "Section 341 Meeting," in a Chapter 11 and a Chapter 7 case. The U.S. trustee and the creditors may question the debtor under oath at the Section 341 Meeting concerning the debtor's acts, conduct, property and assets, and the administration of the case. The U.S. trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, establishing new bank accounts, and paying current employee withholding and other taxes. By law, the debtor in possession must pay a quarterly fee to the trustee for each quarter of a year until the case is converted or dismissed. The amount of the fee, which may range from $325 to $30,000, depends on the amount of the debtor's disbursements during each quarter. If a debtor in possession fails to comply with the reporting requirements of the trustee or orders of the bankruptcy court, or fails to take the appropriate steps to bring the case to confirmation, the trustee may file a motion with the court to have the debtor's Chapter 11 case converted to another chapter of the Code or to have the case dismissed.
Secured creditors are entitled to receive the value of the collateral securing their claim against the debtor. That value can be paid over time with interest and the lien will survive until the claim is paid. If the secured collateral is less valuable than the amount of the claim, then the secured claim is on the value of the collateral and this value is the amount that must be paid or satisfied. The deficiency amount, if any, is treated as a general unsecured claim.
Creditors' committees can also play a major role in Chapter 11 cases. The creditors’ committee is appointed by the U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor.
Among other things, the committee:
consults with the debtor in possession on administration of the case;
investigates the debtor's conduct and operation of the business; and
participates in formulating a plan.
A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties.
The Goal of a Chapter 11 Bankruptcy
The goal of a Chapter 11 bankruptcy in Colorado is for the debtor, with the assistance of the creditors’ committee and any secured creditors, to prepare a plan of reorganization which sets forth how the debtor intends to repay its creditors. Generally, a written disclosure statement and a plan of reorganization must be filed with the court and is subject to approval upon voting of the creditors and satisfaction of certain legal requirements. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization and must be approved by the court before it can be circulated to the creditors. The contents of the plan must include a classification of claims and must specify how each class of claims will be treated under the plan. Creditors whose claims are "impaired," i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan, vote on the plan by ballot. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether the plan meets the legal requirements set forth in the Code and to confirm the plan.
Chapter 11 when used by individuals bears some similarities to Chapter 13 (discussed below). For example:
property of the estate for an individual debtor includes the debtor's earnings and property acquired by the debtor after filing until the case is closed, dismissed or converted;
funding of the plan may be from the debtor's future earnings; and
the plan cannot be confirmed over a creditor's objection without committing all of the debtor's disposable income over five years unless the plan pays the claim in full, with interest, over a shorter period of time.
What is Chapter 11, Subchapter V?
Signed into law in 2019, the Small Business Reorganization Act (SBRA) went into effect in February 2020 as part of amendments to the Code and added a new Subchapter V to Chapter 11. Subchapter V is a simplified, voluntary option for “small businesses debtors” and has many advantages for eligible small businesses compared to traditional Chapter 11. The bankruptcy cases under Subchapter V are known as “small business cases.”
Subchapter V, among other differences:
Limits the filing of the reorganization plan initially to the debtor, but the debtor has a shorter time frame to file;
Allows the business debtor to remain in control of the operations of the business;
Does not involve a creditors' committee unless a committee is ordered by the court for cause;
Does not require disclosure statements, as long as the reorganization plan includes a history of business operations, a liquidation analysis, and a feasibility analysis; and
Allows the bankruptcy judge can confirm a plan without the vote of any impaired class.
When Subchapter V went into effect, “small business debtors” was limited to debtors engaged in commercial or business activities generally with debts no more than $2,725,625 (excluding debt owed to affiliates or insiders) and not less than 50% of those debts arose from the commercial or business activities of the debtor. In response to the COVID pandemic, under the CARES Act, the dollar threshold was increased to $7,500,000 temporarily through March 27, 2021. Single asset real estate debtors and public companies are not eligible.
There are many other differences between traditional Chapter 11 and Subchapter V that may influence the decision to opt between these two alternatives.