RETAIL STORES, RESTAURANTS AND CLOSELY HELD CORPORATIONS
A Chapter 11 bankruptcy begins by the filing of a petition in the bankruptcy court. In most cases, a bankruptcy filing triggers the automatic stay that prohibits creditors from further collection actions such as foreclosure, repossession or replevin. The debtor also becomes the "debtor in possession," which refers to a debtor that keeps possession and control of the debtor's assets while undergoing a reorganization under Chapter 11, without the appointment of a case trustee. Generally, the "debtor in possession" operates the business and performs many of the functions, and has many of the powers and duties, of a bankruptcy trustee.
Chapter 11 is typically used to reorganize a business, which may be a corporation, partnership or sole proprietorship, although individuals may file a Chapter 11, too. The debtor proposes a plan of reorganization that classifies and provides for treatment of different kinds of claims and interests, including secured and unsecured claims, taxes, unexpired leases and executory contracts. Creditors whose claims are impaired under the plan get to vote to accept or reject a plan.
A debtor also may propose a liquidating plan in a Chapter 11 case. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a Chapter 7 liquidation.
Once a plan is confirmed by the bankruptcy court, the debtor receives a discharge, which typically eliminates much of the general unsecured debt. The debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. An individual debtor, however, does not receive a discharge until the plan is completed unless it is a liquidation plan.
The U.S. Trustee of the Department of Justice plays a major role in monitoring the progress of a Chapter 11 case and supervising its administration. The U.S. Trustee can appoint a committee that 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.
The Bankruptcy Code treats a "small business case" somewhat differently from a regular bankruptcy case. A small business case is defined as a case with a "small business debtor." Determination of whether a debtor is a "small business debtor" requires application of a two-part test. First, the debtor must be engaged in commercial or business activities (other than primarily owning or operating real property) with total non-contingent liquidated secured and unsecured debts of $2,190,000 or less. Second, the debtor's case must be one in which the U.S. trustee has not appointed a creditors' committee, or the court has determined the creditors' committee is insufficiently active and representative to provide oversight of the debtor.
In contrast to other Chapter 11 debtors, a small business debtor is subject to more reporting requirements and additional oversight by the U.S. trustee. Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other Chapter 11 cases.
