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Scura, Wigfield, Heyer, Stevens & Cammarota Blog

The Basic Differences Between Chapter 7, Chapter 13 and Chapter 11 Bankruptcy

Confused on what the difference between Chapter 7 and 11 Bankruptcy is? How about the difference between Chapter 7 and 13? Scura is here to help.

Involuntary Proceedings Under Chapter 11 and Chapter 7 Bankruptcy

Recent financial struggles facing the Texas Rangers baseball team have brought attention to the issue of involuntary bankruptcy proceedings. Creditors holding roughly $525 million in debt accrued by the team when its ownership group defaulted on several high-value loans in recent years want to broaden the scope of the Rangers' Chapter 11 bankruptcy proceeding to include the assets of two holding companies belonging to Hicks Sports Group, the current owner of the team.

Creditors have several reasons for bringing an involuntary Chapter 7 bankruptcy claim against a debtor or group of debtors, such as forcing the addressing of all creditors' claims at once. Another reason these petitions are brought is to prevent the debtor from liquidating assets prior to an anticipated bankruptcy filing.

Not all debtors are subject to these proceedings. Chapter 7 or Chapter 11 involuntary bankruptcy proceedings cannot be brought against:

  • Farmers
  • Non-profit groups
  • Banks
  • Insurance companies
  • Credit unions
  • Savings-and-loan businesses
  • Railroads (only barred in Chapter 7 bankruptcy cases)
  • Stock or commodity brokers (only barred in Chapter 11 cases)

No Guarantee of Payment for Creditors

Due to their risky nature, these proceedings make up only a very small part of bankruptcy filings. Creditors must do a careful cost/benefit analysis before undertaking an involuntary bankruptcy filing regardless of whether the petition is aimed at forcing an initial Chapter 7 or Chapter 11 proceeding or amending a current one. An involuntary petition in Chapter 7 or Chapter 11 can be initiated by: Three or more creditors owed at least $13,475 (if there are less than 12 registered creditors, one creditor will suffice). The debt owed cannot be contingent as to liability or the subject of a bona fide dispute as to liability or amount.

Provide credible evidence that the debtor, whether individual or business, is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or within 120 days of the filing of the petition a custodian took possession of the assets of the debtor

If the bankruptcy court judge determines that the involuntary bankruptcy petition was brought in bad faith, the debtor is awarded both monetary damages and legal expenses, thus costing the creditor even more money and restoring them to their original priority in the bankruptcy payment "food chain." Furthermore, the debtor could also seek and receive punitive damages - this fact alone makes many creditors wary of involuntary bankruptcy filings.

Combating Involuntary Bankruptcy Petitions

Just because an involuntary bankruptcy petition has been filed against a debtor does not mean that the debtor has to accept the petition or has no means of recourse. The debtor has 20 days to respond to the filing and file an objection to it. This will force a trial, which leaves the creditor open to the aforementioned negative consequences. Should a creditor choose to proceed to trial, the filing could still be dismissed if the debtor can show one or more of the following factors:

  • The amount owed is less than that claimed by the creditor(s)
  • There is a record of timely payments to the creditor
  • The debtor is willing and able to make payments now and in the future
  • The creditor has acted in bad faith in filing the involuntary bankruptcy

Structured Dismissals: Ask a Chapter 11 Bankruptcy Attorney

"Structured Dismissals" in the Chapter 11 process are becoming an acceptable alternative to confirmation of a Chapter 11 plan.

Take the case of a business owner trying to "save the company" in this troublesome economy. The astronomical costs associated with a Chapter 11 bankruptcy petition are often a crucial problem for this business owner. If you pick up any Law Review or Bar Journal that has anything to do with bankruptcy, you will immediately find articles calling for Chapter 11 reform because of costs. In the final analysis, companies in financial difficulty are unable to pay for all the administrative expenses and to work within the slow procedural steps of a Chapter 11 filing as they are today. The failure rate of Chapter 11 filings is much too high.

As an experienced practitioner in the field of insolvency, I've been involved with different types of Chapter 11 cases. Whether serving as attorney for the debtor or for the creditor's committee, or in those cases where I have monitored the issue of costs, I am convinced that there is a real need for reform of Chapter 11.

Until Chapter 11 is reformed, when a business consults me about filing for Chapter 11 relief, I advise the principals to consider alternatives to the Chapter 11 process. One such alternative may be an Assignment for the Benefit of Creditors (ABC), essentially a decision to liquidate the business under the state system, which is faster and a lot less costly than a federal bankruptcy. A complete discussion of an assignment can be found on the firm website, www.scuramealey.com/, in a separate article that I previously authored called "ABC viewed as an effective and less costly alternative to bankruptcy".

Here, in this article, I wish to focus on an increasingly popular alternative to filing for standard Chapter 11 relief that includes a confirmed Chapter 11 Plan. This alternative is called a "structured dismissal." The strategy involves working successfully with the major creditor in the case. A major creditor may be a judgment creditor that is about to or has levied on a bank account with significant funds; it may be a taxing authority that has padlocked the business; or it may be a secured creditor with the first lien on all the assets. Assuming you can work out an arrangement with this major creditor, and the other creditors are in agreement, there is nothing left to be done in the way of creditor protection and the debtor may file a motion with the court requesting a "structured dismissal." Assuming you are successful on the motion, the business is out of Chapter 11 and you will avoid the significant cost of getting a plan confirmed.

Parties requesting approval of a structured dismissal rely on 11 U.S.C. § 1112 (b), and/or 11 U.S.C. § 305 (a) (1) of the Bankruptcy Code. Structured dismissal motions based on either provision often include a request pursuant to 11 U.S.C. § 105 (a) that allows a bankruptcy court to enter orders necessary or appropriate to carry out the provisions of the bankruptcy code.

When a debtor becomes either administratively insolvent and/or lacks the funding to proceed with confirmation of a liquidating Chapter 11 plan, it may rely upon the statute governing conversion or dismissal of Chapter 11 cases, 11 U.S.C. § 1112 (b), as the statutory basis for a structured dismissal. In part, that statute provides that "the court shall convert a case under this chapter to a case under chapter 7 or dismiss the case under this chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause."

Section 1112(b)(4)(A) provides two primary justifications for structured dismissals: the existence of a "substantial or continuing diminution of the estate" and "the absence of a reasonable likelihood of rehabilitation." Where the debtor is unable to effectuate substantial consummation of a Chapter 11 plan, it may request a structured dismissal on the grounds that dismissal is more favorable than conversion, comparing the cost of converting to and administering a case under Chapter 7, to the provisions of the structured dismissal order specifically drafted for this debtor. The critical component is whether the structured dismissal serves the interests of both the debtor and its creditors.

Overall, there are very few reported or unreported decisions to guide practitioners in the approval of structured dismissals. Nonetheless, more and more bankruptcy courts are entering orders approving structured dismissal orders. Therefore, whether you represent debtors or creditor committees, if the Chapter 11 case has a structured dismissal set up with some degree of protection demonstrating that both interests are best served, and the court agrees, a structured dismissal may be the most cost-effective, and fastest, way to end a Chapter 11 case.

Contact one of our Chapter 11 bankruptcy attorneys today for a free initial consultation. We have offices in Wayne and Hoboken, New Jersey, to serve you better. 

Additional Requirements for a Chapter 11 Bankruptcy Debtor

In Chapter 11 bankruptcy cases, a debtor not only must attend a Creditors' Meeting, but it must also attend an Initial Debtor Interview (IDI). The United States trustee conducts initial debtor interviews following the filing of a petition under Chapter 11 of the bankruptcy code. The purpose of the interview is to review the debtor's financial condition the duties and responsibilities of the debtor and the debtor's likelihood of reorganization.

Chapter 11 Bankruptcy vs. Assignment for the Benefit of Creditors

New Jersey Chapter 11 Bankruptcy vs. Assignment for the Benefit of Creditors

Like with anything, both chapter 11 bankruptcies and Assignments for the Benefit of Creditors have their advantages and disadvantages. An Assignment for the Benefit of Creditors can be a cost effective way of winding up the business of the Assignor and selling the assets of the Assignor under state court supervision. The buyer of the assets will still have the benefit of a court order stating that he or she is buying the assets free and clear of the debts of the Assignor.  The principal of the Assignor is even allowed to buy the assets of the Assignor as long as the court determines that a fair price for the assets was paid.  However, if a debtor company is attempting to save its company in its current form, then a reorganization through a chapter 11 bankruptcy is likely the better avenue to take.

The Unique Benefits of Chapter 11 Bankruptcy

Both Chapter 7 bankruptcy and Chapter 13 bankruptcy provide over one million Americans each year with debt-related protections and solutions. By taking advantage of these two forms of bankruptcy, many Americans obtain a fresh financial start that enables them to build a strong financial foundation moving forward.

Benefits of Chapter 11 Bankruptcy

However, there is another kind of bankruptcy that specifically extends protections and debt-related solutions to businesses and individuals with certain significant levels of secure debt. Chapter 11 bankruptcy offers unique restructuring options for those businesses and individuals that qualify for this option.

Let a New Jersey Bankruptcy Lawyer Help Protect Your Pension

How a Bankruptcy Attorney Can Help Protect Your Retirement

A qualified bankruptcy attorney can help protect your retirement assets including your pension and other retirement investments, but what happens when the employer who owes the pension goes bankrupt?

Chapter 11 Bankruptcy Is Not Just For Business

It is commonly believed that Chapter 11 Bankruptcy is reserved for businesses. While it is true that a business cannot reorganize its financial affairs in a Chapter 13, it is not true that an individual - that is a natural person rather than a company - cannot file for Chapter 11.

Chapter 11 Bankruptcy for Individuals

Individuals Over Allowable Debt Limit May Have to File Chapter 11

Chapter 13 Bankruptcy is the prefered bankruptcy type for an individual or consumer in a reorganization case.  The fees are typically much cheaper in a Chapter 13 and the time commitment is less than in a Chapter 11 case.  However, with the higher mortgage amounts in today's real estate market and the high amount of unsecured credit card debt that many persons now have, many individuals exceed the allowable debt limits in a Chapter 13 and have to file a Chapter 11.

The Benefits of a Chapter 11 Turnaround Plan

Just as individuals feel the pinch of a slow economy, businesses suffer during economic downturns. A recent high profile example of a business seeking bankruptcy protection is the L.A. Dodgers filing Chapter 11 bankruptcy in June 2011. The way that businesses file Chapter 11 is undergoing a transition, with more planning going on in the forefront of the process. This planning tends to make the process go more smoothly.

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