In general the filing of a chapter 11 bankruptcy is complicated, time-consuming and expensive.
Complications of the Governing Provisions
The Chapter 11 bankruptcy process is complicated because the governing provisions for a Chapter 11 are found in section 1101 through 1146 of the bankruptcy code. With the overlay of what can and cannot be done set forth in section 101 through 112 [General Provisions], section 301 through 308 [Commencement of the Case], section 321 through section 333 [Officers], section 341 through section 351[Administration], section 361 through the section 366 [Administrative Powers], section 501 through section 511 [Creditors and Claims], section 521 through section 528 [Debtors, Duties and Benefits], section 541 through section 562 [Estate].
The filing of the Chapter 11 bankruptcy petition, by an entity or individual, is governed by section 301. Following the filing of a voluntary petition for Chapter 11 bankruptcy relief, there is normally set by the U.S. Trustee’s office a Section 341 first creditors meeting, scheduled to take place 4 to 5 weeks after the petition filing. In between the petition filing and the noticed section 341 first meeting of creditors, the initial debtor interview, is conducted at the bankruptcy court by US Trustee’s office.
Which is essentially an informal office interview where the debtor provides business records for his business and personal activities, bank statements 3 to 6 months previous to filing, evidence of insurance, available and most recent financial statements, and the last 2 to 3 years income tax returns. All of these business records are then reviewed by the bankruptcy analyst working for the U.S. Trustee’s office.
The initial debtor interview is usually attended by the debtor and the debtor’s attorney, and answers given at the IDI meeting are usually not under oath, and lead to further questioning by the US Trustee’s attorney representative at the section 341 first meeting of creditors.
After the section 341 first meeting of creditors is concluded by the US Trustee’s office representative, then creditors have an opportunity to ask factual questions about assets and liabilities for debtor’s business affairs. Following conclusion of the section 341 meeting, the debtor has the exclusive time period to file a plan or reorganization of 120 days, followed by another 60 day exclusive of time period to gain confirmation of the plan of reorganization that is timely filed by the debtor.
In the case of small businesses, under section 1121, the requirement is for the debtor to gain confirmation of plan within 300 days from the date of petition filing, unless extended by the court. Additionally, there may be a 90 day limitation to file a plan reasonably capable of being confirmed in the case of a single asset real estate case. See Section 362.
Filing of the Disclosure Statement in Chapter 11 Bankruptcy
After that debtor timely files its plan of reorganization, the debtor also files a companion pleading called a disclosure statement, which disclosure statement is noticed for hearing under section 1125 of the bankruptcy code, seeking a court order decreeing the existence of the adequacy of the information in the disclosure statement, which is a requirement before debtors are allowed to solicit their plan of reorganization.
Once the court enters its order approving of the adequacy of the information contained in the disclosure statement pursuant to section 1125, the debtor can proceed to notice a confirmation hearing under section 1129(a) and (b) of the bankruptcy code. The confirmation hearing is the ultimate goal for a debtor filing the Chapter 11 plan, for a confirmed plan dictates creditors repayment schedule, which payment obligations must be strictly adhered to by the debtor and accepted by a creditor on certain terms and conditions set forth in the confirmation plan.
Timing the Chapter 11 Bankruptcy Filing
Timing may be a critical element in bankruptcy filing for number reasons. Some reasons may affect your individual situation. Your attorney will be aware of the subtle details that might because you to delay the filing date. If these circumstances apply to you, talk with your attorney. Here are some of the important ones:
- If you have repaid debt to family members or insiders during the past year, you may want to wait for a year to pass so you protect them from having to repay money to the estate.
- If you expect to receive a large income tax refund or other payments, you might want to wait until you receive that money. If you file for bankruptcy before you receive the money, that money will become part of the bankruptcy estate and it will potentially go to the trustee not to you.
- If you have recently incurred debt, especially credit card debt, you may want to wait in till some time passes so that the creditor will not try to claim fraud. The creditor may want to try to stop you from including that debt in the bankruptcy and receiving a discharge.
- If you have recently lost your job or have a major reduction in your income, waiting a few months may make passing the means test much easier. The means test is based on your average income for the last six months before filing the petition, so if you have a few months of lower or no income, it will reduce your average monthly income for these 6 months.
- If you’re considering divorce, talk with your attorney to see when the most advantageous filing date would be appropriate.
- If you owe taxes that are more than three years old, it’s possible some of that tax burden may be dischargeable after a specific date also.
- In Nevada, there is a homestead exemption of $550,000 if you purchase the home more than 1215 days ago prior to the petition filing. If you purchased it less than 1215 days prior to the petition filing, the homestead exemption is then set at $155,675. So waiting past that 1215 day may be worth the difference in dollar savings to you.
- If you think you’ll have large medical bills due in the near future, it may pay to wait at until after those bills were incurred to include them in the bankruptcy. You won’t be able to file another bankruptcy for least eight years.
- Your debts will not be wiped out if you have filed a previous Chapter 7 case in the last eight years, or four years for chapter 13 case.
In many of these cases a few days, a week or a month mean the difference of thousands of dollars in assets that you may have to give up or may be able to keep.
I had a case where a husband and wife couple came in to consult with me that had over $2 million in their bank accounts, but were going to owe much more than the $2,000,000 in debts after 1 or 2 years when their creditors’ claims matured. They had transferred most of the $2,000,000 to potentially exempt assets beyond 2 years of their filing, therefore, they did not have to report on Question 10 of the statement of affairs that they transferred assets in the 2 year time frame before filing the petition.
If asked about the transfer in the 341 meeting, they would have to disclose the transfers because it happened within 4 years. As luck would have it, the bankruptcy trustee and creditors that did attend the section 341 first meeting of creditors did not know of the transfers beyond the 2 year period, having failed to request records of the debtors that reflected that the $2 million had been transferred to other asset forms many years before the bankruptcy filing.
If there is no questions asked about the time period after 2 years before filing the petition, and if there were no transfers within the two-year time frame of filing the petition that would be reportable under question number 10, there is no obligation on the part of the debtors to volunteer information relative to transfers that happened in year 3 and year 4 or other years beyond 4 years.
Therefore, in this instance, silence is golden. Had bankruptcy trustee or creditors asked about transfers in years 3 and 4 prior to petition filing, they would have found out about transfers to entities that were arguably exempt, or excluded assets, thereby triggering issues on the avoidance of these years 3 and 4 transfers under section 544, and the need applicable State of Nevada uniform transfer act.
The 9th Cir. previously held that transfers of nonexempt property to exempt property are not prohibited, so long as it is done not to defraud or hinder on delay creditors. If transferring non-exempt to exempt property within 6 months of filing is considered an act in furtherance of defrauding creditors, one must wait for 1 year, 2 years or more. The Ninth Circuit case site for transferring nonexempt and exempt is Sherwood. That case essentially held that transferring non-exempt assets to exempt assets status is legal, so long as it is done without the intent to defraud creditors.
All of the above examples perfectly illustrate why it is absolutely mandatory that you hire an experienced bankruptcy attorney to steer you through a chapter 11 bankruptcy case. I know there is a lot of information here so my advice is to call our office at (775) 786-7600 or (775) 690-2190 anytime to set up a complimentary and confidential consultation with me at your earliest convenience. You can also visit our new business Facebook Page for more information.