Improve the Odds of Getting Paid - Form a Creditors' Committee

    The president of a tire company called me to discuss what to do as a result of a customer going into Chapter 11. He asked what could he do that isn’t going to require him to come up with any cash, is not going to take much time, and has the potential to be very effective?

    I responded that participation on an official creditors committee might make the difference in a satisfactory resolution with the customer that filed chapter 11. While there are no guarantees as to the outcome of a case, often I have been able to use the power of a creditors committee to significantly enhance the treatment of unsecured creditors.

    An active creditors committee has a powerful voice in a Chapter 11 case and the ear of the court. Bankruptcy Judges want to hear from the creditors’ committee on the many issues in a Chapter 11 case. Federal law provides for a seat at the negotiating table for committees. A committee’s activities include oversight of the debtor, and scrutinizing debtor’s affairs, and evaluation of the fairness and feasibility of a debtor’s actions. The bottom line is a well-run pro-active committee can create value for unsecured creditors.

    An attractive aspect of official committees is that they are usually structured so that there is no direct charge to the members for the cost of professionals that advise committees. Thus a mechanism is in place to level the playing field for creditors (or sometimes shareholders) in the negotiations that take place in formulating how a debtor will be restructured or liquidated.

    And the absence of a committee can result in the creditors getting the short end of the stick! Don’t assume that someone else is going to be looking out for creditors; it is the responsibility of the creditors to lookout for themselves – make use of this powerful tool – an Official Creditors Committee.

    I’ll write more on this soon, but for now see that a committee gets formed. Call me if you need help.

How Is Bankruptcy Under Chapter 11 Different From A Case Filed Under Chapter 7 Or Chapter 13?

    Chapter 11 is the known at the Reorganization Chapter; Chapter 7 is called the Liquidation     Chapter; and Chapter 13’s title is Adjustment of Debts Of An Individual With Regular Income.

    As I wrote earlier the goal of a Chapter 11 Case is more often than not the rehabilitation of a troubled business entity, although individual filers are not uncommon.

    Chapter 7. In a chapter 7 case a trustee is appointed, who gathers and sells the debtor’s nonexempt assets for the benefit of the creditors. The notion of chapter 7 is that creditors of the same class will be treated equally; and the debtor, who will retain limited exempt assets, will get a fresh start.

    Chapter 13. Chapter 13 is similar to chapter 11, as the goal is for an individual debtor to confirm a plan that repays all or a portion of the debtor’s obligations. Chapter 13 is available only to individuals (no corporations, LLCs, or partnerships). An individual that operates a business as a sole proprietor (a dba is OK) may be eligible to file for bankruptcy under chapter 13.
    To be eligible to file under chapter 13 the individuals unsecured debts must not exceed $307,675 and the debtor’s secured debts may not exceed $922,975. These thresholds are periodically adjusted for inflation.

    Chapter 11. The goal of a chapter 11 cases is for a rehabilitated debtor to emerge from bankruptcy through the confirmation and implementation of a plan of reorganization. The plan is basically a contract between the various interested parties (creditors, debtor, secured lenders) that controls how the debtor’s affairs are to be conducted.

    An advantage of chapter 11 is that by allowing an enterprise to continue in business, value will be maximized for the benefit of the debtor’s unsecured creditors. Generally a going concern is worth more than a business that is in a state of forced liquidation. Often chapter 11 will be used as a platform to sell an operating business. The proceeds are then used to repay creditors according to priority.