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CHAPTER 11
BANKRUPTCY IN ILLINOIS: REORGANIZING THE SMALL BUSINESS CORPORATION
The definition of a Small Business in a Chapter 11 is one where the debts don’t exceed about $2.5 million (currently $2,566,050). The debt limit excludes amounts owed to persons considered “insiders” such as stockholders and/or family members. A Business owned in an Individual’s name that exceeds the debt limits of a Chapter 13 may be eligible for a Small Business Chapter 11 if their total debt does not exceed the above debt limits.
Upon filing the Chapter 11 Bankruptcy in Illinois, the Debtor becomes a Debtor-In-Possession (D.I.P.). New bank accounts will generally be required and designated as a Debtor-In-Possession. Also, insurance policies must list the United States Trustee for notice purposes.
A Small Business Chapter 11 Bankruptcy may be the best course of action for your Chicago business, with the following benefits:
- The filing imposes the powerful Automatic Stay against all creditors including the IRS. It is similar to an Injunction imposed against all who seek money or property from the company.
- The filing gives the D.I.P. all the powers of a trustee. The D.I.P. can object to claims; file motions to retrieve repossessed property like a car or truck, and sell certain property that it no longer needs;
- The plan can reduce excessive secured debts where the balance owed exceeds the value of the property. This can apply to a fleet of trucks or restaurant or grocery store freezer or even a single automobile.
- The Debtor can get rid of unfavorable leases, rental and other contracts.
- The Chapter 11 Bankruptcy gives your Illinois business an immediate reprieve in paying unsecured debts including past tax debts.
- The Debtor can sell property that is no longer needed for the business.
- The cases give the company time to start paying your tax debts and unsecured debts over a great period of time.
- The Chapter 11 may allow you to pay certain debts less than 100%.
- The filing of the Chapter 11 will allow the company to focus on the future. It can make plans on how to build the company profitability.
The ultimate goal of a Chapter 11 is for the Debtor to file a plan and have the court confirm it. The plan generally allows modifying the payments from the contractual terms due prior to the filing. In some cases, it can actually reduce the amount owed.
Even though a Small Business Chapter 11 Bankruptcy is an opportunity to reorganize your troubled Illinois business, has a lot of work has to be done before a case is filed. The key to filing a successful Small Business Chapter 11 Bankruptcy in Chicago is being well organized and prepared at the time of filing and even before that actual filing of the case.
The law requires certain documents and schedules to be included when the case is filed, some of which follows:
- A schedule of all assets;
- A schedule of all liabilities (debts) ;
- A list of any possible causes of action the Debtor may have;
- The Debtor must have a balance sheet to be turned over to the US Trustee;
- A statement of its operations, and a cash flow statement;
- A copy of its most recent Federal Income Tax return to be turned over the US Trustee;
- A schedule of executory contracts and leases;
- A statement of financial affairs;
Where practical, the company should employ an Accountant to help comply with required schedules and the accountant has to be paid immediately. Likewise, if appraisals will be needed it is best to obtain such before filing. As best you can and with the help of your lawyer, you should be prepared to enter your Illinois Chapter 11 Bankruptcy with comprehensive schedules and documents.
Each experienced attorney will guide you through a number of important considerations in Chapter 7 bankruptcy, including:
- The law requires that you list and categorize all of your debts and also list all of your assets. You will also provide proof of income for the last 60 days and copies of federal income tax returns for the last four years unless you’re not required to do so. Finally, you must obtain the required credit counseling from an approved agency.
- You must pass the “means test” to file for Chapter 7 bankruptcy. If your income is too high or it is determined that you can reasonably pay your debts, you may not qualify for Chapter 7 but you can still file for Chapter 13 relief.
- You do not have to forfeit all your property to discharge debts. Through the Illinois bankruptcy exemptions, most clients are able to keep their home, a family car, retirement savings, and personal possessions.
- The main debt that is not forgiven under Chapter 7 is student loans in addition to recent IRS debts. Also, parking tickets, red light camera tickets, and tollway debts are not forgiven under Chapter 7 but can be dischargeable under Chapter 13.
Please see the bankruptcy blog for answers to common worries or scenarios. As dedicated Chapter 7 attorneys, Robert J. Adams & Associates, Inc. has offices in Lake County and Chicago, Illinois, ready to help provide you with guidance and greater peace of mind.
DEBTS HAVE TO BE CLASSIFIED
- Secured debts are debts where property has been pledged as collateral. This can be a car or truck that has been financed or perhaps restaurant equipment that has been financed;
- Priority Debts have been given a higher status by law and have to be paid in full. These debts include payroll taxes; recent income tax debts; and sales taxes; other Priority Debts include employee wages up to $12,850 for the past 180 days. Any confirmed plan must pay these debts in full;
- Unsecured debts are debts with no liens such as credit cards;
- Debts to Insiders such as stockholders, officers, directors, and family members.
POTENTIAL PROBLEMS AND CONSIDERATIONS
- Businesses that have financial problems frequently defer the payment of Payroll Taxes, Unemployment Insurance, and Sales taxes. After the Chapter 11 has been filed new taxes, etc. must be kept current. Failure to pay these taxes post-filing may well cause the US Trustee to move to dismiss or convert the case to a Chapter 7.
- Small corporations generally have trouble obtaining credit. Creditors frequently require the personal guarantee of the principals of the business. By motion, the automatic stay has to be extended to those having given personal guarantees. Further, if the confirmed case does not pay such debts in full creditors will pursue those who have given personal guarantees.
- If the principals have “commingled” the business’s funds, creditors (including the trustee) may attempt to “Pierce the Corporate Veil.” If principals of the company have used corporate funds to pay personal bills and/or buy things for themselves (like a TV for home or even going on vacations that are not business-related) there may be an attempt to pierce the corporate veil. If successful, the creditor will seek to hold the principals liable for any part of the debt not fully paid when the Chapter 11 is confirmed.
- The principals completing the schedules and testifying at the trustee meeting and/or court appearance must be honest and forthcoming. Everything is signed and testified under oath. A lack of honesty can result in severe penalties.
CASH COLLATERAL ORDERS
(ADEQUATE PROTECTION)
Businesses generally have income-producing assets that have been pledged to creditors. The following is just a sampling:
- A delivery truck financed by ABC Bank;
- Accounts Receivable that have been pledged to XYZ Finance Company;
- An apartment building generating rents with a mortgage;
- A restaurant or grocery store that has liens on its equipment;
- Obviously the list can go on and on. You know which of your assets have been pledged to a finance company or bank.
Adequate Protection payments are needed for these types of creditors. These payments must at least cover depreciation and/or monthly interest.
Almost immediately after the filing of the case, the Chapter 11 Bankruptcy Debtor in Chicago, through its lawyer, will file a motion called a Cash Collateral Order. Generally, an agreement will be reached with the creditor. If not the Bankruptcy Court can impose Adequate Protection payments.
SPECIAL CONSIDERATIONS WITH LEASES AND EXECUTORY CONTRACTS
Leases and executory contracts must either be assumed or rejected. If one is not sure whether to assume or reject the code allows the Debtor up to 120 days to decide.
How one treats these leases and executory contracts depend on the facts and circumstances and how good of a deal the lease is.
If one is currently on the lease and/or executory contract, and wants to keep it, then merely assume it and continue paying it as it becomes due.
The landlord cannot change the terms of the lease because of a bankruptcy filing. Further, any clause that says the lease is terminated by a bankruptcy filing is void.
If the lease has expired by its terms or has been terminated by operation of law (such as a judgment of eviction) the bankruptcy filing is of no effect. The landlord will file a motion to Modify the Automatic Stay and it will be granted.
If one has, let’s say, an expensive lease and can easily move to a lower rent place for the business, it can be rejected and anything owed is an unsecured debt.
But there are instances where one cannot really move and the Debtor is behind on the rent. A restaurant or grocery store is an example. The Bankruptcy law provides Landlords with special protection, namely there are time limits to cure a pre-petition default:
- 60 days;
- The court can extend the time for a period up to another 60 days;
- The court can extend the time period for another 90 days if a motion is filed before the time period expires; and,
- The court can even extend this period for a second 90 days a motion is filed before the time period as expired.
To obtain the extensions there will be a strong burden of the company.
In no event does the Bankruptcy Court have the power to extend the curing of the pre-petition default for more than 300 days.
The time period to cure the default may largely depend on the circumstances and the leverage of the parties. If the Landlord is successful in evicting the tenant the case will likely be converted to a Chapter 7 and the landlord will likely get nothing. Also, it may remain vacant for several more months.
When possible, your attorney should attempt to negotiate with the company’s landlord before the actual filing of your Illinois Chapter 11 Bankruptcy.
Post filing defaults to landlords are given the status of a Priority Debt.
If a lease is rejected the landlord has an unsecured claim for future rent. While subject to some limitations its claim can be the greater of one year’s rent or 15% of expected rent up to 3 years.
OTHER BENEFITS AND REQUIREMENTS OF A SMALL BUSINESS CHAPTER 11 BANKRUPTCY IN CHICAGO
- There are no Creditor’s Committees. Creditor Committees are expensive and they most frequently are at odds with the Debtor which in turn is the cause of frequent and expensive litigation. That said the US Trustee will monitor the case from start to finish.
- The Debtor has the exclusive right to file a plan within 180 days; and the exclusive period can sometimes be extended. If a plan is not filed within the Exclusive Period other interested parties may file a plan which is generally a liquidation plan;
- In any event the plan along with a disclosure statement (if the court so requires) within 300 days of the filing. The 300 days can be extended but there would be a strong burden on the debtor to obtain an extension.
- As stated above undesirable leases and executory contracts can be rejected;
- Unwanted property can be disposed of either through sale or surrender to a secured creditor;
- The Bankruptcy Court can waive the requirement of a Disclosure Statement. If waived it can expedite the process and save a great of additional expense;
- Subject to court approval the Debtor-In-Possession can hire lawyers, accountants, appraisers, and other professionals.
- The Debtor-In-Possession has all the powers of a Trustee to examine claims and object when necessary; file motions to recover money and property;
FEES AND COSTS
The filing fee for a Chapter 11 Bankruptcy in Illinois, including administrative charges, is $1,717.00.
Attorney’s fees are to be paid before the filing of the case. These initial fees must be approved by the Bankruptcy Court when the lawyer by motion becomes the attorney of record. The lawyer cannot seek additional compensation for at least 120 days after the case is filed.
After the case is filed the D.I.P. may hire other professions such as an accountant or an appraiser but only after filing a motion and allowed by an Order of Court.
The D.I.P. is required to file monthly reports with the U.S. Trustee on income and operating expenses. On a quarterly basis, there is a fee to be paid to the U.S. Trustee. The fee is based on disbursements. The minimum fee is $325 every three months.
THE U.S. TRUSTEE
The United States Trustee (a division of the United States Department of Justice) oversees the entire Chapter 11 Bankruptcy in Illinois and all other states and will be present at all court hearings.
Shortly after the filing of the case principals of the company must attend an “initial interview” with the U.S. Trustee. At this interview, the U.S. Trustee will emphasize the duties of the Chapter 11 Debtor and will evaluate the possible plan that will be filed.
Within 20 to 40 days after the filing of the case, there will be a formal meeting with the trustee. The principals of the Chapter 11 Debtor will be sworn under oath. Any interested party may attend the meeting and ask questions.
THE PLAN
The aim of a Chapter 11 Bankruptcy in Chicago is that a plan will be proposed setting forth how the Debtor will repay its creditors over a period of time (rarely exceeding 5 years.)
The plan can call for monthly payments or lump sum payments at a future time and even the sale of assets now or at a future time.
Impaired creditors vote on the plan.
Assuming creditors vote to accept the plan, the plan then goes before the Court to confirm the plan.
As the case goes along, and some changes in assets and leases take place, the plan starts to take shape. With the ongoing reports, the company demonstrates what it is able to do. The plan then proposes what creditors get paid, in what order, and how much they can expect to receive.
The plan goes out to all creditors for their review. The most important creditors are usually paid in full while the lesser creditors may not get as much. Unsecured creditors often get little to no payout, but any creditor not being paid in full gets a chance to vote on the plan.
The court and the trustee act to ensure that the plan is fair considering the finances of the company. What is fair is evaluated in light of the company’s capabilities. If the company has a huge value more in payments will be required for each of the creditors. Companies with smaller values can propose plans with smaller payouts.
If all creditors vote in favor of the plan, then it gets confirmed without much of a problem. If creditors vote against it, then the lawyer for the business has to demonstrate that company is paying to the best of its ability. The process of confirmation involves proving the value of the company going forward based on projected income and assets being retained. If all goes well, the company gets the plan confirmed and begins its life as a reorganized company free of the burdens that dragged it down.