Chapter 11 Bankruptcy in Texas
What is Chapter 11 bankruptcy?
The United States’ Bankruptcy Code offers debtors several types or bankruptcy options. A Chapter 11 bankruptcy allows businesses and individual business owners to propose a reorganization plan to keep their business alive while making manageable payments to creditors over time.
Known as a reorganization bankruptcy, this type of bankruptcy is usually used by businesses that are structured as partnerships or corporations; however, owners of sole proprietorships businesses with income levels that preclude them from qualifying for a Chapter 13 bankruptcy may also file under Chapter 11.
The Chapter 11 Process
Filing for Chapter 11 begins by filing a petition with the bankruptcy court that corresponds with where the debtor lives. A voluntary petition is one filed by the debtor. An involuntary petition is one filed by certain creditors.
A voluntary petition will need to include the debtor’s name, social security or tax identification number, residential address, and business asset location. It must be accompanied by a debtor’s plan (or intention to file a plan) to reorganize its finances.
When filing a voluntary petition, debtors must also submit
- A list of their assets and liabilities
- A breakdown of their current income and expenses
- A list of financial contracts and valid leases
- A statement detailing their financial affairs
When the debtor is an individual or a husband-and-wife team filing jointly, the court also requires that they file
- A certificate of credit counseling and a copy of a debt repayment plan, if there is one, developed as part of
- Proof of income from employers received within 60 days of the filing
- Proof of monthly net income and any increases in either income or expenses expected to happen after the filing
- A record of any interest in qualifying state or federal tuition accounts
Debtors must pay a filing fee of $1,167 and a miscellaneous fee of $500 to the clerk of courts. In some circumstances, however, the court may grant permission to have the fees be paid in up to four installments, as long as the last payment is made within 120 days of the petition filing. If these fees aren’t paid on time, the case may be dismissed.
Once an order for relief has been submitted, debtors gain the title of “debtor in possession.”
This means that debtors get to keep their belongings and control of their own assets while the reorganization plan is put in place without the need of a court-appointed trustee.
This title remains applicable until a reorganization plan is implemented, the case is dismissed or converted to a different bankruptcy type, or a trustee is appointed (which is rare).
Creditors who would be paid less than is owed to them under a Chapter 11 reorganization have traditionally gotten to review a disclosure statement from the debtor and vote on the plan by ballot.
Following that vote, a confirmation hearing provides a final determination as to whether the reorganization can proceed. However, the passage of the Small Business Reorganization Act of 2019 changed part of that process, no longer requiring a committee of creditors to approve a court plan in certain types of Chapter 11 bankruptcy.
Among other changes implemented with the act’s passage are shorter deadlines for completing the process and more flexibility to negotiate with creditors.
There are four courts for filing Chapter 11 bankruptcy in Texas: the Texas Eastern Bankruptcy Court, Texas Southern Bankruptcy Court, Texas Western Bankruptcy Court, and Texas Northern Bankruptcy Court.
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Under a Chapter 11 bankruptcy, individuals cannot file if they have had a prior bankruptcy petition dismissed with prejudice during the preceding 180 days. They also cannot file for 180 days from the date of dismissal, if the prior bankruptcy case was voluntarily dismissed while a motion for relief was pending.
Additionally, credit counseling is a necessary step in the process; no individual may receive relief without first receiving credit counseling from an approved agency within 180 days prior to filing. Exceptions to this rule exist for emergency situations.
What happens to assets?
Typically, when businesses are in trouble, they can choose to file for bankruptcy under Chapter 7, known as liquidation bankruptcy; under Chapter 13, which adjusts debt for individuals with regular income; or Chapter 11 to reorganize and pay back — at least partially — debts over time.
One benefit of this last kind of bankruptcy is that business assets do
not need to be sold off to pay back creditors. And because companies are generally considered to be legal entities separate from individuals, the personal assets of stockholders and owners or partners are not at risk during a Chapter 11 filing.
However, when it comes to individual filers, debtors’ earnings and property acquired after filing are considered part of
the estate, and funding for the plan may come from future earnings. So in this way, a debtor’s personal assets aren’t
Seeking Help for a Chapter 11 Bankruptcy Filing
Because businesses have various options for filing for bankruptcy, and because one option may be more favorable than the others based on a specific debtor’s business and personal circumstances, consulting an experienced attorney is always a good first step. The legal team at Farmer Law understands the ins and outs of the bankruptcy system and stands ready to help.
Filing is not the only time when it’s useful to have an experienced attorney at your disposal. Once a filing has been made with the appropriate court, debtors must adhere to numerous rules, such as ones regarding the use of cash collateral and taking out new loans.
Contact Farmer Law today to ensure that you have the legal representation you need to navigate the complex Chapter 11 process.
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