How Chapter 11 Bankruptcy Begins

How Chapter 11 Bankruptcy Begins

Bankruptcy LawChapter 11 Bankruptcy – How Arizona Chapter 11 Bankruptcy Begins

How Arizona Chapter 11 Bankruptcy Begins

After the initial documents have been reviewed, we prepare the bankruptcy petition, schedules and statements, and a list of 20 of the business’s largest unsecured creditors.  The case is then ready to be filed. Once the case is opened, things begin to move very quickly. The business becomes “the debtor,” and you, the business owner become “the debtor-in-possession,” or “DIP” for short. As a DIP, you are entitled to continue running your business unless you mismanage things, and then a trustee will be appointed to replace you. You, as the owner running the business are also considered a fiduciary, and you have a fiduciary duty to your creditors to manage the business in a way that watches out for their interests and not just your own. As a fiduciary, you are prohibited in engaging in self-dealing.

As a debtor, your business has now become a new entity, you will need to close your books and start new ones. You will need to close your bank accounts and open new accounts that list you, the owner as the debtor-in-possession on the account and on the checks. All the revenue that comes into the business after the petition is filed must be deposited into the DIP account. You will need to obtain the consent of your secured creditors or the court to spend any of these funds to pay business debts as they come due. One of the first things that needs to be done is to provide an accounting of the revenue coming in and the debts coming due to convince the business’s secured creditors to allow you to pay the business bills with the DIP account. If the creditors do not consent in writing, it is important to file a motion with the court to get a hearing scheduled so that the judge can grant you the consent.

In addition to changing the business name on the bank accounts, you will need to contact your utility providers and insurers to change the name on the accounts and policies to read “debtor-in-possession”.

You will also need to ask the court for permission to hire professionals, such as your lawyer, an accountant and perhaps an appraiser. All people you employ to assist you with this bankruptcy need to be approved by the court. Once approved, these professionals will need to submit their billing statements to the court for approval. Bankruptcy judges do not approve exorbitant fees.

Once these urgent matters have been taken care so that the immediate bills are paid, your employees are taken care of, and you have the professionals in place to help you with your case, the next most urgent thing that needs to be filled out is the preparation of the Chapter 11 Operating Report. This will be filed with the U.S. Trustee’s Office, which will supervise your case until your plan of reorganization is confirmed.

Click here for a sample form of a Chapter 11 Operating Report from the Arizona Bankruptcy Court website, then go to Chapter 11 Operating Report Form.

The job of the U.S. Trustee is different than that of a trustee that may be appointed to replace you if you mismanage things, and they are not to be confused as being the same. Once the U.S. Trustee’s Office has reviewed your business’s Quarterly Report, it will schedule a meeting with you in order to gain an understanding of your business and the financial problems you are having. The U.S. Trustee’s website, which is different from the Bankruptcy Court website, has operating guidelines for the reporting requirements the office has, as well as additional Monthly Operating Reports specifically geared toward larger Businesses and Industry, Individuals Engaged in Business, and Small Business Monthly Operating Reports. The guidelines will explain what supporting documents the U.S. Trustee’s Office will want to review when they meet with you. We will go over all this with you as well and attend the interview with you.

Click here for a list of forms and guidelines from the U.S. Trustee’s website

Finally, you will need to pay quarterly fees to the U.S. Trustee based on the amount of money that your business spends. These quarterly fees need to be paid while the U.S. Trustee’s Office is supervising your case. They will supervise your case until the Plan is confirmed. This should be a motivating factor to get your Plan done quickly.

After the initial interview with the U.S. Trustee’s Office, the next meeting will be with the U.S. Trustee and your creditors in a meeting called a 341 hearing. The U.S. Trustee will put you under oath and ask you questions about the schedules and statements that you have filed. Any of your business’s creditors that are present can also ask you questions.

At some point, the U.S. Trustee will solicit unsecured creditors to form a committee. The Bankruptcy Code allows the committee to hire attorneys to represent their interests. The committee can investigate the debtor business, participate in formulating the Plan, and attend all court hearings. The debtor business is responsible for the costs incurred by the committee. However, a small business debtor may request that a committee not be appointed.

After the 341 hearing, the bankruptcy judge will schedule a status hearing to hear a summary of your case, including a report from you or your attorney regarding the use of the cash collateral, a 3 month projection of cash flow for the business, a list of the professionals the business has hired, and an explanation of the methods you will employ to reorganize the business. The judge will want a timetable from you and set deadlines by which you intend to file your Plan and Disclosure Statement, and a date for the confirmation of the Plan.

These are some of the procedures a business owner must be prepared to encounter in the early part of a Chapter 11 case. It is important to have the business bookkeeping up-to-date and in order and work closely with your attorney to provide all the documentation and information requested in a timely manner.

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