BANKRUPTCY LAW
MARR LAW GROUP

BANKRUPTCY LAW

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Geoffrey Marr has over 35 years of experience representing debtors and creditors in all manner before the Bankruptcy Court. Mr. Marr is licensed to appear in all four District and Bankruptcy Courts throughput the State of California. Mr. Marr has been admitted Pro Hace Vice to appear in various cases in the District and Bankruptcy Courts of other states.  

Bankruptcy Basics

Overview of Chapters 7, 13 & 11

There are both individual and business entity bankruptcies. Individual and business entities typically seek relief under several different Chapters (7, 11 or 13) of the Bankruptcy Code. Only individuals can seek relief under Chapter 13 which is an individual wage earner reorganization case with regular income. Both individuals and business entities can seek relief under either Chapter 7 or 11 of the Bankruptcy Code. A Chapter 7 case is a liquidation proceeding which is very different than a Chapter 11 reorganization proceeding with each serving a different purpose. All three Chapters (7, 11 & 13) are discussed in detail on the United States Court’s Website at https://www.uscourts.gov/services-forms/bankruptcy. Additionally, the United States Bankruptcy Court – Southern District of California is an excellent source – particularly under the “information” drop down tab that can be accessed at https://www.casb.uscourts.gov

Most importantly, Congress recently enacted the Small Business Reorganization Act of 2019 (“SBRA”) codified in Subchapter V of Chapter 11 of the Bankruptcy Code. SBRA was designed to minimize the time and expense of small business reorganization. SBRA was also designed to remove many of the cumbersome requirements associated with a traditional Chapter 11 case for businesses with total aggregate debts (both secured and unsecured) under $2,725,625. The recent CARES Act, designed to aid small businesses suffering from the COVID19 crisis, significantly increased the debt limit to $7.5 million for one year. SBRA and the increased debt limitations should allow many more small business debtors to successfully reorganize under its provisions.

Individual bankruptcy cases are typically designed to provide a debtor either a “fresh start” by discharging their personal liability for unsecured debts (Chapter 7) or trying to save important assets (Chapter 13) such as a Residence and/or repay non-dischargeable debts such as mortgages, taxes or student loans. In Chapter 7, the debtor’s non-exempt property is liquidated and the proceeds paid to creditors. However, before Marr Law Group ever recommends an individual file a Chapter 7 case, we conduct a careful analysis to determine available asset exemptions in order to protect property from liquidation. Generally, we will not recommend Chapter 7 to any individual that would lose significant assets such as their Residence, Retirement Accounts or other significant assets. Alternatively, we would recommend an individual file a Chapter 13 conditioned upon them having regular income and a feasible repayment plan over a commitment period of 3 to 5 years. Once the bankruptcy case is completed, the individual is legally discharged or released from any further personal liability for most debts. 

Many people think Chapter 11 can only be filed by large corporations. However, both individuals and businesses (large and small) can seek relief under Chapter 11. Many individuals that need to reorganize may not be eligible for Chapter 13 due to various debt limitations or have irregular income from their assets or business and must then seek protection under Chapter 11. One of the key benefits of filing under Chapter 11 is the debtor can manage/operate their assets or business as a “debtor in possession”. The debtor then undergoes a reorganization process to formulate a plan of reorganization to repay its creditors. Typically, the plan of reorganization will center on increasing income, decreasing expenses and/or the sale of certain assets as necessary to fund the plan with repayments made over time to the creditor body. Both during the Chapter 11 case and after confirmation of the plan, the debtor in possession continues to manage/operate their assets or business seeking either repayment in full of the creditor body or discharge of permissible debts. The Chapter 11 bankruptcy process can be a complex and lengthy even in a small business setting. If you or your business are facing a Chapter 11, you’ll want to work with an experienced Chapter 11 attorney who understands the process and has guided prior clients through that process in the past. Marr Law Group has that experience.

Chapter 7 vs. Chapter 13 Bankruptcy

Most individual debtors will be interested in either Chapter 7 or Chapter 13 bankruptcy. One threshold issue relating to eligibility for either Chapter relates to the debtor's income level. Those with little or lower income based on their household size are generally eligible to file for Chapter 7, which is a simpler and quicker form of bankruptcy subject always to careful analysis to determine available asset exemptions in order to protect property from liquidation. Chapter 13 often permits the debtor to retain most significant assets and/or repay nondischargeable debts, but requires a feasible repayment plan and takes considerably longer (3 to 5 years) before debts are discharged. If a debtor's income qualifies for Chapter 13 bankruptcy but they apply for a Chapter 7 bankruptcy the court may dismiss the case or convert it to a Chapter 13 bankruptcy. Significant differences also arise in the treatment or repayment of claims involving:
  • Secured Mortgages, Deeds of Trust and Auto Loans
  • Debts Owed for Child Support, Alimony, or Student Loans
  • Nonsupport Debts Owed in a Divorce or Property Settlement
  • Co-Debtors on Personal Loans
  • Nonexempt Valuable Property
  • Prior Bankruptcies

Chapter 11 Process

The following steps generally comprise the normal Chapter 11 process – subject to the more expedited Small Business Reorganization Act of 2019 discussed below.

Bankruptcy Petition. A Chapter 11 case is commenced by the debtor filing of a voluntary petition or by creditors of the debtor filing an involuntary petition. When the petition is filed certain Bankruptcy Code provisions automatically come into play: 
    • Appointment of Trustee. In most Chapter 11 cases the debtor will become a “debtor in possession” and will continue to manage/operate their assets or business throughout the case while undergoing the reorganization process. In a small number of cases, a separate trustee may be appointed by the Court based on mismanagement or other wrongful conduct by the debtor in possession.
    • Automatic Stay. An automatic injunction or “stay” arises immediately upon filing of the petition. This automatic stay is a statutory "order" which protects the debtor and their property prohibiting all actions, lawsuits, levies, garnishments or other acts to take possession of the debtor’s assets by creditors after the filing of the petition. Generally, it applies to all creditors whether secured or unsecured, but not to criminal proceedings and in certain instances court orders related to child support.
    • Avoidable Transfers. The debtor in possession or trustee has “avoiding” powers (unique to bankruptcy) that can be used to undo a transfer of money or property made during a specific time period prior to the filing of the petition. For instance, a debtor can seek to undo a “preferential transfer” made within 90 days to a creditor based on an antecedent debt. Avoiding powers can be used to prevent unfair payments to one creditor at the expense of other creditors.
List of Creditors/Schedules/Statement of Financial Affairs. Immediately upon commencement of the Chapter 11 case, the debtor must file: 
    • List of creditors
    • Schedule of assets and liabilities, current income and expenditures
    • Statement of the debtor’s financial affairs
    • Related mandatory bankruptcy forms and disclosures that permit the Court and creditors to understand the current financial affairs of the debtor
Notice to Creditors. The court clerk sends a notice of filing of the petition to all creditors and the notice contains important information that includes:
    • First Meeting of Creditors
    • Deadline to File Proofs of Claim
    • Deadline to File Complaints Objecting to Discharge or the Nondischargeablity of Certain Debts
Filing Proofs of Claim. The Court will set a deadline date by which creditors must file their Proof of Claim (“Claim”). Often this date is listed on the Notice to Creditors, but can be set by request of the debtor during the case. Creditors whose claims are listed in the correct amount are generally not required to file a Claim, but it is prudent to always file a Claim in any bankruptcy case. Any creditor listed by the debtor as disputed, contingent or unliquidated or in an incorrect amount must always file a Claim. Any creditor failing to timely file a Claim in the case risks that it will receive no distribution under the Plan of Reorganization.

Unsecured Creditors’ Committee. The United States Bankruptcy Trustee, a federally appointed official, can appoint a committee of unsecured creditors to represent the interests of all unsecured creditors in the Chapter 11. The formation and participation by unsecured creditors on this committee varies greatly depending on the size of the case. The committee can hire professionals, including lawyers and accountants, to monitor the debtor’s actions and progress in filing and successfully confirming a Plan of Reorganization (“Plan”). The committee has standing as a party in interest to participate in the Chapter 11 case by filing motions, oppositions and even proposing its own Plan. The debtor’s estate is responsible for paying the administrative costs associated the committee’s retained professionals. 

Plan of Reorganization. There is a 120-day period, from the time of filing the Chapter 11, during which the debtor has the exclusive right to file a Plan. However, the Court can extend the exclusivity period based on good cause. Once the exclusivity period has expired, a creditor, unsecured creditor committee or Court appointed trustee may file a competing plan. The contents of the Plan must include a classification of claims (debts) and must specify how each class of claim will be treated under the plan. Section 1123(a) of the Bankruptcy Code lists the mandatory and discretionary provisions of any Plan. Typically, the Plan will center on increasing income, decreasing expenses and/or the sale of certain assets as necessary to fund the Plan with repayments made over time to the creditor body. The Plan must provide for the treatment of all Claims listed in the debtor’s schedules. For example, the debtor may seek to modify the terms related to secured claims such as the applicable interest rate or length of a loan. The Plan might also only seek to repay a portion of the amount due to unsecured creditors. If the debtor is successful in confirming a proposed Plan, the debtor in possession continues to manage/operate their assets or business post-confirmation.  

Court Approval of Disclosure Statement. Before a Plan can be confirmed by the Court it must hold a hearing to approve a disclosure statement that is presented to creditors in conjunction with the Plan. The disclosure statement is similar to an investment prospectus and must provide the creditor body “adequate information” on whether to approve or reject the proposed Plan. At a minimum, the disclosure statement must contain a history of the business operations, a liquidation analysis, and projections with respect to the debtor’s ability to make payments under the proposed Plan.

Vote on Reorganization Plan. Once the Court has approved the disclosure statement, it along with the Plan are considered by all creditors. The debtor will mail all creditors the following: 
    • The Plan and/or summary of the Plan
    • The Court approved disclosure statement
    • Notice of the time within which acceptances and rejections of the Plan must be received
    • Other information as directed by the Court
    • Notice of the time fixed for filing objections to the Plan
    • Notice of the date/time for the hearing on Plan confirmation
    • A ballot for accepting or rejecting the Plan
Confirmation Hearing. Plan confirmation can be complex – particularly if there are many “impaired classes” in the Plan or the proposed Plan fails to obtain the necessary votes for its confirmation. The Court must hold a Plan confirmation hearing upon notice to all interested parties. If no objection to confirmation has been timely filed, the Court will determine the following: 
    • The plan is feasible
    • It is proposed in good faith
    • The plan and the proponent of the plan are in compliance with the provisions of the Bankruptcy Code
    • Even if consensual confirmation is not achieved because a class is impaired and debtor fails to obtain the necessary votes, the debtor can still request Court confirmation by a “cram down” under §1129(b).
Final Decree. A final decree closing the case must be entered by the Court after the estate has fully administered the Plan. Fed. R. Bankr. P. 3022. Local bankruptcy court policies generally determine when the final decree is entered and the case closed.

Small Business Reorganization Act of 2019

(Written by Geoffrey E. Marr of Marr Law Group)
The Small Business Reorganization Act of 2019 (“SBRA”) codified in Subchapter V of Chapter 11 of the Bankruptcy Code became effective in February 2020. SBRA was designed to minimize the time and expense of small business reorganization. SBRA was also designed to remove many of the cumbersome requirements associated with a traditional Chapter 11 case for businesses with total aggregate debts (both secured and unsecured) under $2,725,625. The recent CARES Act, designed to aid small businesses suffering from the COVID-19 crisis, significantly increased the debt limit to $7.5 million for one year. SBRA and the increased debt limitations should allow many more small business debtors to successfully reorganize under its provisions. 
Key features of the new SBRA include:

  • Eligibility: A person (which includes an individual/partnership) or entity engaged in commercial or business activity with aggregate secured and unsecured debts of $7.5 million maybe a small business debtor;
  • Debtor In Possession: The small business debtor may operate as a debtor in possession and manage/operate its own business post-petition subject to the normal prohibitions including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the commencement of the bankruptcy case or for failure to perform its obligations under a confirmed plan.
  • Creditors Committee: There are no creditor committees in order to streamline the process and reduce administrative fees.
  • Sub-chapter V Trustee: A case trustee is appointed in each case. The case trustee monitors the debtor's progress during the case in order to promote consensual plans of reorganization. The bankruptcy court cannot appoint a traditional chapter 11 trustee or examiner in a small business reorganization
  • Plan of Reorganization: Only the small business debtor may file a plan of reorganization and it must be filed within 90 days of the petition. The small business debtor doesn’t need to solicit plan acceptances with a separate disclosure statement. Instead, the plan itself must include a brief history of the business operations, a liquidation analysis, and projections with respect to the small business debtor’s ability to make payments under the proposed plan. All of the small business debtor's disposable income must be contributed to plan payments to creditors, and the plan must be at least three years and cannot exceed five years.
  • Plan Confirmation: The plan confirmation requirements track the criteria of section 1129(a) of the Bankruptcy Code, with the critical exception that the debtor does not need to obtain the acceptance of an impaired class of creditors. The small business debtor can also pay administrative claims over the life of the plan instead of on the effective date.
  • Ownership Interests: Owners are able to retain their equitable interests in the small business.
  • Mortgage Modification: In certain circumstances, an individual small business debtor may modify the mortgage on his/her principal residence, provided that the mortgage loan wasn’t used to acquire the residence but was used primarily in connection with the debtor’s small business.
  • Discharge: If the small business debtor completes the payments required under a confirmed plan, he/she/it can receive a discharge of debts as provided under section 1141(d).
  • United States Trustees: There are no quarterly fees due during the pendency of the case or post-confirmation to the US Trustee.
The legislative changes to the Chapter 11 process contained in SBRA should provide immeasurable assistance to the successful reorganizations of many small business reorganizations. The recent increased debt limit to $7.5 million for eligible small business debtors is exactly the prescription needed in light of the looming COVID-19 crisis. Mr. Marr may be reached at gemarr59@hotmail.com concerning questions regarding this legal article.
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