Essential Documentation for Chapter 11 Filings in the US

Introduction

The United States Bankruptcy Code, through Chapter 11, also known as the ‘reorganization chapter’ offers the much-needed relief required by companies facing financial crises. This is a legal procedure that gives a company the right to rearrange its debts, usually in order to emerge stronger. A Chapter 11 case properly requires adequate research and documentation. This guide explains the fundamental documents that any Chapter 11 filing needs.

Understanding the Filing Requirements

Chapter 11 cases can be described as being either individual or non-individual-or businesses and other entities-each having their own special documentation requirements.

Chapter 11 Individual Filings

Petition

The petition begins the bankruptcy case, and the filing identifies the debtor(s) as an individual or a married couple. Also included is the Chapter number, in this case Chapter 11; the filing district; and,

Schedules: attach with the petition to provide a detailed financial representation of the assets and liabilities of the debtor. It also includes

– Schedule A: Lists real estate owned by the debtor (106A/B   Schedule A/B: Property)

– Schedule B: Lists personal property owned by the debtor

– Schedule C: Details exempt property (106C   Schedule C: The Property You Claim as Exempt)

– Schedule D: Identifies secured creditors (106D   Schedule D: Creditors Who Have Claims Secured by Property)

– Schedule E: Lists unsecured Priority claims (106E/F   Schedule E/F: Creditors Who Have Unsecured Claims)

– Schedule F: Lists unsecured nonpriority creditors

– Schedule G: Executory contracts and unexpired leases (106G   Schedule G: Executory Contracts and Unexpired Leases)

– Schedule H: Codebtors (106H   Schedule H: Codebtors)

– Schedule I: Current Income of Individual Debtor(s) (106I   Schedule I: Your Income)

– Schedule J: Current Expenditures of Individual Debtor(s) (106J   Schedule J: Your Expenses)

Statement of Affairs

A statement showing the debtor’s financial condition, including sources of income, recent transactions, and suits and executions.

Tax Returns

Attach copies of federal income tax returns for the last 2-4 years.

Certificate of Credit Counseling

Certificate showing completion of the required credit counseling course taken within the last 180 days.

Debt Repayment Plan

A plan with full details regarding the debtor’s intention of paying creditors, in case the debtor decides to retain a part or all the property.

Chapter 11 Non-Individual Filings

Petition

To start the case by businesses or other non-individual entities.

Schedules

Just like in an individual filing, but revised for business contexts, including lists of business property, equipment, and inventory.

Statement of Affairs

A detailed statement of the business’s financial affairs including income, transactions, and pending litigation.

Tax Returns

Copies of federal and state income tax returns for the last 2 to 4 years must be supplied.

Declaration Under Penalty of Perjury

An under-oath declaration that the information contained within the schedule is true, which is in lieu of the Certificate of Credit Counseling.

Reorganization Plan

It describes how the debtor is going to restructure its debt, through repayment of the same, sale of its assets, and modification of business, accordingly.

Financial Projections

These are detailed estimates demonstrating the viability of the reorganization plan proposed.

Statement of Financial Affairs (SOFA)

Form B107 SOFA requires the following extensive information regarding the financial history of the debtor:

– Income from Employment and Other Sources for the Last Two Years

– Payments to creditors within 90 days before filing

– Payments to insiders within the last year

– Lawsuits and administrative proceedings

– Property transfers within the last two years

Disclosure of Compensation

The debtor attorney must disclose the compensation arrangement including the fee, retainer agreement and obligations owed and due. (Form B2030)

Creditors and Equity Security Holders Listing

The debtor must list all the creditors and equity security holders, including their names, addresses, and the amount owed, for notice purposes to the interested parties in the bankruptcy case.

Post-Filing Documentation

The filing requires the debtor, post-petition, to further provide continuing documentation to the intent of transparency and court requirements.

Monthly Operating Reports

Debtors would have to file Monthly Operating Reports (MORs) as an overview of the financial results status of the reorganizing business. It would normally contain:

– Statements of profit and loss

– Statement of cash flows

– Balance sheets

– Detailed income and expense accounts

MORs will help the court and creditors to ascertain financial performance and compliance with the reorganization plan.

Disclosure Statement in Chapter 11

The disclosure statement is of paramount importance in Chapter 11 and includes the following:

Disclosure Statement in Chapter 11

–  Brief description of business operations

–  Description of assets and liabilities

–  Statement of the reorganization plan

–  Financial projections and feasibility analysis

–  Risk factors

This document needs to be confirmed by the court in order for the court to ensure that the disclosures within this document are adequate and will enable the creditors to decide about the plan.

Reorganization Plan

Reorganization Plan refers to the method by which debtor will reorganize his debts and businesses, and it must include all the following:

Classification of Claims

The Reorganization Plan should separate the creditors into categories according to the nature of their claims.

Treatment of Each Class

Explain through the plan what the terms and conditions of the repayment will be.

Means of Implementation

Steps required to implement a plan, such as asset sales, financing.

Executory Contracts

An order on unfinished contracts and unexpired leases

The plan must be confirmed by the court to be certain that it is within the perimeters of the law and workable.

Other Papers and their Requirements

Creditors’ Committee

In most Chapter 11 cases, this committee usually is put in place to oversee the operations, negotiate terms and conditions, and protect the interests of creditors. The debtor is supposed to report on his finances periodically to the committee.

Debtor-in-Possession Financing

If new financing is necessary during the reorganization, this type of financing must be sanctioned by the court. The terms of the financing and the benefit derived from the financing must be put on paper and presented.

Employment and Compensation of Professionals

The debtor can retain professional services, such as lawyers and accountants, whose retention and compensation must be sanctioned by the court as fair in terms of fees.

Role of Consulting Firms in Chapter 11

Consulting firms play a significant role in Chapter 11 cases, where they serve as follows:

Role of Consulting Firms in Chapter 11

Financial Due Diligence: Verification of financial statements and metrics, among other items.

Asset and Liability Analysis: Compilation of asset and liability lists. Operational Due Diligence: The efficiency insight and restructuring options therein.

Operational Due Diligence: Provide insights into efficiency and restructuring options.

Preparation of Petitions and Schedules: Accurate preparation with timely filing.

Management Discussion and Analysis: Analysis of financial performance inclusive of turnaround strategies.

Risk Factors and Contingencies: Review for risks, compliance, and transparency.

This guide will take the business through some of the key documents and processes in Chapter 11 filings, and help the business move through such a challenging process toward financial recovery.

Services Offered by Magistral Consulting

Chapter 11 bankruptcy filing is not a straightforward process. It needs professional handling to be successful and smooth in terms of reorganization. Magistral Consulting provides services on aspects that are crucial in a Chapter 11 filing. These include:

Financial Due Diligence

We check the completeness of your financial statements and metrics. Financial experts laboriously go through the books, disclosing any anomalies, and prepare the appropriate documentation which is required by the court and creditors.

Preparation of Petitions and Schedules

Our team makes sure that all the bankruptcy documents, such as petitions and schedules, are prepared accurately and quickly. We will cover everything with regards to documentation so that any possibilities of delay or rejection can be avoided, and your filing can be full and compliant with the law.

Reorganization Plan Development

We assist in the development of an all-inclusive Reorganization Plan, wherein you outline the plan on how you plan to reorganize your debts and operations. This might be about the classification of claims, detailing the repayment terms, or mentioning the method of implementation, like the sale of assets or financing strategies, which would be utilized to effectuate your financial rehabilitation.

Post-Petition Compliance and Reporting

We thereafter provide post-petition support to ensure that requirements are met. This includes the preparation of MORs and Disclosure Statements, crucial in ensuring that your creditors are kept well informed and also in ensuring that the requirements of the courts are met while the reorganization is going on.

At Magistral Consulting, we have it within our scope to provide professional support in these critical areas so that you may navigate through the process of Chapter 11 effectively in order to have a successful reorganization.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com