Liquidating Chapter 11 Case Timeline

Liquidating Chapter 11

A liquidating chapter 11 is a sub-type of the traditional chapter 11 case in which the company prepares for and enters into bankruptcy without a concensus among institutial creditors.  The company either enters into bankruptcy knowing that all assets must be sold or during the course of the bankruptcy case must sell all assets because it is unabe to continue to operate due to lack of funds.

The company prepares for chapter 11 bankruptcy by negotiating with lenders for debtor-in-possession financing and preparing pleadings for filing with the bankruptcy court.  If a liquidating is required by lenders, asset sale pleadings will be prepared at this time. 

The pleadings, among other things, seek permission to become and operate as a debtor in possession or a going concern debtor company through the closing of the asset sale. 

There are three distinct phases to every bankruptcy case, and a traditional chapter 11 is no different:

  1. Pre-petition or before bankruptcy/bankruptcy case preparation
  2. Post petition or during bankruptcy/bankruptcy case execution
  3. Post confirmation or after bankruptcy/bankruptcy estate closure 

The first two relate to the petition date or the date on which the company filed for chapter 11 bankruptcy.  The last refers to the confirmation or court order approving the plan of reorganization or the legal document which provides for creditor settlements. 

The petition date is an important marker of time because it distinguishes how a debt should be classified in a plan of reorganization and in turn, how it should be paid. 

With pre-petition debts, the payment cannot occur until after a plan of reorganization has been accepted by a majority of creditors, approved by the federal bankruptcy court, and all creditor claims within a particular class have been settled.  

With post petition debts, the payment would occur post petition to maintain good standing creditor relationships.  If a post petition payment is not made, it can become an administrative claim which might be subject to a different payment treatment according to the plan of reorganization. 

In each of the phases of the case different restructuring actions take place with the ultimate goal of settling all debts of the bankruptcy estate and closing of the case.  The following lists some of the restructuring activities which take place during each phase of the case.

A summary of each of the activities which occur during each of the liquidating chapter 11 phases is as follows:

  1. Pre-petition phase: Preparation for the chapter 11 filing, negotiating with creditors, operational controls, and if known in advance, preparation for the sale of substantially all the assets of the debtor companies.  
  2. Post petition phase: Chapter 11 compliance, deleveraging of business operations and the sale of substantially all of the assets of the debtor companies, culiminating in liquidating plan confirmation. 
  3. Post confirmation phase: Business operations wind down, claims objection and resolution, disbursement payments, and litigation actions to recover funds. 

The following liquidating chapter 11 timeline explains events graphically:

 

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