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The Perils of Leaving Chapter 11 Too Quickly

Published March 4, 2015 by Sasser Law Firm

No one likes being in bankruptcy. In fact, one of the great attractions of chapter 7 is that most cases are relatively short and debtors are sent merrily on their way within a few months of filing. But for companies or individuals who have to file a chapter 13 or chapter 11 case, debtors have to prepare themselves for the long-haul. Chapter 13 cases typically last 5 years. Chapter 11 cases? It’s complicated.

Most successful chapter 11 debtors confirm a plan within a year or so of filing. The contents of that plan usually propose repayments to creditors that can stretch over years. In this way, a chapter 11 case is similar to a chapter 13 case. The difference is that once a chapter 11 debtor begins making payments under the confirmed plan (this is called “substantial consummation”), they can file a motion with the court requesting that their case be closed. Chapter 11 debtors often want to close their case as soon as possible to avoid having to continue to file operating reports and pay quarterly fees to the bankruptcy court. These are no small burdens, especially when cash and resources are low.

It is important to remember, though, that once a debtor leaves the clutches of the bankruptcy court’s imposition of quarterly fees and reports, the debtor also leaves the court’s protection. You have to take the bad with the good. The confirmed chapter 11 plan remains binding, of course. Creditors still have to abide by the new terms. But what happens if the debtor defaults under the terms of the plan or needs the court’s help in forcing creditor compliance? If the case has closed, then a defaulting debtor is at the mercy of the creditor’s state court remedies. They can foreclose or sue based on the contents of the contract – not the original one, but the new contract that the confirmed plan represents. If a case has not yet closed, a creditor will be required to file a motion with the bankruptcy court seeking relief from the automatic stay. It’s not limitless protection, but it’s an important extra layer. This added protection may not be enough to convince a chapter 11 debtor to remain under the jurisdiction of the bankruptcy court for the duration of its plan payments, but it may make a debtor a little a little happier while they’re there.

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