Business Bankruptcy in Houston: 6 Facts About Chapter 11 in the Southern District of Texas

If your business is basically sound but behind on debts, you may want to reorganize and keep the business. That’s the point of Chapter 11 of the Bankruptcy Code. Chapter 11 is often referred to as “reorganization” bankruptcy. Businesses with at least some ties to Houston can seek relief under Chapter 11 of the Bankruptcy Code in the Southern District of Texas. It requires careful filing and strict adherence to the rules and deadlines. I’ll highlight six facts about business bankruptcy in the Southern District of Texas. Understanding these facts is crucial to understand what Chapter 11 bankruptcy will and won’t do for you.

Filing a Chapter 11 Case

Chapter 11 cases in the Houston area are usually filed in the Southern District of Texas. Most businesses can file bankruptcy where they have their domicile, principal place of business or principal assets in the United States. However, that can sometimes change based on where those locations were 180 days before filing. If your business moved to the area during that period, you might have to file where it was domiciled or had a principal place of business for the longest part of the 180 days before the filing. The Bankruptcy division office in Houston is in the federal courthouse in downtown Houston.

Courts charge a case filing fee to handle the administrative cost of a bankruptcy. The fee for filing a Chapter 11 case is $1,167, in addition to a $571 miscellaneous administrative fee. That’s the court filing fee, it does not include attorney’s fees and costs. In addition to the filing fee and attorney’s fees, Chapter 11 filers must pay quarterly administrative fees to the U.S. Trustee for each quarter after filing. The minimum fee is $250 and it rises depending on the amount of disbursements per quarter.

The filing of a Chapter 11 bankruptcy imposes an automatic stay against all efforts to collect or take action on your business debts. That is, it stops creditors from pursuing your business for debts that were incurred before the Chapter 11 filing. It means creditors must cease all collection efforts, lawsuits and repossessions or foreclosures. After you file the case, you should get together the financial records necessary to prepare the schedules and statements that are required. With Chapter 11, the business is usually allowed to continue operating as what the Bankruptcy Code calls a “debtor in possession.” Under Chapter 11, you as the debtor-in-possession have control of the estate assets. You are able to hire lawyers, accountants and appraisers. But keep in mind that you have to get the court’s approval before taking on professional help.

Subchapter V

There is special relief available under Subchapter V for a small business that needs to reorganize under Chapter 11. Not all small businesses can file under Subchapter V. To qualify for Subchapter V, the amount of debt for the business cannot exceed $3,424,000. The Chapter 11 Subchapter V process also features a trustee appointed by the U.S. Trustee, which is different than other Chapter 11 cases. The Subchapter V debtor must submit a plan within 90 days from the order for relief. That is a much shorter timeframe compared to a regular Chapter 11 case. It’s possible to extend the timeframe under Subchapter V, but the deadline is stricter. If your business qualifies under Subchapter V, then you won’t have to pay the quarterly fees imposed on most Chapter 11 debtors. Under Subchapter V, there’s a status conference in court within 60 days of the order for relief.

Developing the Plan to Pay Creditors

In a Chapter 11, you have the responsibility of developing the plan to pay creditors and get the court’s approval of the plan. With Chapter 11, there is also a disclosure statement that is provided to creditors. The disclosure statement provides the court and creditors with information on the financial affairs of the business to enable creditors to judge your plan of reorganization. Chapter 11 plans must include a method for creditor classification, where you identify the categories of creditors who have similar claims against your business and they get grouped and paid accordingly. If the disclosure statement is approved, then creditors are free to vote on your plan. An impaired creditor (meaning their claims are lowered or changed) gets to vote to accept or reject the plan. Unimpaired creditors do not get to vote. There is also a plan confirmation hearing, where the judge can confirm or reject the plan. Filers under the regular Chapter 11 rules are the only ones who can file a plan in the first 120 days after the order for relief is entered. This exclusive window is not extended beyond 18 months. If you’ve filed for bankruptcy in a small business case not under Subchapter V, get ready to prepare your plan and disclosure statement. They’re due within 300 days after the order for relief.

For most Chapter 11 cases, the U.S. Trustee acts as a “watchdog” to monitor the case and how it progresses, ensuring Chapter 11 rules are being followed. Chapter 11 requires a meeting of creditors and interested parties called the 341 meeting. The U.S. Trustee sets the meeting time. The U.S. Trustee also oversees the Chapter 11 quarterly fee payments. The Houston bankruptcy court has its own policy on when a Chapter 11 should be labeled complex. The Southern District of Texas treats a Chapter 11 case as “complex” when debtors and their affiliates have more than $10 million in total liabilities or the case involves other factors.

Whether to file for Chapter 11 bankruptcy depends on the details of your business and your circumstances. Chapter 11 can sometimes give you an opportunity to reorganize your business to keep it running. But at the same time, you must follow strict requirements and timelines. Speak with an attorney about your particular facts so that you can make the right decision.