Although individuals may file for bankruptcy under Chapter 11, this chapter is most often used by businesses. The primary purpose of Chapter 11 is to allow a business to continue operating while the bankruptcy court reorganizes its debts. Since the court needs a clear picture of the business’ situation, it will require a financial disclosure statement that gives the court the necessary information.
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Bankruptcy courts are divided into districts, and there may be more than one district in a single state. Each district has its own financial disclosure statement form, available through any court within that district. It is common for Chapter 11 filers to draft their own disclosure statement. A court will approve a financial disclosure statement only if it finds that the statement contains “adequate information,” but what constitutes “adequate information” is subject to the discretion of the court. Bankruptcy courts usually take a practical approach to determining whether the provided information is “adequate” and consider each case based on the circumstances surrounding it. Consequently, a disclosure statement that was adequate in one case may not be adequate in another.
Common Disclosure Items
There is no finite list of items required for a disclosure statement because not all cases are the same. However, there are a number of items commonly included in a Chapter 11 disclosure statement. At a minimum, the statement must usually identify the sources for the information included in the disclosure statement, specify the accounting method used to provide the financial information, indicate whether the bankruptcy is intended as a liquidating plan or an operating plan, identify any accountants for the business, describe the anticipated future of the business, identify those persons who will most likely manage the business in the future, disclose all business assets and the estimated value of those assets, describe any claims against the business, estimate the anticipated cost of the bankruptcy and note whether a “cramdown” of debt is a possibility.
Defining Disclosure Terms
Bankruptcy law often uses complicated terms and language that may be unfamiliar to those who are not accountants or attorneys. A disclosure statement that specifies the accounting method refers to whether the business uses an accrual or cash basis. A “liquidating plan” means that the business will be dissolved in the bankruptcy process; an “operating plan” means that the business will continue during and after the bankruptcy process. A “claim” against the business means that a person or entity believes it is owed something, such as goods, services or money, from the business. A “cramdown” means the court reduces the amount of debt to the value of the collateral securing the debt. For example, if the business in bankruptcy has an inventory of 100 cell phones with a total value of $3,000, and if the business received a loan with a balance of $4,500 to purchase those loans, the business would ask the court to reduce (“cramdown”) the debt owed on those phones to $3,000.
Perhaps the most likely problem to arise when submitting a financial disclosure statement is the failure to provide “adequate information.” A court is likely to allow the bankruptcy filer to amend the statement, but the court will not allow an endless number of attempts. The courts are required to consider the level of complexity of the case, the cost that would be incurred to provide additional information and the benefit of receiving additional information, when deciding whether to approve the disclosure statement. There are a number of procedural requirements when submitting a disclosure statement that can lead to problems if not closely followed. The statement must be filed when the Chapter 11 reorganization plan is filed or within the period of time ordered by the court. Some courts require the business to file a written motion to set a court date regarding the statement, while others require only a phone call to schedule a hearing. In all courts, the business must provide the creditors with notice of the hearing at least 28 days before the hearing occurs.