Law Offices of Nicholas Gebelt

May A Debtor Incur New Debts And Obtain New Credit During A Chapter 11 Bankruptcy Case?


A debtor may incur new debts and obtain new credit during a Chapter 11 case. However, the debtor can only do this with the Court’s permission. Why does the Court exercise such paternalistic oversight over the debtor?

Prior to filing for Chapter 11 protection, the debtor has assets and debts. The filing of the Chapter 11 petition creates a bankruptcy estate, which is comprised of the debtor’s prepetition assets, and the debts become claims against those assets.

If the debtor incurs new debt or obtains credit, it must use estate assets to make the payments. However, those estate assets are supposed to be used to pay the claims. The Court serves as a watchdog to prevent the debtor from plundering the estate. For that reason, the debtor must get the Court’s permission prior to incurring new debt or obtaining credit.

The process is typically done by motion. The debtor includes the terms of the proposed new obligation in the motion, and serves copies of the motion on all the creditors. Anyone who wants to can object to the motion. If the Court is satisfied that no creditor’s rights are being prejudiced, and the estate is benefitted, by the incurrence of the new debt or credit, then the court will grant the motion.

There are four different types of new debt that the debtor can incur. The details are found in Section 364 of the Bankruptcy Code. The debtor has to try to get unsecured debt. If that is impossible, then the debtor can get a secured debt under several possible terms.

Who May File A Chapter 11 Bankruptcy Plan, If The Debtor Fails To Do So?

In a classic Chapter 11 case, if the debtor fails to file a plan, or files a plan after a certain period called the exclusivity period, anyone can file a plan. In a Subchapter V, only the debtor can file a plan.

When Do Creditors Vote On Whether To Accept Or Reject A Chapter 11 Bankruptcy Plan?

In a classic Chapter 11, the debtor submit a disclosure statement for the Court to review. The disclosure statement must give creditors adequate information to intelligently vote on plan confirmation. The hearing on the adequacy of the disclosure statement takes place at least 42 days after the debtor files the disclosure statement. Creditors are permitted to object to the adequacy of the disclosure statement.

If the judge grants the motion approving the adequacy of the disclosure statement, the debtor then sends the plan package to all the creditors. The plan package includes the disclosure statement, the plan, the ballots, the order approving the adequacy of the disclosure statement, a notice of deadlines, and a timetable.

After the deadline for submitting the ballots has passed, the debtor (actually it is invariably the debtor’s counsel, though we’ll stick with the linguistic fiction and say “the debtor”) tallies the ballots. If based on the votes the plan can be confirmed, the debtor submits a motion to confirm the plan.

In a Subchapter V, there is no disclosure statement, so the process is more streamlined.

For more information on Business Bankruptcy In California, a free 20 minute phone strategy session is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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