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Can A Ch 11 Case Be Involuntarily Converted To Ch 7?

Serving Families Throughout Mobile

Yes, it is possible for a Chapter 11 bankruptcy case to be converted involuntarily to a Chapter 7 bankruptcy case under certain circumstances. In the United States, bankruptcy cases are typically filed under Chapter 11 for businesses or individuals with substantial assets and debts who want to reorganize their financial affairs and continue operating. However, if certain conditions are met, creditors or other parties may request the court to convert the Chapter 11 case to a Chapter 7 case.

The circumstances under which a Chapter 11 case may be converted involuntarily to a Chapter 7 include:

Failure to file a disclosure statement or a plan: In a Chapter 11 case, the debtor is required to file a disclosure statement that provides adequate information about the debtor's financial affairs and a plan of reorganization that outlines how the debtor intends to repay creditors. If the debtor fails to file these documents, the court may convert the case to Chapter 7.

Failure to obtain creditor approval: In a Chapter 11 case, the debtor must obtain approval from creditors for the proposed reorganization plan. If the plan is rejected by creditors or fails to receive the necessary approval, the court may convert the case to Chapter 7.

Failure to meet obligations or inability to reorganize: If the debtor is unable to meet its financial obligations or demonstrate a viable plan for reorganizing its affairs within a reasonable timeframe, the court may convert the Chapter 11 case to Chapter 7.

There are instances in small business cases where the principals of the business are too closely intertwined with the business' accounts and affairs.  Actions such as characterizing distributions from the business to the principals as "loans," can later be discovered in the ch 11 auditing process and be determined to be an asset.  

If the business cannot formulate a plan to pay those funds back to creditors in equal value. The principals can be sued by a ch 7 trustee for the funds if the case is involuntarily converted.  We have seen cases where the IRS filed the motion to convert because the business income tax returns showed "loans" made to the owners/principals of the business.  

You must provide all requested business and personal tax returns and financial statements for the business to your Attorney before your case is filed.  If that is not possible, due to impending creditor repossession, attachment, levy, or garnishment,  you must factor in the risk of not having this information up front, because it will be discovered by the opposing parties and court-connected personnel once the case is filed.  

It's important to note that the decision to convert a Chapter 11 case to Chapter 7 is ultimately made by the bankruptcy court based on the specific circumstances of the case and the best interests of the creditors and the debtor.  If there would be no reasonable chance of a recovery of funds or assets for creditors, the Court can simply dismiss the Ch 11 case without entering an order to convert it. The decision, however, is solely the determination of the Bankruptcy Court based on the evidence presented.

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