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Chapter 11 Bankruptcy: An Overview
Chapter 11 Bankruptcy, which is sometimes referred to as "reorganization," is available primarily to businesses, but some individuals may also qualify.
October 26, 2011 /Financial PR News/ -- Bankruptcy can be a valuable option for businesses unable to pay their debts. Chapter 11 bankruptcy, which is sometimes referred to as "reorganization," is available primarily to businesses, but some individuals may also qualify. Chapter 11 offers the following unique benefits:
- Chapter 11 allows the business that is filing bankruptcy, or "debtor," to remain in control of its operations while enjoying certain protections from creditors
- Chapter 11 grants the management of the business time to put together a plan to repay its debts
- Chapter 11 forces the business to reevaluate its business plan and make changes to return the business to profitability
Eligibility
The debtor must meet certain requirements in order to be eligible to file Chapter 11 bankruptcy:
- The debtor must be an individual, corporation, partnership or other business entity
- The debtor must file a schedule of assets and liabilities, current income and expenses and a statement of financial affairs
- If the debtor is filing as an individual, he or she must not have previously failed to appear in court, had a bankruptcy filing dismissed or failed to obey a court order within 180 days before the filing of the petition
- If the debtor is filing as an individual, he or she must have received credit counseling from an approved agency within 180 days before filing the petition
Filing Process
The Chapter 11 process begins when the debtor files a petition with the bankruptcy court serving the area where the debtor lives. Either the debtor or a creditor meeting certain requirements may file the petition. If the debtor files the petition, it is referred to as a "voluntary petition." If the creditor files the petition, it is an "involuntary petition".
As soon as the debtor (or creditor) has filed the petition, the case begins and the automatic stay goes into effect. During the automatic stay period, creditors may not collect most new or existing debts from the debtor, unless the court says otherwise. While the stay is in effect, the debtor will be able to draft a reorganization plan and negotiate the repayment terms of its debt, without worrying about the prior debt.
Debtor-In-Possession
Once the debtor has filed the petition, the debtor becomes a "debtor-in-possession." In essence, the debtor continues to operate the business, but with added legal responsibilities which include:
- Accounting for business property
- Examining and responding to claims by creditors
- Filing necessary reports with the court
To assist with these tasks, the debtor has the right to obtain help from attorneys, accountants, appraisers and other professionals. In addition to the requirements listed above, the debtor also has the added responsibility to operate the business with the highest standards in order to preserve the assets of the business and protect the creditors' interests.
Role of the U.S. Trustee
The court, as in other types of bankruptcy cases, will assign each Chapter 11 case a U.S. Trustee or Bankruptcy Administrator to monitor the debtor and the operation of the business. The main role of the Trustee is to evaluate the reports filed by the debtor. The trustee will also schedule meetings between the debtor and the creditors, in order discuss the debtor's operation of the business and other matters.
Role of Creditors
When the debtor files the petition, he or she is required to list all known creditors in the petition. If the debtor omits a creditor from the petition, the creditor can file a proof of claim against the debtor, which allows a creditor to receive any money paid under the reorganization plan and to vote on whether the debtor's reorganization plan is acceptable.
The U.S. Trustee may appoint a creditor's committee whose main functions are:
- Consulting with the debtor on matters involving the case
- Investigating the debtor's operation of the business
- Drafting a reorganization plan if the debtor does not file one or if the debtor's plan is unacceptable to a majority of the creditors
Reorganization Plan
Only the debtor can file a reorganization plan during the 120 days after filing for bankruptcy. The purpose of the plan is to give the debtor the opportunity to propose a strategy to pay off debts, either in full or partially, and restructure the business to return it to profitability once the bankruptcy is completed. If needed, the court can extend the deadline for filing a plan until 18 months after the date the petition was filed. If the debtor does not file a plan within this time, the creditors can file a plan of their own.
After the debtor has filed its reorganization plan, it can take up to 20 months for the creditors to accept the plan. If the creditors do not accept the plan within that time, they can file a plan of their own.
Discharge
Once either the creditor or debtor has filed a plan, the creditors vote on whether to accept it. If the plan is agreeable to the majority of creditors, the court must confirm or accept the plan for it to be final. The court will confirm the plan if:
- The plan is feasible
- The plan was proposed in good-faith
- The plan complies with bankruptcy law
Once the court has confirmed the plan, it will discharge the debtor's debt, meaning that the debtor will not be held responsible for debt not addressed in the reorganization plan. At this point, the debtor will be required to repay the creditors according to the terms of the plan.
Consult a Lawyer in Your Area
If your business is struggling under a seemingly insurmountable debt load, please contact an experienced bankruptcy attorney to explore your options.
Article provided by Gina H. McDonald & Associates, L.L.C.
Visit us at www.ginamcdonaldlaw.com
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