Chapter 11 Bankruptcy
What is Chapter 11?
While Chapter 7 Bankruptcy is typically referred to as liquidation bankruptcy, Chapter 11 Bankruptcy is a reorganization bankruptcy. Chapter 11 is available to individuals and entities (companies), while Chapter 13 is only available to individuals and married couples. Chapter 11 allows the owner of a company, or individual, to come in and act as the Trustee of the financial affairs of the business.
After taking care of quite a bit of preliminary information and Motions, eventually a Chapter 11 Bankruptcy culminates in the filing of a Plan of Reorganization. The Plan of Reorganization is a document that outlines how the company will repay some, but not all of its debts over a period of time.
What is a Plan of Reorganization?
Every Chapter 11 Plan of Reorganization is different, sometimes quite drastically. Each Plan of Reorganization is structured and drafted specifically for each case. These plans can deal with:
- debt payments over successive years
- delinquent or past due tax debts
- bad contracts or leases
- structuring orderly sales of assets
- sale of the entire company to other parties.
Most provide for the repayment of unsecured debts at less than full payment over the next several years. In addition, most Chapter 11 Plan of Reorganizations provide guidance and a mechanism to get the company to its restructuring, such as budgets and financials and assistance from professionals. Just like in Chapter 13 Bankruptcy, the Plan of Reorganization has certain requirements that must be met, as online in the Bankruptcy Code, although the requirements are somewhat less restrictive than Chapter 13.
Once the Plan or Reorganization is filed with the Court, each creditor receives a copy of it. Ultimately creditors will get to vote on whether they want the Plan or not. Assuming the Plan has the requisite number of votes and complies with the applicable provisions of the Code, the Court will enter an Order of Confirming the Plan (basically approving it.) From there, the Plan is treated as a contract between the debtor and its creditors. After a few Wrap up items, the bankruptcy case is closed, the debtor is allowed to continue to resume business operations, now under the Plan. The Chapter 11 case may last anywhere from a few months to a few years, followed by the performance off the Plan of Reorganization over the next several years.
Why File Under Chapter 11?
Chapter 11 bankruptcy is more cumbersome endeavor than the other two common bankruptcy types, those being Chapter 7 and 13. Typically a Chapter 11 is filed when the individual or company wishes to reorganize and isn’t able to file another type of bankruptcy. For example, if an individual has too much debt hat may be forced to file a Chapter 11 instead of a Chapter 13. Additionally, since Chapter 13 is only available for individuals, if a company wants to reorganize they must choose Chapter 11.
Taking the First Steps
While this is a good overview of the Chapter 11 process, there are many additional provisions that come up in most cases and which Chapter will best suit you or your company is very dependent on the fact and circumstances. We recommend you contact us and set up an appointment to meet with one of our attorneys, who will be happy to make a recommendation and strategy on the best direction for you or your company, as well as answer any additional questions you may have about the bankruptcy process.