A Chapter 11 bankruptcy is a federal court-ordered and supervised process in which a debtor obtains a discharge of some debts while retaining many assets. The debtor’s assets may be liquidated, or sold, to pay off debts. Or, the debtor may reorganize his finances and obtain a discharge of the debts that are unsecured by collateral.
Who Can File?
The petitioner may be an individual, a corporation, sole proprietorship, or a partnership. Unlike Chapter 13 bankruptcy, there are no financial limits on the amount of debt. An individual debtor must complete a credit counseling course in the 180 days preceding filing. While primarily larger businesses file for Chapter 11 protection, a small business may do so as well if it meets the statutory requirements.
Bankruptcy Petition Requirements and Fees
The debtor must pay filing fees and file a petition with the bankruptcy court that includes a financial statement outlining the debtor’s income, expenses, assets, liabilities, and any executory leases and contracts. While a debtor may choose to voluntarily file for bankruptcy, creditors may file an involuntary bankruptcy petition as well.
Bankruptcy Case Trustee
The assignment of a trustee is quite rare in a Chapter 11 case. As the “debtor in possession,” a business debtor maintains control and ownership of its assets while continuing operation of the business. However, the business debtor may not use cash collateral without court or creditor approval. A trustee may be appointed if the court finds that the business is engaging in fraud or gross mismanagement.
Prior Debts and the Repayment Plan
Debts acquired in the ninety days prior to filing can be “avoided” or reversed. This money may be returned to the debtor and become part of the repayment plan. Bankruptcy allows a debtor, whether an individual or business, to rid itself of many debts, including leases and union contracts. This often helps the debtor to regain financial independence and profitability.
The majority of the debtor’s unsecured creditors make up a creditors’ committee that negotiates with the debtor for debt repayment. The debtor must submit a written disclosure statement that provides “adequate information” to the creditors regarding its ability to comply with the repayment plan. The creditors vote whether to approve the repayment plan.
Automatic Stay and Creditor’s Meeting
During the pendency of the case, the debtor’s creditors are prohibited from placing liens on the debtor’s property, initiating lawsuits to collect on debts, and from pursuing any other collection activities. This protection is automatically triggered without judicial intervention and is known as the “automatic stay.” Typically, the debtor’s repayments do not begin until about one year after filing of the bankruptcy petition.
Within twenty to forty days of filing, the debtor meets with its creditors to discuss its finances and the debt repayment plan. While generally the committee must approve the repayment plan, the debtor can “cram down” a plan upon creditors and get approval if the debtor complies with certain statutory requirements. The court may convert the case into a Chapter 7 bankruptcy liquidation case if the debtor cannot follow through with the repayment plan.
Chapter 11 bankruptcy is generally more expensive than other bankruptcy procedures and more complex. Many Chapter 11 bankruptcies fail because of the mistakes and pitfalls possible in a Chapter 11 case. However, because there is no limit on the debt amount prior to filing, a Chapter 11 bankruptcy can be a very viable and useful tool for a business or individual to reorganize and become financially sound.