What Is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is normally associated when large organizations need bankruptcy assistance as it lets them restructure their financial arrangements for a maximum return to their owners and creditors. Read on to learn more.

It begins with going to a bankruptcy court and filing a petition. Normally, this is done voluntarily and it is up to the debtor to take the initiative and look for bankruptcy belief. On occasion, creditors will band together to file a Chapter 11 petition on am involuntary basis. Normally filed at where the business is located but can also be where the debtor is domiciled. As Chapter 11 bankruptcies are usually filed by partnerships, corporations and LLC’s. There are risks associated with Chapter 11 bankruptcy so many people choose to file Chapter 7 or 13 bankruptcy.

What Happens Before A Chapter 11 Plan Is Proposed

A Chapter 11 case has no limits on its duration. They can be concluded within a few months but often takes one to two years to complete. Normally no trustee us appointed and the debtor keeps operating their business. A trustee can be appointed by the bankruptcy court if there are suspicions of incompetence, fraud, dishonesty and mismanagement.

Bankruptcy Court Has Control Over Major Decisions

In Chapter 11 cases, the debtor does not always have control over the sale of assets and other aspects of the business such as:

• Retention of and the payment of expenses and fees to attorneys
• Entering into agreements and contracts for vendors and licensing
• Expanding or closing business operations
• Secured financial arrangements including mortgages allowing the debtor to obtain money once the case has filed
• Entering into the breaking of a lease for personal or real property

Role Of Creditors

Shareholders, creditors may be in favor or oppose actions requiring court approval. The court will consider input from creditors in making a decision before deciding how to go forward. Regarding unsecured creditors, their committee can retain professionals and attorneys to help at the expense of the debtor.

Reorganization Plans

Normally, the debtor has the right for 4 months once filing for Chapter 11 to suggest a plan for reorganization. Once showing a good cause, the court may extend the “exclusivity period” that files a Chapter 11 plan up to 18 months following the petition date. Once this time has expired the proposing or the competing reorganization plans can be proposed. This is not common in Chapter 11 cases. The Chapter 11 plan permits the debtor to restructure their financial affairs. In essence, it is a contract between debtors and creditors to meet financial obligations. Occasionally, the plan will provide for immediate and total payment. In other circumstances, creditors may vote or the acceptance of a plan.

Confirmation

When confirming a Chapter 11 plan, the bankruptcy court has to find certain requirements must be met such as:

• The plan has to be fair and equitable in that secured creditors are paid their collateral value. A creditor is considered secured if a mortgage is in place against real property or a personal property lien. The owners of the debt may not retain anything because of their equity interests unless all their obligations have been met.
• The “best interests” in Chapter 11 says all creditors receive as much as they would under a proposed plan like in a Chapter 7 liquidation.
• The court has to be satisfied the plan has been made in good faith and is legal.
• The court has to be satisfied the plan is feasible and has a high chance of success.

Does it Work?

Studies suggest between ten and fifteen percent of reorganizations under Chapter 11 are successful. Most are converted to chapter 7 or just dismissed and that requires the approval of the bankruptcy court. Included in Chapter 11 laws are special guidelines to speed up Chapter 11 cases for small business debtors and single-asset real estate ventures.