How Does Chapter 11 Bankruptcy Work?

Chapter 11 bankruptcy commences with a petition filed to the court and with the assignation of a case number. The automatic stay then begins and a meeting is scheduled with all the creditors. Depending on the circumstances of the person filing for bankruptcy, a reorganization or liquidation are the primary options available. Read on to learn more.

Reorganization

Chapter 11 bankruptcy allows a filer to perform a reorganization of their financial affairs. The bankruptcy plan explains how debts will be met in the future and offers the filer the opportunity to renegotiate and restructure the manner of how they will pay back their creditors.

U.S. Bankruptcy Code rules state creditors are divided into certain classes:

• Creditors whose debts are secured by a property liens
• Unsecured priority claims are given priority for their unsecured debts to obtain money from the plan of repayment
• Unsecured claims that are non-priority are only met when the above classes have been satisfied

Sometimes, those who fall into the last category will assemble a creditors’ committee to try and obtain payment. Security holders with equity also have a claim on the company and may be paid at any time (or not paid at all.) Creditors may also object to the class they have been assigned by the filer. Only the filer can file a plan of reorganization in the first 120 days once the case has been filed with the U.S. Bankruptcy Court. In the case the filer is a small business they are allowed 180 days. After that, a creditor may file a plan for reorganization if the debtor is yet to have filed a plan or has filed a plan that does not meet the acceptance of its creditors.

The plan of reorganization must include a statement of written disclosure that gives information regarding the business affairs of the filer so creditors can make educated decisions regarding the reorganization plan. In the case of a small business the court may decide the plan includes all the relevant information saying the statement of disclosure will not be required.

Proof of claims will be filed by creditors. These claims will contain the money they are owed and it maintains their rights but they still have to provide proof to the courts explaining the validity of their claim. Those with valid claims vote on whether they will accept the plan of reorganization. Court approval and the vote of the creditors are mandatory. The approval of the court requires at least one of the classes of impaired claims will vote in favor of the bankruptcy reorganization plan. Bankruptcy Code rules say a total class of claims accept a plan if at least two-thirds of the creditors of the total amount of the claims and more than fifty percent of the number of claims allowed in the class.

Confirmation

A confirmation hearing will convene so the court can make a determination to approve the plan. The court will ensure the plan is in line with bankruptcy laws and requirements. Once it is confirmed, the Chapter 11 bankruptcy case may be closed until the plan is completed, allowing the filer to save money on fees and prevents the need to file reports on a monthly basis.

In most Chapter 11 cases, a bankruptcy trustee us not appointed. The filer acts in a manner a trustee would in a Chapter 7 or Chapter 13 proceeding. Control is maintained by the filer over their business and finances. They are also responsible for the examination and objection claims from creditors as well as filing tax returns, accounting and meeting the additional duties and requirements of reporting. The administrative side of the Chapter 11 bankruptcy filing is managed by the U.S. Trustee and ensures the debtor does that is required. That said, a Bankruptcy trustee may be appointed when the debtor does not want to act as the debtor in possession. The court may also appoint a trustee to manage the operations if the court has good reason or suspects incompetence or fraud.

Liquidation

This is an option in a Chapter 11 bankruptcy. A plan would shut down the operations of a filer and sell the assets that remain so the creditors can have at least received a portion of the debts owed. Liquidation may be better under Chapter 11 than Chapter 7 as the debtor who is in possession and their creditors have greater say over the execution of the Chapter 11 plan.

Source: https://upsolve.org/learn/what-is-chapter-11-bankruptcy