Chapter 11 Bankruptcy
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Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows businesses to continue operations while restructuring their debt burden. Creditors play a far larger role in negotiating a repayment plan in Chapter 11 proceedings because of the large sums involved in corporate debt. Typically, a group of seven of creditors will form a committee to evaluate the debtor’s repayment plan. The creditors have to agree to the debtor’s plan before the court will certify the bankruptcy.
Creditors often go along with a Chapter 11 plan if the debtor has a reasonable chance of turning the business around. A Chapter 11 bankruptcy serves the creditors’ interest better than a Chapter 7 proceeding, which involves the liquidation of the debtor’s assets. Under Chapter 11, creditors stand a reasonable chance of being paid in full if the indebted company starts to become profitable again.
Chapter 11 bankruptcy permits business owners to oversee the reorganization and payment of outstanding debt under the token supervision of the US Trustee for that region. The business that files for bankruptcy is called the debtor in possession. If fraud or mismanagement was responsible for the debtor’s inability to meet their debit commitments, the US trustee may appoint another trustee to manage the bankruptcy plan.
As with other types of bankruptcy proceedings, the debtor must provide a thorough list of assets and creditors before filing for Chapter 11 relief. The debtor will pay off secured creditors first (i.e., creditors who issued loans on security in case of default) Unsecured creditors are then paid according to a ranking system devised by the bankruptcy courts. If the debtor in possession defaults on the plan, a trustee may intervene to oversee the company’s financial management, or a judge may order Chapter 7 liquidation.
Filing for Chapter 11 has several advantages for debtors. An automatic stay on litigation and debt collection lasts from the time of filing until the certification of the bankruptcy plan. The debtor in possession can negotiate for lower interest rates and manageable payment plans; if the business accrues capital, the debtor can pay off creditors with stock or other securities in lieu of cash. Any transactions or contract finalizations that took place within ninety days of filing for bankruptcy can be reversed with the company getting all its money back from the deal.
Chapter 11 bankruptcy can be costly and time-consuming. While Chapter 11 is open to individuals and small businesses, the expense and complexity of Chapter 11 usually leads entrepreneurs to opt for Chapter 7 or 13 instead. Small businesses, however, can take advantage of an expedited Chapter 11 process that foregoes the creditors’ committee and lengthy judicial review. Companies with less than $2,500,000 in assets are eligible for this slightly and cheaper and faster alternative.
Articles contained here are not intended to provide legal advice, only providing general information. We encourage individuals to consult with an attorney regarding individual circumstances.
