Chapter 11Bankruptcy

What is a Chapter 11 Bankruptcy?

Chapter 11 bankruptcy, commonly known as "reorganization" bankruptcy, is a legal process governed by the United States Bankruptcy Code. It is primarily used by businesses, including corporations, sole proprietorships, and partnerships, to restructure their debts and regain financial stability. Unlike other types of bankruptcy, such as Chapter 7 or Chapter 13, Chapter 11 allows the debtor to remain in control of their assets and continue their business operations while developing a plan to repay creditors.

In a Chapter 11 bankruptcy, the debtor files a petition with the bankruptcy court, providing details about their financial situation, assets, liabilities, income, and expenses. The debtor becomes a "debtor in possession" and assumes the role of a trustee, exercising the powers and duties of a trustee throughout the bankruptcy process. The debtor is required to file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs.

The core objective of Chapter 11 is to propose a plan of reorganization. This plan outlines how the debtor intends to repay its creditors over time. The plan must be approved by the creditors and confirmed by the court. Creditors whose rights are affected by the plan have the opportunity to vote on its approval. If the plan satisfies the necessary legal requirements and receives the required votes, the court may confirm it. Once the plan is confirmed, the debtor continues operating their business under the supervision of the court while adhering to the terms of the approved plan.

How do you qualify for Chapter 11 Bankruptcy?

To qualify for Chapter 11 bankruptcy, businesses must meet certain eligibility requirements. Chapter 11 is typically used by businesses facing financial difficulties and seeking to reorganize their debts rather than liquidate their assets. Unlike Chapter 7 bankruptcy, which is designed for businesses with no hope of recovery, Chapter 11 allows the debtor to continue its operations and propose a plan to repay creditors.

Any business entity, including corporations, sole proprietorships, and partnerships, can file for Chapter 11 bankruptcy. There are no restrictions on the size or type of business that can file. However, individual debtors, such as consumers or self-employed individuals, are generally not eligible for Chapter 11 and are better suited for Chapter 13 bankruptcy.

To initiate a Chapter 11 bankruptcy case, the debtor must file a voluntary petition with the bankruptcy court. Alternatively, creditors who meet specific requirements may file an involuntary petition to force the debtor into Chapter 11. The debtor must adhere to the prescribed format for the petition and provide additional documents, such as schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs.

It's important to note that individuals cannot file for Chapter 11 bankruptcy if they have had a prior bankruptcy petition dismissed due to willful failure to comply with court orders or if creditors sought relief from the court to recover liened property. Additionally, individuals must receive credit counseling from an approved agency within 180 days before filing for Chapter 11 bankruptcy, unless an exception applies.

What occurs following a discharge from Chapter 11 bankruptcy?

Following the discharge from Chapter 11 bankruptcy, the debtor can emerge from the bankruptcy process with a reorganized and healthier financial structure. A discharge in Chapter 11 means that the debtor has fulfilled its obligations under the confirmed plan of reorganization and has obtained relief from its debts.

Once the court approves the plan of reorganization and the debtor successfully fulfills the obligations outlined in the plan, the court grants a discharge order. The discharge order releases the debtor from liability for most pre-bankruptcy debts and prohibits creditors from taking any further collection actions against the debtor. This allows the debtor to move forward with a clean financial slate and focus on the future.

After the discharge, the debtor, now free from the burden of past debts, can continue operating its business and implementing the reorganization plan. The plan may involve various measures, such as restructuring debts, renegotiating contracts, downsizing operations, or seeking new investment opportunities. The debtor must adhere to the terms of the confirmed plan and make any required payments to creditors as outlined.

It's important to note that not all debts may be discharged in a Chapter 11 bankruptcy. Certain types of debts, such as certain tax obligations, domestic support obligations, and debts incurred through fraudulent or illegal activities, may not be eligible for discharge. The specific details of the discharge and its impact on the debtor's financial situation can vary depending on the circumstances of the case and the terms of the approved plan.

The goal following discharge from Chapter 11 bankruptcy is for the debtor to regain financial stability and continue operating its business successfully. By effectively managing its finances, implementing the reorganization plan, and making the necessary changes to improve profitability, the debtor can work towards long-term viability and overcome the challenges that led to the bankruptcy filing in the first place.