Chapter 11 Bankruptcy Explained: How it Works & Who Can File
Chapter 11 bankruptcy is designed to allow struggling businesses restructure their finances & maximize return to their creditors & owners.
Earlier, only large corporations could afford the costs associated with Chapter 11 bankruptcy. Fortunately, Chapter 11 has evolved, and large and small businesses can use it to stay open. Individuals who don’t qualify for Chapters 7 and 13 can file for too. In this article, you will learn: What is Chapter 11 Bankruptcy, how it works, and who all can file for it.
Chapter 11 is a form of bankruptcy that entails reorganization of a debtor’s business affairs, debts, and assets, and for that reason, it is also known as “reorganization” bankruptcy. Named after the U.S. bankruptcy code 11, corporations generally file Chapter 11 if they require time to restructure their debts. Chapter 11 gives the debtor a fresh start. However, the terms are subject to the debtor’s fulfillment of its obligations under the plan of reorganization. Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also the most expensive form of a bankruptcy proceeding. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis & exploration of all other possible alternatives, and strictly under the watchful eyes of an experienced Chapter 11 Bankruptcy Attorney.
During a Chapter 11 proceeding, the court will help a business, whether it’s a small business or a large corporation, restructure their debts and obligations. In most cases, the businesses remain open and operational. Many large U.S. companies file for Chapter 11 bankruptcy & stay afloat. Such businesses include automobile giant General Motors, the airline, United Airlines, retail outlet K-mart, and thousands of other corporations of all sizes. Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, but in rare cases individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a speedy one.
A business in the midst of filing Chapter 11 may continue to operate. In most cases the debtor, called a “debtor in possession,” runs the business as usual. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee steps in to run the company throughout the entire bankruptcy proceedings. The business cannot make some decisions without the permission of the courts. These include: the sale of assets, other than inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court also has control over decisions related to retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor cannot arrange a loan that will commence after the bankruptcy is complete.
In Chapter 11, the individual or business filing for bankruptcy has the first chance to propose a reorganization plan. These plans may include downsizing of business operations to reduce expenses, as well as renegotiating of debts. In some cases, plans involve liquidating all assets to repay creditors. If the chosen path is feasible and fair, the courts accept it, and the process moves forward.
Businesses turn to Chapter 11 bankruptcy when pinched financially—often due to a temporary downturn. It can help a viable business keep the doors open long enough to regroup and reimagine a future-forward strategy. It doesn’t matter whether the company is avoiding paying vendors, having a tough time meeting payroll or rent, or struggling with some other obligation that’s come due— the debt relief afforded by Chapter 11 gets businesses back on track. Both the complex rules and requirements of a Chapter 11 and the need to prosecute a plan to confirmation far beyond than other forms of bankruptcy are the reasons why there is an increased cost for filing a Chapter 11 vs. filing a Chapter 7 or 13.
For Individuals filing for bankruptcy, Chapter 11 is usually too costly, and they usually reorganize their finances & debts under a Chapter 13, which offers a streamlined plan at relatively lower costs, and allows the individual to keep possession of his or her assets, catch up on secured debt, and discharge unsecured debt at the end of the plan.
Explore Chapter 7 & Chapter 13
At Dsouza & Strachan LAWGROUP, we have seasoned and experienced Chapter 11 bankruptcy lawyers in South Florida. To get more insights on Chapter 11 & how it can help your business or you, get a free consultation today.