What is Chapter 11 Bankruptcy?

Running out of money is normal, and it happens all the time.  That’s why the federal government has created a variety of different kinds of bankruptcy to address the different types of circumstances when it might be needed.  The different “chapters” of bankruptcy refer to where the bankruptcy rules are written in the federal laws, the United States Code.  For example, there is a set of bankruptcy rules for cities and towns that are having financial trouble (Chapter 9), and another set of rules specifically for family farmers (Chapter 12).  There is a set of rules for individuals and businesses who want to liquidate their assets (Chapter 7), and one for individuals who simply want to reorganize their debt into a manageable payment plan (Chapter 13).

What is Chapter 11 Bankruptcy Used For?

Chapter 11 bankruptcy is similar to Chapter 13 bankruptcy for individuals who need to restructure their debts, but is intended for use by businesses and other commercial enterprises.  However, Chapter 11 may also be used by individuals who do not qualify under Chapter 13 guidelines.  Although it is intended for businesses that intend to continue operating after the bankruptcy is resolved, individuals may also seek Chapter 11 protection.  Businesses that are winding down (closing) typically liquidate through a Chapter 7 bankruptcy.  At the conclusion of a Chapter 11 bankruptcy, the business will have a court-approved repayment plan for its debts, as well as court supervision while it begins to make repayments from the restructured business.

How Does a Chapter 11 Bankruptcy Begin?

In most cases, a Chapter 11 bankruptcy begins by filing a petition with the court, although there are circumstances in which a creditor can petition the court to force the business to enter a Chapter 11 bankruptcy proceeding involuntarily.  Included with the bankruptcy petition will be information about the business’ current state of affairs, such as the business’ current assets and liabilities as well as current income and expenditures.  The business must also file a plan of reorganization, which includes the details of how the proposed bankruptcy will proceed.

What Happens After a Petition and Plan are Filed?

In most cases, the debtor will be designated as a “debtor in possession,” meaning he or she can continue to operate the business under court supervision while the case proceeds.  In some cases, however, the court will appoint a trustee to take over operation of the business.

The plan of reorganization places the various debts and liabilities owed by the business into different classes, and provides details on how each class of debts will be resolved.  Creditors whose claims are “impaired,” meaning the plan calls for their contractual rights to be modified or to be repaid less than they are owed, get to vote on the plan.  If the plan gets enough votes and the court approves it, the plan of reorganization will go into effect subject to court supervision.  The business will be restructured as decided and begin paying down its debts.

If you are a business owner and are struggling to make ends meet, you’re undoubtedly under a great deal of stress.  Our firm’s attorney has extensive knowledge about business and bankruptcy law and is available to help guide you through this difficult time.  If you’d like to speak with someone about whether or not bankruptcy is right for you or your business, please call us today for a free consultation.

Posted in: Bankruptcy