Guide to Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows a company to reorganize itself and remain operational while it pays back its creditors. The logic behind allowing a company to do this is that it is better for everyone to let a company keep operating and stand a chance at paying creditors back than it is to shut the company down completely.
Chapter 11 bankruptcy is not available to individual debtors. It is only available to companies, like partnerships and corporations, which are not sole proprietorships. Partnerships and corporations are likewise not allowed to file for Chapter 7 or Chapter 13 bankruptcy, which are available only to individuals or sole proprietorships. Chapter 11 bankruptcy is one of the more complicated forms of bankruptcy available to companies, and a decision to file for it should not be made lightly.
Chapter 11 Process
In addition to yourself and your creditors, there are several parties involved in the Chapter 11 process. One of them is the bankruptcy trustee, a court-appointed custodian whose job it is to form a committee of your creditors to vote on a reorganization plan.
You have the right to submit a reorganization plan for the first 120 days after the case is filed. The purpose of the plan is to lay out how your creditors will be paid back. Usually, you will pay them back out of the business’ future earnings, although some plans can include a limited liquidation of business assets. The idea is to come up with a plan that has a realistic chance of success, something which both pays your creditors something of what you owe and keeps your business operational. Unlike in a Chapter 13 plan, there is no time limit on how long the plan has to take.
The committee of creditors will have to vote on your reorganization plan. Not all have to vote for in order for it to be confirmed. If your business is a corporation, your stockholders must also agree to the plan. After it has been confirmed, the bankruptcy court will have to approve it. Even if some creditors object, the court will still approve the plan if it thinks the plan is reasonable. If the plan is approved, you will begin making the prescribed payments to your creditors. If you’re successful, you will leave the bankruptcy process with lower debts and a reorganized business.
Another player involved is the bankruptcy court, which will have the power to approve some of your business decisions. You’ll remain in control of daily transactions, but anything involving a great deal of money needs the consent of your bankruptcy trustee and the court.
Advantages of Chapter 11
A successfully filed Chapter 11 bankruptcy offers many advantages to the debtor company. Among them are:
- Chapter 11 prevents creditors from calling in loans all at once, which could cripple a business not ready to pay them back.
- You continue operating the business, which means that workers stay employed.
- Your business keeps its assets.
- You maintain a lot of control over how the business will run during and after the reorganization.
The bankruptcy process, especially the Chapter 11 bankruptcy process, can be a complicated one. Consider consulting a business bankruptcy attorney before making the decision to file.