Chapter 11 Bankruptcy

Chapter 11 Bankruptcy 2018-05-04T09:04:33+00:00

Chapter 11 is what most people think of when they hear the phrase “business bankruptcy.” Although Chapter 11 Bankruptcy is used more in the context of business practice, its availability is not limited to just business organizations. Some individuals file for Chapter 11 Bankruptcy to reorganize their debt due to specific circumstances. To make things a little easier, the Bankruptcy Code contains specific rules to simplify or streamline this process for small businesses due the labor-intensive nature of the paperwork that goes with Chapter 11 filing.  Consequently, this option tends to be a little more expensive to undertake than filing for other chapters in comparison because of this.

In a Chapter 11 case, the debtor begins to reorganize his debts under the oversight of the bankruptcy court, but the debtor assumes responsibility for its actual implementation or plan. The debtor is called a debtor-in-possession (of his or the company’s property), and so he acts as his own trustee.

The debtor-in-possession continues to conduct normal business practices while working out many details pertaining to the debt’s restructuring. This situation can be changed, however. If an issue arises, the US Trustee or even a creditor may request that another trustee be appointed to the case.

The debtor is said to be “in possession” because they continue their daily business operations under supervision of the court, but the organization is not required to obtain court permission for every detail of those operations. However, the debtor is still required to obtain the court’s permission for other-than-usual actions like the purchase or sale of real estate property and other assets, if that is not the normal business practice of the debtor.  The U.S. Trustee is also watchful and wary, during these proceedings, of layoffs, major personnel decisions, and getting into various forms of financing agreements.

The debtor may also use the Chapter 11 option as a pathway for liquidation which can be accomplished under its own authority or with the help of the court’s trustee.

How Do Actions Proceed?

Here are the main steps of what happens next: In most Chapter 11 scenarios, the court will assemble a creditors’ committee of creditors with a personal stake in the debtor’s affairs. This group will come from the list of the debtor’s primary, usually top twenty largest unsecured creditors. The committee is placed in charge with the task of overseeing the case and representing the interests of all unsecured creditors involved. This gets carried out at the debtor’s expense. The idea is to place responsibility on the debtor to pay those expenses incurred by the creditors for serving on the committee.  It also covers those professionals whom creditors need to utilize while performing their committee-related functions, such as attorneys, examiners, or accountants.

What can the debtor expect to happen?

The aim of the Chapter 11 debtor is to propose and gain approval to begin a reorganization plan for his debt, or the debt incurred by the organization. The plan will certainly change the terms that the debtor and creditor worked under previously.  The filing person needs to also understand that creditors will be divided into classes.  Categories of these “classes” have been set up within the Bankruptcy Code; for instance, all unsecured vendors could be placed in a certain class, while bondholders might be considered another class. All vehicle lenders could be placed in yet another class. Some creditors might be unusual enough – sort of a “miscellaneous entity” that they would get placed into a separate class. For example, the mortgage lender on the debtor’s office building might be a likely candidate to be placed in such a group (class).

When Can You Expect Final Approval from the Court?

There are a few steps that debtors generally watch closely once the preliminary steps toward approval have been taken.  For a proposed plan to pass, it must be presented to the bankruptcy court.  Yet, even before that happens, the committee of creditors must approve the plan.  In fact, it must come to them for a vote.  If they vote to accept the terms of the plan, then steps can proceed toward putting the plan before the court.  Still, for the committee to legally accept the plan, at least one “impaired class” must accept it.  By “impaired,” the legal language means that this certain class of creditors all lost rights in the process and it served to their detriment.  For example, if a class consisting of credit card issuers saw their interest rates lowered on the debtor’s behalf, they would still need to vote to accept the plan before it could pass in front of all the other creditors involved.

Once all the creditors mentioned above come to a vote, the bankruptcy court will have the final say on whether to approve the creditor-approved plan.  And once the plan is confirmed by the court, the debtor will begin his next steps toward fulfilling the plan and working to resolve debts.  In the meantime, the debtor will remain under the oversight of the court until the final consummation of the plan.  This will continue to be the case even if the target date for paying off all debts remains years into the future.