CHAPTER 11

During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. In most cases, the firm remains open and operating. Many large U.S. companies file for Chapter 11 bankruptcy and 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.

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 is not able to 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 bankruptcy, the individual or business filing 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.

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. 

A Chapter 11 bankruptcy reorganization plan lays out how the filer will pay their debt obligations moving forward. It gives the filer the chance to restructure and renegotiate the terms of paying back creditors. 

The U.S. Bankruptcy Code requires that creditors be broken up into classes. Generally, the classes of creditors are:

• Secured creditors whose debts are secured by a lien against property.

• Unsecured priority claims, which are unsecured debts that are given priority to receive money from the repayment plan.

• Non-priority unsecured claims that are paid only after all priority debts are satisfied. 

• And, if the filer is a business, not an individual, equity security holders, which are stockholders or partners of a company in Chapter 11 bankruptcy. 

Which creditors get paid, in what order, and when will be included in the contents of the plan of reorganization. Generally, secured creditors and unsecured priority claims will be paid first. Non-priority unsecured creditors, who sometimes form a creditors’ committee, will be paid after other creditors or in some cases not paid at all. Equity security holders have a claim on the company and may be paid before or after other creditors, or not paid at all. Creditors can object to their assigned class of creditors and to the plan proposed by the filer. 

Only the Chapter 11 bankruptcy filer is allowed to file a reorganization plan in the first 120 days after the case is filed with the United States bankruptcy court. When the filer is a small business debtor, that time frame increases to 180 days after filing their Chapter 11 bankruptcy petition. Thereafter, a creditor may file a reorganization plan if the debtor in possession (the Chapter 11 bankruptcy filer that keeps possession and control of its assets during reorganization) hasn’t filed a plan or hasn’t filed a plan that’s been accepted by the creditors. 

The reorganization plan has to be accompanied by a written disclosure statement. The disclosure statement is required to provide adequate information about the filer’s business affairs so that the creditors can make an informed judgment about the plan of reorganization.  In a small business case, the bankruptcy court may decide that the plan itself provides adequate information and that a separate disclosure statement isn’t necessary. 

Creditors will file proof of claims, which state how much money they’re owed and protects their rights in a bankruptcy case. If an objection to their claim is filed, the creditor will have to prove why their claim is valid. The bankruptcy court ultimately decides the validity of claims. 

Creditors with valid claims get to vote on whether they accept a proposed Chapter 11 bankruptcy reorganization plan. The creditors’ vote and court approval are necessary for plan confirmation. Court approval requires that at least one class of impaired claims – creditors with claims that will not be paid in full  – vote in favor of the bankruptcy plan. Under the Bankruptcy Code, an entire class of claims has accepted a plan if it’s accepted by creditors that hold at least two-thirds the total amount of all claims in the class and more than one-half of the number of allowed claims in the class.  

A confirmation hearing will be held so that the court can determine whether to confirm (approve) the plan. The court will confirm a plan that complies with bankruptcy laws, was proposed in good faith, has reasonable costs and expenses, and meets all other requirements. Once the reorganization plan is confirmed, the Chapter 11 bankruptcy case can actually be closed until the plan is completed, then reopened. This allows the filer to save on fees and to stop having to file monthly reports.

There’s no bankruptcy trustee appointed in most Chapter 11 cases. Instead, the filer performs the duties that an appointed bankruptcy trustee would do in Chapter 7 or Chapter 13 bankruptcy proceedings. Acting as debtor in possession, the individual debtor or the filer’s owner in cases of corporate bankruptcy maintains control over their financial affairs or business operations and serves as representative of the bankruptcy estate. They’re responsible for examining and objecting to claims, accounting, filing tax returns, complying with reporting requirements, and other duties. The U.S. Trustee handles the administrative side of the Chapter 11 bankruptcy filing and makes sure the debtor in possession does what they’re supposed to do. 

A bankruptcy trustee can be appointed if the Chapter 11 bankruptcy filer doesn’t want to act as debtor in possession. The bankruptcy court can also appoint a trustee to take over operations from a debtor in possession if the court has a good reason, like fraud or incompetence on the part of the filer.

A liquidating plan is possible in Chapter 11 bankruptcy. Such a plan would shut down the filer’s operations and sell all remaining assets for the benefit of the creditors to pay back at least a portion of the debts owed. Liquidation under Chapter 11 can be better than under Chapter 7 liquidation because the debtor in possession and the creditors have more say over how the Chapter 11 plan will work.

Just as it is under a Chapter 11 case that operates as a reorganization, a bankruptcy trustee may or may not be appointed in a Chapter 11 that works as a liquidation. 

In a Chapter 11 case, the debtor chooses whether to keep or surrender property to the secured creditor holding the lien. A lien is a security interest that gives the creditor the ability to take property back if the debt is getting paid, either through a repossession or foreclosure. The property with the lien on it is called the collateral. If the property does not have a lien and it does not serve as collateral for a secured debt, the debtor is generally able to keep all property.

Each bankruptcy case is different. However, most people who file a Chapter 7 case don’t lose any property because everything they own is protected by an exemption. As a result, debtors in Chapter 7 bankruptcy don’t pay back any unsecured creditors as part of their bankruptcy case.

In a Chapter 11 case, the debtor generally keeps all property, but must pay back creditors based on a set of rules under the Bankruptcy Code.

A Chapter 11 bankruptcy is a major derogatory mark that can hurt your credit for years to come. The Chapter 11 bankruptcy record can stay on your credit reports for up to 10 years from the filing date, and a completed Chapter 13 bankruptcy can remain on your credit report for seven years from the filing date.

The accounts that were included in your bankruptcy may fall off your credit report earlier, as most negative marks get removed after seven years.