Chapter 11: A Basic Overview

Chapter 11 bankruptcy, often called “reorganization,” is a form of bankruptcy used primarily by businesses that are no longer able to pay their debts. In this type of bankruptcy, debts are restructured under court supervision so that the debtor can continue to pay creditors using a repayment plan. The Chapter 11 repayment plan allows for a revised payment schedule and reduced payments that better meet the financial ability of the debtor. In general, a Chapter 11 “reorganization” bankruptcy is considered opposite to a Chapter 7 bankruptcy, which involves a straight liquidation of the debtor’s assets to pay off debts.

 Who is Eligible for Chapter 11?

Only an eligible debtor can successfully file a petition for Chapter 11 bankruptcy. Determining eligibility is based on several basic guidelines:

• -Debtor must be an individual, corporation, partnership, limited liability company, or other form of business.
• -Debtor must have filed records of assets and liabilities, current income, contracts and leases, and other financials.
• -Debtor cannot have a previous bankruptcy rejected in the last 180 days.
• -Debtor must obtain credit counseling within 180 days of initial filing.

Filing for Chapter 11 – The Bankruptcy Process

To begin the Chapter 11 process, a petition for bankruptcy is filed with the court in the local jurisdiction. In most cases, the petition is filed by the debtor after determining they are unable to pay their current debts. In some cases, an involuntary petition is filed by creditors, mandating the debtor to enter bankruptcy.  Either way, once the petition has been filed, the debtor receives an automatic stay. The automatic stay prevents collection activities, meaning no creditor can take actions to collect debt until the process is coming to an end.

 After the petition has been filed, the debtor becomes a “debtor-in-possession.” As a debtor-in-possession, the debtor is able to maintain control over the business and/or assets while the reorganization is taking place. There are also several legal functions that the debtor-in-possession is expected to undertake, including filing reports with the court and responding to claims made by creditors. There will still be a trustee assigned to the case – but unlike other bankruptcy chapters, the role of the trustee is to monitor the debtor-in-possession rather than take control of the assets.

The debtor has 120 days from the filing of the petition to submit a reorganization plan to the court. At that point, creditors will evaluate the submitted plan to determine its suitability. If the plan does not meet requirements, the creditors will have the opportunity to draft and submit their own plan to be considered.  Once an agreement has been reached, the court will confirm and finalize the plan.

Finally, the court will discharge any debts that will not be included in the debtor’s repayment plans. Discharged debts will no longer be the responsibility of the debtor, meaning they will not need to be paid and can never be collected on by creditors. After these debts have been discharged, the repayment plan will become active and the debtor will be required to begin paying according to the finalized plan.

How the Reorganization Plan Works

The “reorganization” plan is a restructured payment of debts that is proposed by the debtor or creditors and approved by the bankruptcy court and creditors. For a business, the reorganization plan will also address details of this business that will need to change. The plan is intended to serve the best interests of both the debtor and creditors -- the debtor will be able to keep hold of assets, and the creditors will be able to realize more payment than they would in a Chapter 7 action. To create the reorganization plan, the debtor will follow court guidelines and renegotiate payment amounts and schedules with active creditors. According to court guidelines, payments are prioritized by creditor class: secured creditors are paid first, then unsecured creditors. In many cases, debtors will only end up repaying a portion of their debts in the repayment plan. Chapter 11 plans vary in length, but if the agreed payments are made successfully to the court’s satisfaction or the plan’s end, the debtor can emerge from the bankruptcy and continue without their previous debts.

Getting Help from a Lawyer

Contacting a bankruptcy attorney is in your best interests if you are considering a Chapter 11 or another form of bankruptcy. A bankruptcy attorney has the professional experience and knowledge to evaluate your case and offer advice. If you choose to undertake a Chapter 11 for your business or personal finances, you will be able to receive professional representation and assistance in navigating the filing and reorganization process.