Chapter 11 Bankruptcy Explained
The process of going through bankruptcy is protected through federal and state laws. These laws differ by state and can be rather complicated. Before you decide to file for bankruptcy, be certain you have all the facts about how the laws in your state will apply to you. Get answers by talking to a local bankruptcy attorney. Get a free case evaluation with an attorney near you by completing the free form below.
Chapter 11 Bankruptcy is a form of bankruptcy that was designed to allow individuals, corporations, and partnerships to reorganize their debts in an attempt to repay them and get back on their feet. While not limited to businesses, it is often the chosen course businesses take because it does not limit the amount of debt, as is limited by Chapter 13. This means large businesses and corporations with huge debt loads are often able to reorganize under this structure.
Qualifying for Chapter 11
Chapter 11 Bankruptcy has few qualifications. It is usually considered one of the most flexible of all of the different types of bankruptcy protection. The law does not limit this type of bankruptcy to businesses, but it is more expensive than Chapter 7 and Chapter 13 because of the fees paid to the courts, so usually individuals choose another route. Businesses that cannot qualify for Chapter 13 usually start by filing Chapter 11.
How Chapter 11 Bankruptcy Works
Generally in a Chapter 11 case, the debtor will be its own trustee. If the courts believe the business is acting wrongly in the case, they may appoint a trustee to oversee the case. The debtor will usually file monthly operating reports with the courts. These will show income and payments made, profit and loss statements, and a balance sheet.
The debtor generally has four months after filing to create a repayment plan. After that time, the creditors can also make a plan. Creditors are generally divided into classes based on the characteristics of their claims against the debtor, and are given votes based on the amount of their claim. The plan can be approved when the creditors vote in the affirmative to it.
Sometimes the creditors will not agree to the plan. In this case, if the debtor meets certain court qualifications, a plan can be set in place without creditor approval. This process is known as “cramming down” the plan on the creditors, and it requires court approval. Because of the different circumstances that can affect the plan in a Chapter 11 Bankruptcy case, working with an attorney can be helpful.
While in Chapter 11 Bankruptcy, a business should continue operating, paying creditors from their earnings or the sale of any assets. Priority claims in these cases include back taxes and secured claims. These must be paid in full, while those that are not priority claims may be repaid in part.
Chapter 11 Bankruptcy and a Business’s Assets
Under Chapter 11 Bankruptcy protection, a business is able to keep its assets, in most situations. This generally allows the business to continue operating as usual, although they usually operate under court supervision to ensure creditors are getting paid as outlined in the restructuring.
Benefits of Chapter 11
Chapter 11 Bankruptcy usually allows a business to continue operating as it attempts to restructure and work its way out of debt. This is the primary benefit. Since the business will continue running, assets are also protected under Chapter 11 Bankruptcy. It also can allow the debtor to discharge some debts without paying them in full.
