What Is Chapter 11?
Chapter 11 is a type of bankruptcy that involves a reorganization of a debtor's business affairs, debts, and assets, and therefore is called "reorganization" bankruptcy.
Understanding Chapter 11
Named after the United States bankruptcy code 11, businesses usually file Chapter 11 if they need time to restructure their debts. This kind of bankruptcy provides the debtor a clean slate. However, the terms are subject to the debtor's fulfillment of its responsibilities under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy proceedings. It is also generally the most expensive kind of a bankruptcy case. For these reasons, a company must consider Chapter 11 reorganization only after careful evaluation and exploration of all other possible options.
During a Chapter 11 case, the court will help a company restructure its debts and responsibilities. For the most part, the company remains open and operating. Many large U.S. firms declare Chapter 11 bankruptcy and stay afloat. Such businesses include automobile giant General Motors, the airline United Airlines, retail store K-mart, and countless other companies of all sizes. Corporations, partnerships, and limited liability companies (LLCs) typically file Chapter 11, but in rare instances, individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a quick one.
A business in the midst of declaring Chapter 11 might continue to operate. In most cases the debtor, called a "debtor in possession," runs the company as normal. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee comes in to run the business throughout the whole bankruptcy proceedings.
The company is not able to make some decisions without the permission of the courts. These consist of the sale of assets, besides inventory, starting or ending a rental agreement, and stopping or expanding company operations. The court additionally has control over decisions related to retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor can not set up a loan that will begin after the bankruptcy is complete.
In Chapter 11, the individual or business declaring bankruptcy has the first chance to propose a reorganization plan. These plans might include downsizing of business operations to lower expenses, along with renegotiating debts. In some cases, plans involve liquidating all assets to repay creditors. If the chosen path is feasible and fair, the courts approve it, and the process proceeds.
The Small Business Reorganization Act of 2019, which went into effect on Feb. 19, 2020, added a new subchapter V to Chapter 11 created to make bankruptcy easier for small businesses, which are "defined as entities with less than around $2.7 million in debts that also meet other criteria," according to the U.S. Department of Justice. The act "enforces shorter deadlines for completing the bankruptcy process, enables more flexibility in negotiating restructuring plans with creditors, and provides for a private trustee that will work with the small business debtor as well as its lenders to assist in the development of a consensual plan of reorganization."
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by the president on March 27, 2020, increased the Chapter 11 subchapter V debt limit to $7,500,000. The change applies to bankruptcies filed after the CARES Act was enacted and sunsets one year later.
For More Information About Ch. 11 Bankruptcy in Fountain Valley, California, Contact Thomas K. McKnight LLP At (800) 466-7507 or Visit Our Website at TKMLLP.Com for a Free Consultation!
