What Is Chapter 11?
Chapter 11 is a type of bankruptcy that consists of a reorganization of a debtor's business affairs, debts, and assets, and therefore is called "reorganization" bankruptcy.
Understanding Chapter 11
Named after the U.S. bankruptcy code 11, corporations usually file Chapter 11 if they require 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 obligations under the plan of reorganization.
Chapter 11 bankruptcy is the most complicated of all bankruptcy proceedings. It is also usually the most expensive kind of a bankruptcy case. For these reasons, a business needs to consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
During a Chapter 11 case, the court will help a business restructure its debts and obligations. Usually, the company remains open and operating. Plenty of large U.S. firms declare Chapter 11 bankruptcy and survive. Such businesses include automobile giant General Motors, the airline United Airlines, retail store K-mart, and countless other corporations of all sizes. Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, however in rare cases, individuals with a lot of debt that do not qualify for Chapter 7 or 13 might be eligible for Chapter 11. However, the process is not a speedy 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, deceit, or gross incompetence, a court-appointed trustee intervenes to run the business throughout the entire bankruptcy proceedings.
The company is unable to make some decisions without the permission of the courts. These consist of the sale of assets, aside from inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court additionally has control over decisions associated with retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor can not arrange a loan that will commence after the bankruptcy is concluded.
In Chapter 11, the individual or company filing bankruptcy has the first chance to propose a reorganization plan. These plans may consist of downsizing of company operations to minimize costs, along with renegotiating debts. In some cases, plans involve liquidating all assets to pay back creditors. If the selected path is feasible and fair, the courts accept it, and the process proceeds.
The Small Business Reorganization Act of 2019, which took 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 "imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with lenders, and offers a private trustee who will work with the small business debtor and its creditors 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, raised the Chapter 11 subchapter V debt limit to $7,500,000. The change applies to bankruptcies declared after the CARES Act was established and sunsets one year later.
For More Information About Ch. 11 Bankruptcy in Los Angeles, California, Contact Thomas K. McKnight LLP At (800) 466 - 7507 or Visit Our Website at TKMLLP.Com for a Free Consultation!
