Chapter 11
Chapter 11 is the most comprehensive chapter of the Bankruptcy Code. It provides myriad options to reorganize debt, such as by repaying some debts, discharging others and restructuring the remainder. Although individuals may file for Chapter 11 relief, the relatively high filing fees and administrative costs lead most individuals to favor Chapter 7 or Chapter 13 bankruptcy proceedings. In addition, while a debtor may file a petition for bankruptcy voluntarily, an involuntary petition may be filed against a debtor by three or more creditors.
Chapter 11 Bankruptcy, often referred to as “reorganization bankruptcy” is primarily used by businesses. It allows corporations, partnerships and sole proprietorships to continue operating while creditors are paid under a reorganization plan. A Chapter 11 plan is essentially an agreement between the debtor and its creditors which delineates how the business will operate in order to pay the creditors in the future. With a Chapter 11 Bankruptcy, the debtor relinquishes much of its decision-making power to the Bankruptcy Court. The court must approve the sale of any assets or property, any financing agreements entered into post-filing, winding up or expanding the business, entering or breaking leases, and entering or modifying any agreements with third parties. The court must also approve the reorganization plan proposed by the debtor. The court will examine the proposed plan to ensure that it is feasible, made in good faith, is in the best interest of the creditors and is fair and equitable.
For Individuals (non-business filers), Chapter 11 bankruptcy may be preferred if the debtor does not qualify for reorganization under Chapter 13 due to high amounts of debt, or if the debtor does not want to liquidate assets as may be required under Chapter 7. A typical non-business Chapter 11 bankruptcy filer might be a celebrity with excessive amounts of debt, but who still has high income earning potential. Chapter 11 is generally considered more debtor-friendly than other types of bankruptcy, including the ability to “cram down” certain forms of debt. This means the court pushes through a plan over the objections of some creditors.
The Law
A Chapter 11 case begins with the filing of a petition with the bankruptcy court where the debtor has its principal place of business or assets. 11 U.S.C. § 301, 28 U.S.C. § 1408.
Upon filing a petition for relief under Chapter 11, the debtor assumes an additional identity as the “debtor in possession.” 11 U.S.C. § 1101. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under Chapter 11. Generally, as “debtor in possession” the debtor operates the business and performs many of the functions that a trustee performs in cases under other chapters, including the right, with the court’s approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during its bankruptcy case. 11 U.S.C. § 1107(a). Other responsibilities include filing tax returns and reports that are either necessary or ordered by the court after confirmation, such as a final accounting.
Section 1107 of the Bankruptcy Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a Chapter 11 trustee, and it requires the debtor to perform all but the investigative functions and duties of a trustee. These duties, set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee, such as monthly operating reports. 11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a).
Benefits of the law
- There is no limit to the amount of debt
- Allows businesses to restructure their debt
- Debtor is allowed to retain its assets and maintain control of its business as a debtor is possession, under the supervision of the court.
- An automatic stay is granted upon filing, preventing creditors from pursuing litigation, foreclosure, eviction, repossession and other collection activity.
