Chapter 11 is one of the six bankruptcy chapters available under the U.S. Bankruptcy Code. This chapter is often used by small business and corporate entities that desire to reorganize outstanding debts by developing a creditor payment plan.
Chapter 11 can also provide debt relief to individuals carrying excessive levels of debts. It is also offered to family farmers and fishermen that do not qualify for Chapter 12; a bankruptcy chapter reserved solely for this group.
Debtors must have a minimum of $336,900 in unsecured loans and a maximum of $1,010,650 in secured debts to qualify for Chapter 11 bankruptcy. Once a petition is submitted to the bankruptcy court, debtors must adhere to specific protocol to obtain approval and retain protection against creditors throughout the bankruptcy process.
Within 30 to 90 days of petitioning the court, debtors attend a 341 creditor meeting. Debtors must submit a payment plan proposal to the Creditor’s Committee which is appointed by the U.S. Trustee. The Committee typically consists of the seven creditors that hold the highest levels of unsecured debt owed by the petitioner.
Businesses continue operating during the debt restructure phase of Chapter 11. This phase is known as ‘debtor in possession’ and grants the petitioner permission to act as the bankruptcy trustee. Business owners are allowed to sell or trade business assets without court authorization.
The debtor in possession is given ‘avoidance powers’ which cover property transfers made within 90 days prior to submitting the bankruptcy petition. When the value of transferred property exceeds the level of debt owed to creditors, the debtor in possession can void the transfer. Avoidance powers are complex and require the services of bankruptcy attorneys to ensure property transfers adhere to bankruptcy laws.
Corporations holding millions of dollars in business assets usually require a team of bankruptcy lawyers to ensure legal documents are properly filed and comply with state and federal bankruptcy laws.
Chapter 11 bankruptcy payment plans are based on creditor classification. Business loans secured by collateral such as real estate are typically repaid over extended periods of time. Unsecured loans are repaid based on the life cycle of assets purchased with the loaned funds. For example, office equipment has a shorter life cycle than business machinery. Office equipment loans might be paid over a period of 4 to 5 years, while machinery loans would be repaid over 10 or more years.
Petitioners filing for protection under Chapter 11 must obtain bankruptcy confirmation. This three-step process includes the 341 creditor meeting; creditor acceptance of the payment plan; and presenting the plan to the presiding judge during the confirmation hearing.
The judge will review the plan, along with profit and loss statements and financial records to determine if the petitioner is financially capable of adhering to the proposed plan. Upon confirmation, allowable debts are discharged and non-dischargeable debts are confirmed in the reorganization proposal.
Chapter 11 can be beneficial in helping corporations reorganize debt. Petitioners must adhere to the plan or face failing out of bankruptcy. When this occurs, debtors lose protection from the court and creditors can commence with collection action.
Title 11 Bankruptcy – Cornell University Law School
Chapter 11 Bankruptcy – United States Courts