What is a Chapter 11 Bankruptcy?

A Chapter 11 bankruptcy process is often used by large companies to restructure finances but may be very useful small entities as too. In extraordinary cases, consumers may file a Chapter 11 bankruptcy. The debtor may propose a plan that will involve cutting operating costs and looking into alternate revenue resources. Filing a Chapter 7 bankruptcy means closure of the business and sale of assets to pay creditors. One of the most attractive features of a Chapter 11 bankruptcy is that you will have some time to  reorganize, strategize and submit a plan . A Chapter 11 bankruptcy is very complicated, time consuming and costly.

Chapter 11 Bankruptcy Process

Either the debtor or creditors may file a Chapter 11 bankruptcy. When the creditors force a debtor into bankruptcy, it is called an involuntary petition. Once a bankruptcy petition is filed with the bankruptcy court, the Automatic stay goes into effect.  This means that creditors may not engage any collection activities cannot for unpaid debt unless the court grants a modification to the stay. Consequently, the creditor has time to organize, plan and negotiate the payment terms of debt.

Upon filing of the petition, the business may continue to operate as usual. While being supervised by the Court, the debtor reorganizes, strategizes and plans on how the business is going to go about repaying creditors. Typically, repayment amounts are lower than the original debt payments. The debtor may object to creditors claims during the case if legitimate. The debtor is required to submit monthly operating report for progress and compliance managing purposes.

Chapter 11 Bankruptcy Plan

The main objective of filing a Chapter 11 bankruptcy instead of a Chapter 7 bankruptcy is to regain profitability.

Creditors have the incentivized  to cooperate with the debtor as they would not generally get a better outcome from a Chapter 7 bankruptcy.

A reorganization plan puts creditors into different classes. First priority is given to state and federal tax agencies, wages and salaries owed to employees and stockholder interests. These all have their own class. Secured and unsecured creditors all have their own class. The reorganization plan may adjust repayment terms to these creditors. The plan must be voted on by creditors and also approved by the court.