Chapter 11 Bankruptcy

The purpose of a Chapter 11 bankruptcy is primarily to reorganize businesses with heavy debt burdens and keep them operational in order to formulate a plan to pay creditors over time.  A Chapter 11 bankruptcy process can be very complicated if it is not handled by a professional. It is usually used by large corporations, but is also available to small businesses and individuals as well.

Chapter 11 Bankruptcy Petition

The debtor usually files a Chapter 11 bankruptcy petition.  This is known as a voluntary petition.  An involuntary petition is one that is filed filed by the creditors and essentially forces the debtor into filing bankruptcy. When the petition is filed,  the US bankruptcy court will put an automatic stay on all collection activities by creditors.  Unless the court issues an modification to the automatic stay, creditors cannot collect on outstanding debt.  This allows the debtor time to come up with a reorganization plan and to negotiate with creditors.  The debtor maintains control of the business and the business operates without interruption.  The debtor is called the debtor-in-possession and needs to come up with a reorganization plan indicating to the Court how creditors will be paid over time.  A monthly report must be submitted to the Court by the debtor-in-possession.

Chapter 11 Reorganization Plan

As opposed to a Chapter 7 bankruptcy, the intention of a Chapter 11 bankruptcy is to keep the business operational with a new plan and to pay creditors over time.  The debtor-in-possession has to renegotiate leases, contracts and payment terms with creditors.  Some debts may be discharged or partially paid.  The creditors are classed in different categories depending on the priority.  First priority is given to debts such as employees wages and state and federal taxes.  Secured debt creditors are placed in a different category from unsecured debt creditors.  The reorganization plan must be approved by the court and voted on by the creditors.

Chapter 11 Bankruptcy Confirmation

The court usually confirms the reorganization plan if it is reasonable, done in good faith and within the law.  Upon confirmation of the reorganization plan, all debts that are not directly addressed in the plan before the confirmation are discharged.  The debtor- in-possession is required to make payments to creditors as per the plan.

Chapter 11 Bankruptcy Process for Small Businesses 

A business with less than 500 employees is regarded as a small business. An individual operating a business with debts totaling no more than $2.19 million is a small business debtor, according to the US bankruptcy code.  Although Chapter 11 bankruptcy is mainly used by large corporations it is also available to small businesses.  If the the court decides that the business is no longer viable and cannot become profitable, the Chapter 11 bankruptcy may be converted to Chapter 7 bankruptcy and the business assets are sold to pay creditors and the business is shut down.   A small business has to submit the following documents when filing for a Chapter 11 bankruptcy:

  • Most recent balance sheet of the business
  • Statement of operations and business activities
  • Most recent federal income tax return
  • Cash flow statement

Chapter 11 bankruptcy petitions can be very complicated. An incomplete petition may result in your case being dismissed leading to deeper financial trouble. The lawyers at Shipkevich PLLC have helped many individuals with their Chapter 11 bankruptcy cases. Schedule your free initial consultation today to find out how we can help you.

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