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Features and Rules of Chapter 11 Bankruptcy

Posted on July 7, 2017 at 7:27 pm by


Here are some basic features and rules of Chapter 11 bankruptcy. While going through the process, be keen of what you can and cannot do:

The Automatic Stay

During the beginning of a bankruptcy case, an automatic stay is initiated. An automatic stay closely resembles an injunction. For a bankruptcy, an automatic stay stops creditors from continuing to collect debt from the borrower who filed for bankruptcy. However, there are some exceptions. One of those exceptions applies to a secured creditor, who can file a petition in court to exempt them from automatic stay, depending on how valid the cause is. If a creditor is under automatic stay and shows that it doesn’t give adequate protection, then the court may give the creditor periodic cash payments or other forms of relief. New provisions, in the Bankruptcy Abuse Prevention and Consumer Protection Act, regarding automatic stay were made recently. The automatic stay expires, to some extent, except if the debtor gets an order extending it within one month. This is applicable only if there was a case dismissed in an unresolved case that happened during the year the case was filed. Moreover, the automatic stay isn’t initiated except if the debtor files a motion when the debtor had two unresolved cases the year before filing.

Use of Property

The debtor does not need to obtain authorization from court to sell or lease property during regular business operations. If the sale or lease is abnormal, regarding regular business operations, then the debtor needs to get authorization. You can find out what is normal and abnormal from a bankruptcy lawyer.

New Credit

During a Chapter 11 bankruptcy, some companies will have enough monetary sustenance to continue operating. However, sometimes even these companies will depend on cash that is subject to a lender security interest. A courts authorization or an agreement from the creditor will be needed to use the funds during the bankruptcy process. The debtor has to produce adequate assurance to the lender if the lender doesn’t concur to the debtor using the cash collateral.

A new line of credit is rarely needed. The United States Bankruptcy Code renders protection and priority to encourage creditors to make these loans. Interest rates would be higher and loans would be refused if this encouragement did not exist.

Executory Contracts and Leases

When there are remains obligations to be rendered by any party, an executory contract is created. Executory contracts could come in form of unexpired leases or utility contracts. The majority of contracts and leases can be rejected. One-sided contract refinements are not feasible, however negotiating can be deemed useful.

In the Midst of a Chapter 11 Bankruptcy Case

In the coming weeks, after the case was initiated, operations of the business usually normalizes. The debtor has to continue to adhere the court’s assigned bankruptcy duties. A 341 hearing is held with the business representatives, their lawyers, and the appointed United States trustee in the beginning of the case. Most importantly, at this stage of the case, the management can overhaul and continue their business operations, and lawyers continue to negotiate and consider further legal strategies.

Remainder of the Case

At this part of the case, the company can find solutions to consequential complications. It can resolve any technicalities it has in its business and seek for better approaches. The right, and purportedly optimal, business strategy has to be created to improve the company’s financial situation.

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