Chapter 11 of the Bankruptcy Code is the bankruptcy process used by companies and commercial entities who need to reorganize in order to pay off their debts and continue on as a viable business. Individuals can also file under Chapter 11, but it’s far more common for companies to do so. The Chapter 11 process can typically last between six months and two years.
The Chapter 11 Petition
In most cases, a company will file for Chapter 11 on its own. However, a company’s creditors can come together to force the company into bankruptcy. Not all types of commercial entities can be forced into bankruptcy, but many can. A company can be forced into bankruptcy depending on how many creditors it has, how many of those creditors agree to file the bankruptcy petition, and the total value of the debts.
If an individual is filing, he or she must provide the court with a certificate verifying that they’ve completed credit counseling.
Immediate Effects of Filing
After a bankruptcy petition is filed, an automatic stay takes effect. An automatic stay means that all the debtor’s creditors must pursue their claims against the debtor through the Chapter 11 process. If any other legal actions have been started by a creditor, they typically will be stayed, or put on hold, until the bankruptcy process has ended.
The immediate action a debtor filing for Chapter 11 will have to take is to provide all manner of documentation regarding its financial condition and current operations to the court.
Finally, the court will appoint a U.S. trustee, who has certain investigative authority into the actions of the debtor, to the case. The scope of the trustee’s powers will depend on the debtor.
Deciding Who Manages the Business during the Chapter 11 Process
Typically, the company’s management will continue to conduct the day-to-day operations of the business, but under the watchful eye of a bankruptcy trustee. In these cases, the debtor becomes a “debtor in possession” or “DIP.” The trustee can take over operations from the DIP if it acts dishonestly, with gross mismanagement, or incompetently.
Despite being a DIP, the bankruptcy court still has the power to make major decisions for the debtor. Some of these powers include voiding or renegotiating contracts, leases, and sales.
Both the trustee and DIP can void transactions made by the debtor in the immediate period, usually 90 days, right before the bankruptcy petition was filed.
The Reorganization Plan
The debtor has the exclusive right to submit a reorganization plan to the court during the first four months after it has filed for bankruptcy. The creditors are organized into various committees, and they can object to the debtor’s plan. At this point, the creditors can propose their own plan or negotiate for a new one. A plan can only be accepted by a vote of the creditors. If that plan has any class of creditors getting paid less than what they’re owed, which is very common, at least one of these classes must approve the plan in the vote.
If the creditors never approve the plan, the bankruptcy can get dismissed or revert to a Chapter 7 liquidation. If the creditors do approve the plan, the plan must then get confirmed by the court.