A Chapter 11 Bankruptcy is usually used by corporations or partnerships. Also referred to as a “reorganization,” Chapter 11 bankruptcy is similar to Chapter 13 bankruptcy in that the debtor proposes a plan to repay creditors while remaining in business.
A debtor company can file Chapter 11 in the bankruptcy court located in the state where the corporation or partnership has its jurisdiction of incorporation or its jurisdiction of formation or where one or more creditors can file against the debtor. One of the main differences between Chapter 11 and Chapter 13 or Chapter 7 is that Chapter 11 allows a creditor to start the proceedings by filing against the debtor.
If the debtor files voluntarily, the court filing will generally include the following:
- A list of assets and liabilities
- A list of current income and expenditures
- A list of executory contracts and unexpired leases
- A statement of financial affairs.
Debtor in possession
Under Chapter 11, the debtor is also referred to as a “debtor in possession.” This means that the debtor can retain possession of its assets while the reorganization is ongoing. The debtor will keep this designation until all debts are paid off to creditors. The debtor in possession acts much like a court-appointed trustee in that he or she runs the day to day operation of the business until the court dismisses the case or until all debts are paid off.
If the bankruptcy involves more than one creditor, the court will tally the vote of each creditor. The court then holds a confirmation hearing to determine whether to accept the plan.
The debtor will file a written disclosure of assets, which lists the debtor’s assets, liabilities, and business affairs to sufficiently give creditors an idea of the debtor’s plan of reorganization. If the plan will cause a creditor to receive less than the debtor owns, or if the plan changes any contractual obligations, the creditor will vote whether to accept the plan or not.
During the reorganization, the U.S. trustee monitors the progress of the plan. The trustee does not administer the debtor’s assets under this chapter; instead, the trustee functions like an overseer. The trustee ensures that the debtor meets all payroll obligations, reports all monthly income and expenses, and establishes any new bank accounts as required during the reorganization.
The debtor’s creditors also monitor its activities during the reorganization. The bankruptcy trustee will appoint a committee of the debtor’s seven largest unsecured creditors, and the committee must ensure that the debtor’s conduct is consistent with the plan of reorganization filed with the court.
Like other chapters, an automatic stay during reorganization halts collection efforts from the creditors. The stay goes into effect once the debtor or creditor files for bankruptcy. The stay is intended to give the debtor time to negotiate with creditors.
Under a reorganization, a corporation has a chance to remain in business while formulating a plan for repaying creditors. The court appoints a trustee and a committee of creditors to monitor the debtor’s behavior during this time to ensure that the debtor is following a plan to repay debts in the manner approved by the court.