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What is Chapter 11 Bankruptcy?

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Many businesses and individuals want to know what is Chapter 11 bankruptcy and is it right for me or my business? Although less commonly filed in comparison to Chapters 7 and 13, Chapter 11 still far outnumbers the other less common bankruptcy chapters, such as Chapter 9.

Eligibility

Any business or individual may file for Chapter 11 bankruptcy protection. Businesses include anything from a sole proprietorship to a national corporation. Many people are surprised that Chapter 11 is available to individuals as it is most commonly known by the public as a tool for large companies such as Borders Books. However, the bankruptcy code provides for individual eligibility. Chapter 11 is only preferable for an individual when their debt exceeds the limits of Chapter 13, specifically: $360,475 of unsecured debt and $1,081,400 in secured debt.

Debtor-in-Possession

Upon the filing of the Chapter 11 bankruptcy petition, the debtor, be it a business or an individual, becomes a debtor and debtor-in-possession. The debtor-in-possession has the majority of the rights and responsibilities of a bankruptcy trustee. The only right not available is the right to compensation. The debtor-in-possession can file lawsuits to avoid transfers of money to creditors, obtain loans for the debtor, and accept or reject contracts. Many of these powers must be exercised with court approval. Any creditor or the court, on its own, may seek the appointment of a bankruptcy trustee to replace the debtor-in-possession if they believe that it is in the best interest of the bankruptcy estate and creditors, such as if the debtor-in-possession is mismanaging its assets.

Process

   1. Disclosure Statement

The first step in a Chapter 11 bankruptcy is the drafting and approval of a disclosure statement. The disclosure statement is a document that describes how the debtor will reorganize and pay off its debts. The disclosure statement must give sufficient information for the creditors to determine whether reorganization is possible. The court must approve the disclosure statement before the next step in the Chapter 11 process.

    2. Confirmation

The next step is confirmation. The debtor will propose a plan of reorganization to the creditors. The creditors then vote on the plan. In order for a plan to be confirmed, the judge must approve it and every impaired class of creditors must approve the plan. An impaired class is a class of creditors that will receive less than what they are owed (usually most creditors are impaired). There is an exception to this rule which permits confirmation under a process called "cramdown."

    3. Post-Confirmation

After plan confirmation, the terms of the plan are carried out. Usually plans provide for the appointment of a plan agent, a third-party that executes the plan. For example, the plan may provide for payments of $50,000 a month to creditors. The plan agent would deal with the logistics in making the payments. The plan may also provide for how the individual or business will operate to provide money to creditors for the duration of the plan period, as the plan may endure for several years.

Discharge

The confirmed plan of reorganization will provide for when the debtor receives a discharge of debts. The discharge will usually occur upon substantial consummation of the plan, such as the majority of payments to creditors are made.

Cost

Likely the largest and earliest obstacle in Chapter 11 bankruptcy is the cost. Since 2006, the fee to file a Chapter 11 case is $1039, far greater than the Chapter 7 fee of $299. Furthermore, Chapter 11 is highly complex, requiring the retainer of an experienced bankruptcy attorney. This results in a skyrocketing cost of filing for Chapter 11. Moreover, Chapter 11 cases can be highly contentious and involve multiple sophisticated creditors which further increases the cost of the case.

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