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Chapter 11 Filing Basics

Bankruptcy

If you are contemplating a Chapter 11 filing, you are in for the most complex of the bankruptcy chapters, where the central player is a different figure than in individual bankruptcy chapters. At the same time, however, there are plenty of similarities between what happens in Chapter 11 bankruptcy and the steps involved in Chapter 7 or Chapter 13 individual bankruptcies.

Debtor is in Charge in a Chapter 11 Filing

Unlike the central premise of individual bankruptcies, in which the bankruptcy trustee backed up by the U.S. bankruptcy judge, takes control of all aspects of the proceedings, the business owner remains largely in charge in a Chapter 11 filing.

The debtor, who is referred to as the debtor-in-possession once the Chapter 11 filing is received, acts much like a trustee and has some of the powers that of a Chapter 7 bankruptcy trustee. Another change from other bankruptcy filings is that a Chapter 11 filing can be voluntary or can be forced on the company. An involuntary filing can be made by the company's leading creditors, a move that has no similar action in individual bankruptcies.

While the debtor can act something like a trustee, one requirement is that the company completely reveals all of its contracts and finances to the bankruptcy court and to all creditors. This is obviously something that no business owner would willingly do otherwise, but it is essential in the bankruptcy setting because creditors must understand the company's bottom-line situation.

Debtor's Three Obligations in a Chapter 11 Filing

The filing triggers the automatic stay, giving the debtor some time to try to save the business. Under bankruptcy rules, the debtor must submit a reorganization plan within 120 days. During this period, the bankruptcy court is locating the largest creditors who will form a creditor's committee. That committee will play a key role in the bankruptcy proceedings. The debtor must then convince a majority of the creditors to go with the reorganization plan, the second major obligation of the debtor. At the same time, the creditors can come up with a competing plan and it is up to the bankruptcy judge to decide which is best. The third major obligation of the debtor is to receive confirmation of the plan from the bankruptcy judge.

Debtor's Authority in a Chapter 11 Filing

Much like a trustee in an individual bankruptcy case, the debtor has the power to rescind executory contracts if it's in the company's best interests. Parties who lose rights in executor contracts become unsecured debtors, likely to get something but not of the value of the rescinded or changed contract or lease. These could be contracts for supplies or union agreements, for example. Additionally, debtors could decide to close down some business locations, particularly in the case of a retail business going forward with a Chapter 11 filing. The goal is to create more cash to pay off debt and put the company on sounder footing. Because unsecured creditors will end up losing some of their value in the company, a business bankruptcy often involves a number of hearings as creditors and other interested parties contest some or all of the reorganization plan, or ask for a dismissal or seek to fight a confirmation. In all, a business bankruptcy can anywhere from several months to several years.

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