Thomas K. McKnight - Chapter 11 Bankruptcy Lawyer
What Is Chapter 11?
Chapter 11 is a type of bankruptcy that involves a reorganization of a debtor's business affairs, debts, and assets, and for that reason is known as "reorganization" bankruptcy.
Understanding Chapter 11
Named after the United States bankruptcy code 11, companies usually declare Chapter 11 if they need time to restructure their debts. This kind of bankruptcy gives the debtor a clean slate. However, the terms are subject to the debtor's fulfillment of its responsibilities under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive type of a bankruptcy case. For these reasons, a business must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
During a Chapter 11 proceeding, the court will help a company restructure its debts and responsibilities. In most cases, the firm stays open and operating. A lot of big U.S. firms file for Chapter 11 bankruptcy and stay afloat. Such companies include automobile giant General Motors, the airline United Airlines, retail store K-mart, and countless other companies of all sizes. Corporations, partnerships, and limited liability companies (LLCs) usually declare Chapter 11, however in rare instances, individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be qualified for Chapter 11. However, the process is not a speedy one.
A company in the midst of filing Chapter 11 might continue to run. For the most part the debtor, called a "debtor in possession," runs the company as usual. However, in cases involving fraud, deceit, or gross incompetence, a court-appointed trustee steps in to run the company throughout the entire bankruptcy process.
The company is not able to make some decisions without the consent of the courts. These consist of the sale of assets, besides inventory, beginning or ending a rental agreement, and stopping or expanding company operations. The court additionally has control over decisions related to retaining and paying lawyers and entering contracts with vendors and unions. Finally, the debtor can not set up a loan that will begin after the bankruptcy is complete.
In Chapter 11, the individual or company filing bankruptcy has the first chance to suggest a reorganization plan. These plans may include downsizing of company operations to reduce expenses, in addition to renegotiating debts. Sometimes, plans involve liquidating all assets to pay off creditors. If the chosen path is practical and reasonable, the courts accept it, and the case moves forward.
The Small Business Reorganization Act of 2019, which took effect on Feb. 19, 2020, added a new subchapter V to Chapter 11 designed to make bankruptcy easier for small businesses, which are "defined as entities with less than around $2.7 million in debts that also meet other criteria," according to the U.S. Department of Justice. The act "enforces shorter deadlines for completing the bankruptcy process, enables greater flexibility in negotiating restructuring plans with lenders, and offers a private trustee who will work with the small business debtor and its lenders to facilitate the development of a consensual plan of reorganization."
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by the president on March 27, 2020, increased the Chapter 11 subchapter V debt limit to $7,500,000. The change applies to bankruptcies declared after the CARES Act was established and sunsets one year later.