What Is Chapter 11?
Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor's business affairs, debts, and assets, and therefore is called "reorganization" bankruptcy.
Understanding Chapter 11
Named after the United States bankruptcy code 11, businesses usually declare Chapter 11 if they need time to restructure their debts. This version of bankruptcy gives the debtor a fresh start. 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 generally the most expensive form of a bankruptcy proceeding. For these reasons, a business needs to consider Chapter 11 reorganization only after careful evaluation and exploration of all other possible options.
During a Chapter 11 case, the court will help a business restructure its debts and obligations. In most cases, the firm remains open and operating. Many large U.S. firms file for Chapter 11 bankruptcy and survive. Such businesses 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, but in rare circumstances, individuals with a lot of debt who do not qualify for Chapter 7 or 13 might be eligible for Chapter 11. However, the process is not a speedy one.
A company in the midst of declaring 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, dishonesty, or gross incompetence, a court-appointed trustee comes in to run the company throughout the entire bankruptcy proceedings.
The company is not able to make some decisions without the approval of the courts. These include the sale of assets, besides inventory, starting or ending a rental agreement, and stopping or expanding company operations. The court also has control over decisions associated with retaining and paying attorneys and entering contracts with vendors and unions. Lastly, the debtor can not arrange a loan that will begin after the bankruptcy is concluded.
In Chapter 11, the individual or business filing bankruptcy has the first chance to suggest a reorganization plan. These plans might consist of downsizing of company operations to lower costs, in addition to renegotiating debts. Sometimes, plans involve liquidating all assets to pay back creditors. If the selected 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 created to make bankruptcy easier for small businesses, which are "defined as entities with less than about $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, allows for greater flexibility in negotiating restructuring plans with creditors, and offers a private trustee who will work with the small business debtor as well as 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, raised the Chapter 11 subchapter V debt limit to $7,500,000. The change applies to bankruptcies declared after the CARES Act was enacted and sunsets one year later.