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, companies typically file Chapter 11 if they require time to restructure their debts. This version of bankruptcy provides the debtor a fresh start. However, the terms are subject to the debtor's fulfillment of its obligations under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also typically the most expensive kind of a bankruptcy case. For these reasons, a company has to consider Chapter 11 reorganization only after careful evaluation and exploration of all other possible options.
During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. Usually, the firm stays open and operating. A lot of big U.S. firms declare Chapter 11 bankruptcy and survive. Such companies include automobile giant General Motors, the airline United Airlines, retail store K-mart, and countless other corporations of all sizes. Corporations, partnerships, and limited liability companies (LLCs) typically declare Chapter 11, however in rare instances, individuals with a lot of debt that do not qualify for Chapter 7 or 13 might be qualified for Chapter 11. However, the process is not a speedy one.
A business in the midst of filing Chapter 11 may continue to operate. In most cases the debtor, called a "debtor in possession," runs the business as usual. However, in cases involving fraud, deceit, or gross incompetence, a court-appointed trustee intervenes to run the business throughout the whole bankruptcy process.
The company is not able to make some decisions without the consent of the courts. These consist of the sale of assets, aside from inventory, starting or ending a rental agreement, and stopping or expanding business operations. The court additionally has control over decisions related to retaining and paying lawyers and entering contracts with vendors and unions. Lastly, the debtor can not arrange a loan that will begin after the bankruptcy is complete.
In Chapter 11, the individual or business declaring bankruptcy has the first chance to suggest a reorganization plan. These plans may consist of downsizing of company operations to minimize expenses, in addition to renegotiating debts. Sometimes, plans involve liquidating all assets to pay off creditors. If the selected path is feasible and reasonable, the courts accept it, and the process 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 about $2.7 million in debts that also meet other criteria," according to the U.S. Department of Justice. The act "imposes shorter deadlines for completing the bankruptcy process, enables greater flexibility in negotiating restructuring plans with creditors, and offers a private trustee that will work with the small business debtor as well as its lenders to assist in 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 established and sunsets one year later.