Thomas K. McKnight - Bankruptcy Service Law Firm in Irvine, CA
What Is Chapter 11?
Chapter 11 is a form of bankruptcy that consists of a reorganization of a debtor's business affairs, debts, and assets, and therefore is known as "reorganization" bankruptcy.
Understanding Chapter 11
Named after the U.S. bankruptcy code 11, corporations generally declare Chapter 11 if they need 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 complicated of all bankruptcy proceedings. It is also typically the most expensive kind of a bankruptcy proceeding. For these reasons, a business must 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. In most cases, the business stays open and operating. Many big U.S. companies file for Chapter 11 bankruptcy and survive. Such businesses include automobile giant General Motors, the airline United Airlines, retail store K-mart, and thousands of other businesses of all sizes. Corporations, partnerships, and limited liability companies (LLCs) typically file Chapter 11, but in rare cases, individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a fast one.
A company in the midst of filing Chapter 11 might continue to operate. For the most part 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 company throughout the entire bankruptcy proceedings.
The business is unable to make some decisions without the permission of the courts. These include the sale of assets, aside from inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court also 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 declaring bankruptcy has the first chance to propose a reorganization plan. These plans might consist of downsizing of company operations to minimize expenses, along with renegotiating debts. Sometimes, plans involve liquidating all assets to pay back creditors. If the chosen path is feasible and reasonable, the courts approve it, and the case proceeds.
The Small Business Reorganization Act of 2019, which went into 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 United States Department of Justice. The act "establishes shorter deadlines for completing the bankruptcy process, enables greater flexibility in negotiating restructuring plans with lenders, and provides for a private trustee that 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 filed after the CARES Act was established and sunsets one year later.
For more information about chapter 7 and chapter 13 bankruptcy, or how to file your bankruptcy in Irvine CA, contact Thomas K McKnight LLP at (800) 466 - 7507 or visit our website at TKMLLP.com for a Free Consultation.