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 called "reorganization" bankruptcy.
Understanding Chapter 11
Named after the United States bankruptcy code 11, businesses typically file Chapter 11 if they need time to restructure their debts. This version of bankruptcy offers 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 type of a bankruptcy case. For these reasons, a business should 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 company remains open and operating. A lot of large U.S. companies declare Chapter 11 bankruptcy and survive. Such businesses include automobile giant General Motors, the airline United Airlines, retail store K-mart, and thousands of other corporations of all sizes. Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, however in rare cases, 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 quick one.
A company in the midst of declaring Chapter 11 might continue to operate. Usually 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 comes in 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, besides inventory, starting or ending a rental agreement, and stopping or expanding company operations. The court additionally has control over decisions associated with retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor can not arrange a loan that will begin after the bankruptcy is complete.
In Chapter 11, the individual or company declaring bankruptcy has the first chance to suggest a reorganization plan. These plans might include downsizing of business operations to reduce expenses, as well as renegotiating debts. In some cases, plans involve liquidating all assets to pay back lenders. If the selected path is practical and fair, the courts approve it, and the case proceeds.
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 around $2.7 million in debts that also meet other criteria," according to the United States Department of Justice. The act "imposes shorter deadlines for completing the bankruptcy process, allows for more flexibility in negotiating restructuring plans with creditors, and provides for a private trustee that will work with the small business debtor and its creditors to help with 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 enacted and sunsets one year later.
For More Information About Ch. 11 Bankruptcy in Newport Beach, California, Contact Thomas K. McKnight LLP At (800) 466 - 7507 or Visit Our Website at TKMLLP.Com for a Free Consultation!