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 therefore is called "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 type 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 generally 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 company restructure its debts and responsibilities. For the most part, the company remains open and operating. Plenty of big U.S. firms 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 companies of all sizes. Corporations, partnerships, and limited liability companies (LLCs) typically file 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 business in the midst of declaring Chapter 11 might continue to run. 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 steps in to run the company throughout the entire bankruptcy proceedings.
The business is unable to make some decisions without the approval of the courts. These include the sale of assets, other than inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court additionally has control over decisions associated with 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 concluded.
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. Sometimes, plans involve liquidating all assets to pay off creditors. If the chosen path is practical and reasonable, the courts approve it, and the process moves forward.
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 around $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 more flexibility in negotiating restructuring plans with creditors, and offers a private trustee who will work with the small business debtor as well as its creditors 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 filed after the CARES Act was established and sunsets one year later.
For More Information About Ch. 11 Bankruptcy in Orange, California, Contact Thomas K. McKnight LLP At (800) 466 - 7507 or Visit Our Website at TKMLLP.Com for a Free Consultation!