Thomas K. McKnight - Ch. 11 Bankruptcy Lawyer in Orange County, California
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 referred to as "reorganization" bankruptcy.
Understanding Chapter 11
Named after the U.S. bankruptcy code 11, corporations generally declare Chapter 11 if they require time to restructure their debts. This kind 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 complicated of all bankruptcy cases. It is also usually the most expensive kind of a bankruptcy case. For these reasons, a company 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 responsibilities. For the most part, the company remains open and operating. Plenty of big U.S. companies declare Chapter 11 bankruptcy and stay afloat. Such businesses 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) usually declare Chapter 11, but in rare circumstances, 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 speedy one.
A company in the midst of filing Chapter 11 might continue to operate. Usually the debtor, called a "debtor in possession," runs the business as normal. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee intervenes to run the company 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, besides inventory, beginning or ending a rental agreement, and stopping or expanding business 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 set up a loan that will commence after the bankruptcy is complete.
In Chapter 11, the individual or business filing bankruptcy has the first chance to suggest a reorganization plan. These plans might include downsizing of company operations to lower expenses, in addition to 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 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 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 "enforces shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with lenders, and offers a private trustee who will work with the small business debtor and 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 enacted and sunsets one year later.
For more information about chapter 7 and chapter 13 bankruptcy, or how to file your bankruptcy in Orange County, contact Thomas K McKnight LLP at (800) 466 - 7507 or visit our website at TKMLLP.com for a Free Consultation.