Thomas K. McKnight - Ch. 11 Bankruptcy Attorney in Tustin, California
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, companies typically file Chapter 11 if they require time to restructure their debts. This kind of bankruptcy gives the debtor a clean slate. 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 form 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 alternatives.
During a Chapter 11 case, the court will help a business restructure its debts and responsibilities. Usually, the firm remains open and operating. A number of large U.S. businesses declare Chapter 11 bankruptcy and survive. Such companies 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 declare Chapter 11, but 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 quick one.
A company in the midst of declaring Chapter 11 may continue to run. 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 steps in to run the company throughout the entire bankruptcy process.
The business is unable to make some decisions without the consent of the courts. These include the sale of assets, aside from inventory, starting or terminating a rental agreement, and stopping or expanding company operations. The court also 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 filing bankruptcy has the first chance to suggest a reorganization plan. These plans might consist of downsizing of business operations to reduce expenses, as well as renegotiating debts. Sometimes, plans include liquidating all assets to repay lenders. If the selected path is feasible and fair, the courts accept 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 U.S. Department of Justice. The act "enforces shorter deadlines for completing the bankruptcy process, enables greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee that will work with the small business debtor as well as its creditors 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.
For more information about chapter 7 and chapter 13 bankruptcy, or how to file your bankruptcy in Tustin CA, contact Thomas K McKnight LLP at (800) 466 - 7507 or visit our website at TKMLLP.com for a Free Consultation.