What Is Chapter 11?
Chapter 11 is a type of bankruptcy that consists of 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 usually file Chapter 11 if they require time to restructure their debts. This kind of bankruptcy provides 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 complicated of all bankruptcy cases. It is also generally the most expensive kind of a bankruptcy proceeding. For these reasons, a business needs 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 company restructure its debts and responsibilities. In most cases, the business remains open and operating. A number of large 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 corporations of all sizes. Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, however in rare circumstances, individuals with a lot of debt that do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a fast one.
A business in the midst of declaring Chapter 11 may 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 process.
The company 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 commence after the bankruptcy is complete.
In Chapter 11, the individual or business filing bankruptcy has the first chance to propose a reorganization plan. These plans may include downsizing of company operations to lower expenses, along with renegotiating debts. Sometimes, plans include liquidating all assets to repay creditors. If the selected path is practical and fair, the courts accept 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 designed 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 "establishes 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 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, increased 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 11 Bankruptcy in Westminster, California, contact Thomas K. McKnight LLP at (800) 466-7507 or visit our website at TKMLLP.Com for a free consultation!