CHAPTER 11 BANKRUPTCY

Chapter 11 Bankruptcy is a type of bankruptcy that permits the reorganization of a business entity’s assets, debts, and affairs. Although, during the Chapter 11 process, some liquidation may also occur.  Chapter 11 Bankruptcy is usually utilized by corporations, however, it may also be used by LLCs, partnerships, sole-proprietorships, and individuals.  When the debtor is unable to pay its creditors, it may file for Chapter 11 bankruptcy if it so qualifies.  When Chapter 11 Bankruptcy is filed, the debtor, as debtor-in-possession, retains control over its business to continue operations while under the jurisdiction and oversight of the bankruptcy court.  As a debtor-in-possession, the debtor acts as the trustee of the business.  If there is a fraud, dishonesty, or incompetence, then the court will appoint a trustee to take over and run the company during the rest of the bankruptcy proceeding.

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There are three possible outcomes when filing a Chapter 11 Bankruptcy, i.e., reorganization, conversion into Chapter 7, or dismissal.  The Chapter 11 process involves the debtor submitting a reorganization plan, which requires all parties, i.e., the debtors, the creditors, and the court, to agree on the terms.  The reorganization plan must be in the best interest of the creditors and may include selling/liquidating assets to pay creditors, downsizing to reduce expenses, and renegotiating debts.  The courts will approve the reorganization plan if it is fair, is proposed in good faith, and is feasible.

 

The business continues to run during the bankruptcy process.  This is a major advantage in filing Chapter 11 since the company continues to generate income, which will assist in repaying creditors.  However, businesses are not completely free to do whatever they want during bankruptcy.  Certain business decisions do need approval from the court, such as the sale of assets, entering into or terminating rental agreements, expanding business operations, entering into contracts with vendors, and retaining/paying attorneys. 

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At the end of Chapter 11 Bankruptcy, the debtor entity emerges with more equity and less debt, i.e., in essence, it is recapitalized.  This is due to the fact that some debts of the entity are discharged. A determination is needed as to which debts will be discharged and how equities will be distributed.  Moreover, the valuation of assets is subjective therefore, can become highly contentious.  It is important that you retain a highly experienced attorney to assist you and your company with its Chapter 11 Bankruptcy filing.  It is critical that your company discharge the most debt legally, all the while maintaining the highest amount of equity/assets.