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Chapter 11 Bankruptcy

Chapter 11 Bankruptcy

Chapter 11 is a type of bankruptcy often utilized by businesses and some individuals to reorganize the debt owed to creditors. This differs from Chapter 7, which allows liquidation of assets to pay off creditors and discharge debt, and Chapter 13, which allows private individuals to restructure debt.

When a business or individual is overwhelmed by debt, a petition for Chapter 11 bankruptcy can be filed. Filing bankruptcy automatically invokes an automatic stay order, which prohibits creditors from going after the debtor or initiating litigation to collect the money owed to them until the matter is resolved in court.

In Chapter 11 bankruptcy, the debtor typically retains possession of its assets and continues to run the business under the court’s supervision. If the debtor proves to be ineffective at managing the business or is dishonest, a trustee may be appointed by the court. If the company’s debts exceed its assets, the owners’ rights may be terminated and the company’s creditors may take over ownership of the reorganized company.

If the petitioner’s request for bankruptcy is approved, there are several options that can be used to restructure debts. The debtor can obtain financing or loans with favorable terms to pay back its creditors. The court may also allow the debtor to cancel or reject contracts. Debtors have a certain period of time (typically 120 days) during which they can propose a reorganization plan. If they do not meet this deadline, creditors may then propose their own plan.

If the judge and the debtor’s creditors approve of the reorganization plan, the plan can then be confirmed. However, if one class of creditors objects to the plan, the debtor must meet the requirements of a cram down (an involuntary action ordered by the court) for the plan to be confirmed. If the reorganization plan cannot be confirmed, the court can convert it to Chapter 7 bankruptcy or dismiss the case.