Chapter 11 is a form of bankruptcy that is available to most types of businesses and that may be appropriate for certain individuals. In the case of individuals, Chapter 11 functions similarly to Chapter 13. Since filing for Chapter 11 relief is expensive, it is most often used by corporate entities.
Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. Stock and commodity brokers may not file under Chapter 11, and railroad organizations have different Chapter 11 requirements than other types of businesses.
In general, a Chapter 11 bankruptcy case will not put personal assets of the stockholders of a corporation at risk, other than the amount of their investment in stock. However, both business and personal assets are put at risk if a sole proprietorship files for Chapter 11 bankruptcy.
Small business owners may be eligible for a more streamlined and affordable approach to Chapter 11 bankruptcy under Subchapter V.
This type of bankruptcy allows a business to reorganize and restructure its finances under the supervision of the bankruptcy court. A Chapter 11 restructuring plan allows the business to balance its income and expenses and continue to operate. The debtor may also sell some assets so that it can pay off certain debts that are owed.
How Does Chapter 11 Work?
The case begins when a business owner files a petition with the bankruptcy court that serves the area where the business is domiciled or the business owner is living. In certain cases, the petition is involuntary and filed by creditors, rather than the business owner. The debtor is protected from litigation through an automatic stay, which stops most creditors from making collection attempts or filing or maintaining collections lawsuits. As with other types of bankruptcy, a creditor can file a motion with the court asking for the stay to be lifted with regard to a particular debt.
If a voluntary petition is filed, it will include the debtor’s name, residence, location of principal assets, plan or intention to file a plan, and a request for relief. It will also include financial information like schedules of assets and liabilities, contracts, leases, income, and expenses, and a statement of financial affairs. There may be additional requirements depending on whether the business is a sole proprietorship or organized in another form, such as a corporation or limited liability company.
A filer usually retains control of their assets during Chapter 11 bankruptcy, unlike other types of bankruptcy.
Once a voluntary Chapter 11 bankruptcy petition is filed, the debtor usually assumes the role of “debtor in possession,” meaning that the debtor keeps control of its assets during the Chapter 11 proceedings. A debtor in possession has the position of a fiduciary. Most frequently, the debtor in possession operates the business, performing many of the tasks that would be performed by the trustee if another type of bankruptcy were filed. These tasks may include accounting for property, filing information reports, examining creditors’ claims and objecting to them as appropriate, filing tax reports, and filing a final accounting. The debtor is possession is permitted to employ professionals such as attorneys, accountants, and appraisers.
A U.S. Trustee will monitor the debtor in possession’s compliance. In some cases, however, a trustee is appointed for cause, and the trustee administers the debtor’s Chapter 11 case.
How Does a Business Get Restructured in Chapter 11?
A debtor in possession can restructure the business in several different ways under Chapter 11, including by acquiring more favorable financing or loans by giving lenders priority on earnings, or by rejecting and canceling contracts. The court decides whether a proposed reorganization plan is compliant with the bankruptcy law.
When a business is insolvent, Chapter 11 bankruptcy restructuring can leave the owners of the company with nothing and result in the company’s creditors having ownership of the newly reorganized company.