Filing for bankruptcy is a difficult choice and often linked to the ending of businesses. However, this is not true. Bankruptcy gives individuals and businesses a chance to continue and survive by reorganizing and settling their debt. Chapter 11 bankruptcy is defined specifically to help businesses reorganize and plan while safeguarding their assets and giving themselves a chance to survive. The process is one of the most complex procedures and having a bankruptcy attorney for legal guidance and procedures is a must.
Chapter 11 bankruptcy is a type of bankruptcy most commonly used by businesses to reorganize their affairs, dents, and assets. Businesses opt for filing chapter 11 bankruptcy if they require time to reorganize, restructure, and repay their debts. Chapter 11 bankruptcy can be filed by individuals, small businesses, and giant conglomerates.
Chapter 11 bankruptcy is a good option if business owners are looking to protect their company and assets while negotiating new terms with the creditors. It is also a good idea to file for chapter 11 bankruptcy if debtors are looking to sell assets or liquidate their company in an orderly fashion.
The following things happened until chapter 11 bankruptcy cases wrap up:
In most cases, debtors continue business operations, and no trustee is appointed. The debtor conducting business as he does in the ordinary course is known as “debtor in possession” (DIP). In other instances, a bankruptcy court can appoint a trustee to take over the operations if it finds a sufficient cause. Causes to disposition a debtor or owner of the business can include fraud, incompetence, dishonesty, or mismanagement of business affairs.
Although the debtor continues to manage the operations in the ordinary discourse, they lose the authority to make major decisions. The bankruptcy court takes charge of major decision-making. In the course of the proceedings, the debtor needs approval from the bankruptcy court for the following:
Bankruptcy court approval for major decisions taken by debtors is influenced by creditors, shareholders, and other parties in interest. Therefore, the bankruptcy court considers creditors and other parties’ votes in approving or denying a major decision. However, formal votes from creditors are taken only in the case of proposed chapter 11 plans.
Like other bankruptcies, chapter 11 bankruptcy begins with the filing of a petition in court. Following this, a case number is assigned to the petition and an automatic stay to stop creditors from trying to collect their debts. A formal meeting of all the creditors is then called upon to discuss the restructuring of the business affairs. A chapter 11 bankruptcy case can be solved through reorganization or liquidation, depending on the debtor's circumstances.
Chapter 11 bankruptcy can be settled by reorganization, where the debtor is provided with the opportunity to restructure or reorganize their financial affairs to pay off their debt. The objective is achieved by drafting and implementing a plan of reorganization.
The plan of reorganization outlines a strategy using which the debtor will pay creditors moving forward. It gives the debtor a chance to renegotiate the terms of payment with the creditors.
The US bankruptcy code requires debtors to divide the creditors into classes. Typically, creditors are classified into the following categories:
Which class of creditors is paid, and in what order is included in the reorganization plan. Generally, secured creditors and unsecured priority claims are paid first. Unsecured claims are paid after all the creditors or not paid at all. Similarly, equity stakeholders who have control over the company may be paid before all the creditors or after them or may not be paid at all. Creditors can voice their argument by challenging the plan proposed by the debtor and get their class reassigned.
The reorganization plan is only to be submitted by the filer 120 days after the chapter 11 bankruptcy is filed in court. However, if the filer is a small business, the period increases to 180 days after filing the bankruptcy petition. After this period, a creditor is allowed to file a reorganization plan after a debtor in possession does not file a plan at all or the plan is not approved by the other creditors.
The plan needs to be accompanied by a disclosure statement. This statement needs to contain information about the debtor’s business affairs and expenses so that creditors could make an informed decision. Creditors are then required to file proof of claims to state how much money they are owed. The bankruptcy court then decides the validity of the claims.
The creditors with valid claims get to vote for or against the reorganization plan formally. Both the vote of the creditors and approval of the bankruptcy court is required for plan confirmation. The bankruptcy court then arranges a plan confirmation hearing and collects creditors’ votes. A plan is confirmed if at least one class of creditors will not be paid in a full vote for the plan. According to the bankruptcy code, an entire class of claims is considered to have accepted the plan if creditors with two-thirds of the claim amount in the class and creditors with more than half of the allowed claims in the class approve the plan. Once the creditors approve of the plan, the bankruptcy code evaluates it. It approves the plan if it is proposed in good faith, has taken all expenses and costs into account, and meets the other bankruptcy laws. Once the plan is confirmed, the chapter 11 bankruptcy case is closed until the debtor completes the plan. After this, the case is reopened. This is done to allow the filer to save money on fees and exempt them from filing monthly reports.
Under this process, chapter 11 bankruptcy allows the filer to close all business operations and sell all the assets to pay a portion of the debt they owe the creditors.
Hiring an attorney for filing chapter 11 bankruptcy can benefit you in the following ways:
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