There are several types of bankruptcy, and each type varies depending on certain characteristics of the debt. For example, individuals can file Chapter 7, 11, and 13. Corporations must file either Chapter 11 bankruptcy or Chapter 7. Family farmers will generally file Chapter 12 bankruptcy. Knowing the benefits and drawbacks, as well as the requirements to qualify as a debtor, will be helpful in determining which type of bankruptcy will work for your particular situation.
Chapter 11 bankruptcy is a “reorganization.” For most, it means arranging a payment plan with creditors so that the debtor can move forward with either their business or their personal lives. Chapter 11 is similar to Chapter 13 cases in that the debtor will create a repayment plan and make payments to their creditors over time. This arrangement is often referred to as the “plan of reorganization.”
Chapter 11 is by far the most complex type of bankruptcy case. Companies and individuals should think long and hard—and consult a knowledgeable bankruptcy attorney—before they decide that filing Chapter 11 bankruptcy is a good option for their situation.
Who Qualifies for Chapter 11 Bankruptcy?
Most Chapter 11 cases involve businesses. The largest business in the U.S. would qualify for Chapter 11, just like the smallest business in the U.S. would likely qualify. Thousands of businesses file bankruptcy using Chapter 11 every year.
Chapter 11 cases are also appropriate for some high-asset individuals. It is often used for those who have a sole proprietorship or significant business debts as well. These people often do not qualify for Chapter 13, but they also do not want to go through a liquidation, as they would in Chapter 7 bankruptcy.
How Does Chapter 11 Work?
It is a common misconception that any company that files bankruptcy will no longer exist after it completes the bankruptcy process. In Chapter 11, a company simply reorganizes so that it can address and control its debt load. Many businesses still successfully function after going through Chapter 11 bankruptcy.
The following process outline provides an overview of the Chapter 11 process. It is by no means an exhaustive description of every potential activity that may occur in the bankruptcy case. Individuals who go through Chapter 11 can expect a similar process as well.
Starting the Process: Filing the Petition
The company begins the bankruptcy process by providing an array of financial information in their bankruptcy “schedules.” Schedules are bankruptcy forms that are part of the bankruptcy petition. They request very specific information about the company’s financial status. For example, your schedules will have information about any property the company owns, debt obligations related to that property, tax obligations, general income information, and a lot more. This information will be useful as you put together your plan of organization.
The Debtor-in-Possession and New Reporting Requirements
Once the petition has been filed, the company continues to run as usual, with a few notable exceptions. For example, the debtor becomes the “debtor in possession” as soon as the bankruptcy petition is filed. In this role, the debtor has a fiduciary duty to its creditors to act in the best interests of the estate. This means that the debtor cannot squander money and must act as a prudent business person or investor. Making daring business or investment decisions during business is generally frowned upon. The debtor will keep this role until the plan of reorganization is confirmed or the case is converted to Chapter 7.
The company will also be required to file monthly reports with the court. These reports outline income and expenses for that particular month. This information allows creditors and other parties in interest to track the debtor’s progress and ensure that money is being used effectively for the reorganization.
Once the company enters bankruptcy, the court oversees the operations of the business. That means that it must approve major decisions in the business that go beyond the normal day-to-day business activities, such as selling property, making larger purchases, or obtaining financing.
The Disclosure Statement
The company will then file a written disclosure statement. The disclosure statement provides creditors and other parties in interest with relevant summary information and background about the enterprise. It sets out projected cash flows, assets, liabilities, and much more. Creditors will use this information to evaluate the debtor’s plan of reorganization, which is presented in the next step in the bankruptcy process.
Presenting the Plan of Reorganization
The plan of reorganization will set out exactly how the debtor proposes to treat each type of creditor. It will include information regarding repayment amounts, time frames, and interest. It will also set out how long the reorganization will take as a whole. Each claim in the bankruptcy is “classified” and like claims are treated similarly. Then, those creditors who will have their rights modified under the plan will be able to vote on whether they approve the plan. The majority of the creditors must approve the plan for it to go forward in most circumstances.
Depending on the complexity of the case, Chapter 11 bankruptcy can take a few months or several years.
Creditors’ Committees in Chapter 11 Bankruptcy
One of the many unique things about Chapter 11 is the voice that creditors have in the creation of the plan and ongoing business activities. Creditors are invited to form a committee in the bankruptcy. This group represents the interests of all of the unsecured creditors. It is often composed of representatives from three to five creditors of the debtor’s largest creditors.
The Creditors Committee has broad powers of investigation. It can hire its own professionals, including attorneys, accountants, and appraisers. These professionals are paid through the bankruptcy estate by the debtor. The creditors simply get the benefit of these professional services, and there is virtually no “out-of-pocket” expense to them.
The Creditors’ Committee can propose a reorganization plan of its own, negotiate terms on behalf of all of the unsecured creditors, and a lot more.
Many smaller Chapter 11 bankruptcies will not have a Creditors’ Committee simply because there may not be many creditors interested in serving. However, creditors are always invited to form a committee in every Chapter 11 case.
Involuntary Chapter 11
A business can also be forced into Chapter 11 bankruptcy by creditors. Very few bankruptcy cases are involuntary, but it can happen. The company’s creditors start the bankruptcy process instead of the debtor. At least three creditors must work together to initiate the process if the debtor has 12 creditors or more. If the debtor has less than 12 creditors, then a single lender can trigger bankruptcy.
The creditors have the burden to show that bankruptcy is appropriate because the debtor is generally not paying their debts as they become due. To determine whether involuntary bankruptcy is permitted, the court will consider:
- The amount of debt involved
- The number of debts (or creditors)
- The type and nature of the business involved
- The specific creditors that are not getting paid
Although involuntary Chapter 11s are rare, companies should be aware that they are certainly possible.
Getting Help with a Chapter 11 Bankruptcy
Chapter 11 bankruptcies are complicated. If your business is considering bankruptcy, you should not try to navigate this process on your own. Instead, speak with our New Jersey bankruptcy attorneys to determine whether Chapter 11 is right for you. We can help you get the ball rolling if reorganization is the best choice for your business.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.