Chapter 11 Bankruptcy
Chapter 11 Bankruptcy permits businesses, or individuals with substantial assets, to reorganize. It is available to every business, whether it is organized as a corporation, partnership, sole proprietorship, or by an individual.
How does Chapter 11 Bankruptcy work?
Petitions for Chapter 11 Bankruptcy are typically filed voluntarily, however the creditors can band together to file an involuntary Chapter 11 petition against a defaulting business.
Most businesses file their petition for bankruptcy where their primary place of business is located. However, they have the option to file for bankruptcy where they are domiciled. For example, many large corporations are incorporated in Delaware and will choose to file for bankruptcy there instead of in their home state.
During the Chapter 11 Bankruptcy process, the debtor continues to operate their business. However, the Court must approve decisions to sell assets, break leases, shut down or expand business operations, or entering into contracts and agreements.
The Reorganization Plan
The reorganization plan is a contract between the debtor and the creditors outlining how the business will operate and pay its debts in the future. Ultimately, the bankruptcy Court must “confirm” or approve the reorganization plan. The plan must meet numerous requirements:
- Feasibility. The bankruptcy court must determine that the reorganization plan is likely to be successful. The debtor must be able to show that they are able to generate sufficient revenue in the future to repay creditors.
- Good Faith. The plan cannot be in bad faith or generate revenue through illegal means.
- Best Interests of Creditors. The plan must allow for creditors to receive as much as they would if the debtor’s case was converted to a Chapter 7 liquidation filing.
- Fair and Equitable. This means that secured creditors (a creditor who has a mortgage or lien against property) are paid in full and the debt’s owners do not retain anything on behalf of their equity interest until the debt is paid in full.
Changes may occur in this area of law. The information provided is brought to you as a public service, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or substitute for the advice of a lawyer.