Chapter 11 Bankruptcy Process

What is the Chapter 11 Bankruptcy Process?

The primary objective of a Chapter 11 bankruptcy is to reorganize businesses that are facing heavy debt burdens and keep them operational and able formulate a plan to pay creditors over time.  Although a Chapter 11 bankruptcy is usually used by large corporations, it is also available to small businesses and individuals.  

Chapter 11 Bankruptcy Petition

 There are two types of Chapter 11 bankruptcy petitions.  When the debtor files the petition, it is a voluntary petition. Creditors may also file a Chapter 11 bankruptcy and this is referred to an involuntary petition. Once a Chapter 11 bankruptcy petition is filed, the automatic stay goes into effect prohibiting creditors from engaging in any debt collection activities. As such, the debtor is given opportunity to reorganize debt plan and negotiate better terms with the creditors.  The debtor now becomes the debtor-in-possession, maintains control of the business and is responsible for proposing a reorganization plan.   In addition, the debtor in-possession needs to submit monthly reports to the court on the business operations and finances.

Chapter 11 Bankruptcy Reorganization Plan

Unlike a Chapter 7 bankruptcy, the intention of a Chapter 11 bankruptcy is to keep the business running with a new plan to pay creditors over time.  Part of the reorganization process includes renegotiating leases, contracts and payment terms with creditors.  Some debts may be discharged or partially paid.  Creditors are classified according to priority.   First priority is given to debts such as employees wages and state and federal taxes.  The reorganization must not only be approved by the Court, but also the creditors.

Chapter 11 Bankruptcy Confirmation

If the Chapter 11 reorganization plan is reasonable, done in good faith and within the law, it will be confirmed by the Court. Debt that has not been directly addressed in the plan prior to the confirmation may be discharged.  The debtor-in-possession is required to make payments to creditors as per the plan.

Chapter 11 Bankruptcy for Small Businesses

A business with less than 500 employees is considered to be a small business. A business that has debt of no more than $2.9 million is a small business debtor, according to the US bankruptcy code.  Although chapter 11 bankruptcy is mainly used by large corporations it is also available to small businesses.  If the the court concludes that the business is no longer viable and cannot become profitable,  the Chapter 11 bankruptcy may be converted to chapter 7 bankruptcy. Consequently, the business assets are sold to pay creditors and the business is closed.  Here are some of the documents required for a Chapter 11 bankruptcy petition:

  • Most recent balance sheet of the business
  • Statement of operations and business activities
  • Most recent federal income tax return
  • Cash flow statement

A Chapter 11 bankruptcy petition is an important part of your case. It is essential to get the help of an experienced bankruptcy attorney.