Chapter 11 Business Bankruptcy

Chapter 11 Business Bankruptcy – An Overview

Some individuals with very large debts file for Chapter 11 bankruptcy. However, it is mainly businesses that file a Chapter 11 bankruptcy.  A Chapter 11 business bankruptcy has no debt  limitations for eligibility and was designed as a tool available to businesses that assist them reorganize and remain operational.  Remaining operational means saving jobs.  

A Chapter 11 bankruptcy allows the business time to reorganize and become profitable so that it is able to pay creditors over time. Certain creditors will be getting less than what was owed by the business.  This is known as cramdown.  The court oversees this process and ensures that all statutory requirements are met.  The debtor becomes the debtor- in-possession and there is no trustee appointed.  The debtor maintains control of the business.  A United States Trustee monitors the bankruptcy proceedings and the business operations.  A creditors committee is appointed by the United States Trustee to represent the creditors and sometimes a committee is formed to represent the other stakeholders such as stockholders.

If the debtor-in-possession is found guilty of gross negligence,  mismanagement or fraud by the United States trustee, then a case trustee will be appointed to take over the responsibility of the debtor- in-possession.  The case trustee usually hires an operator to run the business in place of the debtor-in-possession.  The operator has to  learn the specific nature of the business.  This will take time and will cost more. An examiner is sometimes appointed to monitor the debtor-in-possession and report to the United States Trustee.  If the debtor-in-possession is found to be unreliable, incompetent or untrustworthy the examiner may carry out duties of the debtor-in-possession.  

The petitioner is the person who initially files the petition pleading the initiation of the Chapter 11 bankruptcy.  This is usually the debtor which could be a corporation, partnership or an individual.  The petitioner may be debtor’s creditors who plead an involuntary bankruptcy in rare cases.  Certain debtors like small business debtors and individual debtors have specific provisions that apply to them.

Small Business Debtor 

A business is regarded as a small business debtor when the debtor has secured and unsecured debt totaling no more than $2,490,925 and for which the United States Trustee has not formed a creditors committee.  The Chapter 11 business bankruptcy process is greatly simplified without a creditors committee but the United States Trustee has to more actively monitor the small business debtor.

Individual Debtor 

There are several statutes that apply to individuals under a Chapter 11 bankruptcy that make it similar to a Chapter 13 bankruptcy.  As in a Chapter 13 bankruptcy the debtor has to take a credit counseling course conducted by an approved agency prior to submitting the initial petition for a Chapter 11 bankruptcy.  The bankruptcy petition must be developed as a result of the credit counseling course.  A creditor may object if the debtor fails to do so and the debtor will have to commit all projected income to paying creditors.

The debtor does not receive any discharge of debt before the payment plan is complete.