Chapter 11 Bankruptcy:
There are four main bankruptcy chapters that are available to individuals. Chapter 7 bankruptcy, often called a “straight bankruptcy,” allows for liquidation of assets and can be used by either consumers or businesses. Chapter 12 was set up entirely for the “family farmer” or the “family fisherman.” Chapter 13, the most common one for individuals, is also known as the “wage earner bankruptcy.”
The purpose of this article is to give more detailed information on the remaining bankruptcy, Chapter 11. Chapter 11 bankruptcies are not often used by individuals because in order to file for one, the individual must owe more money than that allowed in a Chapter 13 bankruptcy (i.e., they must owe at least $336,900 in unsecured debts, or $1,010,650 in secured debts) and they must have an income that would make it possible for them to pay off either the full debt or the debt as reduced by the courts.
Businesses, especially corporations, are the primary users of Chapter 11 bankruptcies, which are often referred to as “reorganization bankruptcies.” Sole proprietorships, like individuals, usually choose to file bankruptcy before their debts reach the amounts required for Chapter 11.
The benefits of bankruptcy to a business are that all creditors can be dealt with in a single integrated proceeding, and it supplies a process for settling creditors’ claims. An addition goal of a Chapter 11 bankruptcy is to reorganize the company.
Unlike a Chapter 7 bankruptcy, in which the business closes down and all of its assets are sold by a trustee and the proceeds given to the creditors, a chapter 11 bankruptcy allows the business keep its assets and to continue operating the business for the benefit of creditors. At the same time they must reorganize, under court supervision, what they owe in contracts and other debts. The court has the power to cancel certain obligations of the business in order to let the company make a “new” start.
If the debts are greater than the company’s assets, stockholders’ rights and interests are usually ended at the termination of the bankruptcy, and the reorganized company is then owned by the original company’s creditors.
A Chapter 11 petition for bankruptcy can be either voluntary (the company itself files the petition) or involuntary (the petition is filed by the creditors). At the time of the filing, the courts are required to charge a case filing fee of $1,000 and a miscellaneous administrative fee of $39---another reason individuals usually don’t file Chapter 11 bankruptcies. If these fees are not paid when due (they may be paid in four installments with the final payment being made within 120 days from the filing or, with court permission, up to 180 days) the case can be dismissed.
As in all types of bankruptcies, once the petition is granted, creditors must stop collection attempts and they may not collect any post-petition debts. Also, if the company is listed on any of the three major stock exchanges, it will be “delisted” from the exchange (NASDAQ indicates the company is in bankruptcy by adding a “Q” as the fifth letter of the company’s stock symbol). However, a delisted company often gets quickly “relisted” as an OTC (over-the-counter) stock.
The company must then present a disclosure statement and a plan for reorganization to the court. This document includes information about the assets and liabilities of the company, as well as enough information regarding the overall business affairs of the company (e.g., a classification of claims and how they will be handled under the plan) to allow creditors to make informed judgments on the reorganization plans.
If the company does not present this reorganization plan within a specified period of time, the creditors may submit their own plans. Either way, the plan must be approved by the courts.
If the business involved is a small business and there is no creditor who is willing to serve on a creditors’ committee or who is able to give enough attention to the case, then there are different processes that may be applied. The case is labeled as being a “small business debtor.” The small business must fit two qualifications: 1) Their activities must be commercial or business, not just owning or operating real property, and their total non-contingent liquidated debts, both secured and unsecured, must be less than $2,000,001, and 2) The creditors’ committee must either be non-existent or unable to oversee the debtor. The small business debtors are subject to more oversight by the U.S. trustee than larger businesses.
Chapter 11 is often considered to be quite flexible; this makes it more costly for the debtor. It is estimated that only about 10% of Chapter 11 reorganizations are successful.
Thank you to Mary Lou Derksen for this "Chapter 11 Bankruptcy" article.
