Chapter 11 bankruptcy is referred to as a “reorganization” bankruptcy since it entails reorganizing a debtor’s financial affairs, liabilities, and assets. With Chapter 11 bankruptcy, troubled companies can reorganize their finances to maximize the amount of money they can pay back to their creditors and owners. While Chapter 11 bankruptcy can be filed on behalf of individuals, it is generally most widely used for businesses.
In the past, Chapter 11 bankruptcy charges were only affordable for large corporations. Thankfully, the Chapter 11 bankruptcy code has developed, and now both big and little companies can use it to stay open. People who do not meet the requirements for Chapter 13 may also file for Chapter 11. If questioning whether Chapter 11 is the right answer, it is wise to set up a free consultation with an attorney to go over all available options. There are various types of bankruptcy, and what will work for one business may not be the answer for another.
A bankruptcy “reorganization” is a common term used to describe a case filed under chapter 11 of the United States Bankruptcy Code. Typically, the debtor continues to be “in possession,” has the rights and obligations of a trustee, is allowed to carry on with its operations, and with the court’s permission, may borrow additional funds. A proposed plan of reorganization is put forth, the concerned creditors and lenders have the opportunity to vote on it, and if it receives the necessary support and complies with the law, the court may approve the plan.
Each bankruptcy chapter, including Chapter 7 bankruptcy, Chapter 13 bankruptcy, and Chapter 11 bankruptcy, stops the collecting process and prevents foreclosure and repossession. When a petition is filed, an “automatic stay” prevents the majority of creditors from pursuing the individual or business filer, providing the petitioner, creditors, and the court a chance to restructure their financial affairs. This will also help secure the business, its operations, any real estate and other properties.
A bankruptcy trustee is not in charge of the company and other bankruptcy property, unlike earlier bankruptcy chapters. As a “debtor in possession” during the Chapter 11 bankruptcy, the filer continues to manage daily operations. However, under Chapter 11, Sub-chapter V, small business bankruptcies are subject to extra scrutiny and oversight.
Both individuals and organizations frequently utilize bankruptcy as a mechanism to get rid of debt that will probably not be paid back and to gain a fresh start. Personal bankruptcy and commercial bankruptcy, however, are distinct concepts with unique laws and chapters.
The means test is one of the key distinctions between personal and commercial bankruptcy. Companies do not need to demonstrate this for a Chapter 11 filing, whereas individuals must engage in one to assess whether they are eligible for a Chapter 7 or Chapter 13.
Businesses can also break agreements with creditors if doing so would be profitable for all sides, but consumers do not have this choice when it comes to debts like school loans or other obligations that are not dischargeable in bankruptcy.
Individuals or certain businesses who have no chance of repaying accumulated debt should file for Chapter 7 bankruptcy. This chapter is intended for those with low incomes, and it leads to the discharge of certain debts in bankruptcy.
For people with income who could control their debt if they had a repayment schedule, Chapter 13 bankruptcy is an option. The goal of this chapter is to assist persons who may have improved financial circumstances as a result of bankruptcy or who are having financial difficulties but are not in dire straits.
Businesses, including corporations, can file for Chapter 11 bankruptcy in order to reorganize their finances or sell off assets to pay off debt. A Chapter 11 filing typically results in a reorganization. Debtors initially have the option of proposing their own reorganization plans, but after a predetermined period of time, creditors may also do so. Any plan chosen must receive the approval of the creditors.
Businesses may also petition for bankruptcy under Chapter 7, but the outcome is dissolution rather than reorganization. Although Chapter 11 bankruptcy is an option for individuals, most choose Chapter 7 or 13 due to the complexity of this chapter.
Under Chapter 11 bankruptcy, almost anyone may submit a bankruptcy petition. Chapter 11 debtors might be individuals, businesses, partnerships, joint ventures, or limited liability companies (LLP). For Chapter 11 bankruptcy filings, there are no restrictions or requirements regarding debt or income.
Other than the good faith requirements, a Chapter 11 bankruptcy case can be brought primarily for purposes of reorganization. There are no restrictions relating to finances or insolvency for filing a voluntary Chapter 11 case. A Chapter 11 debtor may be solvent or bankrupt, have assets that are more than its liabilities (or vice versa), and have either significant or no income.
The only practical financial restriction is whether the desired benefit outweighs the cost of the case to the debtor. A Chapter 11 case that was initiated by the debtor is known as a voluntary case. A Chapter 11 case brought against the debtor by its creditors is referred to as an involuntary Chapter 11 case.
The main goal of the Chapter 11 bankruptcy proceeding is to reorganize a Debtor’s debts and secure the business’s finances so that it can eventually emerge as a financially stronger and more viable entity. For this reason, while referring to the Chapter 11 debtor, the terms bankruptcy “protection” or “relief” are sometimes used indiscriminately.
A company must submit a Chapter 11 petition to the proper California bankruptcy court in order to commence the legal procedure for declaring Chapter 11 bankruptcy. A bankruptcy petition may be submitted freely or against one’s will.
After filing bankruptcy, there is a list of documentation and other forms the filer will need to submit to the court. A Chapter 11 bankruptcy lawyer will be able to help submit the proper forms and documents to ensure proper procedure is followed. This will require Official form 201, a list of creditors, compensation disclosure, balance sheets, statements of operation, cash-flow documents, tax returns, and creditor matrix files.
The Chapter 11 process for the Debtor’s case officially starts after the bankruptcy petition is submitted to the court. The filer is given a case number, a judge to preside over the proceedings, and a court clerk to keep records and oversee the timeline. Since the following events in the case are either initiated by or dependent upon this specific day, sometimes referred to as the petition date, the filing of the bankruptcy petition becomes an official date in the timeline of the case.
When reorganizing under Chapter 11, both smaller companies and large businesses must generally adhere to the same guidelines and procedures. Special provisions, however, facilitate a quicker Chapter 11 process for small business debtors while lowering legal costs and other restructuring costs.
When a business complies with Chapter 11, Subchapter V’s small business claim requirements, it becomes a “small business debtor.” The first prerequisite is that they must be involved in business or other commercial operations. The second condition is that as of April 1, 2022, their total outstanding debt must not exceed $3,024,725 (exclusive of obligations payable to insiders such as the business owners’ relatives) (for cases filed between April 1, 2022, and March 31, 2025).
The main benefit is that the company, which is typically a business, can continue to run its business while it is being reorganized. By doing this, they can provide cash flow that will help with the payback process. Additionally, the court orders a restraining order against creditors. Since they stand to recover more of their money over the course of the repayment plan, if not all of it, most creditors are amenable to Chapter 11.
A big disadvantage is that of all bankruptcy cases, Chapter 11 is the most complicated. Additionally, it is typically the priciest type of bankruptcy proceeding. The legal fees alone may be a bit burdensome for a business that is failing to the point where it is considering declaring bankruptcy.
When a business considers filing for Chapter 11 bankruptcy relief, it will need professional advice and counsel who are knowledgeable about bankruptcy laws and processes. The Debtor will need to retain the professional services of a law firm specializing in bankruptcy laws in order to navigate the choice and each subsequent step.
Having the appropriate bankruptcy attorney is crucial due to the complexity of the bankruptcy procedure and its length, which can range from several months to a few years. Many law offices throughout the Los Angeles area and California specialize in bankruptcy filings to offer companies debt relief.