Chapter 11 is one of the most popular among business entities, as it was designed especially for financially drowning business corporations. Chapter 11 is named after the Bankruptcy Code 11 and it allows businesses reorganize their debts, obligations, business processes, and assets in order to keep the business afloat.
Chapter 11 for business basically plays the same role as Chapter 13 does for individuals, where debts are not just liquidated, but instead, a debtor wins time to manage their finances and regain the control over the situation.
As it is designed to help the business get out of hardship, this Chapter is reasonably highly expensive to file for. Thus, the entity must do a thorough financial analysis before making a final decision.
Filing under this Chapter has many benefits for a corporation. In a case of success with approving the petition and reorganization plan, the company can keep all business processes alive and active which gives a company great chance to earn the money without being disturbed by creditors.
In fact, lots of well-known corporation are filing for bankruptcy from time to time to get debt relief. Therefore Chapter 11 could be considered an efficient tool for managing financial distress.
Who can file under Chapter 11
Bankruptcy code allows companies, partnerships, and corporations file for bankruptcy under Chapter 11 when they meet a number of requirements. Only in this case, the Federal law provides the business legal protection from creditors.
Unlike Chapter 13, Chapter 11 does not have a debt ceiling (the maximum amount of debt). On the other hand, Chapter 11 requires more comprehensive and detailed reorganization plan to be developed by the debtor and approved by the creditors.
In fact, reorganization plan plays a role of an Agreement between the company (the debtor) and his creditors, where creditors agree with the offered plan and a manner of debt repayment in the future.
There are four criteria upon which the court does or does not approve the plan:
- Feasibility: in short, the court must find the plan plausible and reasonable. That means that court’s financial specialist must confirm that the offered calculations on planned income and the overall strategy seem likely to succeed.
- Must be fair and equitable: in a case of secured debts, all creditors must receive from the debtor at least the value or collateral.
- Good faith: the debtor must convince the court that the plan is created at its best and with a solid and good faith in what’s written down.
- Must match creditors interests: according to the plan, all financial operations and efforts should be directed, first, to finding funds for repaying the debt the soonest possible.
According to the official statistics, the major part of cases under Chapter 11 is dismissed due to parties (creditors and a debtor) have come to a mutual agreement before the court. The operations, though, must be in line with the plan’s strategy. The Trustee (if any) must supervise whether the operations are aligned with the reorganization plan.
What does the bankruptcy bring to the debtor?
The court may or may not appoint a special Trustee who will look after the business operational processes if the court finds it reasonable. The purpose is to help the company get an income which will meet the reorganization plan. In other cases, the business entity acts without supervision in a regular mode but without the pressure from creditors.
However, the court must approve each big business decision like assets sale or assets relocation. Also, the entity must acknowledge the court and get an approval in following cases:
- the decision to close or reorganize any departments or terminate certain business processes;
- making agreements concerning getting new loans after the filing for bankruptcy;
- hiring (and paying considerable fees) attorneys or other law specialists after the case is filed;
- creating or entering business unions which involves assets or funds relocation.
In the rest of cases, the debtor has full rights to act upon own business decisions in accordance with the plan confirmed by the court. The operations, though, must be in line with the plan’s strategy. The Trustee (if any) must supervise whether the operations are aligned with the reorganization plan.
What are consequences of becoming bankrupt under Chapter 11?
First of all, a debtor must get themselves prepared for a long process. Filing for bankruptcy under Chapter 11 may take up to 2 years, depending on the sum of debts. Moreover, sometimes, creditors may file against the debtor and this can drag out the case.
What is good for the debtor is all assets remain within the business; still, these assets cannot be freely sold or relocated. All assets and business possessions (equipment, buildings, the land, etc) can still be used in the interest of this particular Company.
Contrary to common belief, Chapter 11 is also available for individuals, not only for businesses. Yet, it is highly unpopular chapter among individuals to file for due to very high fees and strict requirements.
The rate of successful cases of bankruptcy under Chapter 11 is catastrophic now in the USA – about 15%, still, it’s the best chapter for corporations in terms of flexibility, freedom of actions and the minimum impact on vital operational processes.