Explain Chapter 11 Bankruptcy
Although individuals may file for Chapter 11 bankruptcy protection, this category of bankruptcy typically involves a partnership or corporation. The debtor put forth a plan to reorganize finances to keep the business enterprise afloat, while it pays creditors in accordance with a court-approved plan. Often people refer to this type of case as "reorganization."
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Significance
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Most individuals who file for bankruptcy do so under Chapter 7 or Chapter 13. Unlike Chapter 13, which has limits of less than $100,000 in secured debts and $350,000 in unsecured debts, Chapter 11 does not have a cap on the amount of debts. Most filers consist of large businesses that require debt restructuring in order to continue its operations.
Features
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Chapter 11 allows the debtor to continue in possession of its assets as it manages the business under the direction of the bankruptcy. However, the debtor takes on the legal responsibility to operate the company for the financial gain of the creditors. In some cases, the court may appoint a trustee for ineffective or questionable management. Generally, the trustee appoints a committee consisting of the 20 largest unsecured creditors.
The members of the creditor committee cannot have an ownership interest in the business and must represent all the creditors. They oversee the operations of the business and enter into negotiations with the debtor to develop a satisfactory plan to reorganize the business finances. The creditors vote to approve the plan.
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Function
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The bankruptcy process commences with a voluntary petition filed in federal bankruptcy court. Sometimes, creditors may force the business into an "involuntary petition" of bankruptcy. Various financial statements must accompany the petition, including asset and liabilities and current income and expenditures. In May 2010, the filing fee cost $1,000.
Reorganization Plan
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A debtor must file disclosure statements along with its reorganization plans with the court. A disclosure statement reveals information regarding the company's assets and liabilities and the business dealings of the enterprise. The debtor must shed some light on its financial circumstance in order for creditors to make informed decisions about the viability of the debtor's reorganization plan. The court may not require a disclosure statement in the case of a small business, as long as sufficient information about the operation exists.
The reorganization plan should contain categorized list of claims, creditors receiving reduced values under the plan, proposed settlement values of creditor claims and votes cast on the plan.
Conclusion
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The court must approve the disclosure statement. Creditors vote on the reorganization plan via a balloting process. The court counts the votes and schedules a confirmation hearing to decide on whether or not to approve the plan. Usually, the funding of the plan comes from the future earnings of the company. Approval of the plan can only go forward over any objections if all of the "business disposable income" over the period of the plan (up to five years), goes toward paying, as much as possible, the creditors in full. An exception exists for the full payment of a claim (including interest) over less time.
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References
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