California Chapter 11 Bankruptcy Law
California businesses have a couple of options to deal with dire financial conditions, and filing for a Chapter 11 bankruptcy can be an attractive option. However, it can be a bit complex, and to be successful, the business should consult experienced legal counsel to prepare the necessary filings.
Other People Are Reading
-
Definition
-
Chapter 11 in the federal Bankruptcy Code is specific to business and allows for a reorganization of debt and liabilities owed to creditors. Businesses most commonly affected by Chapter 11 include corporations, sole proprietorships, partnerships and other types of companies.
How it Works
-
The business seeking a formal court reorganization of debt files under federal Chapter 11 in court, specifying all of its properties, assets, and amounts owed to creditors. This also includes a written and detailed record of financial status under oath to the court. Under Chapter 11, the filing debtor business will function as its own trustee, administering the bankruptcy proceeding and reporting to the court as needed. That said, the court can still step back and appoint a third-party trustee if there is cause to do so.
-
Benefits to Using Chapter 11
-
The major significant benefit of this bankruptcy approach is the fact that the debtor trustee gets to maintain title of possession of all estate property involved. Second, the business does not have to face liquidation, which in many cases would mean the end of the business. Liquidation more often than not sells off the few assets left that could still maintain the business. Under Chapter 11, these vital resources remain with the business while it reorganizes and pays down debt with new revenue.
The Chapter 11 Plan
-
The debtor can pitch its plan on how to reorganize within the first 4 months of reorganization. After that, the creditors can pitch their desired plan to the court. The court decides which plan will remain standing as needed.
If approved to go forward by the court, the debtor and legal help meet with all standing creditors. The plan will include monthly financial reporting from the debtor, tracking all in- and out-flows of cash, profits, losses and business fiscal reports. In addition, the debtor has to pay a fee to the U.S. Trustee calculated on all funds actually distributed to creditors during the quarterly period.
The Plan Approval
-
Creditors are treated in categories under Chapter 11 and sorted by debt type. A vote is allowed by creditors if they are for or against the plan proposed to the court. The plan is approved by a simple majority head count of creditors and by two-thirds majority of the dollar interests involved (the voting count is concurrent, not separate, so if a simple majority wants the plan, but they only represent 22 percent of the dollars owed, the vote fails). The court still maintains an oversight position to make sure the plan is equitable and fair.
How Creditors Get Paid Under a Chapter 11 Plan
-
Obviously, the debtor doesn't have sufficient ready funds to pay all creditors at the time of filing. Instead, an approved plan relies on future business earnings and profits to address creditor debts. The debt claims are prioritized with taxes owed being paid first. Secured claims will come next and unsecured debts follow third with partial payments.
-
References
Resources
- Photo Credit courthouse image by Michael Shake from Fotolia.com
