I really don’t want you to get confused in a load of terms and formal explanations about Chapter 11. In this article, you will find the core idea of the chapter available in the Bankruptcy Code. So, let’s start going over.
Chapter 11: the essence
This is a chapter of Title 11 of the US Bankruptcy Code. No matter you are running a corporation, partnership or sole proprietorship, Chapter 11 refers to all. In general, when the business can’t pay its debts or the creditors, that business or its creditors may file a claim in the federal bankruptcy court to protect their rights under Chapter 11. The chapter is designed to reorganize the debtor’s business, personal assets and/or debts. Though, it may be a tool for liquidation as well (depending on the specific case).
It is important not to confuse Chapter 11 with Chapter 7. On the one hand, both refer to bankruptcy cases, on the other hand, they act differently. As we see, Chapter 11 refers to companies which may have a chance to reorganize after going bankrupt. But we can’t say the same for Chapter 7, Liquidation. According to it, the business stops operations and its trustee sells the assets. As a result, the owner of the company receives any residual amount.
The chapter in action
After your company files for Chapter 11, you become ”a debtor-in-possession.” It is noteworthy, that the company keeps on operating. The management goes on with its duties. You don’t appoint any trustee until someone files a motion after which the court decides that there are serious errors in the old management. Then, the court may find that Chapter 11 will serve the best interests of the creditors. As a decision, the court may approve the company’s new business plan, i.e. the plan of reorganization.
Citation from the Bankruptcy Code
Though I don’t want to make you bored with long and complicated rules and regulations from Chapter 11, I would like to cite some basic rules which you should now before consulting your bankruptcy lawyer.
“In most instances, the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.”
”Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise, the trustee may operate the debtor’s business.” (11 U.S. Code § 1108)
”In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541-all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first. The earnings from services performed by the debtor after the commencement of the case, but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.” (11 U.S. Code § 1115)
Cons of Chapter 11
Surely, Chapter 11 has both advantages and disadvantages. Let your attorney speak about a number of advantages it has. Here come the disadvantages. One of them is that bankruptcy process under Chapter 11 is a long and rather expensive one. In fact, the chapter doesn’t force to sell assets, but the costs of filing fees and legal fees may make you do so. Don’t be so happy when the court confirms a new management plan. You are going to pay off old debts during upcoming years.
Who is the US trustee?
Otherwise called a bankruptcy administrator, the trustee plays a great role in monitoring the progress of the chapter and leading the administration. One of the main responsibilities of the US trustee is to monitor the debtor in operation of the business. He/she also monitors whether the operating reports and fees are properly submitted. In accordance with section 341 in Chapter 11 (11 USC §341), the trustee should conduct a meeting of the creditors to discuss debtor’s acts, property, conduct, and the case administration. The law states that the debtor who is in possession has to pay a quarterly fee to the US Trustee. The payment should be provided until the case is discontinued or converted.
Undoubtedly, this is not the complete data you need when your company is on the edge of bankruptcy. This is just a hint to understand the main concept of Chapter 11 and beyond. Bankruptcy cases are one of the most complex and time-consuming. It is almost impossible to deal with such cases without a proper bankruptcy lawyer. I’m sure you are already thinking about finding one. Don’t go far, you are just on it. Our attorneys are ready to explain all ins and outs of Chapter 11 and give wrathful advice on how to act.