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Chapter 11 bankruptcy - What is all about and how does it work?

Chapter 11 bankruptcy, also termed as reorganization bankruptcy or business bankruptcy, is primarily filed by large businesses or individuals with huge debts. Chapter 11 allows the corporations/businesses to reorganize or restructure their debts and work out a repayment plan. Thereby, the businesses can continue to operate again and the employees can carry on with their jobs.

Who can file

11 bankruptcy can be filed by:

  • Small businesses
  • Large businesses/ Corporations/ Partnerships/ Any other business entity
  • Individual debtors
  • Creditors

Following is the eligibility criteria to file a Chapter 11 bankruptcy petition:

  • Debtor has to file a schedule of assets and liabilities, current expenses, current income, a schedule of contracts and leases, statement of financial affairs
  • Debtor hasn’t failed to appear in the court
  • Debtor didn’t have a prior bankruptcy filing dismissed during the preceding 180 days
  • Individual attempting to file a bankruptcy has received credit counseling from an approved agency during the preceding 180 days

Who can’t file

You won’t be able to file a Chapter 11 bankruptcy if:

  • Your earlier bankruptcy petition was rejected as you had not appeared in the court intentionally or refused to obey the court orders
  • Your previous bankruptcy petition was voluntarily rejected after your creditors asked for relief from the court to retrieve property on which they held liens
  • You haven’t received credit counseling from an approved agency prior to filing bankruptcy (A debtor has to submit a budget formulated during counseling when filing bankruptcy petition)

Role of a debtor in Chapter 11 bankruptcy

The debtor has a huge role in a Chapter 11 bankruptcy, as no trustee is appointed. The debtor has the powers of a trustee.

A debtor:
as a DIP (Debtor In Possession)
Runs his business
Formulates the repayment plan
Negotiates with the creditors
Provides all information regarding his financial situation
Makes plans to pay creditors

However, a US trustee keeps a close eye on the DIP for the successful completion of the bankruptcy. He can appoint a case trustee if he finds the DIP inefficient. In turn, the case trustee employs a person to run the debtor’s business efficiently.

Advantages:
  • You, the debtor, can "buy" time
  • Contracts can be accepted/rejected by you
  • You can enjoy “automatic stay” after filing Chapter 7 bankruptcy
  • Proposal of a reorganization plan of the balance sheet can be worked out
Disadvantages:
  • Usually, the fee is quite high, which you’ve to bear
  • The bankruptcy documents can be read by anyone who reviews court files; however, certain confidential information is not disclosed
  • It is time-consuming
  • Debtor may lose some control over business operations
  • It is a relatively complex process
  • Debtor should be confident that reorganization will turn into profitability
  • Some debtors believe that filing bankruptcy carries some stigma
  • Civil penalties may result, which may lead to imprisonment and arrest

It can be said that it is better to avoid bankruptcy. You can try out other debt relief options and if you fail to meet the financial requirements, then bankruptcy can be your last resort.