Also known as the reorganization stage of bankruptcy, the Chapter 11 bankruptcy was derived from the USA bankruptcy code 11. It is a type of insolvency that entails the reorganization of a debtor’s assets and business affairs. This form of liquidation is filed by corporations that need enough time to reorganize their debts and it is basically meant to give a fresh start to the debtor.
The fresh start is subjected to the Chapter 11 bankruptcy obligation fulfillment by the debtor, under the reorganization plan. It is available to partnerships, corporations and individuals. This form of liquidation doesn’t have limits on the debt amounts, like the Chapter 13.
In most cases, it will be used by large businesses that intend to reorganize their debt. It is also different from Title 11, which covers various types of bankruptcies.
How It Works
In the Chapter 11 bankruptcy, the debtor will most likely depend on the possession of their assets, but the business will be operated under the court’s supervision. Also, the business will be operated for the creditors’ benefit.
Here, the debtor will be the creditors’ fiduciary. In case the management of the debtor is less honest or ineffective, then a trustee can be appointed. The committee of creditors will be appointed by a U.S Trustee from amid the twenty biggest and unsecured creditors that are not insiders. This committee will rep every creditor in offering an oversight for the operations of the debtor. It will also act as a body that is available for the debtor to negotiate an acceptable reorganization plan.
The plan of the Chapter 11 will be approved when there are enough affirmative votes of the creditors. The creditors will be split into classes that are on the basis of the characteristics of their claims also, the votes of these creditors are meaningful to the amount of claim they make against the debtor.
In case the debtor cannot get the right votes to confirm a particular plan, they will try to propose another plan to the creditors and it will be confirmed, regardless of the creditor opposition. This will be done by holding discussions with a number of statutory tests.
This form of liquidation is also the most versatile of the rest, but also, it is the most difficult to generalize. Since it is flexible, it becomes more costly to the debtors.
The Common Tools or Aspects Of Chapter 11
- Exclusive time period. The debtor will be granted the exclusive right to file a chapter 11 reorganization plan for a period of 120 days. 180 days is granted to petition a reorganization plan. If the exclusive period is over, the creditor can file a reorganization plan for the debtor.
- A committee of indiscreet creditors. There is also a committee of unsecured creditors, which is aimed at balancing the powers of negotiations of the creditors. The committee is selected by the US Trustee.
- The reorganization plan. The entire Chapter 11 offers the debtor with specific tools for restructuring their financial affairs. It can offer the debtor with a plan that allows them to reject certain leases or contracts that might ruin their financial progress.
Generally, the Chapter 11 bankruptcy is aimed at offering the debtor a second chance of fixing the dead ends in their financial report and make more rational decisions.