Which Type of Bankruptcy Allows the Business to Continue to Operate While Paying Off​ Debt

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a legal process that involves the reorganization of a debtor's debts and assets. It is available to individuals, sole proprietorships, partnerships, and corporations. It is most commonly used by corporations. The reorganization allows the business to continue operations but under supervision, subject to the debtor's fulfillment of some of their obligations. Since it is the most expensive of all bankruptcy proceedings, a business should perform a careful analysis of all other bankruptcy alternatives before settling for Chapter 11.

Once a business has filed a Chapter 11 bankruptcy, it is allowed to operate under the management of a debtor, commonly referred to as a debtor in possession. The debtor in possession takes control of the business operations and is tasked with accounting for property and examining claims and employment of professionals such as accountants, attorneys, and auctioneers. A trustee supervises the compliance of the debtor in possession with the reporting requirements set by the court.

The Process for Chapter 11 Bankruptcy

A Chapter 11 case starts with the filing of a petition in the bankruptcy court where you are a resident. The petition may be voluntary or involuntary. A voluntary petition is submitted by the debtor, on the condition that no prior bankruptcy petition was dismissed due to the debtor's intentional failure to appear in court or comply with court orders. Upon filing the petition, the debtor must submit a schedule of current income and expenditures, assets and liabilities, executory contracts, and unexpired leases, as well as a statement of financial affairs. After the debtor has filed the petition, they automatically assume the role of "debtor in possession" and take control of the business operations and assets during the reorganization. An involuntary petition is filed by creditors who meet certain requirements provided by the bankruptcy court.

The voluntary petition includes the debtor's tax identification number, the location of principal assets, residence, and his intention to file a plan of reorganization. When receiving the petition, the bankruptcy court is required to charge a $1,167 filing fee and a $500 administrative fee. The fee is paid to the court clerk in whole, or in installments as decided by the court. If the court allows payment in installments, the debtor is limited to four installments, with the final payment not being later than 120 days from the date of the case filing.

A disclosure statement and a plan of reorganization must also be filed with the court. The disclosure statement contains details about the debtor's assets, liabilities, and business affairs, sufficient enough to allow the court to make an informed decision about the plan of reorganization. The plan of reorganization contains a classification of claims and the treatment of each claim. For creditors whose claims are impaired, they vote on the plan of the reorganization through balloting. Creditors who are unimpaired are deemed to accept the plan, while creditors who are impaired are assumed to reject the plan. After the court has allowed the disclosure statement and tallied the votes, it holds a hearing on whether to confirm the plan of reorganization.

Debtors in Possession

Chapter 11 bankruptcy places the debtor in possession with a role to perform all functions relating to the business except investigative functions and the roles of a trustee. These functions include examining and objecting to claims, accounting for assets, and filing reports as required by the court. With the court's approval, the debtor in possession can employ professionals such as attorneys, accountants, auctioneers, and appraisers to assist in his/her functions.

The trustee is required to monitor the compliance of the debtor in possession with the reporting requirements set by the court. If the debtor in possession fails to comply with the reporting requirements of the trustee or bankruptcy court, the trustee may file a motion to have the case dismissed or converted to another chapter of the bankruptcy code.

Automatic Stay

An automatic stay order suspends all judgments, foreclosures, collection activities, and property repossessions by creditors that arose before the petition. The stay against creditors sets in place immediately when the petition is filed. It gives the debtor a chance to hold negotiations in a bid to resolve the financial distress. In some circumstances, the secured creditors may apply for relief from the automatic stay to foreclose on the assets and apply the sale proceeds to the owed debts.

Confirmation of the Reorganization Plan

The bankruptcy court requires the debtor to propose a plan within 120 days from the date of filing the bankruptcy petition. If the debtor proposes a reorganization plan within the stated period, the court grants another 180 days to allow the debtor to obtain confirmation of the plan. The plan designates classes of claims for treatment in the reorganization. Also, the plan lists the creditors in order of priority, with secured creditors topping the list.

Chapter 11 dictates that the entire class of creditors is deemed to have accepted the reorganization plan if it is accepted by creditors with at least two-thirds in amount and at least one-half of the number of allowed claims in the class. Also, the plan must be approved by at least one class of creditors who hold impaired claims. The holders of unimpaired claims are deemed to have accepted the plan.

If at least one class of creditors vote to object, the plan can still be confirmed as long as the requirements are met. The basis of this confirmation is that the plan must be fair and equitable, and should not discriminate against that class of creditors. If no objections are filed, the court must be satisfied that the plan has complied with all the requirements for confirmation. The court must also find that the plan is feasible, it is proposed in good faith, and that the plan and its components have complied with Chapter 11. The plan then becomes binding and identifies how debts will be treated for the plan duration.

If the reorganization plan is not accepted, the court can either convert the case to a Chapter 7 bankruptcy or dismiss it in its entirety. Rejecting the plan returns things to the status quo before the petition filing. Creditors can then opt for a non-bankruptcy law to protect their interests.

Learn more:

Thank you for reading CFI's guide to Chapter 11 bankruptcy. To further your financial education, we offer the following free CFI resources.

• Section 338
• Tax-Free Reorganization
• Section 368
• Private Company Valuation

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Source: https://corporatefinanceinstitute.com/resources/knowledge/other/what-is-chapter-11/

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