Chapter 11 bankruptcy is technically available to both businesses and individuals for the reorganization of debt, but it is almost never used by individuals for this purpose due to the substantial expense of such reorganizations. As a result, this article focuses on the use of Chapter 11 reorganization proceedings to manage corporate debt, and some considerations to make regarding Chapter 11 bankruptcy versus other types of reorganization.
Chapter 11 is the corporate reorganization chapter of the bankruptcy code and is designed to allow for the continued operation of the debtor’s business when this is needed to maximize its value for creditors. Chapter 11 typically allows the debtor to remain in control of its business as the “debtor in possession,” although it must get approval from the bankruptcy court to carry out most major transactions after filing. Many corporate debtors are able to emerge from a Chapter 11 bankruptcy months or years after filing and operate as a viable business once more.
Within a few months of the filing of a Chapter 11 bankruptcy petition, the debtor in possession typically proposes a corporate reorganization plan to creditors and the court for confirmation. Interested creditors vote on the plan, and if sufficient votes are present, the plan can be confirmed by the bankruptcy court. Debtors in possession normally have a time period in which they have the exclusive right to propose a corporate reorganization plan, often 120 days. After that time, creditors may also propose corporate reorganization plans for possible confirmation. When confirmed, the plan will dictate the elements of the corporate reorganization process. If a debtor in possession is no longer able to comply with the plan, the plan can sometimes be modified, or the debtor can convert the Chapter 11 restructuring into a Chapter 7 liquidation bankruptcy.
Filing Chapter 11 bankruptcy has many advantages for the debtor in possession and its management. The debtor in possession is allowed to gain access to below-market rate financing through the ability to grant new debt higher priority than other similar pre-existing debt. In addition, the bankruptcy court can allow the debtor to cancel contracts and other executory obligations if the termination of these obligations would benefit the bankruptcy estate. Generally the management team of the debtor in possession stays on board to manage the company, as they are typically the most familiar with the debtor’s business operations.
If you own or manage a business and are considering a Chapter 11 bankruptcy filing, Nova Law Group is pleased to offer you a free consultation to discuss the legal needs of your organization.
