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This Chapter of the Bankruptcy Code is available to a business suffering severe financial difficulty. The business can be a corporation, partnership or sole proprietorship. Chapter 11 can also be used to liquidate the assets of the business and pay the creditors from the realization. A chapter 11 liquidation often will obtain a greater realization for the creditors than a Chapter 7 bankruptcy. Fast Tracking for Small Businesses (Debt less than $2,000,000).
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How it Works
Automatic Stay
The business is protected by an automatic stay that takes place upon the filing of the petition. No creditor can take any action against the debtor. The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
Debtor in Possession
The debtor retains control of the business by the fact the Bankruptcy Code (section 1107) places the debtor in possession , with the rights and powers of a Chapter 11 trustee.
Creditors' Committees
The creditors' committee can play a major role in chapter 11 cases. The United States trustee, a federal employee to be distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. The committee may consult with the debtor in possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan. 11 U.S.C. § 1103. A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession.
Plan of Reorganization
After the order for relief, the debtor has 120 days to formulate and file a plan of reorganization with the bankruptcy court. If the debtor fails to submit a plan within the 120 day period, or if creditors fail to consent to the debtor's plan during the first 180 days, any of the creditors can submit a plan. The court is then sometimes faced with conflicting plans.
A plan of reorganization must designate classes and interests under the plan and what these classes of creditors will receive under the plan. For example, secured creditors might be one class, unsecured trade creditors a second, and employees a third. The plan must be fair and equitable and must provide an adequate means for its own execution. Generally, all identified classes must accept the plan of reorganization by a majority vote in number of claims and at least 2/3 in dollar value, within each class. The bankruptcy court must approve the proposed reorganization plan after determining that it is in the best interests of the creditors.
Although each class of creditors must normally approve the reorganization plan, the bankruptcy court can still approve a plan over the objections of one or more classes of creditors. This power is called the "cram down" power.