may file for straight bankruptcy under Chapter
7 of the Bankruptcy Code or under the reorganization
provisions in Chapter 11.
a straight bankruptcy proceeding, the assets of the business are
liquidated and paid out to creditors. In a reorganization proceeding,
the business continues to operate according to a reorganization plan
while making repayments to creditors.
purpose of this article is to address, in lay terms, the steps in the
Chapter 11 reorganization.
11 reorganization proceedings create the opportunity to:
prevent the spread of
economic failure to smaller suppliers
permit communities to
retain their tax base
are the steps for filing a Chapter 11 proceeding:
A Chapter 11
proceeding commences by the filing of a petition either by the debtor,
or in rare cases, by a creditor or a group of creditors of the debtor.
Once the petition has
been filed, the debtor is referred to as the debtor in possession
because the debtor remains in possession of the business and its
assets and continues to run the business.
In very rare cases of
fraud, dishonesty, incompetence, or gross mismanagement, the
Bankruptcy Court may appoint a trustee to run the business.
The debtor in
possession, or the trustee if one has been appointed, must file:
a list of
a schedule of assets
and liabilities, current income and expenses
a statement of the
debtor's financial affairs.
One hundred twenty
days (120) after the filing of the petition, the debtor in possession
must file a plan for the reorganization of the business. An appointed
trustee may also file a plan, and the creditors have the right to file
a plan under certain circumstances. The plan must be proposed in good
faith and not violate any applicable laws.
Creditors in each
specified "class" of creditors (shareholders, bondholders,
secured creditors, unsecured creditors) have the right to approve the
plan. Each respective class has certain voting rights with respect to
the other classes, depending on the number and nature of the classes
and the overall vote of creditors. If the creditors approve the plan,
it must also be confirmed by the Bankruptcy Court.
If the plan has been
carried out successfully, the debtor is discharged from the debts that
arose before the confirmation of the plan and the business may
continue to operate.
plans can be extremely complex for large corporations with thousands
of creditors, especially if the debts arise from actual and potential
liability claims. In some
cases, a Chapter 11 proceeding will be pre-packaged meaning the debtor
will negotiate with creditors prior to the filing of the bankruptcy
proceeding to work out an agreement for the reorganization of the
company. The plan is then filed with the Bankruptcy Court, with the
creditors having already agreed to the plan.
wish you well.
our next installment we will discuss the benefits and burdens of the
Chapter 11 filing.