Chapter 11 Bankruptcy filings help a business reorganize its affairs and get more time to repay its debts. A business can seek protection under Chapter 11 of the bankruptcy laws when it operates a viable and profitable business that has a future, but it is unable to function normally because it is completely buried in debt. If such companies are given more time to repay their debts, the bankruptcy can turn into a win-win situation for all stakeholders. The business continues as usual, the customers get their product, the creditors get their dues over a period of time, and the state keeps making revenues from taxes.
Chapter 11 bankruptcy filings kick off when a business files for bankruptcy in the relevant court that has jurisdiction. The Chapter 11 bankruptcy filing petition can be voluntary or involuntary. The business has to submit a list of the following documents that can include:
- Statement of assets and liabilities
- Statement of income and expenditure
- Statement of financial affairs
- Statement detailing the executor contracts and leases that have not yet expired
- List of 20 largest creditors with amounts due
- Declarations as required by the court
- Other statements as required by the court (including tax records, SSN, ID, location of principal assets)
- Reorganization plan
- Disclosure statement as required by the court
When a voluntary petition is filed or when an order of relief is entered in an involuntary case, the business owner also becomes a “debtor in possession.” He must control the business’s assets until the reorganization plan is confirmed or till the case is dismissed or converted into a Chapter 7 case or till a trustee is appointed. A “debtor in possession” is required to deal with the assets in the same way that a court-appointed case trustee would.
The reorganization plan must clearly classify the claims against the business. It should include the list of creditors whose contractual rights will be altered or who will be paid lesser than what is owed to them. The next step in Chapter 11 bankruptcy filings is to hold a meeting of creditors and get the reorganization plan confirmed. If majority of the creditors confirm the plan then it gets the court’s approval.
Once the reorganization plan gets approved by the court, then the business owner must start executing it. He must ensure that the plan is executed as confirmed and if there are any variations or default, then the plan gets nullified, the bankruptcy protection vanishes, and the gloves come off. The creditors can sue the business owner. If the business owner executes the plan as stated, then a final decree is entered after the plan has been executed and the company becomes debt-free. It can then start all over again. This is how Chapter 11 bankruptcy filings work.
Other Business Bankruptcy Articles: