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Understanding Chapter 11 Bankruptcy

By Spodek Law Group | February 20, 2024

Understanding Chapter 11 Bankruptcy

Declaring Chapter 11 bankruptcy can be a complex process for companies and individuals. This guide covers key aspects in plain language to aid understanding.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy allows companies and high-income individuals to reorganize debts rather than liquidate assets. It is the most common form of bankruptcy filing for large corporations in financial distress.The goal is to develop a reorganization plan to pay creditors over time while keeping the business operating (for companies). The plan allows the entity to reschedule debts, cancel some debt, and issue new equity to creditors. If creditors approve the plan, the business can emerge from bankruptcy as a newly reorganized company.

Key Benefits

Some benefits of Chapter 11 include:

  • Automatic Stay Protection – Filing triggers an automatic stay, stopping collections, foreclosures, and repossessions. This allows time to restructure.
  • Creditor Negotiation – The entity can negotiate with creditors to reduce debt through the reorganization plan.
  • Business Continuity – The business can typically continue operating during the process.

“The automatic stay is invaluable for companies in Chapter 11 bankruptcy,” said one Redditor. “It gave us breathing room to renegotiate with vendors.”

Eligibility

To file Chapter 11 bankruptcy, an entity generally must have:

  • Regular income
  • Regular operating expenses
  • Debts exceeding assets

For individuals, minimum debt levels apply:

  • Secured debts over $4,153,150
  • Unsecured debts over $1,257,850

High-income individuals typically need to pass a means test showing financial distress.

The Reorganization Plan

The key part of Chapter 11 bankruptcy is developing a reorganization plan stating how the filer will restructure debts and continue operating.The plan must divide creditors into classes and specify the repayment treatment for each class. It should:

  • Pay administrative costs first
  • Pay secured creditors at least liquidation value
  • Provide equal treatment within each class

Creditors vote whether to approve the plan. Approval requires support from a majority of creditors in each class.

Process and Timeline

The Chapter 11 process generally includes:

  1. Filing – The entity files bankruptcy paperwork and reorganization plan outline.
  2. Automatic Stay – Collections stop instantly with the automatic stay.
  3. First Meeting – The first meeting of creditors is within 20-40 days.
  4. Negotiating – The filer negotiates with creditors and develops the full reorganization plan.
  5. Plan Filing – A 120-180 day exclusivity period applies for the filer to file the plan.
  6. Voting – Creditors vote on the plan, followed by court confirmation.
  7. Emergence – The court discharges eligible debts. The entity emerges from bankruptcy.

The timeline varies by case complexity, but often lasts 6 months to 2 years.

Success Rates

According to US Courts statistics, about 47% of Chapter 11 bankruptcies reach a confirmed reorganization plan. The success rate is higher for businesses than individuals.With an experienced legal and financial team, companies can boost their chance of successfully navigating Chapter 11.

The Chapter 11 process involves extensive legal paperwork and court proceedings. Working with an attorney experienced in bankruptcy law is highly recommended. Useful sites to find lawyers include:

  • Avvo – Searchable directory of lawyers by location and practice area
  • FindLaw – Database of bankruptcy attorneys throughout the US
  • Justia – Listings of local consumer bankruptcy lawyers

“[Our lawyer helped prepare the complex reorganization plan],” a Reddit user commented. “Without that expertise, I doubt we would have succeeded.”

The Bottom Line

Chapter 11 bankruptcy allows distressed companies and high-income individuals to restructure unsustainable debts through a court-supervised process. With legal guidance, many entities emerge with reduced debt levels and a path toward financial stability.While the process involves compromise and hardship, Chapter 11 provides an alternative to liquidation for those needing a fresh start.“It was tough but we made it through,” said one person on Reddit. “Chapter 11 gave our business a second chance.”

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