Who Qualifies For Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy is the most commonly used by businesses, corporations, and partnerships. This provision primarily aims to restructure businesses, giving them a chance to reorganize debts and get out from under onerous contracts and leases. In general, while a business is under Chapter 11 bankruptcy, they can continue their operations, being supervised by the Bankruptcy Court and its appointees.
Who is eligible for Chapter 11 Bankruptcy?
Individuals, businesses, partnerships, and corporations are all eligible to file for Chapter 11 Bankruptcy. However, this provision is rarely used by individual debtors due to its complexity, and pursuing this bankruptcy provision is also more expensive compared to Chapter 7. This is more complicated as debtors usually propose a company reorganization plan to keep its business operating, earning enough profits to pay creditors over a certain period of time. They are given 120 days during which they have an exclusive right to file a reorganization plan. This may be reduced or extended by the court. Once this period has expired, their creditors may file a competing plan.
How does Chapter 11 Bankruptcy Work? Under the US Bankruptcy Code, this provision is often referred to as 'reorganization bankruptcy.' Debtors have to come up with a viable business reorganization plan to enable them to pay off their debts. A business may voluntarily file bankruptcy with a court where they have organized their company or their creditors may file this first after meeting certain requirements (involuntary petition). Under this bankruptcy petition, debtors must follow the Form 1 format of the Official Forms set by the US Judicial Conference. The court may also order debtors to file the following schedules: (1) Assets and liabilities; (2) Current income and expenditures; (3) Unexpired leases and executory contracts; and (4) Financial Affairs Statement. Standard information detailed below must also be included: (1) Debtor's name; (2) Social security number or tax identification number; (3) Residence or business address; (4) Location of principal assets for businesses; (5) Intention to file a plan; and (6) Request for debt relief. Once a bankruptcy petition is filed under Chapter 11, the debtor automatically becomes a 'debtor in possession.' This means that a debtor retains ownership and control of their business's assets while undertaking company reorganization. A company here may be: (1) A corporation - this bankruptcy petition does not include its stockholders' personal assets. The only assets at risk are the value of their investments in the company. (2) A sole proprietorship (owner as debtor) - filing for bankruptcy puts both personal assets and business at risk. (3) A partnership - personal assets of a partner may be used to pay creditors in some cases or the partners themselves may be compelled to file for bankruptcy protection. A business or an individual shall remain a 'debtor in possession' until the court confirmed their reorganization plan. Once confirmed, the debtor's bankruptcy case is either dismissed or converted to Chapter 7. Before filing under Chapter 11 Bankruptcy, it is always a good idea to ensure that the petition will be dismissed. Otherwise, one may lose assets if converted to Chapter 7.
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