Chapter 11 Bankruptcy of United States Bankruptcy Code
Chapter 11 bankruptcy offers reorganization and repayment of debt. Chapter 11 is available to corporations, sole proprietorships and individuals. Large farming organizations that do not qualify for Chapter 12 bankruptcy are also allowed to file for protection under Chapter 11.
In order to file Chapter 11, debtors must have a minimum of $336,900 in unsecured debts or $1,010,650 in secured debts. When debtors file Chapter 11 bankruptcy they must enter into a repayment agreement with their creditors. Generally, this takes place 30 to 90 days after petitioning the bankruptcy court.
During Chapter 11 proceedings, the business is allowed to continue operating while debts are restructured. This period is referred to as 'debtor in possession' and provides the debtor with the rights of a bankruptcy trustee. This authority status allows the debtor in possession to use assets of the business without obtaining permission from the court.
Additionally, the debtor in possession is allowed to obtain secured or unsecured credit, without court approval, to continue business operations. Chapter 11 grants 'avoidance powers' to debtors, which are quite complex. They encompass the avoidance of property transfers made within 90 days prior to filing Chapter 11. In essence, if a property transfer allows the creditor more than they are entitled to, the debtor in possession can void the transfer.
For obvious reasons, filing Chapter 11 requires the services of qualified bankruptcy attorneys. Multi-million dollar organizations who file this bankruptcy chapter generally require a team of experts to ensure they comply with the law and properly file documentation in a timely fashion.
The Chapter 11 reorganization plan is typically broken down by creditor classification. Loans secured by real estate are generally repaid over an extended period of time. Unsecured notes are paid based on the useful life of the collateral. For instance, loans for machinery would be repaid over 10 years, while loans for office equipment would be repaid over 5 years.
Chapter 11 repayment plans must be confirmed by the court. This three-step process requires the debtor to develop a plan, creditor acceptance of the plan, and presenting the plan at a confirmation hearing. Additionally, the bankruptcy judge must review the plan to ensure the debtor has the finances to follow-through on repayment.
Once Chapter 11 is confirmed, all debts are discharged with the exception of specified non-dischargeable debts. Chapter 11 is one of the most complex and complicated bankruptcy chapters. In some cases, confirmations are contested which can lead to numerous legal issues.
Learn more about the various bankruptcy chapters and alternatives to bankruptcy by visiting Simon Volkov's comprehensive realestate article database.