How Does Chapter 11 Bankruptcy Work?
Accomplished California bankruptcy attorneys answer your frequently asked questions
If you’re contemplating Chapter 11 bankruptcy for your business, you’ve undoubtedly got questions about the process. With decades of experience helping businesses out of debt, the Law Office of Michael Jay Berger is the bankruptcy law firm with answers you can trust. No two bankruptcies are alike and your case will certainly have unique features you can discuss when you schedule your consultation. To get you started, we offer these frequently asked questions and answers on Chapter 11 business bankruptcy.
- What type of bankruptcy is Chapter 11?
- Who can petition for Chapter 11 bankruptcy?
- What is a payment plan?
- What is a Disclosure Statement?
- What is a “debtor in possession?”
- Is Chapter 11 only for major corporations, or can a small business file?
Chapter 11 is frequently referred to as reorganization bankruptcy because it allows a company to reorganize debt, continue operations and gradually repay creditors. The alternative is a Chapter 7 liquidation, which shutters the business and sells off the assets to repay as much debt as possible. So, while liquidation is a business death sentence, Chapter 11 an give a company a new lease on life.
Petitions for Chapter 11 business bankruptcy can be voluntary, in which case the business owners file on behalf of the company. Debtors can file as individuals in the case of a sole proprietorship or general partnership or as officers or shareholders in the case of a corporation. A debtor can also be forced to enter Chapter 11 involuntarily when one or more creditors file the petition.
Also called a reorganization plan, a Chapter 11 plan outlines the changes a business will make to return to profitability and repay its creditors over time. Your proposed plan is the centerpiece of your bankruptcy filing. The creditors can request alterations to the plan or propose their own. Once your creditors accept a plan as viable, you’ll be able to reorganize and continue to operate.
Chapter 11 petitions require multiple supporting documents. One of the key documents is a disclosure statement, which provides information to creditors about your financial situation. Items the statement must contain include:
- An explanation why your proposed payment plan is better for your creditors than a Chapter 7 liquidation bankruptcy
- Projections of your expected income and expenses during the plan period
The disclosure statement should be complete and detailed in order to persuade your creditors to adopt your payment plan.
In many cases, the owner of the business is permitted to continue to operate it during the Chapter 11 process. That owner is known as a debtor in possession (DIP). The U.S. Bankruptcy Code makes the DIP a fiduciary, which means he or she is accountable to the bankruptcy court and has a duty to operate the company for the benefit of the creditors.
Many large corporations have filed Chapter 11 business bankruptcies and rebounded successfully, including Apple, General Motors, Marvel Entertainment and Texaco. But Chapter 11 had historically been too expensive to be feasible for small businesses. That changed in 2019 when the Small Business Reorganization Act created Subchapter V, giving small business debtors a streamlined, less costly version of Chapter 11. The remedy is available to a business that has no more than $3,024,725 in debts.