What Are the Basic Steps in a Chapter 11 Bankruptcy?
Chapter 11 is a legal remedy designed to help financially troubled businesses remain operational and protected from creditors while they work to restructure their debts under a court-approved reorganization plan. The goal is for creditors to be partially repaid and for the debtor company to emerge solvent and financially stable at the end of the case.
The Chapter 11 process is complex and can vary based on the particular company’s size, industry and debt situation. However, these procedural steps are common to all cases:
- Preparation and filing of petition — In most Chapter 11s, a petition is voluntarily filed by the company seeking protection. The petition is supported by disclosure documents such as a list of assets and liabilities, a statement of current income and expenditures, a schedule of executory contracts and unexpired leases and a statement of financial activities.
- Automatic stay — Immediately upon the petition’s filing, an automatic stay goes into effect, preventing creditors from taking collection actions against the debtor company. This provides a period of relief during which the reorganization plan can be developed.
- Appointment of trustee — The court may name a trustee to supervise the reorganization. However, in most cases, the company’s principal owner is allowed to operate as a debtor-in-possession under court oversight. This role includes conducting general business activities, obtaining financing as needed and making periodic reports to the court.
- Notice to creditors — The bankruptcy court sends a notice of filing of the petition to all listed creditors. The notice includes a date by which creditors’ proofs of claim must be filed.
- Creditors’ committee formation — In many cases, a committee is appointed to represent the interests of unsecured creditors of different classes. The committee’s role includes negotiating terms of the reorganization plan and monitoring the company’s adherence to the plan.
- Reorganization plan Filing — The debtor company has the exclusive right to propose a reorganization plan within 120 days of the petition’s filing. The plan includes a classification of claims and interests, provisions for how each class of claims will be treated and means of implementation of the plan.
- Disclosure statement approval — Along with the reorganization plan, the debtor must file a disclosure statement providing information adequate to enable creditors to evaluate the plan. The court holds a hearing to determine if the disclosure statement is acceptable.
- Plan confirmation — All creditors have the right to vote on the plan. A court hearing is held, with notice given to all interested parties. The court confirms the plan upon finding that it is feasible, proposed in good faith and compliant with legal requirements.
- Implementation — Once confirmed, the reorganization plan is put into effect, and the business begins to make payments to creditors. The plan can be modified, with court approval, as warranted by subsequent changes in circumstances.
- Emergence from Chapter 11 — After all terms of the reorganization plan are fulfilled, the debtor company can seek a final decree closing the case. The company has then successfully emerged from Chapter 11, which means a discharge of much of its remaining debt.
Chapter 11 bankruptcy offers a proven pathway for businesses to regain profitability and adjust their operations to meet new financial realities. However, it requires careful planning and orchestration. The assistance of an experienced Chapter 11 attorney can be indispensable.
California companies in financial straits are encouraged to contact the Law Offices of Michael Jay Berger in Beverly Hills, California to discuss how Chapter 11 can help restore their economic health. Call 310-271-6223 or contact us online to schedule a free consultation.
