Chapter 11 Bankruptcy

In Brief

Chapter 11 is for entities which need to reorganize but which are unable to qualify for Chapters 13 or 12. This includes entities such as corporation or partnerships or LLCs, or individuals whose debts exceed the debt limits of Chapter 13. The process restates the contractual relationship between the debtor and the creditors so that the creditor will receive a fair return given the circumstances, and the debtor will be permitted to retain property and/or continue the operation of an otherwise fruitful business.

In Depth

Chapter 11 is the most expensive and complicated type of bankruptcy among Chapters 7, 11, 12, and 13. However, sometimes, it is necessary to resort to Chapter 11 simply because no other chapter under the code is available to address the issues confronted by a particular debtor.

Such issues generally involve the need of the debtor to reorganize instead of completely liquidating in Chapter 7 and Chapters 12 and 13 are not available due to the nature of the debtor or the extent of the debtor’s debts.

Chapter 12 is limited to debtors whose significant income comes from farming or fishing business operations.

Chapter 13 is limited to individuals (not statutory entities such as LLCs and corporations). Chapter 13 also imposes limits as to how much secured and unsecured debt the debtor has. The limits are relatively generous for the majority of debtors but for those who exceed these limits and need to reorganize because liquidation is unacceptable, then the debtor might resort to Chapter 11 for that purpose.

To restate: Chapter 11 is generally the only reorganization available if:

  1. The debtor is a corporation, partnership, LLC, limited partnership or other such statutory entity; or
  2. The individual debtor’s obligations exceed the debt limits of Chapter 13.

The goal of Chapter 11 is generally to restructure the relationship between the debtor and its creditors by proposing a Plan of Reorganization to the creditors and the court. This is usually proposed in conjunction with a Disclosure Statement which provides creditors, the court, and other interested parties with information regarding the debtor which is sufficient for interested parties to make a judgment as to the feasibility of the plan and whether to support it.

The Chapter 11 debtor usually begins as a "debtor-in-possession" meaning that the debtor remains in control of the operation as long as the debtor follows the rules. The Chapter 11 debtor must abide by extensive rules which other debtors usually do not have to observe. Many of these are found in the Operational Instructions and Reporting Requirements (OIRR) published by the Executive Office of the United States Trustee (EOUST). The OIRR sets out a number of criteria for success in prosecuting a Chapter 11 including tax reporting, monthly operating reports, and requirements such as opening all new bank accounts and the printing of checks which identify the debtor as a debtor in Chapter 11.

A unique feature of Chapter 11 is that the creditors of the debtor actually are given a vote as to whether the plan should be confirmed. Creditors and debtors often work together to achieve the best result, one that permits the debtor to continue to operate without liquidating but is fair to the creditors and gives the creditors more than they would have received had the debtor been liquidated. Deming Law Office has been successful in a number of Chapter 11 cases in soliciting and receiving positive votes from creditors resulting in the confirmation of a Chapter 11 plan.

Most bankruptcy lawyers do not get involved with Chapter 11 but limit themselves to Chapters 7 and 13. They can be a trial of the best patience of everyone involved and there are other rules which apply in Chapter 11 which do not come into play in Chapters 7 and 13. But a debtor who finds Chapter 13 unavailable may well fashion a solution by resorting to Chapter 11.

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