Chapter 11

Bankruptcy under Chapter 11 of the Bankruptcy Code is often referred to as "business reorganization." Chapter 11 is available to individuals but is rarely used by them. Chapter 11 allows qualified individuals and businesses to reorganize their obligations and pay their debts over time. Businesses that choose to take advantage of Chapter 11 relief continue to operate their business while paying their debts.

A business debtor begins the Chapter 11 bankruptcy process by filing a petition with its local bankruptcy court. Once the debtor files its Chapter 11 petition, an "automatic stay" goes into effect which prohibits the business’ creditors from making any attempt to collect their debt, including attempting foreclosure and repossession. Along with the filing of the petition, or shortly thereafter, the debtor files various written "schedules" and "statements" to inform the Court of its outstanding debts, its current revenue and expenses, any existing contracts, any current or potential lawsuits, and any recent asset transfers. Once that information has been submitted, the debtor proposes a repayment plan to the Court. Under Chapter 11, the creditors are able to vote on the debtor’s proposal. It can take anywhere from six months to a year or more before a repayment schedule is approved and in place. Under the schedule, the debtor must generally pay all tax obligations and secured debts in full, plus interest, and at least a portion of unsecured debts. Once approved, the debtor may have up to six years to repay its obligations.

A Chapter 11 Bankruptcy filing has no initial qualifying requirements in terms of the amount of debt that a debtor is required to owe or the type of entity that the debtor needs to be. There are various benefits that a debtor gains from a Chapter 11 Bankruptcy filing. A business in serious financial difficulty may continue to operate without danger of immediate closure by its creditors via lawsuits, enforcement of judgments, liens as well as turnover orders. This breathing spell is supposed to provide the debtor with an opportunity to attempt the successful reorganization of its financial affairs. The debtor’s breathing spell lasts until the statutory time to propose a plan of reorganization which is usually 120 days or until the automatic stay if lifted by a creditor.

Chapter 11 Bankruptcy can be an excellent method to deal with the financial problems of companies that may have encountered excessive debts, numerous debt based lawsuits, liquidity problems, temporary down turns in business or even the need to reject certain leases or contracts. Reorganization of business debt under Chapter 11 may at times be a much better option to both the Debtor and its Creditors as opposed to liquidation under Chapter 7 Bankruptcy.

If a company is facing imminent or irreparable financial damage due to the collection efforts of creditors, or simply has hit a few economic bumps but wants or needs to stay in business, there are alternatives to Chapter 11 Bankruptcy. Such options include out of court workouts and settlement arrangements, assignments for the benefit of creditors, as well as receiverships and forbearance agreements. Depending on the facts of a particular case alternatives to Chapter 11 Bankruptcy may not be viable.