When most people think of bankruptcy, they think of personal bankruptcies. However, businesses can file for bankruptcy too. A Chapter 11 bankruptcy is available to businesses under federal bankruptcy law. Under a Chapter 11 bankruptcy, the debtor remains in control of the business operations and is overseen by the bankruptcy court. The court chooses whether to grant total or partial relief from the company’s contracts and debts. The company eventually emerges from the bankruptcy with a newly reorganized company.
Chapter 11 is not strictly limited to businesses. An individual can also seek relief under a Chapter 11, although it is rare. This can happen if the majority of the individual's debts are business related, or if the individual has unsecured debt greater than the limit for a Chapter 13. A Chapter 11 is generally much more expensive, but it does give the debtor the opportunity a larger control over the outcome of his/her case.
A Chapter 11 begins when a debtor files a petition with the bankruptcy court. The petition will contain schedules of assets and liabilities, income and expenses, lists of contracts and leases and a statement of financial affairs. After the petition is filed, the debtor becomes the “debtor in possession”, and keeps control of its assets while going through a Chapter 11. The debtor remains a debtor in possession until a plan of reorganization is confirmed, the case is dismissed, the case is converted to a Chapter 7, or a trustee is appointed. Trustees are appointed only in a few Chapter 11 bankruptcies – typically the debtor in possession operates the business and manages the bankruptcy.
When there is a Trustee in a Chapter 11, he or she will play a big role by monitoring the case, imposing requirements on the debtor in possession regarding its monthly income and expenses, paying current employees and withholdings and taxes. The debtor in possession must pay a fee each quarter for the Trustee’s services.
During the bankruptcy, a written disclosure statement and a plan of reorganization must be filed. The plan will contain a list of claims and how those claims will be paid. Any creditors who will be receiving less than the full amount of their claims under the plan will vote on the plan. The court will then conduct a hearing to decide whether to confirm the bankruptcy plan.
Chapter 11 bankruptcies also involve “creditors’ committees”. Creditors’ committees consist of unsecured creditors who hold the seven largest unsecured claims against the debtor.Creditors’ committees consult with the debtor in possession on the administration of the case, investigate the debtor’s operation of the business, and help form a plan. A creditors’ committee can also hire an attorney or other professionals to help with their duties.
For small businesses, there may not be creditors willing to serve on a committee. Therefore, small businesses are treated differently under the bankruptcy code. A small business debtor must file more information with the court, and more ongoing filings, and has more ongoing oversight by the court. It usually proceeds more quickly than a Chapter 11 for a larger business.