Chapter 11 Bankruptcy
If efforts to restructure its debts in an informal, consensual manner are not practical or do not succeed, the company may turn to a formal chapter 11 filing in the Bankruptcy Court as an alternative. The purpose of a case under chapter 11 of the Bankruptcy Code is to formulate a plan of reorganization or structured liquidation that a majority of creditors will accept, as a means of either preserving a company’s enterprise and restructuring debt, or conducting a liquidation of its assets in a manner that will maximize recoveries. While chapter 11 is usually a process used by commercial businesses, it can be appropriate for individuals as well in some circumstances.
A chapter 11 case is commenced by the filing of a bankruptcy petition, which immediately operates as an automatic stay of creditors’ enforcement actions against the company’s assets. This allows the company a breathing spell in which to negotiate with its creditors, restructure its operations, address cashflow needs and formulate a plan for its reorganization. In doing so, the company must comply with a comprehensive set of rules under chapter 11 for asset management, disclosure of assets and liabilities, and Court approval for sales of assets and other actions out of the ordinary course of business. Frequently, a creditors’ committee is appointed to advocate for unsecured creditors’ rights throughout the process.
During the chapter 11 process, the debtor is allowed to continue to operate its business and to negotiate a reorganization plan to restructure its obligations. Ultimately, the debtor must propose a plan of reorganization that provides for its emergence from bankruptcy with its enterprise intact and debts restructured in a viable manner. The plan may provide, among other things, for asset sales, conversion or reduction of debt, adjustment of operations, or termination of leases or other burdensome contracts. Creditors then have an opportunity to vote to accept or reject the plan, and to win confirmation, the plan must be accepted by calculated majorities of creditors in different classified groups. Notably, the plan may be confirmed and become effective without every creditor’s consent, provided that the requisite majority of acceptances have been obtained. Once the plan is effectuated, all prior obligations of the company, except as preserved or created under the confirmed plan, are discharged – often called a “fresh start.”
Chapter 11 is a complex process that requires careful analysis, planning and effectuation. Having experienced chapter 11 counsel is essential in protecting rights of both debtors and creditors. Meyers Law Group, P.C., with its extensive experience in representing both companies and their creditors in the chapter 11 process, can provide that important protection.