You may have heard a news report about a company that has emerged from Chapter 11 so that it can continue doing business. Similarly, you may have read about how a financially troubled company proposes, in its Chapter 11 reorganization plan, to pay its employees. In 2003, nearly 10,000 debtors — both individuals and businesses — filed for Chapter 11 bankruptcy.
What is "Chapter" 11?
The Bankruptcy Code is a collection of federal laws that apply in bankruptcy cases or proceedings. The Code is made up of various “Chapters” that each apply to a different type of debtor or bankruptcy. One purpose of Chapter 11 is to “rehabilitate” or “reorganize” a business so that it can continue without folding or closing. Chapter 11 also allows an individual debtor or a consumer to “reorganize” his or her debts and, thus, his or her financial situation. In Chapter 11, the debtor will not “liquidate” or wipe out most debts, as would be the case in a Chapter 7 bankruptcy proceeding. In Chapter 7, much of a debtor’s property can be sold to pay debts owed to creditors.
A consumer with debts that do not exceed certain amounts can file for personal bankruptcy under Chapter 13. This type of debtor must have regular income. As in Chapter 11, a Chapter 13 debtor seeks “reorganization.” Not all debtors, however, are able to file for Chapter 13 bankruptcy.
Who can file for bankruptcy under Chapter 11?
An individual debtor or consumer or a business or company can file under Chapter 11. These debtors are seeking a “second chance” to pay their creditors. They wish to avoid having to liquidate or sell off property and assets. Businesses wish to remain in business. For example, an airline in financial distress may seek a Chapter 11 reorganization in an effort to keep its planes flying.
In order to file a Chapter 11 petition, a consumer must have debts or liabilities in amounts that exceed the limits for Chapter 13 bankruptcy.
What happens in a Chapter 11 bankruptcy proceeding?
A Chapter 11 bankruptcy proceeding is a lengthy, complex, and costly process. For this reason, many consumers or individuals do not seek Chapter 11 bankruptcies; instead, they file under Chapter 7 or Chapter 13. In 2003, fewer than 1,000 consumers or individuals sought the protection of the bankruptcy laws under Chapter 11. In comparison, approximately 467,000 consumers filed for Chapter 13 bankruptcy that same year. Well over one million Chapter 7 bankruptcy proceedings were filed in 2003.
As in all other types of bankruptcy proceedings, a Chapter 13 debtor starts the process by filing a “petition” with a United States Bankruptcy Court. The petition consists of the paperwork, documentation, and forms required by the court . The debtor will be asked to provide a great deal of financial information, including the amounts of debts owed, the names of the creditors, and assets and property.
After a Chapter 11 petition has been filed, most creditors cannot try to collect debts; instead, they must work within the requirements of the law as it applies to bankruptcy proceedings. Similarly, the debtor must follow the requirements of the bankruptcy laws. During the proceedings, the debtor cannot transfer or sell property or assets without approval of the court.
The Chapter 11 debtor will file a reorganization plan that explains how the debtor proposes to repay creditors. The court appoints a bankruptcy trustee to supervise the case. If the court approves the plan, the debtor will have to repay specified debts according to the terms set forth in the plan. Not surprisingly, the outcomes of Chapter 11 proceedings vary widely, due to the individual nature of the financial situation of each debtor.