Chapter 11 Bankruptcy: A Guide to Federal Business Reorganization

Chapter 11 Bankruptcy: A Guide to Federal Business Reorganization

Chapter 11 of the United States Bankruptcy Code provides a powerful mechanism for businesses facing financial distress to reorganize their debts while continuing to operate. Unlike Chapter 7 liquidation, Chapter 11 allows a debtor to propose a plan of reorganization that restructures obligations and provides a path to financial viability.

Who Can File Chapter 11?

Chapter 11 is available to:

• Corporations and LLCs of any size
• Partnerships
• Sole Proprietors
• Individuals with debts exceeding Chapter 13 limits

The Small Business Reorganization Act of 2019 created Subchapter V of Chapter 11, providing a streamlined process for small businesses with debts under approximately $7.5 million.

The Chapter 11 Process

Filing the Petition: The process begins with filing a voluntary petition in the appropriate federal bankruptcy court. Upon filing, an automatic stay immediately takes effect, halting all collection actions, lawsuits, and foreclosures against the debtor.

Debtor in Possession: In most Chapter 11 cases, the debtor continues to operate the business as a "debtor in possession" (DIP), retaining management control while the case proceeds. The DIP has fiduciary duties to creditors and must operate the business in their best interests.

Disclosure Statement and Plan: The debtor must file a disclosure statement containing adequate information for creditors to make an informed judgment about the proposed plan of reorganization. After the disclosure statement is approved, the plan is submitted for creditor voting.

Confirmation: The bankruptcy court must confirm the plan, finding that it meets all requirements of the Bankruptcy Code, including that it is feasible and in the best interests of creditors.

Key Features of Chapter 11

Automatic Stay: The automatic stay is one of the most powerful protections in bankruptcy law. It immediately stops:

• Foreclosure proceedings
• Collection lawsuits
• Wage garnishments
• Utility disconnections
• Repossession actions

Rejection of Executory Contracts: The debtor may reject burdensome contracts and unexpired leases, allowing the business to shed unprofitable obligations.

Cramdown: If certain classes of creditors reject the plan, the court may still confirm it under the "cramdown" provisions if the plan does not discriminate unfairly and is fair and equitable.

Priority of Claims: The Bankruptcy Code establishes a priority system for the payment of claims:

1. Secured claims (to the extent of collateral value)
2. Administrative expenses
3. Priority unsecured claims (taxes, wages)
4. General unsecured claims
5. Equity interests

Costs and Considerations

Chapter 11 is a complex and expensive process. Professional fees for attorneys, accountants, and financial advisors can be substantial. Businesses considering Chapter 11 should carefully evaluate:

• Whether the business is viable with restructured debt
• The availability of debtor-in-possession financing
• The likely treatment of key creditors
• Alternative options such as out-of-court workouts or assignments for benefit of creditors

Conclusion

Chapter 11 bankruptcy offers a valuable opportunity for businesses to restructure and survive financial difficulties. However, the process requires careful planning, experienced legal counsel, and a realistic assessment of the business's prospects for reorganization.

This article is for informational purposes only and does not constitute legal advice.