Bankruptcy (Chapter 11)
Chapter 11 bankruptcy is a legal process in the United States that allows businesses to reorganize and restructure their debts while continuing their operations. It is primarily designed for businesses, although individuals with substantial debts can also file for Chapter 11 bankruptcy under certain circumstances. The goal of Chapter 11 bankruptcy is to provide a path for the company to become financially viable again and repay its debts over time. Here are key features and steps involved in the Chapter 11 bankruptcy process …
Petition: The bankruptcy process begins with the filing of a petition for Chapter 11 bankruptcy in a federal bankruptcy court. This petition can be filed voluntarily by the company itself (voluntary bankruptcy) or involuntarily by its creditors (involuntary bankruptcy) if certain criteria are met.
Automatic Stay: Upon filing for Chapter 11 bankruptcy, an automatic stay goes into effect. This stay halts any ongoing collection actions, lawsuits, or creditor actions against the company, providing it with temporary relief from the pressure of debt collection.
Debtor-in-Possession (DIP): In Chapter 11 bankruptcy, the company usually continues to operate under the supervision of existing management as a debtor-in-possession (DIP). The DIP has the authority to make operational decisions and manage the business while formulating a plan for reorganization.
Plan of Reorganization: The company must develop and propose a plan of reorganization outlining how it intends to restructure its debts and address its financial difficulties. The plan may involve reducing debt, renegotiating contracts, selling assets, and modifying the company’s operations. The plan must be approved by the bankruptcy court and accepted by the creditors.
Disclosure Statement: Along with the plan of reorganization, the company must provide a disclosure statement to its creditors. This statement contains relevant information about the company’s financial situation, assets, liabilities, and proposed restructuring plan. Creditors use this information to evaluate the feasibility and fairness of the proposed plan.
Creditors’ Vote and Confirmation: Once the disclosure statement is approved by the bankruptcy court, the creditors have the opportunity to vote on the proposed plan of reorganization. For the plan to be confirmed, it must be accepted by the creditors holding a majority in number and two-thirds in value of the claims that vote on the plan.
Confirmation and Implementation: If the plan is approved by the required majority of creditors and meets the court’s approval, it is confirmed by the bankruptcy court. The company then begins implementing the plan, which may involve restructuring debts, repaying creditors, and making necessary operational changes to achieve financial stability.
Chapter 11 bankruptcy is a complex and often lengthy process that requires significant legal and financial expertise. It offers businesses an opportunity to restructure their debts, preserve jobs, and continue operating while repaying creditors. However, not all companies are successful in their reorganization efforts, and in some cases, Chapter 11 bankruptcy can result in liquidation or the sale of the company’s assets to repay creditors.