About Chapter 11 Bankruptcy

Bankruptcy Ch. 11 is used by corporations and businesses that have developed serious financial problems from which they can't recover to return to a viable position by postponing and/or reducing debt payments. This procedure can be used by corporations, partnerships or even sole proprietorships. It is never used by a private individual except for their business.

Once a Chapter 11 bankruptcy is filed, an automatic stay comes into effect which protects the business from actions by creditors under the court proceedings are completed. During this period, the business can negotiate with creditors, gather funds, and make arrangements to repay creditors based on new agreements. The debtor has control of the business during this period and is known as the debtor in possession.

A creditor's committee, usually made up of the creditors holding the seven largest outstanding unsecured debts of the business, work with the debtor to create a plan to recover from their financial difficulties. This provides added insight and ensures that a fair plan is developed and also prevents the business owner from attempting to liquidate assets.

Bankruptcy Ch. 11 requires that the business file a plan of reorganization with the court within 120 days. Creditors have an opportunity to respond to the plan or submit a different plan of their own. Sometimes these plans include paying debts at a percentage of the total amount of the debt and discharging the debt while other debts might be repaid over a longer period of time with smaller payments.

One reason bankruptcy Ch. 11 is attractive is that small businesses with debts under $2 million, can get a fast track case where, after disclosure and a confirmation hearing, a creditor's committee is not mandatory. In this fast track format, the debtor has only 100 days to file a recovery plan and all plans from anyone in interest must be filed within 160 days from the order of relief.

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