Chapter 11 Bankruptcy: Definition, Protection & Process

Instructor: Michelle Reichartz

Michelle has lead multiple training initiatives and has a master's degree in Business Administration.

In this lesson, you will learn what Chapter 11 Bankruptcy is, how it works, and what protections it provides to the filer. The process from filing to completion under Chapter 11 protection will also be chronicled.

Starting Over

Everyone makes mistakes, as no one is perfect. In some cases, those mistakes become costly and you suddenly find yourself stuck under the weight of a heavy financial situation. How do you get out if you can't pay it all back?

For companies and individuals alike, Chapter 11 bankruptcy is one option for getting a fresh start and starting over with a clean slate. Commonly known as the 'reorganization' bankruptcy, the goal of this bankruptcy type is to reorganize a business to keep it alive and pay their creditors over time in a process that can take as long as two years to complete.

How It Works

The process starts with a petition being filed with the bankruptcy court. It must be filed in the area where the debtor takes residence. The petition can be filed one of two ways: a voluntary petition filed by the debtor or an involuntary petition that is filed by the creditors.

Along with the petition, the following documents must also be filed with the court:

1. Schedule of assets and liabilities

2. Schedule of current income and expenses

3. Schedule of contracts and unexpired leases

4. Statement of financial affairs

Individual filers must provide the following:

1. Certificate showing they went through credit counseling

2. Copy of the repayment plan developed by credit counseling.

3. Evidence of payment from employers within 60 days before filing

4. Statement of monthly net income and any expected increase in income or expenses after filing

5. A record if the debtor has any interest in federal or state qualified education or tuition accounts

Once the petition has been filed, the debtor becomes what is known as the debtor in possession. This means that the debtor keeps control of their assets while being restructured under Chapter 11, without a trustee getting involved to take control of the assets instead. They will remain the debtor in possession until the plan of organization is confirmed, the case is dismissed, the case is converted to a chapter 7, or a trustee is appointed.

Restriction, Reorganization, and Dismissal

Throughout the Chapter 11 bankruptcy, the debtor cannot make certain decisions without the court's permission. This includes: sale of any assets beyond inventory, starting or ending a rental agreement, stopping or expanding the business' operations, retaining or paying attorneys, entering into contracts with unions or vendors, and arranging loans.

A reorganization plan must be filed proposing what changes are to be made by the individual or company in order to clear their debts. These plans can include renegotiating debts, downsizing the business, or liquidating all assets to pay off the debtors. If the courts accept the plan, the process moves forward. Any plan must be in the best interest of the creditors. If the debtor does not suggest a plan the creditors may do so.

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