Definition
Chapter 11 of the 1978 Bankruptcy Act refers to a chapter of the Bankruptcy Code that involves the reorganization of a debtor’s business affairs, debts, and assets. It is primarily used by corporations and partnerships, but individuals in business can also utilize this provision. The primary goal of Chapter 11 is to keep the business alive and pay creditors over time through a court-approved reorganization plan, providing flexibility for the debtor (the business filing for bankruptcy) to manage operations and propose restructuring solutions.
Key Features:
- Debtor in Possession: The debtor maintains control and possession of its assets and business operations during the reorganization.
- Plan of Reorganization: The debtor proposes a reorganization plan, which must be approved by the court and creditors.
- Automatic Stay: Filing for Chapter 11 initiates an automatic stay, which halts most collection activities against the debtor.
- Creditors’ Committee: Typically, a committee of creditors is formed to represent the interests of unsecured creditors in negotiating the reorganization plan.
Examples
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Corporation A Files for Chapter 11: Corporation A, facing heavy debts and declining revenue, files for Chapter 11 bankruptcy. The company continues to operate while formulating a reorganization plan, which involves restructuring debts, renegotiating contracts, and selling off non-essential assets.
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Retail Chain Reorganization: A national retail chain files for Chapter 11 to overcome financial difficulties. The case involves closing unprofitable stores and renegotiating lease agreements, allowing the chain to stabilize and eventually emerge from bankruptcy.
Frequently Asked Questions
What is the primary objective of Chapter 11 bankruptcy?
The primary objective is to allow the debtor to restructure its debts and continue operating with a feasible plan to pay creditors over time, unlike Chapter 7 which focuses on liquidating assets.
Who can file for Chapter 11 bankruptcy?
Both corporations and partnerships primarily use Chapter 11, but individuals engaged in business can also file.
Can creditors influence the reorganization plan in Chapter 11?
Yes, creditors play a significant role and often participate in a creditors’ committee to negotiate and approve the reorganization plan.
What happens if the reorganization plan is not approved?
If the reorganization plan fails to gain approval from the court or creditors, the court may convert the case to a Chapter 7 liquidation or dismiss the case outright.
How long does the Chapter 11 reorganization process take?
The duration can vary significantly. It may take several months to years, depending on the complexity of the debtor’s financial situation and the negotiations involved.
Related Terms
- Debtor in Possession (DIP): A debtor who retains management control of assets/business operations during the bankruptcy process.
- Automatic Stay: A provision of bankruptcy law that temporarily prevents creditors from pursuing collection actions against the debtor.
- Disclosure Statement: A detailed document outlining the debtor’s assets, liabilities, and proposed reorganization plan, which is reviewed by creditors and the court.
- Creditors’ Committee: A group of creditors appointed to represent the interests of all creditors in the bankruptcy proceedings.
- Confirmation: The court’s approval of a reorganization plan.
Online References
- United States Courts - Chapter 11 - Bankruptcy Basics
- American Bankruptcy Institute
- National Bankruptcy Archives
Suggested Books for Further Studies
- “Bankruptcy and Insolvency Accounting, Practice and Procedure” by Grant W. Newton
- “Chapter 11: Reorganizing American Businesses” by Elizabeth Warren and Jay Lawrence Westbrook
- “The Law of Debtors and Creditors: Text, Cases, and Problems” by Elizabeth Warren and Jay Lawrence Westbrook
Fundamentals of Chapter 11: Business Law Basics Quiz
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