“Chapter 11 bankruptcy” refers to a bankruptcy petition filed under Chapter 11 of the United States Bankruptcy Code. Chapter 11 differs in many ways from other chapters under the Bankruptcy Code under which bankruptcy petitions may be filed.
For instance, Chapter 7 bankruptcy petitions begin a liquidation process for nonexempt assets of the debtor, to be sold for the benefit of the debtor’s creditors. This is the most commonly filed form of bankruptcy.
However, Chapter 11 bankruptcy petitions allow an individual, corporation, partnership, or sole proprietorship to reorganize in order to repay debts. Most Chapter 11 bankruptcy petitions are filed by corporations, partnerships, or sole proprietorships rather than individual debtors.
Benefits of Chapter 11 Bankruptcy
One of the main benefits to a business entity of filing a Chapter 11 bankruptcy petition is the ability to continue to conduct business rather than cease to exist or lose everything. While the business entity continues to conduct business it also must continue to repay creditors. The plan under which the business entity will repay creditors must first be approved, or confirmed, by the bankruptcy court.
The debtor is entitled to come up with a plan of reorganization first, within one hundred and twenty days of filing. The debtor must give the creditors enough information, through a sufficient disclosure statement, in order for the creditors to evaluate the debtor’s plan. It is then up to the bankruptcy court to approve or disapprove of the plan.
The Oversight by the Trustee
Another large player in any bankruptcy proceeding is the bankruptcy trustee. Generally, the duties of the U.S. Trustee in a Chapter 11 bankruptcy case are set forth in 28 U.S.C. § 586. They include the following:
- Reviewing the debtor’s requests for emergency orders early in a bankruptcy case, and ensuring that the requested relief is tailored to the circumstances.
- Determining what official committees should be established to serve in the case; appointing committee members; and engaging in oversight of committee actions.
- Reviewing reorganization plans and disclosure statements filed by parties in the case to make sure they provide adequate and accurate information.
- Ensuring that all required reports, schedules, and fees are timely filed, and that the debtor manages money and assets consistent with the Bankruptcy Code and with its fiduciary duty to creditors.
- Taking action to prevent undue delay by, for example, filing a motion to dismiss the case, to convert the case to a Chapter 7 liquidation, or to appoint a Chapter 11 trustee.
- Reviewing and, if appropriate, objecting to applications filed by professionals seeking employment in the case, payment of compensation, and/or reimbursement of expenses.
- Investigating criminal, fraudulent, or abusive conduct for possible civil or criminal prosecution.