The United States Bankruptcy Code is long and complicated. It provides different requirements for businesses and individuals who are seeking bankruptcy protection.  The Code is divided into chapters and people often refer to the chapter number pursuant to which they qualify to file for bankruptcy.

Who Can File for Chapter 11?

Chapter 11 Bankruptcy is usually used by businesses that are unable to pay their creditors, although some individuals may also be eligible to file for bankruptcy pursuant to Chapter 11.  The business itself can initiate a voluntary Chapter 11 petition or its creditors can file for an involuntary petition under Chapter 11 in certain circumstances.

Why File for Chapter 11?

Businesses that voluntary file for Chapter 11 protection are seeking to reorganize their debts so that the company can remain in business.  Pursuant to Chapter 11, the court has the authority to give companies a fresh start by granting them complete or partial relief from their existing debts.  Chapter 11 exists because there are times when it makes more sense for both a company and its debtors to see the business succeed.  The business can, simply, earn more money as an ongoing operation than it can if it goes out of business and sells its assets off separately.  Therefore, a plan is developed that is approved by creditors and the court that allows the business to continue operating and to pay its debts over time.

Businesses should be aware that Chapter 11 protection does not allow them to rack up debt, stay in business and not pay off their responsibilities.  Creditors are often given partial or full ownership of the reorganized company if the original owners can not satisfy their debts.  So, while the owners may lose control of their business, the employees of the business generally continue to have their jobs and the creditors of the business get their money.

What Happens Pursuant to Chapter 11?

When a business files for Chapter 11, the business is provided an opportunity to propose a reorganization plan. If an agreement with creditors is not reached during that time then the creditors are provided with an opportunity to propose a reorganization plan.  The plans must meet specific criteria in order for to be approved by the bankruptcy court.  If a reorganization plan is not reached and agreed to by the creditors then the Bankruptcy Court can either convert the case to a Chapter 7 bankruptcy proceeding or it can discharge the case entirely.

Creditors of businesses who file for Chapter 11 bankruptcy protection are paid in the same order as they are in other bankruptcy proceedings.  Specifically, secured creditors are paid first and then unsecured creditors are paid according to the rules set forth in federal statute.

Nobody wants to file for bankruptcy.  Business owners are not eager to give up control of their company in this way.  However, Chapter 11 is designed to protect the greater good.  It protects the jobs of the existing employees and it keeps the business going so that it can make the money necessary to pay off its existing creditors.

For more information about chapter 11 bankruptcy, Contact Firebaugh and Andrews at 734-722-2999