The chapter 11 of Title 11 of Bankruptcy Code of the United States, also known as the Chapter 11 bankruptcy, allows for reorganization of business entities if it is found out that the business in question still has the capacity to profit despite its debts. Chapter 11 is preferable if the value of the business as a whole is higher than the value of the parts added together. And since the business is also still in operation, jobs are saved. However, business entities, like corporations, partnerships and others, are not the only ones that can file under Chapter 11 bankruptcy. Individuals can qualify as well.
How to Apply for Chapter 11 Bankruptcy
- File for a petition. A business entity can file for a chapter 11 bankruptcy in the area where the business is registered. For individuals, they can file in the area where they reside. Along with the form, the debtor must also file documents that the court will need. For business entities, these documents include lists of assets and liabilities, lists of current income and expenses, lists of executor contracts and unexpired rental contracts and the statement of the company’s financial affairs. For individuals, they must provide documents like pay slips received 60 days before filing for the petition, a statement of net income per month and a perceived raise of income, if any. If there are unpaid student loans, documents must also be provided along with the certificate proving they have completed the credit counseling and the plan they have completed through the said counseling.
- Automatic stay. Under chapter 11, automatic stay or the halt of collection from creditors is immediately put in place once the petition for chapter 11 has been filed. This way, the debtor will be able to stay afloat while in the process of reorganization.
- Reorganization plan. The whole point for filing a chapter 11 for business entities is to have the opportunity to reorganize the business. Thus, the debtor must provide or formulate a plan to make the reorganization feasible for all parties involved. The debtor is given 120 days from the day the petition is filed to come up with the plan. If after 120 days no plan is provided, other parties involved can propose. If the plan is provided within the 120-day period of exclusivity, a 180-day exclusivity period from filing of petition is given for the plan to be approved.
- Debtor in possession. The debtor is usually given the opportunity to continue running the business unless proven that the debtor is involved in fraudulent practices, dishonesty and/or incompetent in his job. If that is the case, though it is very uncommon, a trustee is put in charge of the business.
- Confirmation of the reorganization plan. The judge will approve the plan when all parties involved agree of the plan put forward by the debtor. Once approved, the plan is put in motion and the business starts its operation as stated in the reorganization plan. If the plan is not approved, the business can either file for chapter 7 bankruptcy then proceed to liquidate the business, or the case will be dismissed and the business will be as it was before filing for chapter 11 bankruptcy.
Chapter 11 bankruptcy is an expensive and long process so you really have to know how chapter 11 works. It can be completed within a few months while some more complicated cases can last up to 2 years. It cannot be done alone and a help of an expert is definitely needed. It is advised that an expert lawyer help you through the process of it all.