Chapter 11 Bankruptcy

Chapter 11 bankruptcy is mostly used by corporations and businesses which have developed some serious financial problems from which they cannot recover, to return to a more viable position by postponing and/or reducing their debt payments. This method can be used by corporations, partnerships or even sole proprietorships. It is never used by any private individuals except for their business.

Once you file a Chapter 11 bankruptcy, an automatic stay will come into effect which will protect the business from actions by creditors until the court proceedings have been completed. During that time, the business is able to negotiate with creditors, gather funds, and make arrangements in order to repay creditors based on new agreements. The debtor will have control of the business during this period and will be known as the debtor in possession.

A creditor's committee, which is usually made up of the creditors holding the seven largest outstanding unsecured debts of the business, will work with the debtor in order to conceive a plan that will help them to recover from their financial difficulties. This will provide some added insight and will ensure that a fair plan is developed and will also prevent the business owner from trying to liquidate assets.

Chapter 11 bankruptcy will require that the business file a plan of reorganization with the court within 120 days. Creditors will then have an opportunity to respond to the plan or to submit a different plan of their own. At times these plans comprise paying debts at a percentage of the total amount of the debt and discharging the debt whilst other debts might be repaid with smaller payments over a longer period of time.

One reason why Chapter 11 bankruptcy is attractive is that small businesses with debts of under $2 million are able to get a fast track case where, following disclosure and a confirmation hearing, a creditor's committee will not be mandatory. In this fast track format, the debtor will have only 100 days in order to file a recovery plan and all plans from anyone in interest will have to be filed within 160 days from the relief order.

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