Chapter 11, Title 11, United States Code
Chapter 11 of the United States Bankruptcy Code permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11, while Chapter 13 provides a reorganization process for the majority of private individuals.
Chapter 11 overview
When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.
In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.
A Chapter 11 bankruptcy will result in one of three outcomes for the debtor: reorganization, conversion to Chapter 7 bankruptcy, or dismissal. In order for a Chapter 11 debtor to reorganize, the debtor must file a plan of reorganization. In effect, the plan is a compromise between the major stakeholders in the case, including the debtor and its creditors. Most Chapter 11 cases aim to confirm a plan, but that may not always be possible.
If the judge approves the reorganization plan and the creditors all agree, then the plan can be confirmed. Section 1129 of the Bankruptcy Code requires the bankruptcy court reach certain conclusions prior to confirming or approving the plan and making it binding on all parties in the case, most notably that the plan complies with applicable law and was proposed in good faith. The court must also find that the reorganization plan is feasible in that, unless the plan provides otherwise, the plan is not likely to be followed by further reorganization or liquidation.
In a Chapter 11 bankruptcy, the debtor corporation is typically recapitalized so that it emerges from bankruptcy with more equity and less debt, a process through which some of the debtor corporation's debts may be discharged. Determinations as to which debts are discharged, and how equity and other entitlements are distributed to various groups of investors, are often based on a
valuation of the reorganized business. Bankruptcy valuation is often highly contentious because it is both subjective and important to case outcomes. The methods of valuation used in bankruptcy have changed over time, generally tracking methods used in investment banking, Delaware corporate law, and corporate and academic finance, but with a significant time lag.
Features of Chapter 11 reorganization
Chapter 11 retains many of the features present in all or most bankruptcy proceedings in the United States. It provides additional tools for debtors as well. Most importantly, empowers the trustee to operate the debtor's business. In Chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business.Chapter 11 affords the debtor to possess several mechanisms to restructure its business. A debtor in possession can acquire financing and loans on favorable terms by giving new lenders first priority on the business's earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay. While the automatic stay is in place, creditors are stayed from any collection attempts or activities against the debtor in possession, and most litigation against the debtor is stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue. An example of proceedings that are not necessarily stayed automatically is family law proceedings against a spouse or parent. Further, creditors may file with the court seeking relief from the automatic stay.
If the business is insolvent, its debts exceed its assets, and the business is unable to pay debts as they come due, the bankruptcy restructuring may result in the company's owners being left with nothing; instead, the owners' rights and interests are ended and the company's creditors are left with ownership of the newly reorganized company.
All creditors are entitled to be heard by the court. The court is ultimately responsible for determining whether the proposed plan of reorganization complies with bankruptcy laws.
One controversy that has broken out in bankruptcy courts concerns the proper amount of disclosure that the court and other parties are entitled to receive from the members of the creditor's committees that play a large role in many proceedings.
Chapter 11 plan
Chapter 11 usually results in the reorganization of the debtor's business or personal assets and debts, but can also be used as a mechanism for liquidation. Debtors may "emerge" from a Chapter 11 bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. The debtor in possession typically has the first opportunity to propose a plan during the period of exclusivity. This period allows the debtor 120 days from the date of filing for Chapter 11 to propose a plan of reorganization before any other party in interest may propose a plan. If the debtor proposes a plan within the 120-day exclusivity period, a 180-day exclusivity period from the date of filing for Chapter 11 is granted in order to allow the debtor to gain confirmation of the proposed plan. With some exceptions, the plan may be proposed by any party in interest. Interested creditors then vote for a plan.Confirmation
If the judge approves the reorganization plan and the creditors agree, the plan can be confirmed. If at least one class of creditors objects and votes against the plan, it may nonetheless be confirmed if the requirements of cramdown are met. In order to be confirmed over the creditors' objection, the plan must not discriminate against that class of creditors, and the plan must be found fair and equitable to that class. Upon confirmation, the plan becomes binding and identifies the treatment of debts and operations of the business for the duration of the plan. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7 or, if, in the best interests of the creditors and the estate, the case may be dismissed, resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.In order to proceed to the confirmation hearing, the bankruptcy court must approve a disclosure statement. Once the disclosure statement is approved, the plan proponent will solicit votes from the classes of creditors. Solicitation is the process by which creditors vote on the proposed confirmation plan. This process can be complicated if creditors fail or refuse to vote. In this case, the plan proponent might tailor his or her efforts to obtain votes, or the plan itself. The plan may be modified before confirmation, so long as the modified plan meets all the requirements of Chapter 11.
A chapter 11 case typically results in one of three outcomes: a reorganization, a conversion into chapter 7 liquidation, or it is dismissed.
For a Chapter 11 debtor to reorganize, they must file a reorganization plan. Simply put, the plan is a compromise between the major stakeholders in the case, including, but not limited to the debtor and its creditors. Most chapter 11 cases aim to confirm a plan, but that may not always be possible. Section 1121 of the Bankruptcy Code provides for an exclusivity period in which only the debtor may file a plan of reorganization. This period lasts 120 days after the date of the order for relief, and if the debtor does file a plan within the first 120 days, the exclusivity period is extended to 180 days after the order for relief for the debtor to seek acceptance of the plan by holders of claims and interests.
If the judge approves the reorganization plan and the creditors all "agree", then the plan can be confirmed. §1129 of the Bankruptcy Code requires the bankruptcy court reach certain conclusions prior to "confirming" or "approving" the plan and making it binding on all parties in the case. Most importantly, the bankruptcy court must find the plan complies with applicable law, and has been proposed in good faith. Furthermore, the court must determine whether the plan is "feasible," In other words, the court must safeguard that confirming the plan will not yield to liquidation down the road.
The plan must ensure that the debtor will be able to pay most administrative and priority claims on the effective date.