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Chapter 11 - Business Bankruptcy

Chapter 11 is a chapter of the United States Bankruptcy Code that protects any form of business that is unable to service its debt or pay its creditors through a process of reorganization under the bankruptcy laws. Although an individual may file under Chapter 11, it is generally used to reorganize a business.

Chapter 11 allows the debtor in possession several mechanisms to restructure its business. The debtor may acquire financing and loans by giving new lenders first priority on the business' earnings. The bankruptcy court may also permit the debtor to reject and cancel contracts. Chapter 11 debtors are also protected from litigation against the business through the use of an automatic stay. While the automatic stay is in place, 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.

Generally speaking, it is more advantageous to reorganize than to liquidate. Reorganization often times preserves jobs and assets. An example of this on a macro scale would be General Motors. By extending and reducing their debts, and by dramatically reducing its operating costs, it has returned to viable state. Granted, the Federal Government had a hand in ensuring the success of this turn-around, but be assured, for many companies, it can be done without such assistance.

Frequently Asked Questions

• What is a "Debtor in procession"?

  This term refers to a debtor which keeps procession and control of its assets while undergoing a reorganization under Chapter 11.

• Is Chapter 11 only for corporations?

  While individuals are not precluded from using Chapter 11, it is more typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership.

• What is a a "Small Business Debtor"?

  Certain types of debtors are defined in the Bankruptcy Code and have special provisions that apply only to them. One such debtor is a "small business," defined as a person engaged in commercial or business activities (not including a person who primarily owns or operates real property) who has aggregate non-contingent liquidated secured and unsecured debts that do not exceed $2,000,000. If the debtor qualifies and elects to be considered a small business, the case is put on a "fast track" and treated differently that a regular Chapter 11.

• What is a "Single Asset Real Estate Debtor"?

  The term, "Single Asset Real Estate" is defined as a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor and on which no business is being conducted by the debtor other that operating the real property and which has aggregate non-contingent liquidated secured debts of no more than $4,000,000.

• What is The "Automatic Stay"?

  The automatic stay provides for a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued on any debt or claim that arose before the filing of the bankruptcy petition. The stay provides a breathing spell for the debtor, during which negotiations can take place and to try to resolve the difficulties on the debtor's financial situation.

• Who is on the "Creditors' Committees"?

  Creditors' committees can play a major role in the Chapter 11 cases. The US Trustee appoints the committee which consists of the persons willing to serve on the committee who hold the seven largest unsecured claims against the debtor.

• What are the "Day-One Requirements"?

  Day one requirements include the following:

  • Close out all existing books and records
  • Open a new set of books and records
  • Close all existing bank accounts
  • Open new general, payroll and tax bank accounts
  • Obtain insurance coverage
• What is the "7-Day Package"?

  Within seven days of the date the petition is filed, the case is converted, or an order for relief is entered, the debtor must submit a package of the required documents (i.e. the "7 Day Package") to the US Trustee consisting of the following:

  • 7 Day Package Cover Sheet
  • Real Property Questionnaire
  • Proof of Closed /Opened Bank Accounts
  • Proof of Establishment of New Debtor in Procession Accounts
  • Proof of Insurance Coverage
  • Proof of Required Certificates and Licenses
  • List of Insiders
  • Pre-petition Financial Statements
  • Projected Cash Flow Statement
  • Trust Agreements
  • Physical Inventory of Goods, Machinery and Equipment
  • Statement of Major Issues and Timetable Report
  • Federal Income Tax Returns, Federal and State Payroll Tax Returns and State Tax Returns
  • Employee Benefit Plan Questionnaire