Chapter 11 Bankruptcy

Chapter 11 bankruptcy is primarily aimed at the business that has a lot of debt but they do not want to shut down operations. Chapter 11 is often referred to as reorganization bankruptcy because it allows the business to reorganize their finances so that they can hopefully remain solvent.

Unlike other types of bankruptcy, Chapter 11 allows the business to keep its assets while working with the bankruptcy courts to make a plan to repay some of their debt. During this time the business can still conduct business as usual. The primary purposes for this type of bankruptcy is to allow the business to one day emerge from bankruptcy proceedings, hopefully with a stronger financial plan. If the business owner wishes to close the business and walk away they must file Chapter 7.

Chapter 11 is the most complicated type of all the bankruptcy chapters. It is the intention of the courts to allow debt-laden businesses to continue operations while they are working on a financial plan to repay at least part of their debts. By remaining in operation the business is still paying taxes and still providing jobs for the employees. The courts believe this type of bankruptcy is a better option than Chapter 7 because it allows the business to continue to contribute to the economy. Attorneys can negotiate with creditors to come up with a viable solution about debt repayment.

Chapter 11 is only an option when the debts of the business do not greatly exceed the assets. Sometimes a business finds that its monthly obligations cannot be met due to economic times or perhaps a decrease in sales. By working with the courts some debtors may consider accepting less than the actual amount owed in order to avoid liquidation. During the time the business is going through Chapter 11 it is safe from lawsuit litigation, meaning the creditors cannot file suit against the business during that time in order to collect the debt.

With Chapter 11 the creditors and the court system will negotiate a plan for repayment of the debt. The creditors are not forced to agree with any plan but most are willing to work with the business because they know that is the best option for getting their money. Most creditors realize the benefit to themselves and the business if the business stays solvent and avoids liquidation. While going through Chapter 11 the business has to meet the requirements that are set by the court. This type of bankruptcy is very time consuming and involves a lot of administrative efforts. The business is required to file reports usually on a monthly basis to prove to the court they are meeting their end of the bargain. Usually these reports must be filed with the court system and the U.S. Trustee’s Office.

With Chapter 11 bankruptcy there are many different options that are available to the business but these options are determined by the courts. Working with the Trustee, the court system will look at the debt of the business and they will also look at the cash flow coming into the business. All things will be taken into consideration including payroll and monthly operating expenses. The courts will then recommend an action that will ultimately end with everyone’s best interest in mind.

REFERENCE DESK

In re Latam Airlines Group S.A., 55 F.4th 377 (2d Cir. 2022):

A Chapter 11 bankruptcy is implemented according to a “plan,” typically proposed by the debtor, which divides claims against the debtor into separate `classes’ and specifies the treatment each class will receive. The plan must designate each class as impaired or not impaired. Classes with “impaired” claims may vote to accept or reject the plan. If a class of impaired creditors dissents, the debtor must resort to the “cramdown” process for the plan to be confirmed. An unimpaired class is “conclusively presumed to have accepted the plan” and thus gets no vote. 11 U.S.C. § 1126(f).

In re Ryan 1000, LLC, 631 B.R. 722 (Bankr. E.D. Wis. 2021):

Chapter 11 is a very different animal from Chapters 7 and 13. For one, a Chapter 11 debtor-in-possession—and, by extension, the debtor’s attorney—owe a fiduciary obligation to creditors. An attorney must be familiar with the fiduciary duties imposed by Chapter 11 of the Code, because “It is the role of the attorney for the debtor in possession to make sure the debtor in possession understands its fiduciary obligation and acts consistent with that obligation.

Chapter 11 cases also impose additional administrative burdens on counsel—for example, the requirements to file monthly operating reports and to seek approval to employ professionals—that are not present in consumer bankruptcy cases. An attorney hoping to represent a Chapter 11 debtor must have more than just integrity; that counsel must also have a strong knowledge of technical requirements under the Bankruptcy Code.

In a Chapter 11 case, an attorney can provide competent representation to the estate only if the attorney is thoroughly familiar with the Bankruptcy Code, the Bankruptcy Rules, and the Local Rules. Bankruptcy, and especially Chapter 11 bankruptcy, is a highly specialized area of law. An attorney for a debtor in possession must have expert knowledge of bankruptcy law in order to achieve a successful result. Experience indicates that a business that files a Chapter 11 case, by definition, is already in trouble. … Only an attorney with expert knowledge of bankruptcy law can properly aid in the administration of the case.