Chapter 11 Bankruptcy: Reorganization
What is a chapter 11 business bankruptcy?
A chapter 11 business bankruptcy, also known as a reorganization bankruptcy, is when an organization restructures their business debt and repays creditors while continuing their operations.
The organization’s aims with a chapter 11 business bankruptcy are to:
- Reduce or pay off debts and liabilities
- Liquidate assets while remaining operational
- Reorganize into a healthier structure or legal entity
Chapter 11 vs chapter 7
The legal remedies for insolvency in business are covered by chapters 11 and 7 of the US Bankruptcy Code. Chapter 11 relates to corporate restructure, whereas chapter 7 liquidates the entire business so that it ceases to operate. This is also known as a "straight bankruptcy". There is also chapter 12 for some businesses but it’s only available to "family farmers" or "family fishermen".
Chapter 11 vs chapter 13
Chapter 13 also provides for debt relief for businesses, however it is relevant only to sole proprietorships. This chapter discharges debt using a monthly repayment plan for 3 to 5 years.
What happens when a company files for chapter 11 bankruptcy?
Companies filing under chapter 11 usually plan to remain in business while negotiating with creditors to reorganize their debt.
Until an agreement is reached, the company has the protection of the bankruptcy court. Usually, the debtor remains “in possession” of the business and has the powers and responsibilities of a trustee. The business can continue to operate, and may even borrow new money with approval from the court while restructuring takes place.
Chapter 11 restructuring process
- The chapter 11 petition is filed with the court
- Initial hearings
- Automatic stay (preventing creditors from pursuing debtors) goes into effect
- Debtor receives Debtor-in-Possession Financing
- Business as usual for company operations
- Debtor files financial information
- Creditor files Proof of Claim
- Office of the US Trustee appoints creditors committees (usually unsecured creditors who hold the seven largest unsecured claims against the debtor)
- Assets are sold if applicable
- Financial contracts and/or leases approved or rejected
- Debtor puts together plan of rerganization
- Negotiation with creditors
- Debtor company files plan to court
- Creditors file feedback
- Court approves plan
- Plan voted on by creditors
- Plan confirmed by court
- Chapter 11 proceedings conclude
- Company puts plan into action
- Claims resolution starts
- Creditors paid
Who gets paid first in chapter 11?
All actions during a chapter 11 business bankruptcy must be approved by the court. In addition, creditors must file a Proof of Claim, with supporting documents that illustrate how much they believe they’re owed.
There are several factors that determine the hierarchy of creditors during a liquidation process. Here are examples of common priority claims:
- costs to administer the bankruptcy (such as accounting or legal fees)
- up to $15,150 in wages, commissions, and other compensation earned 180 days before bankruptcy
- up to $15,150 in contributions to an employee benefit plan
- taxes owed to the government