Chapter 11 bankruptcy definition
Chapter11 of the US bankruptcy code allows reorganization of businesses in conformance with the bankruptcy laws of the country. It is open to concerns under single ownership or a corporation, or person who has unsecured debts amounting to a minimum of $336,900/- or secured debts worth $1,010,650/- or more.
How does chapter 11 work
In the event of a business running into losses and reaching a position where it cant pay back the debts to its creditors, a federal bankruptcy can be filed by either party under the chapter 11. If found favorable, the court may relieve the debtors, either completely or partially, from their debts, which gives them a chance to start their business afresh.
The case gets initiated when a petition which is filed with a court for bankruptcy in the residing place of the debtor. This can be done by the debtor himself or by the creditors provided it meets specific requirements. If filed by the debtor himself, the petition should be in accordance with the format of Form1 that is prescribed by the US judicial conference. Along with the petition, schedules of 1) assets and liabilities, 2) income and expenses, 3) contracts and live leases and 4) a financial statement. The court fee for filing a case is $1,000 and motley administrative fee of $39.
Once a petition is filed under the chapter 11, voluntary or involuntary, the debtor by default acquires an extra identity of the debtor in possession, which denotes a debtor who maintains the ownership of his assets while a reorganization is underway. He will continue to be so until the reorganization is assured or the case is dismissed or a trustee is appointed.
U.S. Trustee or administrator: The trustee plays an important role in overseeing the development of a case and its administration. The responsibility of observing the activities of the debtor in possession wrests with the trustee. In addition, he also monitors the requests for reimbursements by professionals, and plans and statements filed with the court. He is authorized to conduct meetings of the creditors which are known as section 341 meetings.
The trustee can enforce certain criteria on the debtor in possession on matters relating to reporting the income and expenditure. Legally, the debtor in possession is bound to pay a fee to the trustee for every 3 months until the dismissal of the case or its conversion to another chapter.
Automatic stay: It is an interval allowed in which actions such as court judgments, collection, retrieval of property and other legal proceedings stand suspended. This stay comes into force as and when the bankruptcy petition is filed. The period of stay may be used by the debtor for negotiations and to try and find a way out of the present crisis. In special situations though, the creditor can get the stay relieved through a court order.
Filing of a plan: The debtor gets 120 days in which he can rightfully file a plan, though the period can be extended or cut short by the court. The maximum period allowable for submitting a plan is 18 months. After the expiry of the allowed period, a contesting plan may be submitted by the creditor or the case trustee. Since a case under chapter11 may prolong for years unless the concerned parties or the court itself intervene and try for a faster closure. The creditors right of filing a contesting plan actually serves as a push to the debtor to file a plan within the allotted period which also helps in the early resolution of the case.
Case trustee: A case trustee can be appointed as per the request of the party concerned or the U.S. trustee before the case is confirmed. The court permits if found favorable, a trustee for causes such as fraud, cheating, mismanagement etc. the case trustee thus appointed will hold the responsibility for the management of the belongings of the estate, the functioning of the business and also in some cases developing and filing of a plan of reorganization.
Avoiding powers: the debtor in possession or the trustee may reverse a transfer of finance or property made during a specific time interval prior to the bankruptcy petition filing. This provision is known as the avoiding powers. Through the avoiding of a specific transfer of property, the debtor in possession can annul the dealing and affect the return of the requitals or property, which will then be available to pay the creditors. Though usually the avoiding power is effective against transfers made within 90 of filing the petition, the transfers to relatives, partners and the employees of the debtor that are done within a year before filing may be refrained from.
Conversions and dismissals: The debtor concerned in a chapter 11 case can rightfully convert the case into one under chapter 7 given that 1) he is the debtor in possession 2) the case was not initiated as an involuntary case, or 3) the case was not converted to one under chapter 11 without the debtors request.
Approval and acceptance of the plan: As per the Bankruptcy code, a plan is seen to be accepted if it is accepted by the creditors who hold a minimum of two-thirds in amount and in excess of more than 50% in number of the claims that are allowed in the class. If impaired classes of claims are there, the court can accept a plan only if it is accepted by at least one class of outsiders holding the impaired claims. According to the law, the person who develops the plan may make changes to it before the final confirmation though it should be within the required limits of the chapter.
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