Businesses may file for straight bankruptcy under Chapter 7 of the Bankruptcy Code or under the reorganization provisions in Chapter 11.

In a straight bankruptcy proceeding, the assets of the business are liquidated and paid out to creditors. In a reorganization proceeding, the business continues to operate according to a reorganization plan while making repayments to creditors.

The purpose of this article is to address, in lay terms, the steps in the Chapter 11 reorganization.

Chapter 11 reorganization proceedings create the opportunity to:

a.    restructure failing businesses

b.    preserve jobs

c.    prevent the spread of economic failure to smaller suppliers

d.    permit communities to retain their tax base

Following are the steps for filing a Chapter 11 proceeding:

1.    A Chapter 11 proceeding commences by the filing of a petition either by the debtor, or in rare cases, by a creditor or a group of creditors of the debtor.

2.    Once the petition has been filed, the debtor is referred to as the debtor in possession because the debtor remains in possession of the business and its assets and continues to run the business.

3.    In very rare cases of fraud, dishonesty, incompetence, or gross mismanagement, the Bankruptcy Court may appoint a trustee to run the business.

4.    The debtor in possession, or the trustee if one has been appointed, must file:

a.    a list of creditors 

b.    a schedule of assets and liabilities, current income and expenses 

c.    a statement of the debtor's financial affairs.

5.    One hundred twenty days (120) after the filing of the petition, the debtor in possession must file a plan for the reorganization of the business. An appointed trustee may also file a plan, and the creditors have the right to file a plan under certain circumstances. The plan must be proposed in good faith and not violate any applicable laws. 

6.    Creditors in each specified "class" of creditors (shareholders, bondholders, secured creditors, unsecured creditors) have the right to approve the plan. Each respective class has certain voting rights with respect to the other classes, depending on the number and nature of the classes and the overall vote of creditors. If the creditors approve the plan, it must also be confirmed by the Bankruptcy Court.

7.    If the plan has been carried out successfully, the debtor is discharged from the debts that arose before the confirmation of the plan and the business may continue to operate.

Reorganization plans can be extremely complex for large corporations with thousands of creditors, especially if the debts arise from actual and potential liability claims.  In some cases, a Chapter 11 proceeding will be pre-packaged meaning the debtor will negotiate with creditors prior to the filing of the bankruptcy proceeding to work out an agreement for the reorganization of the company. The plan is then filed with the Bankruptcy Court, with the creditors having already agreed to the plan.

I wish you well.

In our next installment we will discuss the benefits and burdens of the Chapter 11 filing.