What is Chapter 11 Bankruptcy?

A Chapter 11 bankruptcy is commonly referred to as a “reorganization” bankruptcy.  This refers to the purpose of most chapter 11 cases: To allow the debtor to reorganize and restructure debt so the debtor may continue in business. Like the other types of bankruptcy cases, there are specific eligibility requirements. Many people think only a business such as a corporation can file a Chapter 11 bankruptcy. While corporate business debtors are often the most frequent filers of Chapter 11 bankruptcies, individuals may file a Chapter 11 bankruptcy. One unique feature of Chapter 11 bankruptcy is that the debtor has most of the same rights given to the trustee under other chapters of the bankruptcy code.

What to Expect When Filing a Chapter 11 Case

A Chapter 11 case is commenced by filing a Chapter 11 bankruptcy petition. To file this case, the bankruptcy court charges a $1,167 filing fee and a $550 miscellaneous administrative fee. As part of the petition, the debtor must list of all assets and all debts; a list of all their current income and expenses; a list of all their contracts and leases; and a statement of financial affairs. Individual debtors (as opposed to business debtors) are also required to file a certificate of credit counseling. The debtor must also file a plan of reorganization that meets the complicated requirements of chapter 11 and provides for repayment of the debts.  In order for a chapter 11 plan to be approved by the court, creditors are given the right to vote to approve or disapprove the plan of reorganization. Once the creditors have voted, the court will count the votes and review the case, and either confirm or deny the plan.

To confirm the plan, the court must find:

1. The plan is feasible
2. The plan is proposed in good faith
3. The plan complies with the Bankruptcy Code.

If the plan is denied, the debtor may modify the proposed plan and try again, or correct deficiencies that prevented confirmation. Once the plan is confirmed, the debtor and all creditors identified in the plan are bound to the terms of the repayment plan. The debtor is required to provide monthly operating reports that report monthly income and operating expenses. The debtor is also required to open a new bank account identified as a “DIP” (for “debtor in possession”) account. This bank account is only used for the operation of the business. No other funds should be deposited into the account. In addition, the debtor is required to pay a quarterly fee to the U.S. Trustee. The amount of the fee depends on the amount the debtor disburses to creditors each quarter. If the debtor fails to properly prepare the case for confirmation or fails to comply with the reporting requirements of the U.S. Trustee or the bankruptcy court, the U.S. Trustee may ask the court to convert the case to a chapter 7 case or dismiss the chapter 11 case.

A Chapter 11 bankruptcy is the most complex, expensive, and demanding of the 4 types of bankruptcy cases. It is very important that you consult with a bankruptcy attorney if you are interested in filing a Chapter 11 bankruptcy.