Most frequently used by businesses, Chapter 11 bankruptcy primarily allows for reorganization of debt without complete liquidation. More than 6,000 businesses filed for this type of bankruptcy in 2016 as opposed to just over 1,100 individuals.
The rules of Chapter 11 allow creditors to get together and force an involuntary Chapter 11 bankruptcy on a business that is in debt and unable to rebound, but that is unusual. Individuals may also choose Chapter 11 if their debt or income is too large to qualify under Chapter 7, the category of bankruptcy most often used by individuals.
How Chapter 11 bankruptcies are filed?
A business that is unable to keep current with its debt may petition to file Chapter 11 bankruptcy through the U.S. District Court's bankruptcy division with jurisdiction. The court clerk's office handles bankruptcy filings, including logging all necessary financial documents and scheduling. If a business has publicly traded stock, Chapter 11 bankruptcy will automatically result in the stock being delisted.
The debtor has 120 days from the time of filing bankruptcy to come up with a plan for restructuring the business and paying what's possible to creditors or his creditors may make a plan of their own. Unlike in other forms of bankruptcy, a trustee is not often used to execute the repayment plan; rather the business owner is most often left in charge of the company throughout the process. Even so, the court has ultimate control over the business during bankruptcy and may require assets to be sold, contracts to be voided, and/or certain fees be paid. Creditors are automatically prevented from collection attempts while the business is in bankruptcy.
Once proposed, a confirmed reorganization plan has 180 days to be put into practice. If a plan is not confirmed by the court and creditors, the business may have to file Chapter 7 bankruptcy and liquidate assets, or it may withdraw the bankruptcy petition and continue operating as before. A plan generally enumerates the priority creditors, including any cost to keep the business going, such as staff wages, administrative costs, and supplies; secured debts are also priorities on the plan, as they hold collateral; unsecured creditors are lowest in priorities. Those holding unsecured credit may form a committee and hire legal representation to ensure their interests are not overlooked.
Any contract that is not beneficial to the business' bottom line or to its creditors may be canceled under Chapter 11. Airlines used this provision to renegotiate all of their labor contracts in recent years as all of the major airlines have filed bankruptcy with this specific intention in mind.
The process and complexity of Chapter 11 bankruptcy has prompted many businesses to be creative about reorganization: many meet with creditors prior to filing in court, instead offering the court a "package" plan with all agreements in place. Other companies have opted for state-level reorganization rather than bankruptcy through the federal court system.
There were 7,200 Chapter 11 filings in 2016; of those, over 6,100 were businesses and about 1,100 were individuals.