How the Chapter 11 Process Works

Chapter 11 bankruptcy is known as "chapter 11 plan of reorganization" and is the usual chapter for large corporations and partnerships seeking to reorganize their debts as there is no limit on the amount of debt, such as in Chapter 13 bankruptcy. In effect, the chapter 11 basics of reorganization means that rather than "liquidate" the assets of the debtor, the debts are restructured or renegotiated. To begin with a petition is filed with the bankruptcy court either voluntarily or under certain circumstances involuntarily (by creditors) in which case the request for relief under Chapter 11 is an "order for relief'. A number of documents are also required at this stage, such as details of income & expenditure, assets and liabilities, leases, contracts and other financial matters. Individuals who file under Chapter 11 are also required to file a certificate to show that they have been through credit counseling. Chapter 11 is more expensive than other types of bankruptcy: the filing fee is $1000, and there is also an administrative fee of $39. Under certain circumstances these fees may be paid in installments.

Debtor In Possession

Once the petition has been filed the debtor becomes the "debtor in possession." This means that the debtor has the powers and rights of a chapter 11 trustee except for the investigative functions. The debtor must however report monthly income, operating expenses and other matters to the U.S. trustee, who monitors the progress of the case, as well as supervising how the business is run. In return for this assistance, the debtor in possession pays a quarterly fee to the U.S. trustee which can range from $250 to $10,000. If the debtor does not comply with the reporting requirements, or does not act to progress the case to having the plan confirmed, the U.S. trustee can apply to have the case dismissed or converted to another bankruptcy code chapter.

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Automatic Stay

As soon as the petition is filed, the automatic stay comes into effect. This means that creditors are not entitled to pursue foreclosures, repossessions, judgments and other debts. This period of time allows the debtor to try to negotiate with creditors to help to alleviate financial problems. However, there are certain circumstances in which a secured creditor's debt will not apply to the stay. If property is not required to effect the reorganization, and the debtor has no equity in it, the court has the power to order foreclosure and sale of the property on application by the creditor. Once an order for relief has been granted, the debtor has a limited period within which to file a plan.

Avoiding Powers

The trustee and/or the debtor in possession has the ability to negate or undo a transfer of money or other property made prior to the filing of the petition (usually 90 days). Once this money has been reclaimed, it can be used to pay all creditors. Although there are certain defenses to this, the procedure is intended to prevent one creditor being favored over the others in the period prior to the filing of the petition.

The Plan

Once a reorganization plan is put forward, creditors have the chance to vote on it. Not all creditors' votes have the same sway as they are classed by the characteristics of their claims. If the debtor does not achieve enough votes for the plan, there are certain statutory tests that can be used to override the vote. Unfortunately, the chances of success of Chapter 11 reorganization are only about 1 in 10.

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