The Basics of Filing for Chapter 11 Bankruptcy

Within the tide of the recent financial times and reeling from the mortgage crisis meltdown, many businesses and non-businesses face the looming future of filing for a Chapter 11 bankruptcy. Chapter 11 bankruptcy protection is essentially reorganization under Title 11, Chapter 11 of the United States Code. Through the careful watch of the federal courts, individuals and businesses can restructure their financial situation without interference from creditors at the discretion of the bankruptcy courts. Here is some bankruptcy chapter 11 information; according to the United States Courts, the total number of bankruptcy filings for Americans, including all six chapters of bankruptcy, increased a staggering 29.7 percent from 2007 to 2008. In regards to exclusively Chapter 11 bankruptcy cases, businesses and non-businesses account for 6,971 total filings in the twelve months prior to March 2008. Interestingly though, Chapter 11 bankruptcy filings account for only 0.008% of all bankruptcy filings, however, each person or business facing bankruptcy carries with them a unique set of circumstances. Finding expert bankruptcy advice and understanding the Chapter 11 basics from a chapter 11 bankruptcy attorney is essential when filing for bankruptcy in the United States Federal Court, and in doing so, garnering more information on the proper route and chapter of bankruptcy to pursue is ascertained by clients and client businesses.

Businesses Filing for Chapter 11 Bankruptcy

Any formalized entity of business can file for Chapter 11 bankruptcy in accordance to United States Bankruptcy Code Title 11, Chapter 11 and under the terms of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Included in the entities able to reorganize and restructure under Chapter 11 bankruptcy include:

  • Sole Proprietorships
  • Partnerships
  • Limited Liability Partnerships
  • Limited Liability Corporations
  • Corporations
  • Co-operatives and Non-Profits

The dichotomy of the impetus for filing Chapter 11 bankruptcy stems from two parties: the debtor company and the pursuing creditors. When utilizing a Chapter 11 restructuring, companies face the prospect of continuing business in light of current debt obligations. For executives and employees, the possibility of maintaining jobs, an income source, and retaining all assets used in producing this income are all retained. Furthermore, companies have been known to emerge from Chapter 11 bankruptcy and regain full control of their enterprise once again rather than full liquidating their assets.

For creditors, some instances of debtor companies prove more lucrative to continue operating the business rather than completely liquidating all of the company's assets. A bankruptcy court will supervise a company under Chapter 11 bankruptcy, manage the organizations debt, and contract obligations. Under the guidance of federal law, bankruptcy courts can discharge certain debts and contractual obligations in certain circumstances. In other instances, creditors will entirely take over a company in the event the organization's debts outweigh the current assets.

Approving a Plan for Filing Chapter 11 Business Bankruptcy

Under the mediation of the bankruptcy courts, creditors and debtor companies meet to discuss plans for reorganization and restructure. Typically, a debtor company has a specific period to offer a plan of reorganization, which will include methods to satisfy existing debts, cuts in expenditures, and potential incomes. Creditors will then vote to agree or disagree on the plan, or if no plan is presented, creditors have the opportunity to present their own agenda. The court will decide whether each party is receiving treatment in the fair and equitable interest of resolving the matter at hand.

In voting to approve or deny a proposed Chapter 11 bankruptcy restructuring, creditors must agree, by vote, to accept the debtor company's plan for restructuring as well as the courts, who ensure the debtor company meets all legal criteria during the restructuring phase. If creditors cannot ratify a proposed debt-restructuring plan, the bankruptcy case will either become a liquidation case under Chapter 7 or return to status quo prior to initial bankruptcy filing. In the event a company returns to status quo, a debtor company will face creditors attempting to acquire money through non-bankruptcy court methods again, but with a Chapter 7 bankruptcy liquidation, the company will discharge all assets, and in the same stroke, the profits from this sale will be used to satisfy creditors.

Non-Businesses Filing for Chapter 11 Bankruptcy

Although relatively rare, individuals can file for Chapter 11 bankruptcy proceeding under Title 11 of the United States Code. In the twelve months prior to March 2008, 697 persons filed for bankruptcy under Chapter 11 for non-businesses. There are certain caveats, which restrict most individuals from utilizing this form of debt consolidation however. Chapter 11 bankruptcy is feasible only for individuals holding unsecured debts in excess $336,900 or secured debts of $1,010,650 or more. This eliminates a vast majority of those facing debts, but for persons wishing to restructure debts at dollar amounts less than the federal mandates, Chapter 13 bankruptcy is another possible option.

Essentially, the procedures for filing a non-business Chapter 11 bankruptcy claim mirror those of businesses. Albeit often on a much smaller scope, the procedures of addressing creditors through the mediation of the bankruptcy court will place a hold on all credit collection actions until an individual debtor presents a restructure plan before the court and to creditors. Pending the approval of the plan by creditors, individual debtors will either begin implementing the proposed debt-restructuring plan or face other bankruptcy and non-bankruptcy alternatives. These alternatives, similarly to businesses in the same situation, will include other bankruptcy alternative such as a Chapter 7 liquidation or facing creditors on a non-bankruptcy basis.

If you are considering filing for Chapter 11 bankruptcy or would like more information about your bankruptcy options, contact a bankruptcy attorney for a free consultation.

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