Unlike Chapter 7 bankruptcies, in which the debtor's assets are sold to collect money in a fund from which the creditors' claims are at least partially paid, in a Chapter 11 bankruptcy the debtor reorganizes its failing business so that it can keep operating and still pay creditors at least part of what it owes. This approach has many advantages over liquidation, not the least of which is that the business debtor has the opportunity to continue in existence. In addition, the more far-reaching benefits include the facts that the employees of the business get to keep their jobs, and suppliers and other companies dependent on the debtor's business for their smooth operations can continue their relationships with the debtor. Chapter 11 reorganization relief is available to most, but not all, businesses.
A Chapter 11 proceeding is initiated by filing a petition, but in these cases unlike Chapter 7 proceedings no trustee is automatically appointed. The bankruptcy judge may decide to appoint a trustee in Chapter 11 cases, but usually decides against it. The filing of the petition stops the creditors from trying to collect on their debts. The debtor then has 120 days to file a plan of reorganization, which sets forth the details of how it intends to remain in business while continuing to make payments to its creditors. The "debtor in possession," as it is then called, or the trustee must also file a list of creditors and a statement of its financial affairs, including a schedule of assets and liabilities and its current income and expenses.
All creditors whose contracts with the debtor are modified by the plan or who will not be paid the full amount owed to them have the right to vote on the plan. The plan must also be approved by the court. In some cases, the court approves the plan even though some of the creditors do not, in which event the court can force dissenting creditors to accept it. If a plan is not approved, the company can be forced into liquidation.
In reorganization or restructuring cases, the debtor in possession continues to operate its business throughout the bankruptcy proceedings unless it has engaged in some type of fraud or dishonesty, in which case the appointed trustee will run the business and preserve its assets. The trustee may also file the reorganization plan, and sometimes even the creditors have the right to do so.
Bankruptcy can be an expensive process and has serious long-term effects on a commercial establishment. The damage to the business's credit and the public perception can have negative repercussions on future profitability. There are alternatives to bankruptcy, such as working informally with creditors to come up a plan for repayment, which is known as a "workout." A lawyer experienced in bankruptcy law can help a business decide which method may best meet its needs and can facilitate a debt-repayment plan with the business's best interests in mind.
Worksheet: Calculating Your Company's Net Monthly Income
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Calculating Your Company's Net Monthly Income
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This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.