Chapter 11 Bankruptcy
by Kurt A. Steinke, O'Reilly Rancilio P.C.
While primarily utilized for business reorganizations, Chapter 11 of the Bankruptcy Code can be used by individuals as well. The most common reason for an individual to file a petition in Chapter 11 rather than Chapter 13 is the existence of debts which exceed one or more of the debt limitations established for eligibility under Chapter 13.
Generally, the filing of a petition under Chapter 11 gives the filing party, known as the “debtor in possession”, immediate protection from most forms of debt collection as a result of the automatic stay. As substantial a benefit this is, it comes at a significant price. Depending on the complexity of the situation, the legal fees can be substantial. In addition to the burden of legal fees, the debtor in possession also has the obligation to provide detailed financial information. Ultimately, the financial information provided will be included in a disclosure statement that is provided to creditors for their consideration in determining whether or not to accept a proposed plan. The debtor in possession must also submit periodic reports to the U.S. Trustee’s office regarding the ongoing finances of the business, including income and expenses.
Unless the court extends or reduces the time period, a debtor in possession is the only party that can file a proposed plan of reorganization for the first 120 days from filing. In a plan, claims of the creditors are classified into categories, such as secured and unsecured, and the plan proposes a treatment for each class of creditor. There is then a voting process for creditors to either approve or reject the plan as proposed. If the debtor in possession fails to get a plan timely filed, competing plans may be proposed by other parties in interest. The largest unsecured creditors in a case may form a creditor’s committee to actively participate in the development of the plan.
If a plan is ultimately confirmed by the court, the parties are bound by the terms of the plan, which are considered to replace the “pre-bankruptcy” contractual terms.