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Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a form of reorganization under the U.S. Bankruptcy Code. The requirements specific to an individual debtor work much the same as those outlined under chapter 7. However, with chapter 11 bankruptcy, a petition may be voluntary or involuntary. When the petition is involuntary, it is filed by creditors that meet certain requirements (“Bankruptcy Basics, p. 29”). Voluntary petitions require adherence to a prescribed format; debtors must use “Form 1 of the Official Forms prescribed by the Judicial Conference of the United States” (p. 29).

The types of documents that debtors must file are similar to those required under chapter 7, but they are also specific to businesses. For example, debtors must file the following: 1) schedule of assets and liabilities; 2) schedule of current income and expenditures; 3) schedule of executory contracts and expired leases; and 4) statement of financial affairs (p. 29).

Voluntary petitions reference standard information, which includes the debtor’s name, social security number and identification, residence, location of principal assets, debtor’s plan to file, and request for relief. “Upon filing a voluntary petition for relief, under chapter 11, or, in an involuntary case, the entry of an order for relief, the debtor automatically assumes an additional identity as the “debtor in possession. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee” (p. 30). The debtor may remain a debtor in possession until the confirmation of the debtor’s plan of reorganization, or the debtor’s case is dismissed, or the conversion of the case to a chapter 7 or chapter 11 case.

Debtors under chapter 11 file a written disclosure statement and a plan of reorganization with the bankruptcy court. The written disclosure statement “must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization” (p. 30). The information required is subject to judicial discretion. On the other hand, the content of the reorganization plan must reference a classification of claims and how those classes of claims will be treated under the plan (p. 30). Voluntary or involuntary petitions involving small business owners require additional documents. Small business cases are defined as a bankruptcy case with a small business debtor.

Chapter 11 bankruptcy relief allows the debtor, in general, to create a liquidating plan. This type of plan allows the debtor to liquidate the business “under more economically advantageous circumstances than a chapter 7 liquidation” (p. 39). Once the plan is confirmed, debts that predate the filing of the petition are discharged. The debtor is still held responsible for making plan payments and is legally bound to the provisions of the plan. Essentially, the “confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts” (p. 39). Once the confirmation has been entered in the court records, the court may issue an order to administer the estate. All confirmation orders may be revoked at the request of a party in interest.

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