Chapter 11 Bankruptcy Filing
While juridical entities can file bankruptcy either under Chapter 7 or 13, choosing either can pose some threats to the company assets. Before a company chooses between the available options, it is best advised to make an informed decision on the matter. After all, company assets are not exclusively company matters; third persons—the creditors and stockholders—have rights that corporate officers must be careful not to encroach on. Chapter 11 bankruptcy provides more details how entities can proceed with their petitions under this provision and by virtue of this law and how they can avoid some unnecessary loopholes on their way to financial recovery.
Video: What is Chapter 11 Bankruptcy?
Definition of Chapter 11 Bankruptcy
Otherwise known as the reorganization bankruptcy, Chapter 11 bankruptcy pertains to the opportunity for corporations to have a fresh start as the law empowers them. According to the Securities and Exchange Commission, federal bankruptcy laws govern how companies go out of business or recover from crippling debt. In Chapter 11 parlance, a bankrupt company becomes the debtor and as such, may invoke the provisions of this chapter under the Bankruptcy Code in order to "reorganize" the business as a way to rehabilitate its operations. Under the Chapter 11 set up, the corporate management operates the mundane activities of the company just like any other typical business day, save for the fact that important business decisions are subject to approval by the bankruptcy court, exercising jurisdiction over the case.
Chapter 11 Bankruptcy Process and Expectations
The Chapter 11 bankruptcy process is commenced by filing a petition with the bankruptcy court having jurisdiction where the debtor holds domicile or residence. According to the United States Courts, the basic documents that a debtor applicant must prepare are: (1) a schedule of assets and liabilities; (2) a schedule of current income and expenses; (3) a schedule of executor contracts and unexpired leases; (4) a statement of financial affairs; (5) a certificate of credit counseling and a copy of any debt repayment plan as a result of credit counseling; (6) proof of payment received from employers within 60 days prior to filing bankruptcy, if any; (7) a statement of monthly net income and any anticipated increase in income or expenses after filing; and (8) record of any interest incurred by the debtor in federal or state qualified education or tuition accounts.
The applicant debtor must provide the Chapter 11 case trustee with a copy of tax return or transcripts available for the most recent tax year. The tax returns filed as the bankruptcy case progresses must also be filed with the case trustee. If you have unfiled tax returns in previous years before the case commenced, copies of those should be given to the case trustee as well. The law mandates the courts to charge a case filing fee of $1,000 and $39 for miscellaneous administrative fee. Such fees must be paid to the clerk of court. Should the debtor find these difficult to pay, the court may permit payment of filing fees by installments, subject to the law's terms and conditions.
According to the United States Courts, the customary practice of filing bankruptcy under Chapter 11 includes filing a written disclosure statement and a plan of reorganization with the court. A disclosure statement is a document that involves information about the debtor company's assets, liabilities, and business affairs that are adequate for the creditor to form a sound judgment as to the suitability of the debtor's plan to reorganize the company. This case is not necessary for small businesses. The disclosure statement is not required provided that the small business debtor has included such information in the reorganization plan. For individual debtors, Chapter 11 bankruptcy is similar to the set up of Chapter 13. The company acts a fiduciary while Chapter 11 bankruptcy is in effect. In this case, the U.S. Trustee is tasked to monitor the company's operations and fiduciary activities. The trustee also is empowered by law to hold meetings with the creditors to ascertain and investigate the soundness of the debtor's actions and administration of the case.
Eligibility
Those eligible to file a petition under Chapter 11 bankruptcy may be an individual, a sole proprietorship, partnership, or corporation. By virtue of the separate juridical personality of corporations, the investors or stockholders are not at risk of losing their assets, except those that they have invested in the corporation, as evidenced by their shares. However, such is not the case for partnerships and sole proprietorships. Partners in a partnership may be held personally liable in some cases to answer for the debts of the partnership. In sole proprietorship, there is no separate and distinct personality from the owner of the business which means that the sole proprietor may be held liable for the entire obligation, which means personal assets may be at risk of loss.
Advantages
The advantage of filing a Chapter 11 bankruptcy is for the juridical entities to start off with a clean slate. Sometimes, company financial practices can get messy and disorganized. The company needs external help when the situation gets out of hand, in which case, they need the courts to intervene to help them get their business back to order. Such a case is better than shutting down the operations of the company, which will inevitably cause unemployment many individuals. Another advantage is company creditors have an automatic stay order as provided by the Bankruptcy Code. This order restrains creditors from pursuing collection suits against the debtor company while the Chapter 11 bankruptcy is still in effect. This way, a company in this situation can rehabilitate without the external pressures of collection suits.
Disadvantage
The disadvantage of filing a Chapter 11 bankruptcy is the reduction of corporate powers on the corporation. While it is true that the corporate management can continue running the operations of the company, it is the U.S. Trustee and the bankruptcy courts who will have a final say on significant corporate acts. While the law allows creditors and stockholders to vote on the proposed reorganization plan, the court may disregard such vote if it finds such plan as fair for both parties to the case.
Changes in Laws
Based on legal information, bankruptcy under Chapter 11 has been updated, expanding its grounds for dismissal on petitions, particularly Section 111(b) of Chapter 11. Congress has revised the law on this aspect, adding several grounds for dismissing a petition for bankruptcy which includes among others failure to pay post petition taxes on time and failure to comply with any bankruptcy court order.
Video: Understanding Chapter 11 Bankruptcy Rules
Additional Information and Pertinent Forms
For more information on securing the required forms, you can go to the United States Courts' web site and download these online. Such forms are not available from your court of jurisdiction. The alternative would be to purchase these at legal stationery stores.
Disclaimer
These forms are not for sale. Official forms are readily available for free by downloading them from the United States Courts' web site.