Chapter 11 of the U.S. Bankruptcy code is intended for businesses seeking to reorganize their debts and accept a payment plan to pay at least some of those debts. A Chapter 11 plan allows a business owner to keep his business alive while he negotiates with creditors on a solution to his financial distress. While some of the terms apply to other forms of bankruptcy, others are specific to Chapter 11 filings.
In all bankruptcy cases, a trustee is assigned by the court to oversee the case. In the case of a Chapter 11 bankruptcy, the trustee monitors the debtor in possession's management of the company, the submission of business reports, any applications for compensation from vendors, the Chapter 11 plan filed with the court and the 341 meeting, also called the meeting of creditors.
The Debtor In Possession
This person performs some of the duties of the trustee, but has more of a fiduciary responsibility for the bankrupt company. The DOP is obligated to account for property, monitor and object to any claims relating to the case, and fill out and file all forms related to the case. The DOP has the right to hire personnel to help the debtor during the case and to file tax returns and any reports required by the trustee, including reports after the case is discharged. The DOP is usually the owner or a manager of the business filing for Chapter 11.
This creditors' committee is appointed by the trustee and usually is made up of the seven largest unsecured creditors of the bankrupt company. The committee consults with the debtor in possession on many issues, investigates the debtor's conduct and help formulate the Chapter 11 repayment plan.
The Automatic Stay
Once a business has filed for Chapter 11 bankruptcy protection, it receives an automatic stay, meaning that its creditors, both secured and unsecured, cannot pursue legal action against the debtor, including foreclosure and collection. The automatic stay in a Chapter 11 lasts for a variable period of time, but it usually occurs while the debtor and creditors are negotiating a repayment plan.
The Small Business Debtor
In some cases, a business filing for Chapter 11 bankruptcy can be considered a small business debtor, if it is engaged in business activities with debts of $2 million or less and if the trustee has not appointed a creditors' committee. A small business debtor case can move quickly than a normal Chapter 11 because, for the first 180 days, only the debtor is allowed to propose a repayment or reorganization plan.
A Chapter 11 case is discharged by the bankruptcy court when the repayment and reorganization plan is confirmed. In return for abiding by the repayment plan, the debtor is released from all liability for the debts filed under the plan.