Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a reorganization of debt. Unlike Chapter 13, there is not a limit on the amount of debt which can be filed. For large businesses trying to restructure their debt, Chapter 11 is generally the choice of bankruptcy options. When a business files a Chapter 11, the debtor usually continues to remain in possession of their assets and their business operates under the supervision of the court, specifically for the benefit of the creditor. If the management of the debtor is less than honest or ineffective, a trustee may be appointed by the courts (Moran Law Group, 2007).
Chapter 11 bankruptcy laws indicate that an individual may not file bankruptcy under Chapter 11, or any other chapter for that matter, if they have had a previous bankruptcy dismissed within the preceding 180 days as the individuals intentional failure to appear before or comply with orders of the court, or if their dismissal was voluntarily occurred after creditors had sought relief to recover property. The United States bankruptcy laws also state that no individual can be a debtor under Chapter 11 (or any other bankruptcy code) unless they have received credit counseling from an approved credit counseling agency within 180 days prior to filing. When debt management plans are developed during required credit counseling, the plans must be filed with the court (US Courts, 2007).
Chapter 11 bankruptcy can be filed by an individual or by an involuntary petition, which is filed by creditors that meet certain requirements. If filing is voluntary, the individual must file with the court a schedule of assets and liabilities, current income and expenses, unexpired leases and executory contracts, and a statement of financial affairs. Individuals must file a certificate of credit counseling along with any debt repayment plans which were developed through credit counseling, proof that they receive payment from employer(s) which has been received sixty days prior to filing, monthly collect income statements and any expected increases or decreases in income or expenses after filing bankruptcy, and lastly, a record of any interest the debtor has in state or federal tuition or qualified education accounts (US Courts, 2007).
As our company is not incorporated, it still may file Chapter 11 bankruptcy. If the company is a sole proprietorship, the individual’s personal and business assets are viewed. In the case of a partnership, only in some cases are the individuals personal assets used to pay creditors. To avoid this in a partnership, each partner may be forced to individually file bankruptcy (US Courts, 2007). The US Trustees appoint a creditor committee from the 20 largest unsecured creditors who are not insiders. This committee represents all of the creditors to provide negotiations and plans of reorganization. The creditors are formed into groups based the characteristics of their claims. Their vote’s function of the amount of claim against a debtor, and a Chapter 11 plan is only confirmed by the positive votes of the creditors. If a plan cannot be agreed upon by the creditors and the debtor, the debtor can attempt to get the plan “crammed down”, or forced into agreement, with creditors so that the plan is confirmed by the debtor meeting specific statutory requirements (Moran Law Group, n.d.).
Chapter 11 is the most flexible of the chapters, and that flexibility makes it difficult to generalize. Chapter 11 is also the most expensive type of bankruptcy to file and it has the lowest reorganization rate, often times estimated at 10% or less (Moran Law Group, n.d.).
Several large companies have filed Chapter 11 bankruptcy; however the largest Chapter 11 bankruptcy filed was Worldcom in 2002. MCI/Worldcom had filed Chapter 11 in 2002, elected a new chairman and CEO in 2003 who led them out of bankruptcy, then MCI was purchased by Verizon, with the sale completed in January, 2006. Worldcom had filed for bankruptcy due to a $41 billion debt load one week after announcing that $3.8 billion in expenses were booked improperly. Worldcom had listed assets totaling $107 billion. When problems at Worldcom came into public knowledge, banks that had previously dealt with Worldcom refused to provide any more money to the company unless the loans were secured with assets owned by Worldcom. There were over 1,000 creditors listed in the bankruptcy filing for Worldcom. Worldcom had started out as a success story in the 1990’s, purchasing MCI in 1998. Worldcom started receiving a lot of attention from auditors when it was discovered that their musty CEO had been taking personal loans from the company totaling $366 million (CNN Money, 2002).
It is distinguished to remember that a small business debtor can only file Chapter 11 bankruptcy if their secured and unsecured debt is under $2 million. Small business are put on a faster course of action than other Chapter 11 filings and hearings may be combined to expedite the discharge of the bankruptcy for businesses choosing to file as a minute business. Under 11U.S.C. §362(b), an automatic stay allows a period of time when foreclosures, collection efforts, repossessions, and judgments must cease. This automatically goes into effect when the bankruptcy petition is filed and any debt incurred prior to the filing must cease collection efforts or legal action. A United States State Trustee supervises the administration of Chapter 11 bankruptcy cases. The trustee is a federal employee who appoints the committee of creditors. The committee of creditors has the right to consult with the debtor, investigate the operation of the business as well as investigate the conduct of the debtor, and they may also participate in the plan of reorganization (Chapter 11 Bankruptcy, n.d.). I would recommend Chapter 11 as our company would be able to keep our assets and continue to function and potential grow as a company once we recover from the bankruptcy repayments.
Resources
Chapter 11 Bankruptcy. (n.d.). Retrieved on June 19, 2007 from:
http://www.file4bankruptcy.com/Chapter11.htm
CNN Money. (2002). Worldcom Files Largest Bankruptcy Ever. Retrieved on June 19,
2007 from: http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/
Moran Lay Group. (n.d.). Bankruptcy in Brief, Chapter 11. Retrieved on June 18, 2007
From: http://www.moranlaw.net/chapter11.htmieved
US Courts. (2007). The Federal Judiciary. Bankruptcy Basics. Retrieved on June 18,
2007 from : http://www.uscourts.gov/about.html
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