What Happens in Chapter 11 Bankruptcy?
The discount retailer Ames has filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. What happens when a company files for Chapter 11?
The U.S. Bankruptcy Code spells out the different types of bankruptcy, which are known by the chapter of the code in which they appear. Individuals who go broke generally file for Chapter 7 bankruptcy, which involves liquidating a debtor's property and distributing the proceeds to creditors. Floundering businesses typically use Chapter 11 bankruptcy, also known as "reorganization" bankruptcy. During a Chapter 11 bankruptcy, businesses usually retain possession and control of their assets under the supervision of a bankruptcy court.
Filing for Chapter 11 suspends all judgments, collection activities, foreclosures, and repossessions of property against the filing business. This gives it time to negotiate with its creditors. The company's creditors are not allowed to pursue debts or claims that arose before the bankruptcy petition was filed.
The business must file a written disclosure statement and a plan of reorganization with the bankruptcy court. The disclosure statement contains information about the company's assets, liabilities, and business affairs, and the reorganization plan includes a discussion of how the company will handle the claims against it.
The company's creditors participate in the bankruptcy proceedings. A creditors' committee, usually consisting of those holding the seven largest unsecured claims against the company, can investigate the company's conduct and its business operations, and the committee can help formulate the reorganization plan. The creditors can question the company under oath during what is called a "section 341 meeting" (after the relevant section of the bankruptcy code). Creditors can also file motions to convert the bankruptcy to a Chapter 7 liquidation or to dismiss the case.
For 120 days after filing for Chapter 11, the business has the exclusive right to file a reorganization plan, and the business has 180 days to persuade creditors to accept its plan. If the company misses those deadlines, creditors can file their own reorganization plans.
Once the creditors have accepted a reorganization plan (either the company's plan or a competing plan), the bankruptcy court confirms that the plan is feasible and proposed in good faith. The plan's confirmation discharges the company from its old debts, but the company is bound by the plan to make payments to its creditors.
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