What Constitutes Chapter 11 Bankruptcy?
Chapter 11, named after the U.S. bankruptcy Code 11, is a form of bankruptcy
that involves the reorganization of a debtor’s business affairs,
debts, and assets. Corporations generally file Chapter 11 if they require
time to restructure their debts, and this process of bankruptcy essentially
gives the debtor a fresh start. However, the terms of the agreement are
subject to the debtor’s fulfillment of its obligations under the
During a Chapter 11 proceeding, the court will help a business restructure
its debts and obligations after evaluating all the relevant documents
provided. In most cases the firm will remain open and operating during
the process. In most cases the debtor will run the business as usual.
(Though in cases involving fraud, dishonesty, or gross incompetence, a
court-appointed trustee steps in to run the company throughout the entire
bankruptcy proceeding). Many large U.S. companies like General Motors
and United Airlines have actually filed for Chapter 11 bankruptcy and
stayed active. Corporations, partnerships, and limited liability companies
usually file Chapter 11, but in rare cases individuals with a lot of debt
may also be eligible for Chapter 11.
Note that a business in the process of filing Chapter 11 is not able to
make certain decisions without the permission of the courts, such as actions
- selling assets;
- starting or terminating a rental agreement; and
- stopping or expanding business operations.
The court also has control over decisions related to retaining and paying
attorneys and entering contracts with vendors and unions.
The debtor also cannot arrange a loan that will commence after the bankruptcy
However, in any case the individual or business filing Chapter 11 bankruptcy
has the first chance to propose a reorganization plan that may include
downsizing business operations to reduce expenses or renegotiating debts.
If the chosen path is deemed feasible and fair, the courts will accept
it and move the process along.
Why Do Most Chapter 11’s Fail?
Common circumstances that lead to Chapter 11 are:
- lawsuits that end badly;
- economic downturn;
- unanticipated competition;
- excessive or unexpected debts;
- poor marketing;
- loans that mature or are accelerated due to a default;
- bad management.
Chapter 11 can often fix the above problems, but it will require careful
planning and deft hands. Most Chapter 11 cases do not succeed primarily
because the lawyer who filed did not undertake enough pre-filing analysis
and develop an effective game plan. That is, the cases did not have enough
of the elements necessary to succeed in the first place and should never
have been filed the way the attorney did.
If you are considering Chapter 11, you should first ask your lawyer about
their process of evaluating the case and the potential exit strategy.
If the lawyer does not drill down and look at financials in detail and
evaluate the nature of the debts, it is unlikely they can conjure an exit
scenario. The lawyer you choose to take on your case should be able to
fully understand how the case is likely to end before it is filed; if
they do not clearly explain how your facts and figures will lead to a
successful outcome, they’re probably winging it, which isn’t
in your best interests. Chapter 11 proceedings are expensive cases to
file, and you should think long and hard before signing up for one with
a lawyer who doesn’t seem experienced.
Some good questions to ask when choosing a bankruptcy lawyer are:
- Does the lawyer understand exactly how my business works?
- Did the lawyer look at my loan documents, and lawsuit pleadings?
- Did they study my financials?
- Did the lawyer give me a spreadsheet showing the probable outcomes of my case?
- Did the lawyer explain how Chapter 11 unfolds, and what tools are available
to modify debts?
- Did they explain the problems that can arise and the likelihood of overcoming