Chapter 11 bankruptcy is usually filed by financially-troubled businesses. These companies, which are forced to seek help in the bankruptcy courts, run the gamut from small neighborhood stores to mega-corporations like United Airlines and General Motors.

Under Chapter 11, the indebted company’s assets, debts, and business affairs are reorganized in a court-approved plan. These plans reduce financial obligations and modify repayment terms, allowing the company owners (known as the “debtors in possession” to keep the business going and, if all goes well, regain profitability.

Who can file Chapter 11?

Most of the parties that file Chapter 11 are businesses. On rare occasions people who have a lot of debt and do not qualify for Chapter 7 or 13 may file for Chapter 11, which takes anywhere from a few months and two years to complete.

What happens when a business files Chapter 11?

Businesses that file Chapter 11 may remain in operation afterwards, with the debtor in possession running it. In some cases a trustee may step in to run the company, especially if fraudulent or incompetent behavior contributed to the bankruptcy. Certain business decisions, such as those below, will require court permission beforehand:

  • Starting or ending a rental agreement
  • Growing or closing down the business
  • Entering into contracts with vendors
  • Selling any assets that are not inventory

For four months after filing Chapter 11, the business or individual has the exclusive right to propose a reorganization plan to the court. Plans typically involve selling assets to repay creditors, renegotiating debts, and reducing expenses by downsizing operations. If the plan is fair and in the best interests of the creditors, then the court will usually agree to it. After the period of exclusivity expires, creditors can propose reorganization plans of their own, but competing plans are relatively rare.

For a plan to be approved, the bankruptcy court must find that it meets certain criteria, such as:

  • The plan must be feasible, or likely to succeed.
  • It must have been proposed in good faith.
  • The outcome must in the best interests of the creditors, meaning that they will receive as much as they would if the case was converted to Chapter 7.
  • The plan must be fair and equitable, with secured creditors gradually receiving the value of their collateral.

Special provisions for small businesses

There are some special provisions available to make the Chapter 11 process faster for owners of smaller businesses and help them reduce associated expenses.

The Bankruptcy Code defines a “small business debtor” as a company or individual who:

  • is engaged in business activities
  • owes a maximum of $2,490,925 (not including money owed to insiders)

Small business cases can bypass standard requirements such as a disclosure statement and creditors’ committee. They also have a longer exclusivity period to propose a plan. They are, however, subject to certain restrictions such as a deadline to propose a plan and greater trustee oversight.

Any New York company or individual facing bankruptcy should contact an experienced Chapter 11 bankruptcy attorney to review their options and decide on the best course of action. When properly completed, Chapter 11 can provide debtors with a fresh start and second chance at success.