Generally, a Chapter 11 bankruptcy is a form of bankruptcy that specific ally focuses upon reorganization. Although it is similar to chapter 13 bankruptcy, the primary difference is that there is an absence of limitations in regard to how much money can be owed by the debtor. Originally intended only for large corporations, it is now possible for individuals to file this form of bankruptcy as well. It does not matter if the business is a sole proprietorship or a corporation, as it can be used by either for reorganization purposes.

Why Companies And Individuals File Chapter 11 Bankruptcy

The primary reason that Chapter 11 is filed is because a business or individual is unable to pay its creditors the debts that are owed. Both the business, as well as the creditors, can file with a federal bankruptcy court in order to obtain protection using this type of bankruptcy. Typically, the control of the business remains in the control of the company that files, being regarded as a debtor in possession. Despite having control over their business during the bankruptcy, it is still subject to the jurisdiction and oversight of the court.

How Debtors Are Protected After Filing Chapter 11

There are several mechanisms by which a debtor may restructure his business during this bankruptcy process. They may acquire loans and financing, with favorable terms, which gives new lenders first priority over any of the business’s earnings. It is also possible for the Court to deem it permissible for the debtor in possession to cancel and reject contracts. They may also be protected from additional forms of litigation against their business through what is called the imposition of an automatic stay.
Filing for Bankruptcy Chapter 11 is an option that businesses may choose if they wish to reorganize their assets in order to pay debts owed to their creditors. In most cases, it is beneficial to work with a bankruptcy attorney that can properly complete and fill the paperwork that is necessary. By doing so, the business will improve its odds of being able to pay off its debts before the end of five years, helping it to become financially viable once again.

Terms Of Chapter 11

  • Chapter 11 Plan

    • It states the claims made against the debtor by creditors, the treatment requested for each claim and further provides a detailed plan on how each of these claims will be met. It is a complex process wherein the debtor seeks the approval of the creditors and the Court for its plan.
  • Corporate Veil

    • This term refers to the protection provided by a corporation or other legal entity (incorporated business body). It treats the corporation and its shareholders as separate entities. In case of unlawful/fraudulent business practices or bankruptcy, the Court may pierce the corporate veil. This means that the shareholders' can be held accountable for the corporation's debts.
    • Factors Leading To Piercing The Corporate Veil
      • The Court carefully scrutinizes business operations and proceeds to consider whether to pierce the corporate veil under the following circumstances:
        • Fraudulent Acts - In case the corporation has used illegal, unlawful or fraudulent means to deceive and/or cheat others;
        • Harm Caused - If the corporation has caused harm or engaged in exploitation of another;
        • Corporate Formalities - In cases where the organization has shown negligence in observing corporate formalities;
        • Under Capitalization - If the corporation did not have the required capital to operate with in its particular class of business operations; and
        • Alter Ego - If the corporation has merely been used a shell by its owner(s) to promote personal interests.
  • Automatic Stay

    • Similar to other types of bankruptcy, petitions that are filed under Chapter 11 initiate the automatic stay. The automatic stay refers to stoppage of debt collection activities by creditors against for the corporation that has declared bankruptcy. In special circumstances, there may be an exception to automatic stay granted by the Court.
    • Confirmation

      • After approval or confirmation of the Chapter 11 Plan (reorganization plan) by the Court as well as the creditors, the plan is said to be confirmed. In order to attain approval of all creditors, the plan must be equitable and fair in its treatment of debts to all classes of creditors.

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