Chapter 11 Facilitates Business Reorganization
Chapter 11 commonly facilitates business reorganizations for corporations and other business entities. Because the Chapter 11 process is complex and expensive, legal counsel is critical. Mr. Gorrill on occasion represents small businesses in San Diego in these cases.
The debtor usually retains control of assets during Chapter 11 reorganization without a case trustee. A debtor in possession has the powers of a bankruptcy trustee and owes a fiduciary duty to creditors while operating the business.
Chapter 11 Requires A Detailed Plan
The debtor starts the process by filing a written disclosure statement and plan of reorganization. This filing creates an “automatic stay,” which halts creditor collections, foreclosures and repossessions. The business continues to operate, but the automatic stay gives the debtor time to restructure. In certain circumstances, however, a creditor may move to lift or modify the stay.
Next, the court reviews the disclosure statement then sends it to the creditors with the plan and a ballot. Creditors with “impaired” claims, which means that the plan would affect their rights or payment of their claim, may vote to accept or reject the plan. If enough votes accept the plan, it proceeds consensually. If not, the court determines whether the plan can proceed despite creditors’ objections.
After the confirmation, the reorganized debtor and the creditors are bound by the terms of the plan. The confirmed plan creates new contractual rights, replacing or superseding prepetition contracts (with limited exceptions).
Experienced Legal Counsel Is Critical
Unlike Chapter 7 bankruptcy or Chapter 13 bankruptcy cases, where most of the paperwork is done with standardized forms, a Chapter 11 requires extensive pleadings. Debtors must customize the plan and disclosure statement.
Each step in the reorganization process may require notice to creditors or a court hearing, which adds to the cost of the case. Since most Chapter 11 cases end in dismissal or conversion to Chapter 7, it is important to consult with an experienced attorney to determine if reorganization is a realistic option.
Timely Filing Can Give You An Advantage
There is no specific time for filing a plan during bankruptcy, but the debtor initially has an exclusive period to file a plan and disclosure statement. After the exclusive period expires, a creditor or the case trustee, if one is appointed, may file a plan. The debtor’s exclusive right to file a plan is an incentive for the debtor to act promptly.
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