Article
Chapter 11 Bankruptcy
[Download step-by-step guidance and analysis on Chapter 11 bankruptcy proceedings.]
Bankruptcy is a legal proceeding for individuals and entities in some form of financial distress, typically those who are unable to pay their debts to creditors. In the United States, bankruptcy is only available through the federal courts, and the law governing bankruptcy is the United States Bankruptcy Code.
Ordinarily, once a bankruptcy case is filed, an automatic stay is immediately put in place to shield the debtor from collection actions while the bankruptcy case proceeds. The form of relief available to the debtor depends on which chapter of the Bankruptcy Code the debtor proceeds under. Chapter 11 bankruptcy, in particular, refers to Chapter 11 of the United States Bankruptcy Code, and it typically involves a restructuring of debts.
What is Chapter 11 bankruptcy?
Cases filed under Chapter 11 of the United States Bankruptcy Code are legal proceedings that provide for reorganization. Individuals, corporations, small businesses, and other business entities may file a Chapter 11 case. Chapter 11 bankruptcy provides business entities, and individuals with large amounts of debt, an opportunity to reorganize their financial affairs and deal with all of their creditors in a single proceeding.
The debtor in Chapter 11 ordinarily files a plan of reorganization to be voted on by its various classes of creditors. The plan may provide for restructuring of the debtor’s debts. Alternatively, the debtor can conduct a company sale under 11 U.S.C. § 363 followed by a liquidating plan that distributes the sale proceeds to creditors. Chapter 11 reorganizations may be voluntary, filed by the debtor, or involuntary, filed by creditors of a potential debtor.
Chapter 7 bankruptcy vs. Chapter 11 bankruptcy
How is Chapter 11 bankruptcy different from other types of bankruptcy? In particular, how does it differ from Chapter 7 – the type that most people think of when they hear the word “bankruptcy”? Let’s take a look.
Chapter 7
The primary purpose of a Chapter 7 bankruptcy is to liquidate the debtor’s non-exempt assets, make a distribution to creditors, and for the debtor to receive a discharge from prepetition debts, giving the debtor a fresh start. Chapter 7 cases are typically only filed voluntarily by the debtor.
Chapter 11
The primary purpose of a Chapter 11 bankruptcy is to give business entities and individuals with large amounts of debt an opportunity to reorganize their financial affairs. The debtor in Chapter 11 ordinarily files a plan of reorganization to be voted on by its various classes of creditors. The plan may provide for restructuring of the debtor’s debts. Alternatively, the debtor can conduct a company sale under 11 U.S.C. § 363 followed by a liquidating plan that distributes the sale proceeds to creditors.
What is Subchapter V?
Even before the pandemic, important changes were being made to bankruptcy law. In particular, The Small Business Reorganization Act of 2019 created a special type of Chapter 11 case. Known as Subchapter V, it is essentially a streamlined Chapter 11 process to provide an economically feasible and efficient option for small business debtors, and to remove some of the obstacles—financial, temporal, and otherwise—to reorganization. Subchapter V is limited to individuals and entities that qualify as a “small business debtor”—defined as a person or entity engaged in commercial or business activities that has aggregate secured and unsecured debts as of the date of filing of less than $2,725,625.
This threshold debt amount was increased to $7.5 million by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, and while the increased limit was originally scheduled to sunset on March 26, 2021, the increased limit has since been extended to March 27, 2022.
The plan does not require approval through voting, but has its own confirmation standards, which are much less rigorous than those in a conventional Chapter 11 case. After confirmation, the Subchapter V case bears some similarities with Chapter 13 as the debtor starts making payments to the plan trustee.
What’s next for litigation?
The litigation landscape has been profoundly impacted by the long-term consequences of Covid-19, from what is defined as “unforeseeable” in breach of contract claims to an increase in ADA-related litigation related to RTO mandates.
That’s why Bloomberg analysts compiled our annual outlook on the legal industry, outlining the different ways COVID has affected the legal world, and what it means for you. In this special report, our analysts evaluate the trends, including:
- Complex Covid-19 related labor and employment issues
- Emerging antitrust case trends
- Bankruptcy filings in the travel industry