Bankruptcy is the legal process through which individuals and businesses can eliminate their debts or reorganize and repay them under the protection of the bankruptcy court. It allows people or businesses to make a fresh start after experiencing financial difficulties.
There is more than one type of bankruptcy. In addition to Chapter 11 bankruptcy, the most common types of bankruptcies are Chapter 7 proceedings (a liquidation of debt, eliminating most debt but exposing the debtor to loss of property), and Chapter 13 proceedings (a court-supervised reorganization of debt, reducing a debtor’s monthly payment and allowing repayment to creditors over a specified period of time). These forms of bankruptcy are discussed in detail in separate articles.
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Individuals who file for Chapter 11 bankruptcy relief generally do so because they do not qualify for Chapter 13 reorganization (for example, they have too much secured debt). As such, it is a useful, however more expensive, tool to reorganize debt and still retain assets and ongoing businesses.
Chapter 11 Bankruptcy is a reorganization under the protection of the Bankruptcy Court which is available to corporations or unincorporated businesses as well as to individuals. As is the case with other bankruptcy chapters, upon the filing of a Chapter 11 bankruptcy petition, an automatic stay goes into effect which brings most lawsuits and collection proceedings against the Chapter 11 debtor to a stop.
In a Chapter 11 bankruptcy proceeding, a trustee is authorized to operate the debtor’s business. Often, unless a separate trustee is appointed for cause, the debtor, as ‘debtor in possession’, acts as trustee of the business and will continue to operate the business under the protection and oversight of the bankruptcy court.
The U.S. trustee plays a major role in monitoring the progress of a Chapter 11 bankruptcy case and supervising its administration. The U.S. trustee is responsible for monitoring the debtor in possession’s operation of the business and the submission of operating reports and fees. The U.S. trustee conducts a meeting of the creditors, often referred to as the “section 341 meeting“. The U.S. trustee and creditors may question the debtor under oath at the section 341 meeting concerning the debtor’s acts, conduct, property, and the administration of the case.
A committee of secured creditors, consisting of creditors who hold the seven largest unsecured claims against the debtor will be appointed. Among other things, the committee:
- consults with the debtor in possession on administration of the case
- investigates the debtor’s conduct and operation of the business
- participates in formulating a plan of reorganization.
Chapter 11 bankruptcy affords the debtor in possession a number of ways to restructure its business, such as by securing new financing and loans. The court may also permit the debtor in possession to reject and cancel contracts.
Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time (in most cases 120 days). After that time, creditors may also propose plans. If a plan cannot be confirmed, the court may either convert the case to a liquidation under Chapter 7, or, if in the best interests of the creditors and the estate, the case may be dismissed resulting in a return to the status quo before bankruptcy. If the case is dismissed, creditors will look to non-bankruptcy law in order to satisfy their claims.
A chapter 11 case may continue for many years unless the court, the U.S. trustee, the committee, or another party in interest acts to ensure the case’s timely resolution. The creditors’ right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.
The bankruptcy law generally provides that confirmation of a plan discharges a debtor from any debt that arose before the date of confirmation. After the plan is confirmed, the debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.
Hoffman, Larin and Agnetti PA has protected the rights of Florida residents for more than 35 years and is experienced in all areas of Bankruptcy Law. We are available for a free consultation for all your Florida bankruptcy questions at our offices in Miami-Dade, Fort Lauderdale (Broward County) and Monroe County (offices in Key West and Islamorada).