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What is Chapter 11 Bankruptcy and How Can It Help?

A Chapter 11 bankruptcy petition allows business owners who owe money to creditors a path to avoid liquidation of their business assets.
Chapter 11 is a court-supervised reorganization of debts in coordination with a committee of the petitioner’s creditors, who approve operation of the debtor’s business for the purpose of repaying his creditors.

Qualifications for Chapter 11 Bankruptcy

A qualified candidate for Chapter 11 can be a corporation, sole proprietorship, or partnership.
Because the owners of a corporation (stockholders) are distinct from the corporation itself, personal assets of stock-holders are never at risk from the Chapter 11 reorganization.
A sole proprietorship however, unlike a corporation, does place both the personal and business assets of the business owners at risk during a Chapter 11 process.
For example, the Chapter 11 laws may require a partner to assign their personal assets to pay off creditors. Also, the partners may be forced to file for personal bankruptcy protection (Chapter 7) as a condition of the Chapter 11 reorganization.

The Chapter 11 Bankruptcy Process

A business owner who has creditor liens against her business is called the debtor in possession, and operation of the business will be monitored by the government designated Trustee overseeing and administering the reorganization.
The trustee will conduct a meeting with creditors and establish reporting requirements during the reorganization.
Failure to meet the trustee’s reorganization plan can result in having the case dismissed or possible referral to a different bankruptcy category.
The trustee will create a committee of creditors who are empowered to monitor the business owner’s compliance with the plan set forth for reorganization. Such creditor committees are also empowered to hire attorneys and other professionals to assist them in their oversight responsibilities.

Chapter 11 for Small Businesses

For small businesses, it may be difficult or impossible for the trustee to find creditors willing to assume the broad responsibilities of a creditor committee, and in that case, there are provisions in the Chapter 11 bankruptcy laws that enable the trustee to categorize the business as a “small business case.”
This designation allows a small business owner to report to the bankruptcy court at an expedited pace, which may be advantageous for the business owner compared to the traditional format.