Economic crises are no surprises in the corporate world. Bankruptcy is the buzzword in such times. But, deciding an accurate form of action to deal with such difficult scenarios is up to the management of the company.
The United States Bankruptcy Code has a provision of Chapter 11 Bankruptcy which is said to be a breather in such catastrophic situations. Also known as “debtor-in-possession” because it permits you to carry on with the usual activities of the business while allowing you to preserve your assets and rearrange your debts, liabilities, and equity in the balance sheet.
Let us have a deeper look at the chapter 11 bankruptcy lawsuit.
Special Features of Chapter 11 Bankruptcy
This is one of the best exit plans for companies in crisis. Its special features are listed below:
- The company gets enough time to reassemble its machinery and equal distribution of its equity estates,
- The automatic stay provides blanket protection to the debtor from any litigations,
- The creditors lose their individual collection rights,
- No separate trustee is appointed by the court; the owner can still work as usual.
- Creditors have a better chance to receive payments in such cases, as compared to the liquidation case.
A reorganization bankruptcy is mostly for companies that do not qualify for chapter 7 or chapter 13. It is taken up by those whose assets do not touch the ceiling for the above-mentioned chapters. Following are eligible candidates for it:
- Small and medium enterprises
- Joint ventures
- Sole proprietorship
- Partnership businesses
- Individual businesses
- Limited liability companies (LLC)
Process of filing a chapter 11 bankruptcy
There are two important segments of this case. The debtor is the one who applies to the consumer courts for bankruptcy, and the creditor is the one who is liable for returns.
The process of filing the lawsuit is as follows:
- Firstly, the debtor files the petition voluntarily about the financial state of the company in court.
- Then, after investigation, the petition is considered by the jurisdiction.
- The debtor is assigned a period of exclusivity of 120 days to propose a plan of restructuring the business.
- In the next 180 days, the debtor is asked to convince the creditors for confirmation of the plan.
- If all the creditors and the court approves the plan as per the bankruptcy code, it’s declared confirmed for further proceedings.
- In case of objection or rejection of the plan, other options of liquidation via chapter 7 are looked up for. The creditors can also try to reach no bankruptcy laws to reevaluate the debts.
- A disclosure statement is then released after a voting mandate is received from each creditor.
- Next in the line is implementing the plan and repaying all the creditors of the money or assets.
- Voidable preferences can also be filed by the debtor in case of disputes.
During the whole process, case filing fees and administrative fees are charged by the debtor. In case of non-submission of the amount, the case is dismissed.
The bankruptcy cases can extend from month to year in court. The debtors must assure restitution in the suggested time frame.