When most people hear the word “bankruptcy,” they tend to associate it with the term “Chapter 11.” In fact, over the past decade, Corporate America on a whole has become all too familiar with the Chapter 11 bankruptcy, from the inevitable filings of multiple seemingly well-run businesses to the scandalous, fraud-driven circumstances of others. As an attorney who has spent more than 20 years helping clients with their bankruptcy-related matters, Stephen Graves of the San Antonio, Texas-based Graves Law Firm believes that bankruptcy protection can often be a wise choice for companies in need.
A Chapter 11 bankruptcy is one that allows companies or corporations to reorganize their debts under that particular section of the bankruptcy code while remaining in business for the short term and, if possible, the long term. When a company reaches the point where it can no longer pay its creditors in a reasonable timely fashion, then Chapter 11 often becomes the next logical step.
During a Chapter 11 proceeding, a debtor must compile a list of all of its outstanding creditors and release a schedule of all of its liabilities. The debtor must also disclose all of its current assets in order to produce a clear picture as to where it stands financially. Once all of this information is released, creditors of the bankrupt company in question must be notified so that they can file their own claims against the debtor. Although the debtor is required to identify the amounts owed to its respective creditors, in some cases, there could be a discrepancy between the debtor’s records and those of certain creditors. Therefore, it’s important to give creditors the opportunity to file their own claims as well.
In any given Chapter 11 bankruptcy, the debtor’s claims are broken down into several categories of priority. Secured claims, which are ones that are backed by liens, are given priority over unsecured claims (which, as the name implies, are not backed by any form of security). Although a debtor might owe a fair amount of money in secured claims, in most cases, the majority of individual claims will come in the form of unsecured claims.
As part of the Chapter 11 proceedings, a debtor will need to come up with a way of restructuring its debt and obligations to be able to pay off creditors accordingly while remaining operational. This method will then be documented and filed with the bankruptcy court in what is called a plan of reorganization. The plan of reorganization is an essential component of any Chapter 11 proceeding, as it is the formal plan that sets forth, in detail, how a debtor’s claims will be treated, and what types of distributions will be made to creditors accordingly. In order for a plan of reorganization to be put into effect, it must be voted on and approved by a certain percentage of creditors, all of whom will have an interest at stake. In many situations, a debtor will have no choice but to revise its plan of reorganization in the event that it is not initially accepted. For this reason (and others), Chapter 11 bankruptcy proceedings tend to be long, drawn-out affairs.
In many situations involving Chapter 11 bankruptcy filings, it is the creditors more so than the debtors who end up suffering the most. On the other hand, the bankruptcy code was put into effect for a reason, and it only makes sense for debtors to take advantage of it as necessary. In fact, given the state of the economy today, the option of filing Chapter 11 has served as a lifeline for many struggling companies, plenty of which were simply victims of circumstance as opposed to poor financial planning. Still, there are those who regard Chapter 11 as a “get out of jail free” card of sorts, as plenty of companies do end up filing for protection under the bankruptcy code after years of monetary mismanagement. Regardless of what many might think, when it comes to the Chapter 11 option, one thing’s for sure – it’s not going anywhere for awhile.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
