Chapter 11 bankruptcy

Chapter 11 bankruptcy
Chapter	11
Title	11, United States Code
Sections	§§ 1101–1174
Data1	Also known as, Reorganization
Data2	Primary use, Business reorganization
Data3	Governing body, United States bankruptcy court

Chapter 11 bankruptcy. It is a provision of the Bankruptcy Code in the United States that permits the reorganization of a debtor's financial affairs, debts, and assets. Often utilized by corporations, it allows a business to continue operating while formulating a court-approved plan to repay creditors over time. This process is overseen by the United States bankruptcy court and is distinct from the liquidation procedures found in Chapter 7 bankruptcy.

Overview

The primary goal is to rehabilitate a business as a going concern, providing a structured alternative to outright liquidation under Chapter 7 bankruptcy. The process is initiated by filing a petition with the United States bankruptcy court, which triggers an automatic stay that halts most collection actions, lawsuits, and foreclosures. This legal framework is codified in Title 11 of the United States Code and is a cornerstone of American corporate law. The debtor, often referred to as the "debtor in possession," typically retains control of business operations, unlike in a Chapter 7 bankruptcy proceeding where a trustee in bankruptcy takes over.

Eligibility and filing process

Most entities, including corporations, partnerships, and limited liability companies, are eligible, though specific provisions exist for small business debtors and single asset real estate cases. The process begins with the filing of a voluntary petition or, less commonly, an involuntary petition by creditors in the appropriate United States bankruptcy court. Key initial filings include schedules of assets and liabilities, a statement of financial affairs, and a list of creditors. The United States Trustee, a division of the United States Department of Justice, appoints a creditors' committee, often comprised of the largest unsecured creditors like bondholders or major suppliers, to represent collective interests.

Key participants and roles

The debtor in possession manages the company's day-to-day operations and has the fiduciary duty to act in the best interest of the estate. The United States Trustee monitors the case for compliance and appoints official committees. The creditors' committee, typically representing unsecured creditors, negotiates with the debtor and can investigate the debtor's conduct. Other critical parties may include secured creditors such as JPMorgan Chase or Bank of America, equity holders, and potential investors or purchasers like Apollo Global Management. The presiding United States bankruptcy judge resolves disputes and ultimately confirms the reorganization plan.

The plan of reorganization

The debtor has the exclusive right to file a plan for a set period, typically 120 days, outlining how it will treat various creditor claims and equity interests. The plan must classify claims, such as separating secured debt held by Citigroup from unsecured debt owed to trade vendors, and specify what each class will receive. It is subject to a vote by impaired creditor classes and must meet the best interests of creditors test, comparing the plan's payout to what would be received in a Chapter 7 bankruptcy. Confirmation by the United States bankruptcy judge requires the plan to be feasible and proposed in good faith, often following intense negotiations at venues like the Southern District of New York.

Advantages and disadvantages

A significant advantage is the ability to reject burdensome contracts and leases, a power often used to shed unprofitable real estate obligations, as seen in cases involving General Motors and Sears Holdings. The process also allows for debtor-in-possession financing from lenders like Goldman Sachs to fund operations. Major disadvantages include high costs for legal advisors from firms like Kirkland & Ellis, loss of control to creditor committees, and intense public scrutiny. The process can be lengthy, taking years in complex cases like that of Pacific Gas and Electric Company, and may still result in a conversion to Chapter 7 bankruptcy if reorganization fails.

Notable examples

Many major American corporations have utilized this process. The Lehman Brothers filing in 2008, adjudicated in the Southern District of New York, was the largest in history. The General Motors bankruptcy in 2009 involved significant intervention from the United States Department of the Treasury. More recent high-profile cases include the restructuring of Pacific Gas and Electric Company following liabilities from California wildfires and the retail bankruptcies of J.C. Penney and Neiman Marcus. The airline industry has seen multiple filings, including those by United Airlines, Delta Air Lines, and more recently, Latam Airlines Group.

Category:United States bankruptcy law Category:Business law Category:Corporate finance