Sometimes, an individual or a company will be forced to declare bankruptcy, when it officially proclaims that it cannot pay its debts, and will need bankruptcy relief. Bankruptcy courts of different types exist for just such an occasion, and chapter 11 bankruptcy cases are one particular example. Contract disputes, computer intrusions, complex civil litigation, or simply hard times can all lead a company to declare chapter 11 bankruptcy (it is much more common for a company to do this than individuals). Bankruptcy courts and their judges are on hand to make sure that such a case is settled quickly and productive for all involved.
Bankruptcy Law and Arbitration
It is believed that 90% of chapter 11 debtors are people or companies that have under $10 million worth in assets or liabilities, under $10 million in annual revenues, and 50 or fewer employees on their payrolls. According to Nolo, such a bankruptcy case begins when a petition of bankruptcy is filed in bankruptcy court, and most of the time, this action is voluntary on the part of the debtor because they are eager for bankruptcy relief, although sometimes, creditors will take this step instead. Most often, defaulting companies will file for bankruptcy in the state in which they are primarily based, such as where their headquarters. Even if a company has campuses on several states, it is “domiciled”, or incorporated into one particular state and will file for bankruptcy there instead of their home states. Chapter 11 bankruptcy filing is relatively rare given how expensive it is to undertake, with chapter 7 and 13 being much more common, especially for private individuals. Still, chapter 11 bankruptcy can be very useful for companies that need it.
Such cases may take six months to two years to complete, but the process is roughly similar for any given case. For one thing, the defaulting company is considered “debtor in possession”, or DIP, meaning that it may continue to operate as normal, but with some conditions attached. Major financial decisions by that company cannot be taken without approval of the court, such as selling property or real estate assets (exempting items that are normally sold by the debtor as a matter of business), expanding or shutting down business operations, entering or breaking leases of property, and the retention of and payments to attorneys. The creditors will weigh in on such decisions and may support or oppose various actions on the debtor’s part.
A reorganization plan of the defaulting company must be drawn up, and for the first four months of the case, the defaulting company has exclusive rights to do this, although the period may be extended much further if the defaulting company shows good faith. However long or short that period ends up being, once it expires, the creditors and court may propose competing plans, but it is more common to convert the case to chapter 7 status or even dismiss it entirely. A chapter 11 reorganization plan will rearrange the debtor’s finances to allow it to show creditors how it will operate and pay off its debts in the future. This usually involves downsizing operations and liquidating some assets to help pay off the debt faster, or all assets may be liquidated and sold off.
In bankruptcy court, a confirmation takes place when a plan is approved, usually by the court itself. Some prerequisites exist, such as the defaulting company offering a feasible plan that is likely to succeed as intended. The debtor must prove that it can pay off its creditors within a certain time frame, in short. Aside from that, the debtor must create and propose a plan under good faith, meaning that it does not use any means forbidden by law. And in general, the plan should work in the best interests of the creditors, either based on how much would be owed in a chapter 7 case, or just paying a fraction of that under a chapter 11 case in bankruptcy court.