Chapter 11 Definition

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What is Chapter 11?

Chapter 11 is a form of bankruptcy which involves a reorganization business affairs, debts and assets of a debtor and for this reason is known as “reorganization” bankruptcy.

Key points to remember

  • Chapter 11 is the most complex form of bankruptcy proceedings. A Chapter 11 bankruptcy allows a business to remain in operation and restructure its obligations.
  • If a company filing for Chapter 11 chooses to propose a plan of reorganization, it must be in the best interest of creditors.
  • If the debtor does not offer a program, creditors can offer one instead.
  • Many large corporations, including General Motors and K-Mart, have taken advantage of Chapter 11 bankruptcies to restructure their debts while continuing to do business.

Understanding Chapter 11

Named after US Bankruptcy Code 11, corporations typically file chapter 11 if they need time to restructure their debts. This version of bankruptcy gives the debtor a fresh start. However, the conditions are subject to the performance by the debtor of its obligations under the plan of reorganization.

On September 1, 2021, U.S. Bankruptcy Court Judge Robert Drain approved a $4.3 billion settlement of the Chapter 11 bankruptcy of OxyContin maker Purdue Pharma LP. The settlement dissolves Purdue Pharma and creates a new public benefit corporation to fund the treatment and prevention of opioid addiction. It protects former owners, the Sackler family — who will pay $4.5 billion over nine years, including federal settlement costs — from lawsuits related to the opioid epidemic. Purdue has also agreed to release 30 million documents related to the case.

Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of bankruptcy proceedings. For these reasons, a company should only consider Chapter 11 reorganization after careful analysis and exploration of all other possible alternatives.

During a Chapter 11 proceeding, the court will help a company restructure its debts and obligations. In most cases, the business remains open and operational. Many large US corporations are filing for Chapter 11 bankruptcy and staying afloat. These companies include auto giant General Motors, airline United Airlines, retail outlet K-mart, and thousands of other companies of all sizes. Corporations, partnerships, and limited liability companies (LLCs) typically file Chapter 11, but in rare cases, highly indebted individuals who are not eligible for Chapter 7 or 13 may qualify for Chapter 11. However, the process is not fast.

A business in the middle of filing Chapter 11 can continue to operate. In most cases, the debtor, referred to as the “debtor in possession”, conducts business as usual. However, in cases of fraud, dishonesty, or gross incompetence, a court-appointed trustee steps in to lead the business through the bankruptcy process.

The company is unable to make certain decisions without the authorization of the courts. These include the sale of assets, other than inventory, the commencement or termination of a lease, and the discontinuation or expansion of business activities. The court also exercises control over decisions relating to the recruitment and payment of lawyers and the conclusion of contracts with suppliers and trade unions. Finally, the debtor cannot take out a loan that will begin after the end of the bankruptcy.

In Chapter 11, the person or business that declares bankruptcy has the first chance to come up with a plan of reorganization. These plans may include reducing business operations to reduce expenses, as well as renegotiating debts. In some cases, the plans involve liquidate all assets to repay creditors. If the path chosen is feasible and fair, the courts accept it and the process moves forward.

The Small Business Reorganization Act 2019, which came into force on February 19, 2020, added a new Subchapter V to Chapter 11 designed to facilitate the bankruptcy of small businesses, which are “defined as entities having less $2.7 million in debt. that also meet other criteria, according to the US Department of Justice. The law “imposes shorter time frames for completing the bankruptcy process, allows greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee to work with the small business debtor and its creditors to facilitate the development of a consensual reorganization plan. .”

the Coronavirus Aid, Relief, and Economic Security (CARES) Actsigned into law by the President on March 27, 2020, raised the Chapter 11, Subchapter V debt limit to $7,500,000. The change applies to bankruptcies filed after the CARES Act was enacted and expires one year later.

Since Chapter 11 is the most expensive and complex form of bankruptcy, most businesses explore all alternative avenues before filing one.

Chapter 11 Example

In January 2019, Gymboree Group Inc, a popular children’s clothing store, announced that it had filed for Chapter 11 and was closing all of its Gymboree, Gymboree Outlet and Crazy 8 stores in Canada and the United States. .

According to a press release from Gymboree, the company had received a debtor-in-possession commitment in the form of funding ($30 million in new money loans) provided by SSIG and Goldman Sachs Specialty Lending Holdings, Inc. and a “roll-up” of all of Gymboree’s obligations under the “Pre-Petition Term Credit Agreement”.

CEO Shaz Kahng said the company “continues to pursue an operating sale of its Janie and Jack business and a sale of the intellectual property and online platform for Gymboree.” Gap announced in March 2019 that it had purchased Janie and Jack. In early 2020, Gymboree made a comeback as a “shop-in-a-shop” at Children’s Place locations and with a new online store.

This was the second time in two years that Gymboree Group Inc. had filed for Chapter 11 bankruptcy. The first time was in 2017, but at that time the company managed to reorganize and significantly reduce its debts.

What are the chapters of the US bankruptcy code?

There are officially six chapters in the US bankruptcy code and they deal with different aspects of the process. They are: Chapter 7 (liquidation), Chapter 9 (municipalities), Chapter 11 (reorganization, usually for businesses), Chapter 12 (family farmers), Chapter 13 (repayment options) and Chapter 15 ( international bankruptcies). Of these, Chapter 7, Chapter 11, and Chapter 13 are the most common.

What is the difference between chapter 7 and chapter 11?

Chapter 7, also called liquidation bankruptcy, is when the court appoints a trustee to oversee the sale of as many of an individual’s assets as necessary to pay creditors. Unsecured debts, such as credit card debts, are usually written off. However, Chapter 7 does not forgive any taxes owed or student loans. Individuals are allowed to retain “exempt” property.

Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts, and assets, and for this reason is known as “reorganization” bankruptcy. It is most often used by large entities, such as businesses, although it is also available for individuals. The main difference is that the entity filing for bankruptcy retains control of the operations and is not required to liquidate the assets.

Are there any benefits to filing Chapter 11?

The biggest advantage is that the entity, usually a company, can continue to operate while going through the reorganization process. This allows them to generate cash flow which can facilitate the repayment process. The court also issues an order that keeps creditors at bay. Most creditors are receptive to Chapter 11 because they are able to recover more, if not all, of their money during the repayment plan.

What are the disadvantages of filing Chapter 11?

Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of bankruptcy proceedings. For a company that is struggling to the point of considering filing for bankruptcy, the legal fees alone can be a bit costly. Additionally, the reorganization plan must be approved by the bankruptcy court and must be manageable enough to reasonably pay off the debt over time. For these reasons, a company should only consider Chapter 11 reorganization after careful analysis and exploration of all other possible alternatives.

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