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Purpose of Chapter 11

HomeBankruptcyPurpose of Chapter 11

Case filed under Chapter 11 of the United States Bankruptcy code is known as reorganization bankruptcy.

Importance of Chapter 11

The US bankruptcy laws in the past have either been creditor or debtor friendly. With the implementation of current Bankruptcy code in 1978, US law lays down comprehensive treatment for reorganizing business propositions for financially distressed companies which is found in Chapter 11 of the code.

Chapter 11 highlights the primary policy of US bankruptcy law for corporate debtors.

Read more about bankruptcy chapter here

Purpose of Chapter 11

The purpose of Chapter 11 is to preserve the debtor’s business by restructuring its debt and equity interests so that the actual state of the business can be realized and equity value can be created for shareholders which helps to retain the business value.

Entities Eligible for Chapter 11

Any commercial enterprise or individuals can file for relief under Chapter 11.

One important exception is the Bankruptcy code provision. The stockbrokers and commodity brokers can be debtors under the Securities Investors Protection Act, the similar case was observed in Lehman Brothers case.

Entities not Eligible for Chapter 11

The entities that are not eligible for relief under one or more chapters of the code are:

  • Banking and insurance institutions
  • Entities having no residence, domicile, place of business or property in US
  • Government units that are not municipalities

Filing of Petition under Chapter 11(Voluntary and Involuntary Petitions)

Chapter 11 case can be started on a voluntary or involuntary basis. The debtor commences a voluntary Chapter 11 case by filing petition for relief with the help of a clerk of a bankruptcy court.

The filing of a voluntary Chapter 11 petition automatically allows entry of an order for relief opening the case.

On the other hand, an involuntary case is commenced by an entity (excluding debtors).Usually creditor is the entity responsible for it.

For most businesses, three creditors having bona fide unsecured claims of certain fixed value in aggregation are needed to file an involuntary petition against a debtor. If the debtor fails to timely contest the involuntary petition or if the court decides that the statutory criteria has been met, the court enters  an order of relief and conducts the case like any voluntary Chapter 11.

Read more about process of bankruptcy filings here

Role of Creditors’ Committees

Creditors’ committees play a major role in Chapter 11 cases. The committee is appointed by the U.S. trustee and consists of unsecured creditors holding the seven largest unsecured claims against the debtor. The committee discusses with debtor, finds out the debtor’s conduct and how the business is operated and comes out with a plan.

What is Bankruptcy Estate?

The Bankruptcy estate is created once the bankruptcy case commences. The estate comprises of all property of the debtor. This includes legal property interests of the debtor, property that can be recovered from the third parties with rents and profits from the property of the estate.

Primary Parties in Reorganization Process

  • Debtor
  • Creditors
  • United States Trustee
  • Other relevant parties in interest

Summary

It takes between few months and two years to complete Chapter 11 bankruptcy case. Chapter 11 has helped business restructure its debts and obligations. In fact many large U.S companies like General Motors have filed Chapter 11 and have been saved from critical debt situations.

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