Filing for Chapter 11 bankruptcy can be a complex task. The first step to navigating it successfully is to develop a clear understanding of the most common – and most important – terms used in the process.
Chapter 11 bankruptcy overview
Often referred to as a “reorganization” bankruptcy, a Chapter 11 bankruptcy case usually features a corporation or partnership as the debtor. Filing for Chapter 11 bankruptcy gives the debtor the opportunity to propose a plan of reorganization or repayment, thus allowing the business to be kept alive and creditors to be paid over time.
This provision of bankruptcy law is designed to protect those who file for bankruptcy by automatically stopping all legal action against the debtor, including lawsuits, foreclosures, repossession, and garnishment. Typically, an automatic stay takes effect as soon as a petition for bankruptcy is filed.
An assertion by a creditor of a right to payment from the debtor or the debtor’s property at the time the debtor files for bankruptcy.
The final approval given by a bankruptcy court or judge for a plan of reorganization or liquidation in a Chapter 11 case. Typically, creditors approve the plan first before confirmation is given.
Appointed by the trustee (see “Trustee”), this committee of representatives for the creditors is usually comprised of the debtor’s seven largest unsecured creditors. Working on behalf of all the debtor’s creditors and in consultation with the debtor in possession (see “Debtor in possession”), this committee is responsible for negotiating and helping to develop a plan of reorganization or repayment (see “Plan”).
During this meeting, which is a requirement of section 341 of the Bankruptcy Code, the debtor is questioned under oath by creditors, a trustee, an examiner, or the U.S. trustee about the debtor’s financial matters. This meeting is also known as a 341a meeting.
Debtor in possession
This refers to a situation in which the debtor remains in control of operations and in possession of the estate property. In the case of a Chapter 11 filing, this is usually the business manager or owner. The responsibilities of a debtor in possession include accounting for property, monitoring claims related to the case, and completing all required paperwork.
Chapter 11 cases are discharged following the confirmation of the repayment and reorganization plan. In return for following this plan, the debtor is released from liability for all debts that fall under the plan.
A comprehensive document that describes the debtor’s finances and business history, lists the parties-in-interest, and outlines both how the bankruptcy came about and how the reorganization plan will get the debtor out of bankruptcy. The statement is filed with the reorganization plan and is reviewed by creditors prior to approving the plan (see “Confirmation”).
In this analysis, one part of the process needed to justify a reorganization plan, the debtor must demonstrate that creditors will benefit more from reorganization than from simply liquidating the debtor’s assets.
Monthly operating report
These reports are filed by debtors with the U.S. Trustee’s Office (see “U.S. Trustee”). They show receipts and disbursements, outline any changes in the debtor’s liability and asset picture, and provide confirmation of timely payment of taxes, insurance, and similar obligations.
Also known as a “plan of reorganization,” this is a proposal that outlines the debtor’s strategy for getting out of bankruptcy or debt. The proposal lays out how the debtor’s creditors will be satisfied. After filing for protection, the debtor has a 120-day window of exclusivity in which to submit the plan, together with the disclosure statement (see “Disclosure statement”). Creditors must vote on and approve the plan before it can be accepted by a bankruptcy court or judge (see “Confirmation”). A creditor or the trustee may file a competing plan after the exclusivity window has expired.
Small business debtor
Unless the U.S. trustee has appointed a creditors’ committee, or in cases where the creditors’ committee is insufficiently active, a business whose debts are $2 million or less can be considered a small business debtor. These cases can usually be handled more quickly than regular Chapter 11 cases because of the extended exclusivity window for filing a plan. The debtor has 180 days as opposed to the standard 120 days, and extensions are more difficult to obtain.
An agent assigned by the court to oversee all aspects of the bankruptcy process. In the case of a debtor in possession, a trustee will also monitor the debtor’s report submission, business management duties, and related details.
The officer who supervises bankruptcy, estate, and trustee administration on behalf of the U.S. Justice Department. The duties of a U.S. trustee include monitoring the filing of plans and disclosure statements, supervising creditors’ committees, overseeing fee applications, and other statutory responsibilities.