What is Chapter 11 bankruptcy and how does it work?
Rudy Giuliani has filed for bankruptcy after being ordered to pay $148 million in damages. What is Chapter 11 bankruptcy and how does the process work?
Former Trump lawyer Rudy Giuliani has filed for bankruptcy after a jury ordered him to pay $148 million to two former Georgia election workers he defamed. How do bankruptcy proceedings work?
What is Chapter 11 bankruptcy?
The term “Chapter 11″ refers to the specific chapter of the United States Bankruptcy Code under which this type of bankruptcy is outlined. The US Bankruptcy Code is a federal law that governs bankruptcy proceedings in the United States.
It is organized into different chapters, each addressing a specific type of bankruptcy or debtor. Chapter 11 was designated as the chapter for business reorganization when the Bankruptcy Code was enacted in 1978. The restructuring of a debtor’s assets and liabilities allows a business to continue operating and pay creditors over time while addressing the financial challenges they face.
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Chapter 11: Most expensive form of bankruptcy
Chapter 11 bankruptcy is a legal process that is commonly used by businesses, both large and small, to overcome money difficulties and work towards financial stability. While it offers opportunities for rehabilitation, it is a complex and resource-intensive process that requires careful planning and negotiation.
Because of its complexity and expense, reorganization bankruptcy is usually the last resort of a company after exploring other alternatives. Although Chapter 11 usually involves a corporation or partnership, people in business or individuals can also seek its relief.
A number of companies that were on the brink of failure and filed for bankruptcy have managed to bounce back, including General Motors, Marvel Entertainment, and Texaco.
How does Chapter 11 bankruptcy work?
The process begins when a business voluntarily files for Chapter 11 bankruptcy by submitting a petition to the bankruptcy court. The petition may also be an involuntary one, filed by creditors that meet certain requirements. Once the petition is filed, an automatic stay goes into effect. This stay prohibits creditors from taking any action to collect debts, including lawsuits, repossessions, or foreclosures.
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Crafting a reorganization plan and disclosure statement
The business, with input from creditors, must develop a reorganization plan. This plan outlines how the company will address its financial problems, including how it will restructure its debts, renegotiate contracts, and continue its operations.
Any plan must take into consideration the best interest of the creditors. If the debtor is unable to propose a plan, the creditors may submit one of their own.
The business must also create a disclosure statement, providing creditors with detailed information about its financial condition and the proposed terms of the reorganization plan.
Creditors then have the opportunity to vote on the plan. If it is approved, it is submitted to the bankruptcy court for confirmation. The court reviews the plan to ensure it meets legal requirements and is fair and equitable.
Plan implementation and ‘business as usual’
Once the court confirms the plan, the business begins implementing it. This may involve restructuring debt, selling assets, renegotiating contracts, or other measures outlined in the plan. The debtor, considered a “debtor in possession” continues to run the business.
The company will need the permission of the courts to take certain actions such as selling assets, borrowing new money, signing rental contracts, and ceasing or expanding operations.
Coming out of Chapter 11 bankruptcy
If the debtor is successful in implementing the reorganization plan, the business emerges from Chapter 11 bankruptcy. It continues its operations under the new financial structure outlined in the plan.
The business is often subject to ongoing monitoring and compliance to make sure it sticks to the terms of the reorganization plan. The bankruptcy court may retain jurisdiction over the case during this period.