Iconic companies from major retailers to airline corporations to rental car companies have declared bankruptcy. What does this mean? Bankruptcy can be an unavoidable outcome for some businesses when they experience long-term financial distress. It often is accompanied by a lasting impression of failure and concerns that the company cannot continue to operate. While many companies do ultimately close their doors due to a liquidation or sale of the business after filing for bankruptcy, this isn’t the story for most Corporate Bankruptcy cases.
What is Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy, which is named for Chapter 11 of the U.S. Bankruptcy Code, allows corporations to continue operating with the option and time to restructure their finances. Upon filing for Chapter 11, the business is referred to as the “Debtor”. Any entities that are owed money from the Debtor are called the “Creditors”.
Filing for Ch.11, also referred to as a “reorganization”, gives a Debtor an opportunity to restructure its business affairs, debts, and assets, so it can reemerge as a healthy organization. Ch.11 is an option for nearly anyone, including individuals, businesses, partnerships, joint ventures, limited liability companies (LLCs), complex enterprises (with parent and subsidiary companies), and publicly traded corporations.
In this article, we’d like to share with you how Chapter 11 bankruptcy works, how it can benefit the Debtors and other parties involved, and the different outcomes that can be achieved.
Why Do Companies File for Chapter 11?
When an organization files for Chapter 11 bankruptcy, it is often the result of significant financial distress that hinders its ability to sustain profitability, meet the obligations on its debts, and ultimately continue to operate in its current state.The intent of a Debtor in declaring Ch.11 bankruptcy is to undergo a reorganization of its affairs and restructuring of its debts, so that it can maximize the amount paid to its Creditors.
Corporations may seek bankruptcy protection for any number of reasons. These include general economic weakness, operational conflicts, ineffective business strategies, increased competition, regulatory changes, litigation (e.g. class action lawsuits), environmental issues, illegal business activities, or fraud.
Most companies that file for Ch.11 are typically larger businesses, however, recent modifications made to the Bankruptcy Code has allowed smaller business owners and certain individuals to benefit from filing for reorganization as well. Either way, Ch.11 offers a fresh start to businesses that need time and assistance to regain their financial bearings.
While Chapter 7 and Chapter 13 bankruptcy processes might be faster and more affordable for some situations, Chapter 11 allows businesses to maintain their assets and continue operating. Chapter 11 bankruptcy also gives Debtors the leverage to negotiate with Creditors in order to revise the terms of their debts or bankruptcy claims, and develop a repayment plan that does not require Debtors to liquidate or sell their assets. By undergoing a lawfully protected court process, businesses are able to restructure their finances and operations through Ch.11 in order to improve their future outlook and business viability.
What is the Goal of Ch. 11 Bankruptcy?
The primary objective of the Ch.11 bankruptcy process is to stabilize the finances of a Debtor’s business and restructure its debts with the goal of exiting as a financially healthier and viable business. For this reason, the terms bankruptcy “protection” or “relief” are often used interchangeably in reference to the Ch. 11 debtor.
By filing for Ch. 11 bankruptcy, a debtor aims to accomplish the following in order to restructure and re-emerge:
Reduce or pay off debts and liabilities
Reorganize into a healthier structure or entity
Ch.11 bankruptcy was created for the purpose of helping debtors stabilize their financial affairs and keep their creditors at bay. At the same time, the justice upheld in the law provides Creditors their rights of recourse against the Debtor within the legal proceedings. Ultimately, the goal of the bankruptcy process is to “protect” the Debtor and address the health of its business, while upholding the rights of its Creditors.
What Happens When A Company Files for Ch. 11 Bankruptcy?
In order to initiate the legal process to begin Ch.11 bankruptcy, a business officially declares bankruptcy by filing a Ch.11 petition with the court. The bankruptcy petition can either be filed voluntarily or involuntarily.
A voluntary petition is initiated and filed by the business itself, or more often, its legal representatives on its behalf. As its name suggests, the Debtor is voluntarily choosing to enter the Ch.11 legal process.
Alternatively, an involuntary petition can be filed against a business by three or more of its Creditors to commence a Ch.11 bankruptcy case. An involuntary petition must meet certain requirements set by the bankruptcy code in order to be accepted by the court. In this scenario, it is a serious legal action that Creditors may decide to take up against a Debtor that has breached its performance under contract or failed to meet its debt obligations to the Creditors. Essentially, the Debtor is legally forced into Ch.11 bankruptcy by its Creditors.
How Does the Chapter 11 Bankruptcy Process Work?
Obtain Legal Representation
When a company evaluates the decision of pursuing Chapter 11 bankruptcy relief, it will require professional guidance and counsel specialized in bankruptcy laws and procedures. In order to navigate the decision and each step thereafter, the Debtor will need to solicit the legal services of a law firm specializing in bankruptcy regulations. Due to the complexities of the bankruptcy process, and its duration which could take anywhere from several months to a few years, having the right counsel is imperative.
Working with the right fitting and most experienced bankruptcy attorney(s) can be the key factor that leads to a successful outcome of the bankruptcy case. The legal representatives can help the Debtor determine the proper and most beneficial course of action.
In the scenario where a Debtor encounters Ch.11 bankruptcy through an involuntary petition, it will need to seek immediate legal representation to guide and defend it in subsequent proceedings.
Choosing a Bankruptcy Court to File In
In addition to obtaining legal representation, the next decision a Debtor and their counsel will need to make is where to officially file its bankruptcy petition. The bankruptcy petition must be filed with the particular bankruptcy court district where the Debtor has a legal presence.
For Debtors incorporated or located in a single location, the decision simply defaults to selecting a district within their State’s bankruptcy court system. For large global corporations with multiple country locations or legal entities in different states, the decision may be more complex. It can take into account multiple factors such as physical proximity, presiding judges, nuances in State regulations, tax laws, prior legal precedence, the court’s experience with similar types of cases, and legal strategy.
Many large corporations are incorporated in (but don’t have a physical presence in) the state of Delaware due to its relatively friendly regulatory environment for businesses, and as such, it becomes a logical candidate to consider Delaware’s court district for bankruptcy filing. Ultimately, selecting a bankruptcy court to proceed with is a prerequisite step to the filing process, and has its advantages for the Debtor.
Petition Filing with the Court
After selecting legal representation and the specific court district to declare bankruptcy, the Debtor can proceed with officially filing their bankruptcy petition.
Bankruptcy petitions, whether voluntary or involuntary, and any other documents required for the filing, can be found on the US court’s website. They can then be downloaded and filled out to be submitted to the bankruptcy court district in which the Debtor is filing.
The paperwork for filing a bankruptcy petition is relatively straightforward. Each page has easy-to-read instructions at the top, as well as more specific instructions for each question in the left-hand column. Legal representation will provide assistance for a Debtor in filling out and completing the appropriate documents, and gathering the initial information needed to present their case.
What information does one need to fill out the bankruptcy petition? The following is a list of the necessary information a debtor will have to provide at the time of petition filing.
For individuals - Voluntary Petition Official Form 101
For non-individuals - Voluntary Petition Official Form 201
List of Creditors Who Have the 20 Largest Unsecured Bankruptcy Claims and Are Not Insiders
Statement About Social Security Numbers
Disclosure of Compensation of Bankruptcy Petition Preparer
Bankruptcy Petition Preparer’s Notice, Declaration and Signature
Statement of Operations
Federal Income Tax Return
Creditor Matrix File
Once the bankruptcy petition is filed with the court, the Chapter 11 process officially begins for the Debtor’s case—which is assigned a case number, a judge to oversee the proceedings, and a court clerk to administer records and manage the timeline. The filing of the bankruptcy petition is an official date in the timeline of the case, as subsequent events in the case are triggered by or dependent on this particular date, also commonly known as the petition date.
At the start of a Chapter 11 bankruptcy case, the court will automatically institute an injunction known as the “automatic stay”. Under section 362 of the US Bankruptcy Code, the automatic stay takes effect the moment the bankruptcy petition is filed. This injunction halts creditors from collections activities against the debtor during the remainder of the bankruptcy case.
More specifically, the automatic stay provides a certain amount of time in which any judgements, collection actions, foreclosures, and repossessions of property are withheld for the duration of the case. Therefore, Creditors are not allowed to pursue any of these actions on any outstanding claim that may have been incurred by the Debtor before the filing date of the Ch. 11 bankruptcy petition. With few exceptions, Creditors are essentially mandated under law to remain in their debted position as they were prior to the petition date.
The automatic stay was created as a legal mechanism to provide the Debtor enough time to stabilize its finances, so that it can develop a plan of reorganization, negotiate the plan with Creditors, collect votes on the plan, complete the process of business restructuring, and so to resolve claims with its Creditors.
Debtor in Possession vs. Case Trustee
In the course of bankruptcy proceedings, the court will often assign a trustee to the case (also known as a “case trustee”) to make decisions on behalf of the company for the use of its assets, property and estate throughout the legal process. Control over the company in making significant financial and operational decisions would be ceded to the assigned case trustee, and requiring its approval to proceed.
However, Debtors can have the right to maintain control of their own operations and decision making. This is referred to as “debtor in possession”. A debtor in possession has several of the same rights and powers that a traditional case trustee gains when assigned. The debtor in possession can additionally employ different resources to assist them in developing a Plan of Reorganization, as long as the Debtor obtains approval from the court.
The rights a debtor in possession has also come with responsibilities, which include:
Accounting for all property comprising the bankruptcy estate
Reviewing creditors’ claims (and objecting to them, when necessary)
Filing all required documentation relative to the case
Ensuring company operations continue
The required documentation may include inventories, appraisals and tax returns. Debtors in possession must handle these responsibilities while also continuing to operate the business in its existing state until the Plan of Reorganization is effectuated by the court.
Given that the Debtor’s struggling business is under financial duress, and thus seeking Ch.11 bankruptcy protection, one of the first responsibilities of the debtor in possession is to evaluate and secure financing. Known as debtor-in-possession financing (or DIP financing for short), this is a unique type of financing arrangement whereby a Debtor raises capital for the sole purpose to fund its continuing business operations for the duration of the bankruptcy. Lenders who provide debtor-in-possession financing are afforded special privileges given the nature of the Debtor’s Ch.11 circumstances, and thus, they are provided a senior priority in the case over existing debt, claims, and equity of other creditors.
Motions, Adversary Proceedings and Fraudulent Conveyance
Soon after filing for Chapter 11 bankruptcy, a Debtor will file its “first day” motions with the bankruptcy court. These will allow the debtor to continue the day-to-day operations of its business. The motions typically include requests regarding retention of legal and financial counsel, the use of cash collateral, and the approval of financing for maintaining control as the debtor in possession.
In a litigation known as an adversary proceeding, a debtor in possession will institute a lawsuit to recoup money or property for the estate. Adversary proceedings may involve the following actions:
Actions for lien avoidance
Actions to avoid preferences
Actions to avoid fraudulent transfers
Actions to avoid post-petition transfers
Under certain circumstances and authorization of the bankruptcy court, the actions listed above may be pursued by the Creditors’ Committee against insiders of the debtor. This can only be done if the Reorganization plan allows the committee to do so or if the Debtor has refuted a demand to do so.
Creditors may in turn institute adversary proceedings as well through the following actions:
Filing complaint to determine validity or priority of a lien
Revoke order confirming a plan
Determine dischargeability of a debt
Obtain an injunction
Subordinate claim of another creditor
Furthermore, a debtor in possession has “avoidance” powers that can be utilized to reverse a transfer of money or property that was made during a certain time period before the filing of the Ch. 11 petition. This would allow the cancellation of a transaction and “disgorgement” or return of the payments or property, which can then be used to pay back all the Creditors.
The power to avoid transfers is generally effective against transfers that were made by the Debtor within 90 days before filing for Ch. 11. This does not include transfers to “insiders”, or relatives, partners, and directors/officers of the debtor).
Within 14 days of the petition filing, a Debtor is required to submit the following to the court:
Summary of Assets and Liabilities
Schedule A/B: Property
Schedule C: Property Claimed as Exempt
Schedule D: Creditors Who Have Secured Bankruptcy Claims by Property
Schedule E/F: Creditors Who Have Unsecured Claims
Schedule G: Executory Contracts and Unexpired Leases
Schedule H: Co-Debtors
Schedule I: Debtor’s Income
Schedule J: Expenditures
Disclosure of Compensation for Attorney
Statement of Financial Affairs
Verification of Creditor Matrix/List of Creditors
The purpose of these schedules is to formally submit records to the court that detail the Debtor’s assets, liabilities, expenses, obligations, and debts owed to various parties. This information is critical to the case proceedings and begins the Debtor’s reconciliation process with its Creditors.
Creditors will be notified of the Debtor’s Chapter 11 bankruptcy case by receiving a Notice of Bankruptcy. Creditors are then instructed to and given the opportunity to review their claim as listed in the filed Schedules. Then, if necessary, a Creditor can refute the status of their bankruptcy claim, or object to its accuracy by filing a formal Proof of Claim with the court to assert their legal rights as a Creditor.
The Ch. 11 bankruptcy process allows the Debtor to stabilize its operations while staving off actions against them by Creditors. As mentioned previously, a debtor in possession may seek specialized financing in order to utilize the capital to continue operating the business for the duration of the case. This can be a lifeline for the Debtor to resume “business as usual” while it proceeds with the Ch.11 legal process.
Once the debtor obtains debtor-in-possession financing, it notifies its vendors, suppliers, and customers to communicate the company’s financial ability to remain in operation, provide services, and make payments for goods and services during its reorganization efforts under Ch.11.
By restructuring under Chapter 11, the Debtor can take advantage of other in-court mechanisms to additionally benefit its operational turnaround: the ability to sell assets (if applicable), and the ability to approve or reject executory contracts.
If a particular asset is not performing well, not critical to the core of the business, or if it can fetch a higher valuation to a potential buyer or as a separate entity, then a Debtor has the option of divesting in it. This asset sale transaction would allow the Debtor to be able to increase liquidity, reduce leverage and raise funds for the continuation of its operations.
In-court operational restructurings also allow the Debtor to evaluate its existing executory contracts to determine whether they are beneficial. These contracts might include leases, employment agreements, service contracts, partnership agreements, and vendor or supplier contracts. After an assessment, the Debtor may choose to reject these contracts or renegotiate their terms.
The Creditors’ Committee is a group of individuals specifically chosen to represent the interests of the company’s Creditors in a Ch. 11 bankruptcy case. The most significant of which is to ensure that all Creditor parties receive fair payment on their claims or have their obligations remedied by the Debtor at the exit of Ch.11 process. In pursuit of this end-goal, Creditors’ Committees will primarily seek to negotiate with the Debtor on devising an equitable Plan of Reorganization for all parties, and may also evaluate liquidation of the Debtor’s assets as an option to maximize recovery of Creditor claims.
The United States Trustee will appoint a Creditor’s Committee. Members of the unsecured Creditors’ Committee are typically selected from the Top-20 Creditors who hold the largest unsecured claims against the Debtor. Their role is to ensure that unsecured Creditors with smaller claim amounts have their fiduciary interests protected and do not go underrepresented in the case proceedings. Depending on the size of claim amounts owed, the unsecured Creditors’ Committee can have more or less leverage in comparison to the secured Creditors’ Committee in the bankruptcy case, with the case trustee presiding to ensure fairness to all parties.
The role of the Creditors’ Committee is as follows:
Negotiate with the Debtor and other Creditors
Contribute to development of the Reorganization Plan
Assess and seek conversion of Chapter 11 bankruptcy to a Chapter 7 bankruptcy (liquidation of Debtor’s assets), if appropriate
Consult with the debtor in possession or case trustee on the administration of the case
Investigate the Debtor’s conduct, assets, liabilities, business operations, and financial condition
Advise members of the Creditor class of which it represents on the Committee
Request appointment of a case trustee
With the court’s approval, a Creditors’ Committee is allowed to hire an attorney or seek other professional assistance to help with the performance of the Committee’s responsibilities. Creditors that serve on the Committee (which is an unpaid responsibility) must be prepared for a significant time commitment, appearances in court, considerable travel requirements and possible expenses. They will also be put in a position to make decisions on behalf of all Creditors that may conflict with their individual interests.
Plan of Reorganization
A mandatory step within the Ch.11 bankruptcy process is for the Debtor to formulate a Plan of Reorganization. Within 120 days of the petition date (unless an additional extension is permitted), the Debtor must submit a Plan of Reorganization to the court. This plan will specifically outline how the Debtor proposes to restructure its business, pay or discharge its debts with Creditors, and effectively emerge from the Ch.11 bankruptcy as a financially healthy business.
Embedded in the court’s timeline is an exclusive period designated for the Debtor to formulate and submit their Plan of Reorganization. The premise behind the exclusivity period is that the Debtor must have sufficient time and opportunity to stabilize its internal operations, explore all available options, negotiate with Creditors, and create a proposal for restructuring that offers the most value, while taking conflicting goals of the groups involved into account.
In most Chapter 11 cases, a Debtor may arrive at a Plan of Reorganization in one of three ways:
Traditional Plan of Reorganization (also known as "Free-Fall")
No agreements are reached between the Debtor and its Creditors before the petition date. As a result, the bankruptcy process (as described in this article) goes into full swing and will bear significant uncertainty for all parties involved. The legal proceedings may include negotiation, litigation, and compromises with Creditors to arrive at an acceptable Plan of Reorganization, then ensuring sufficient votes for its confirmation. This type of scenario is by far the most common for large corporations and their Chapter 11 bankruptcies. Free-fall Ch.11 bankruptcies are also the most contentious— with some taking many years to resolve while the parties seek a consensual resolution.
Pre-Negotiated Plan of Reorganization (also known as "Pre-Arranged")
In advance of the court proceedings, a Debtor may negotiate or arrange terms with its Creditors ahead of time. Before the petition date, agreement has been reached between most Creditor parties—but not all—with the Debtor, which is enough to have confidence on how the bankruptcy process can be expected to play out for the Debtor to exit Ch.11. This approach can dramatically simplify and accelerate the remaining aspects of the bankruptcy process in court, having reached pre-negotiated agreement with most Creditors prior.
Pre-Packaged Plan of Reorganization
Using standardized agreements and methods, and a templated approach to formulating a Plan of Reorganization, a Debtor is able to expedite consensus for its Plan before ever reaching the court, and thus proceeds through Ch.11 smoothly and quickly. Full agreement between all Creditor and Debtor parties are settled before setting foot in court. The vast majority of any uncertainty is removed in regards to how the legal proceedings will play out before the bankruptcy petition is filed. This is the most predictable scenario and most swift for the Debtor’s re-emergence.
A Creditors’ Committee or individual Creditor may also devise and file a Plan of Reorganization if the Debtor fails to submit theirs, or fails to obtain plan acceptance before the exclusive period expires. A Plan proposed by the Creditors’ Committee or other party in interest may compete directly with the Plan proposed by the Debtor. To maintain fairness, a Creditors’ submitted Plan is subject to the same requirements as that of the Debtor’s Plan in regards to disclosure and solicitation.
The Plan of Reorganization must be submitted along with a Disclosure statement. A disclosure statement is documentation a Debtor must complete containing all material information about the Debtor, its organization, and the proposed Plan of Reorganization. Within the Disclosure Statement, Debtors are required to include a classification of claims and specification of how each Creditor class of claims will be treated under the Plan of Reorganization. It allows Creditors to make an educated and informed decision when voting to approve or reject the proposed Plan of Reorganization.
Plan Solicitation, Voting, and Confirmation
After the Plan of Reorganization and accompanying Disclosure statement have been submitted, a hearing is held by the bankruptcy court to examine the documents, and to ensure that it has the necessary information to be approved. This information is governed by judicial discretion and the unique circumstances of each Ch. 11 bankruptcy case.
The court will then solicit final feedback, objections, or motions from Creditors on the proposal before it is put to a vote. Qualified creditors are eligible to vote to either approve or reject the Plan. In order to be allowed to vote on the Plan of Reorganization, Creditors must qualify both individually and by class. As an individual, a Creditor must have a valid claim that has been approved by the Bankruptcy Court. The requirements for a Creditor to be able to vote on the Plan are similar to the eligibility requirements for purposes of claim payment.
As part of the proposed Plan, each valid claim is classified into a Creditor class. For a Creditor’s claim to be eligible to submit a vote, the class in which the Creditor is assigned must be allowed to vote.
Creditors with allowed claims within a class of impaired claims are allowed to vote on the Plan. For an entire class of claims to be impaired, at least one claim in that class must be impaired. Creditors in unimpaired classes and those with priority claims are not eligible to vote on the acceptance or rejection of a Chapter 11 Plan.
Upon collection of all the completed voters’ ballots, the votes are tallied and a hearing with the court is scheduled to determine the outcome. Any Creditors who wish to file an objection to the confirmation of the plan are allowed to do so.
If all objections have been settled and the court concedes that everything is in compliance with the requirements set by the bankruptcy code, the court will grant a confirmation of the plan. The court will set a date to implement the restructuring, or the “plan effective date”.
The court maintains the authority to declare any other order necessary for administration after the Plan has been confirmed. Post-confirmation determination of objections to bankruptcy claims or adversary proceedings must be resolved before the Plan can be effectuated on its effective date.
A debtor in possession or designated case trustee is required by the Bankruptcy Code to perform the following responsibilities post-confirmation:
Consummating the plan
Reporting on status and progress of plan
Applying for a final decree
After settlement of proceedings the Debtor can exit the Ch.11 bankruptcy process. Upon the plan effective date, the Debtor will officially be permitted by law to start executing the confirmed Plan of Reorganization and begin to implement its restructuring efforts.
Claims Resolution and Creditor Recovery
During the pendency of the bankruptcy case, the Debtor will review all of the filed Creditor claims and compare the information with their own financial records to confirm validity, accuracy and the amount of all the owed amounts. This process is referred to as Claims Reconciliation. Resulting from this reconciliation, valid Creditor claims are accounted for in the Plan of Reorganization.
After court-confirmation of the Plan of Reorganization, the Debtor can initiate the Claims Resolution process according to the approved Plan. This involves the Debtor making payment distribution, making equity distribution, implementing new loan repayment terms, or providing other equitable remedies as agreed in the confirmed Plan with each Creditor class on their bankruptcy claims.
Creditors and their bankruptcy claims are categorized by class and seniority level. This determines both the order and the timing of when Creditors will receive payment distribution under the bankruptcy claims resolution process. Under Federal Bankruptcy procedures, Creditor claims are sequentially paid out or resolved in order of priority, seniority and by class. Distributions are made out of the Debtor’s bankruptcy estate to each Creditor class on their claims in order of seniority, and the remainder of the bankruptcy estate is then used to make distributions to the next class of Creditors on their claims. Procedurally, as governed by law, the Debtor will issue payments to Secured Creditors first, then to Priority Unsecured Creditors, then to General Unsecured Creditors, and finally to Creditors with Equity Interests (e.g. shareholders).
Unfortunately, the bankruptcy process does not guarantee that a Creditor will receive payment on their claim. If there is nothing remaining from the bankruptcy estate for the Debtor to make distributions from, Creditors will not receive a claim payout. Alternative methods may be pursued by the Debtor such as the issuing of promissory notes, creation of installment payment plans, or conversion to equity in the reorganized Company.
The typical Ch.11 bankruptcy claims timeframe can last one to two years. However, in complex bankruptcy cases this process can take much more time, in some cases several more years. Typically, Creditors won’t receive a recovery on their claims until 30 to 90 days following the consummation of a Plan of Reorganization and completion of the claims resolution process.
What are Successful Bankruptcy Outcomes?
After a long and grueling legal process, the Debtor has finally resolved its disagreements, reduced its liabilities, obtained creditor votes, and received court confirmation on its Plan of Reorganization. Once the Plan of Reorganization is put into effect and payouts have been distributed (or remedies made) to Creditor classes on their claims, the Debtor can successfully emerge anew.
Having reorganized to be a healthier and more financially viable business, the Debtor has effectively restructured its debts, assets, and other affairs through the Ch.11 court process to position itself to increase value and be profitable again. As stated above, the premise behind Ch.11 Bankruptcy is to afford the Debtor a just, legal process through which it can protect its business and be provided the opportunity to reorganize its operations and affairs for future viability.
What are Unsuccessful Bankruptcy Outcomes?
With so many parties involved and dependent factors at play in the court proceedings, a Debtor might not be successful in emerging from Chapter 11 Bankruptcy via a confirmed Plan of Reorganization. Some of the common outcomes that arise from an unsuccessful Ch.11 bankruptcy are as follows:
Sale as a Going Concern
In order to seek its best interests as an entity and for its owners, the Debtor may utilize the Ch.11 process to stabilize its finances and improve the health of its operations to stay afloat but choose to ultimately put up its business for sale. This is known as a “Going Concern” sale, meaning the Debtor strikes a deal with an acquirer to purchase the business in order to continue its operations indefinitely. Instead of preserving ownership in its business future through a reorganization, the Debtor chooses to (or is forced to by Creditor objections and the court) to divest its ownership through a sale.
In the event that a Creditors' Committee or case trustee requests that the bankruptcy court dismiss the Debtors’ proposed Plan of Reorganization, the Debtor may be forced to convert their Chapter 11 bankruptcy case to a Chapter 7 bankruptcy. As a consequence, the Debtor liquidates all of its assets, divests its interests, and uses the proceeds to meet Creditor claim obligations. After the completion of the liquidation process under Ch. 7 bankruptcy, the Debtor’s business effectively ceases to exist. Unfortunately, this can be a relatively common outcome that can result when the Ch.11 bankruptcy process is unsuccessful for the Debtor.
While incredibly complex, Chapter 11 Bankruptcy can provide an opportunity for financially distressed organizations to reorganize, refinance, and re-emerge as a healthier, more profitable business. Ch. 11 bankruptcy gives businesses of every size the chance to keep their operations going and their business alive.
In addition to the advantages for the Debtor, the Ch.11 bankruptcy claims resolution process also offers a light at the end of the tunnel for Creditors. If you are a Creditor caught in the cross-fire of a Chapter 11 bankruptcy case, you have two options. You can wait for the bankruptcy proceedings to pan out. Or you can sell your bankruptcy claim for immediate cash.