Chapter 11 Allows Companies to Continue Their Operations
Chapter 11 is a type of bankruptcy that allows the restructuring of the borrower’s assets. It is more complex and expensive than other forms of bankruptcy.
How it Works
In general, chapter 11 is a special form of bankruptcy and an arrangement that allows borrowers to continue their business operations. Limited liabilities, corporations, and partnerships can file a petition. Government agencies are one exception to the rule. Under this arrangement, borrowers develop a plan for debt repayment and keep ownership of their assets and property. A trustee in bankruptcy can be appointed in case of fraud or poor management. Debtors are allowed to continue operations and raise livestock and crops. They can use their assets, but there are limitations on the use of cash collaterals. They are not allowed to lease, sell, or use the collateral unless the financial institution agrees. Court approval is not required to apply for unsecured and secured loans. Borrowers can sell any assets and property unless they are used as collateral.
The debtor or the financial institution files a petition with a local bankruptcy court. Thus the petition may be involuntary or voluntary. Companies must present documents and information such as a statement of financial liabilities, their expenses and income, liabilities and assets. The information required and the document filing criteria depend on whether the borrower is a company or individual. Individuals must present pay slips, a statement of monthly income, a debt repayment plan, a certificate of credit counseling, and other documents. Spouses can file a petition jointly or separately. Debtors pay $46 in administrative fees and $1,000 to file a petition. The fees can be paid in several installments or upon filing. A court’s permission is required to pay the filing and administrative fees in installments.
Debtors may need to offer additional information such as a request for relief, main assets and their location, state or province of residence, and tax identification and social security number. In addition, borrowers should present a disclosure statement that includes information about their business operations, liabilities, and assets.
Individual borrowers should list any real estate properties, which have been acquired after filing. They are not required to list gifts and payments made to company employees, family members, and friends. At the same time, other payments and assets are included in the reorganization plan. The goal is to avoid mismanagement, fraudulent activities, and manipulation of the assets.
Assets and Liabilities Under Chapter 11 Bankruptcy
As a rule, businesses opt for this arrangement because their assets’ liquidation value would be lower than their revenues. Companies should present a repayment plan and are required to undergo reorganization. They should disclose their debts and liabilities, including credit card debt, commercial loans, small business loans, and others. In addition, they should list their assets such as plants, facilities, machinery and equipment, intellectual property, and others. Companies should list their tangible and intangible assets, including bank accounts, trucks, cash equivalents, and others.
Companies continue their normal operations and can make purchases and sales. However, they cannot sell real estate properties, machinery and equipment, or divisions of the company. Mergers and acquisitions and major expansions are not allowed.
Under chapter 11, borrowers are required to restructure their debts. The repayment schedule is often modified to make payments more affordable. For secured debts, the term can be extended to up to 10 years, which is the useful life of the property or asset pledged as collateral. The interest charges can be modified to reduce the monthly payments. Unsecured creditors may agree to accept less than the full amount.
After the organization plan has been submitted, the shareholders and financial institutions vote on it. Bankruptcy is confirmed after the court approves the terms of the reorganization plan. Borrowers make payments to a trustee or their financial institution.
A downside to this arrangement is that the shares of the company decrease in value. Their value would be much lower than their original purchase price.
Violation of the Terms and Consequences
In case of violation, fraud, or mismanagement, there are two possible outcomes. The arrangement can be converted to Chapter 7 bankruptcy if the company is unable to keep up with the monthly payments or follow the repayment schedule. Another option is to assign a trustee of bankruptcy who will monitor the company’s operations. The executives and other employees may be prosecuted if there is sufficient proof that they are involved in financial fraud.
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