Page 75 - Encyclopedia of Business and Finance

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Bankruptcy

CHAPTER 11 REORGANIZATION than the full amount to each of the creditors. Eligible per-
The Bankruptcy Code recognizes that liquidating a com- sons are natural persons who have regular income and
pany may entail the loss of jobs as well as other disruptive who possess noncontingent, liquidated, unsecured debts
events. Accordingly, Chapter 11 seeks to permit compa- of less than $250,000 and secured debts of less than
nies to become solvent again by reorganizing themselves $750,000.
in such a way as to permit them to continue functioning The plan of payment must be filed within fifteen days
as viable entities. Chapter 11 applies to individuals, part-
after the filing of the Chapter 13 petition. The plan must
nerships, corporations, unincorporated associations, and
railroads, although corporations are almost always the recite the debtors’ finances, estimated income, and
petitioners. It does not apply to companies that are regu- expenses with a payout over a three-year period (5 years if
lated by other statutes, such as banks, savings and loan approved by the court). The advantages to debtors include
associations, unions, insurance companies, and brokerage continuation of possession of their property. The planned
firms. installment, which is made to the trustee, is to commence
The advantage to a Chapter 11 filing is that the within thirty days of filing. The trustee is responsible for
debtor is permitted to remain in possession of the entity, paying the creditors.
which is especially important in business filings since the
Objections to the plan may be filed by the creditors,
debtor may continue to operate the business. If the court
believes there may be adverse circumstances, such as pos- which are then determined at a hearing. The court exam-
sible fraud or other dishonesty or gross mismanagement, ines whether the plan was made in good faith, whether it
then it may appoint a trustee or examiner to review the is feasible (if the debtor will be able to make the proposed
debtor’s finances. payments), and be in the interests of the creditors, that is,
Once an order of relief is granted, the court will the creditors must receive at least what they would have
appoint a creditors’ committee, which generally consists received under a Chapter 7 liquidation proceeding.
of the seven largest unsecured creditors. Their function
includes appearances at court hearings, participation in
BIBLIOGRAPHY
the plan of reorganization, and asserting possible objec-
Borges, W., and Nathan, B. C. (2005, April 15). Bankruptcy
tions to the plan. As in Chapter 7, there is an automatic
abuse and consumer protection act of 2005: Significant busi-
stay that prevents creditors from pursuing other judicial
ness bankruptcy changes in store for trade creditors.
proceedings or collecting debts.
Retrieved September 7, 2005, from
Chapter 11 permits the debtor to accept or reject http://www.nacm.org/resource/Bankruptcy-Act apr15-
executory contracts (contracts whose completion is to be 05.html
accomplished in the future). The plan of reorganization is
Davis Polk & Wardwell. (2005, June 2). Bankruptcy code and
to be filed within 120 days after date of the order of relief.
selected other provisions of the United States code. Retrieved
The plan sets forth the debtor’s proposed new capital
November 28, 2005, from
structure, designates the different classes of claims and
http://www.dpw.com/practice/code.blackline.pdf
interests, and proposes possible alteration of the rights of
Houlden, L., and Morawetz, G. (2004). The 2005 annotated
creditors, conversion of unsecured creditors to equity
bankruptcy and insolvency act. Toronto, Ontario, Canada:
holders, sale of assets, and other items. The creditors are
Carswell.
to receive a disclosure statement containing necessary
Jeweler, Robin (2005, March 14). The Bankruptcy Abuse Pre-
information concerning the plan of reorganization. The
vention and Consumer Protection Act of 2005 in the 109th
creditors and interests are to accept or reject the plan
Congress. Congressional Research Service. Retrieved November
before confirmation by the court. Confirmation requires
28, 2005, from http://www.bna.com/webwatch/
that the plan be in the best interests of each class of claims
bankruptcycrs4.pdf
and interests, and be feasible. If creditors object, the court
is empowered to compel acceptance and participation. Resnick, A., and Sommer, H. (2005). The Bankruptcy Abuse Pre-
vention and Consumer Protection Act of 2005: With analysis.
New York: LexisNexis/Matthew Bender.
CHAPTER 13 CONSUMER DEBT
Reynolds, J. (2005, August). Debtor relief or grief? The bank-
ADJUSTMENT
ruptcy act of 2005. Retrieved September 8, 2005, from
Chapter 13 applies to natural persons and is intended to
http://www.dcbar.org/for_lawyers/washington_lawyer/august
allow the debtors to file a petition with the Bankruptcy
_2005/bankruptcy.cfm
Court in an endeavor to permit the debtors to become sol-
vent by either extending the time to pay their debts or by
a composition that permits the debtors to pay a sum less Roy J. Girasa
52 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION