While individuals may file a petition under Chapter 11, it is typically used to reorganize a business. Upon the filing of a voluntary petition for relief under Chapter 11, the debtor automatically assumes an additional identity as the “debtor in possession.” The term refers to a debtor that keeps possession and control of his or her assets while undergoing a reorganization under Chapter 11, without the appointment of a case trustee. Generally, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs in cases under other chapters.
How Chapter 11 Works
As with all other chapters, a Chapter 11 case commences when a bankruptcy petition is filed with the bankruptcy court. The voluntary petition will include standard information concerning the debtor and its assets and liabilities, and a request for relief.
A written disclosure statement and a plan of reorganization must be filed with the court. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization. The contents of the plan must include a classification of claims and must specify how each class of claims will be treated under the plan. Creditors whose claims are impaired, that is, those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan, vote on the plan by ballot. After the disclosure statement is approved and the ballots are collected and tallied, the bankruptcy court will conduct a confirmation hearing to determine whether to confirm the plan.
Adversary Proceedings
Under certain circumstances, the debtor in possession may institute a lawsuit, known as an adversary proceeding, to recover money or property for the estate. At times, a creditors’ committee may be authorized by the bankruptcy court to pursue such actions against insiders (that is, officers and directors) of the debtor, if the plan provides for the committee to do so or if the debtor has refused a demand to do so. Creditors may also initiate adversary proceedings by filing complaints seeking various types of relief.
The Chapter 11 Discharge
The Bankruptcy Code specifies that the confirmation of a plan discharges or relieves the debtor from any debt that arose before the date of confirmation. There are, of course, exceptions to that general rule. Confirmation of a plan of reorganization may discharge any type of debtor––corporation, partnership, or individual––from most types of debts that arose before the confirmation of the plan. It does not, however, discharge an individual debtor from any debt that the bankruptcy court determines should not be discharged.
The above information is an excerpt from an article entitled Your Day in Bankruptcy Court published by the Administrative Office of the U.S. Courts on behalf of the U.S. Courts. The full article can be found here.