Chapter 11 bankruptcy cases typically involve business enterprises that seek bankruptcy protection in order to reduce their debt or shed unprofitable contracts and leases. Increasingly businesses file “prepackaged” Chapter 11 cases in which the debtors and their counsel negotiate with the businesses’ major creditors and prepare plans of reorganization prior to filing the bankruptcy petition.
One major benefit of a Chapter 11 bankruptcy is that it permits debtors to maintain control over their financial affairs, typically with the goal of emerging from bankruptcy as a profitable business. Nevertheless, it is not uncommon for businesses to strategically file a “liquidating 11,” using the features of a Chapter 11 bankruptcy case to avoid the chaos that sometimes accompanies a large Chapter 7 case.
Generally, consumers do not file Chapter 11 bankruptcy cases. However, in some rare circumstances, a consumer debtor may not qualify for a bankruptcy under Chapter 7 or Chapter 13. In those cases, a Chapter 11 bankruptcy can provide individual debtors with the benefit of a bankruptcy discharge when it might not otherwise be available.
In 2005, the United States Congress enacted substantial changes to the United States Bankruptcy Code putting in place certain constraints on debtors’ ability to file under particular chapters and placing some important procedural hurdles to filing. As a result, it is more important than ever for insolvent consumers to consult with a qualified bankruptcy attorney before filing any bankruptcy petition.
A bankruptcy attorney will help you avoid common mistakes and assure that your petition is filed correctly the first time. More importantly, a bankruptcy lawyer will advise you on the probable outcome and issues that will arise in your bankruptcy case. Filing without a clear idea of what the bankruptcy process entails and what to expect in your individual case can be avoided by consulting with a qualified bankruptcy professional.
A filing under Chapter 11 of the United States Bankruptcy Code allows the operators of the business to maintain control over it through the bankruptcy process. Traditionally, the Chapter 11 process is considered a “reorganization” bankruptcy, although that is not always the case. Chapter 11 bankruptcy cases are almost always more costly than liquidation bankruptcies. An experienced bankruptcy lawyer will examine your particular circumstances to determine whether a Chapter 11 case can help you realize the optimal result.
If Chapter 11 is normally considered a “reorganization” bankruptcy, then a Chapter 7 bankruptcy is a “liquidation” bankruptcy. In the case of a business, this means that its assets, including litigation and certain bankruptcy claims, will be placed in the hands of a Chapter 7 Trustee. The debtor’s responsibility is to fully and fairly report its assets liabilities and financial affairs. Although creditors will have no recourse to the principals and responsible officers of the debtor in most cases, there are exceptions. You should consult a highly qualified bankruptcy lawyer to consider this and many other issues that can arise in a Chapter 7 business case.