Chapter 11
Unlike a chapter 7, a chapter 11 normally does not involve a liquidation. The goal of a chapter 11 is to reorganize the debtor and to come up with a plan to pay creditors over time. The Code requires that the debtor provide a disclosure statement to creditors which sets forth financial information regarding the debtor and explains why the creditors should vote for the confirmation of the plan. The code also sets forth specific requirements for the contents of the plan and what type of creditors have to be paid in full. Unsecured creditors normally only have to receive what they would receive in a chapter 7 liquidation, which is often pennies on the dollar. The plan must provide for creditor’s treatment by breaking down creditors into different classes. The creditors are entitled to vote to accept or reject the plan and if each class votes to accept, and the plan meets all other statutory requirements, the plan will be confirmed. Even if a class votes against acceptance, the Court can still confirm the plan if it finds that it is fair and equitable. Once the plan is confirmed, all pre-petition creditors are bound by its terms.
Although available to individuals, chapter 11 is usually utilized by corporations. This is primarily due to the fact that individuals, subject to certain debt limitations, can utilize a chapter 13, which is more advantageous due to its simplicity and broader discharge provisions. Chapter 11 differs from a chapter 7 or 13, in that there normally is no trustee in an 11 and the Debtor continues to operate as a "debtor in possession11 or DIP. A trustee is appointed only in rare instances, usually when there is mismanagement or fraudulent conduct by the DIP. However, the United States Trustee, and in most cases a creditor's committee, provide some oversight of the debtor's activities
On occasion, a chapter 11 will be used instead of a chapter 7 to liquidate a debtor. This will be done through a liquidating plan. This option allows the debtor to control the sale rather than a trustee, eliminates the trustee's commission, and often maximizing the return if the business can be sold as a going concern.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
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