Chapter eleven is a form of business bankruptcy which allows debtors to restructure debts. Business owners are allowed to keep business assets during the reorganization phase as long as they submit creditor payments on time and adhere to bankruptcy guidelines.
Chapter eleven can be used to protect businesses registered as a sole proprietorship, partnership, or corporation. Only business debts are restructured when the business operates as a corporation. When businesses operate as a partnership or sole proprietor, business debts are restructured, but business and personal assets can be used to pay off outstanding debts.
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Filing business bankruptcy can force sole proprietors and business partners into personal bankruptcy when courts order liquidation of personal assets. Therefore, owners of these types of business entities should obtain legal counsel to determine if chapter eleven is the best option for overcoming debt problems.
Creditors sometimes submit chapter eleven petitions against debtors with high levels of outstanding debt. When creditors file, it is referred to as 'involuntary bankruptcy.' Creditors utilize this strategy to force bankruptcy on debtors in attempt to collect debts before debtors file bankruptcy on their own.
Chapter eleven is governed by the U.S. Department of Justice. Petitioners must abide by guidelines set forth in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Congress enacted BAPCPA in 2005 to reduce the number of bankruptcy petitions submitted by debtors engaging in frivolous spending, than filing bankruptcy to write-off debts.
BAPCPA guidelines require all debtors to engage in credit counseling. Debtors must attend classes provided by U.S. Trustee-approved agencies. Upon completion, debtors present a certificate of credit counseling to the judge. Debtors must meet this requirement to obtain bankruptcy approval.
Debtors are required to establish a chapter eleven payment plan. Soon after bankruptcy petitions are filed, debtors attend a 341 creditor meeting to discuss payment options with creditors. The plan must be approved by a creditor committee and submitted to the presiding judge.
Debtors must disclose all assets held by the business, as well as personal assets, if applicable. Disclosure statements are used by the creditor committee to determine if debtors qualify for protection under chapter eleven and to determine the amount of debts to be repaid. Bankruptcy payments are submitted to the Trustee, who in turn remits payments to creditors until restitution is complete.
A debtor in possession is appointed through the courts to act as fiduciary. This person is responsible for submitting financial reports; filing tax returns; securing personal property and business assets; hiring accountants, attorneys, or consultants to assist with the bankruptcy process; and other duties outlined in Section 1107 of the U.S. Bankruptcy Code.
Debtors who file chapter eleven must abide by strict guidelines and adhere to payment plans. Otherwise, the business will fail out of bankruptcy and lose court protection. It is estimated that less than 20-percent of debtors succeed with reorganization of debt under chapter eleven.
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