An Introduction to Chapter 11 Bankruptcy
By Michael C. Dennis, MBA, CBF

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts, or repay them under the protection of the Bankruptcy Court. A voluntary Chapter 11 filing is an action taken by a company to resolve financial problems such as lack of liquidity or excessive debt. During the Chapter 11 process, a company is able to continue to conduct business while reorganizing its finances and operations in order to pay the claims of those to whom it owes money.

The goals of a company in Chapter 11 Bankruptcy are [1] to "reorganize" its business and [2] to try to become profitable again. A company in Chapter 11 may continue to sell goods, and to employ workers. It is also able to purchase on open account terms, and to borrow money from banks.

A company exits Chapter 11 when the U.S. Bankruptcy Court has approved a Chapter 11 Plan of Reorganization, and the transactions and payments proposed in the Plan are consummated. The U.S. Trustee will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a Plan of Reorganization.

Before the Chapter 11 Plan may be implemented, the debtor in possession must send the creditors a court approved disclosure statement, and obtain acceptance of the plan by its creditors. Even if pre-petition creditors vote to reject the Plan, the Court can disregard the vote and still confirm the Plan if it finds that the Plan treats creditors and stockholders fairly. A class of claims is considered to have accepted a Plan if such a Plan has been accepted by vote of creditors that hold at least two-thirds in dollar amount, and more than one-half in number, of the allowed claims of that class.