It is the Chapter 11 bankruptcy law that allows businesses to seek the same protection and relief that individuals have a right to under the Federal bankruptcy statues. Any business entity, whether a large corporation, a small partnership or even a one-man sole proprietorship, can file under Chapter 11 in order to have their debts reorganized.
The Chapter 11 law requires that the business filing for brokeness, must provide full financial disclosure to the bankruptcy court. This means that the organization, or their attorney, must provide a complete and detailed list of all of the company's assets, all of the liabilities and a complete statement of the financial status and affairs of the entity.
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Unlike other types of bankruptcies, according to Chapter 11 law, the debtor is able to act as his own trustee. In Chapter 7 and Chapter 13 bankruptcy cases, the court appoints a trustee.
When a debtor acts as a trustee in a Chapter 11 bankruptcy, it is known as a "debtor in possession" because the trustee maintains possession of the property. However, the court is able to appoint a different trustee to the case if there is just cause shown, such as in the case of mismanagement of the business entity.
After approximately one month from the time that filing for bankruptcy took place, the business and their bankruptcy attorney attend a meeting with the various creditors of the entity. According to Chapter 11 bankruptcy law, the company also is required to submit monthly activity reports that show the company's income and expenses. These reports are also summarized in the form of a balance sheet and a profit and loss statement for the period.
Chapter 11 law allows for the debtor to file a financial plan during the first four months after a new bankrupt filing is submitted to the Federal bankruptcy court. After that time, the creditors of the company are allowed to submit filings of their plans.
The Chapter 11 law also requires that the plan submitted by the debtor includes a disclosure statement that goes into detail of company's financial situation and future plans. Some of the areas that are disclosed are the following:
- a summary of the company history and the primary cause that necessitated filing for brokeness;
- the company's assets and liabilities;
- the income and the expenses of the operation; a
- description of the company's treatment of their creditors;
- an analysis of asset liquidation; projections of future earnings;
- expected tax consequences;
- a discussion of various options open to the entity;
- and finally, the plan for repayment of the debts.
According to Chapter 11 bankruptcy law, the plan for reorganization can stipulate that the company must continue to operate the business in order to make the payments from future income, or from the proceeds of new loans or the sale of existing assets. Creditors who hold priority claims, including tax debts, are required to be paid in full.
Any secured claims also require full payment and must include interest as well. Other debts that are non-priority and are unsecured receive dividend payments which equal at least the amount that would have been granted under a Chapter 7 filing.
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