10 Key Provisions in Chapter 11 of the U.S. Bankruptcy Code

For many businesses in financial distress, reorganizing their debts through a Chapter 11 bankruptcy is the best path forward. Reorganizing allows businesses to get back on solid financial footing without liquidating their assets—and, with only rare exceptions, business owners can continue to run their companies without interference from a bankruptcy trustee. 

With that said, business owners contemplating bankruptcy still need to ensure that they are making informed decisions based on their specific circumstances. This requires a basic understanding of some key provisions of the U.S. Bankruptcy Code. Keep reading to learn more from an experienced Miami bankruptcy litigation attorney:

1. “Debtor in Possession”  

The first key provision appears in the Definitions section of Chapter 11. Section 1101(1) establishes that a debtor in a Chapter 11 bankruptcy is a “debtor in possession.” This means that the debtor remains in control of its assets throughout the bankruptcy process, and it can continue to use its assets to sustain its operations and cover expenses, investments and other expenditures in the ordinary course of business.

2. Creditors’ Committees

Section 1102 of Chapter 11 outlines the rules for creditors’ committees. In a traditional Chapter 11 bankruptcy case, the creditors’ committee participates in the structuring of the debtor’s final reorganization plan, and it has the authority to examine the debtor’s books and operations for this purpose. As a result, as the U.S. Bankruptcy Court explains, “creditors’ committees “can play a major role in Chapter 11 cases.”

But, Section 1102(a)(3) also provides that a creditors’ committee “may not be appointed” in a small business bankruptcy under Subchapter V (unless the court orders otherwise “for cause”). This is one of several benefits of filing under Subchapter V for businesses that qualify.

3. Appointment of a Bankruptcy Trustee

Section 1104 of Chapter 11 specifies when a bankruptcy trustee may be appointed at the request of a creditor or other “party in interest.” Once a trustee has been appointed, the trustee can play a major role in the process as well (the trustee’s responsibilities are outlined in Section 1106). Some examples of grounds for a party in interest to seek appointment of a trustee include:

• Fraud or dishonesty;
• Incompetence or cross mismanagement; or,
• If appointment of a trustee “is in the interests of creditors.”

4. Duties in Small Business Cases

Section 1116 of Chapter 11 applies specifically to small business cases. A “small business case” is an alternative to a small business bankruptcy under Subchapter V. Small business cases and Subchapter V small business bankruptcies both offer unique benefits (and have unique requirements); and, for owners of qualifying businesses, it is worth considering both options before deciding how to move forward.

5. Who May File a Reorganization Plan

Section 1121 of Chapter 11 establishes that only the debtor may file a reorganization plan during the first 120 days of a business bankruptcy proceeding (in most cases). It also establishes the conditions for creditors and other interested parties to submit proposed plans (with or without a debtor-submitted plan), and it restricts creditors’ ability to file competing plans in Subchapter V small business bankruptcies.

6. Contents of a Reorganization Plan

Section 1123 of Chapter 11 lists the required contents for a proposed reorganization plan. The same requirements apply to debtors, creditors and other interested parties. Submitting a plan that complies with Section 1123 is essential, and this is one area (among many) in which an experienced Miami bankruptcy litigation attorney will be able to provide critical insights.

One of the key requirements for a reorganization plan is that it must “provide adequate means for the plan’s implementation.” By focusing sufficient time and effort on documenting how the business will comply with its proposed plan, business owners (and their counsel) can often avoid challenges from the business’s creditors and streamline the plan confirmation process.

7. Requirements for Plan Confirmation

Section 1129 of Chapter 11 outlines the requirements for securing the bankruptcy court’s approval (or “confirmation”) of a proposed reorganization plan. It provides that the court may confirm a plan “only if” the plan meets the 16 requirements listed in Section 1129(a). Some of the key requirements in Section 1129(a) include:

• “The plan complies with the applicable provisions of [the U.S. Bankruptcy Code;”
• “With respect to each class of claims or interests—(A) such class has accepted the plan; or (B) such class is not impaired under the plan;” and,
• “ Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.”

8. Effect of Confirmation

Section 1141 of Chapter 11 makes clear that the debtor, its creditors and other affected parties are bound by the reorganization plan confirmed by the bankruptcy court. If a debtor fails to comply with its reorganization plan post-confirmation, affected creditors can seek appropriate remedies in court—which may include seeking to terminate the reorganization plan and pursue collection.

9. Implementation of the Debtor’s Reorganization Plan

Section 1142 of Chapter 11 further clarifies the debtor’s obligation to comply with its confirmed reorganization plan (stating that the debtor “shall carry out the plan and shall comply with any orders of the court”). It also provides that the court may direct the debtor “and any other necessary party” to take any action that is necessary “for the consummation of the plan.”

10. Revocation of an Order of Confirmation

Section 1144 of Chapter 11 provides that creditors and other interested parties have 180 days to seek revocation of a confirmed reorganization plan. Under Section 1144, the sole ground for seeking revocation is “if such order was procured by fraud.”

Schedule an Appointment with a Miami Bankruptcy Litigation Attorney

If you are a business owner or executive in Florida and you have questions about reorganizing your company’s debts under Chapter 11, we encourage you to contact us for more information. To schedule an appointment with a Miami bankruptcy litigation attorney at Edelboim Lieberman, please call 305-768-9909 or request a free initial consultation online today.