How Does a Corporate Bankruptcy Work, Q&A

How does a chapter 11 corporate bankruptcy work overall?

Corporate bankruptcy primarily involves Chapter 7 or Chapter 11. In Chapter 7, the company ceases operations, and a trustee sells its assets to pay creditors. In Chapter 11, the company reorganizes its debts and operations to return to profitability, continuing to operate under court supervision. The company proposes a reorganization plan to restructure its debts, which creditors and the court must approve. This plan often includes measures like downsizing, selling assets, or renegotiating contracts to make the business viable again.

Are there hearings in a bankruptcy case for Chapter 11, and if yes, what kind of hearings?

Yes, there are several hearings in a Chapter 11 bankruptcy case. Key hearings include:

• First Day Hearings : Address immediate issues like employee wages, cash management, and critical vendor payments.
• 341 Meeting : Creditors can question the debtor about the company's financial affairs.
• Disclosure Statement Hearing : The court reviews the disclosure statement to ensure it provides adequate information for creditors to evaluate the reorganization plan.
• Plan Confirmation Hearing : Creditors vote on the reorganization plan, and the court decides whether to confirm it.

Other hearings may address motions, objections, and disputes throughout the case.

What kinds of motions?

In Chapter 11 bankruptcy, common motions include:

• Motion for Debtor-in-Possession Financing : To obtain new financing to keep the business operating.
• Motion to Use Cash Collateral : To use cash secured by creditors for operations.
• Motion to Reject or Assume Executory Contracts : To discontinue unfavorable contracts or continue beneficial ones.
• Motion for Relief from Automatic Stay : Creditors request to proceed with actions against the debtor's property.
• Motion to Sell Assets : To sell assets outside the ordinary course of business.

These motions help manage the debtor's operations and financial obligations during the bankruptcy process.

Who is in control of a company's finances during bankruptcy?

In Chapter 11 bankruptcy, the debtor usually remains in control of its bank accounts and operations as a "debtor-in-possession." Company management continues to run the day-to-day business but must operate under the oversight of the bankruptcy court. A bankruptcy trustee may be appointed in cases of fraud, mismanagement, or if the court believes it's in the best interest of creditors. Otherwise, the debtor remains in control, but must seek court approval for significant decisions.

So, are you saying that there is typically no bankruptcy trustee in Chapter 11?

Yes, that's correct. In most Chapter 11 cases, there is no bankruptcy trustee appointed. Instead, the debtor acts as a "debtor-in-possession," maintaining control of its operations and assets during the bankruptcy process. The debtor-in-possession has fiduciary responsibilities to creditors and must operate under the oversight of the bankruptcy court. A trustee is only appointed in specific circumstances, such as fraud or gross mismanagement.

What are good things to know about a Chapter 11 bankruptcy?

Here are some insights specific to Chapter 11 bankruptcy:

• Reorganization Plan : The debtor proposes a plan to restructure its debts and operations, which may include downsizing, renegotiating contracts, or selling assets. The plan must be approved by the creditors and confirmed by the bankruptcy court.
• Debtor-in-Possession : The debtor remains in control of the business as a "debtor-in-possession," continuing to operate and make decisions under court supervision. This allows the company to try to return to profitability.
• Creditors' Committee : A committee of unsecured creditors is often appointed to represent the interests of all unsecured creditors. The committee plays a significant role in negotiating the reorganization plan.
• Executory Contracts : The debtor has the option to assume or reject executory contracts and leases. This means the debtor can choose to continue beneficial agreements and terminate unfavorable ones.
• Priority of Payments : In Chapter 11, secured creditors are paid first, followed by priority unsecured creditors, such as employees owed wages, and then general unsecured creditors. Equity holders are last in line.

If you are intetrested in a bankruptcy, we at the Law Offices of Albert Goodwin are here for you. You can call us at 212-233-1233 or send us an email at [email protected].