What is Chapter 11 Bankruptcy in Arizona?

what is chapter 11 bankruptcyChapter 11 bankruptcy is typically called reorganization bankruptcy. This blogpost will describe the basics of Chapter 11 bankruptcy.

Chapter 11 is typically used by corporations or businesses.  Individuals may also file a Chapter 11 bankruptcy, but it is less common.  Filing Chapter 11 tends to be more expensive and many times individuals to not have the means to handle that expense.

Businesses may also file Chapter 7 bankruptcy, if it qualifies.  In Chapter 7, a business will completely cease operations, assets will be sold, and the bankruptcy trustee distributes all the money from the proceeds to the business creditors. Chapter 11 allows a business to reorganize, instead of selling off the business to satisfy creditors.

Chapter 11 bankruptcy is similar to other forms.  There is a meeting of the creditors and debtor, with the assistance of attorneys and the bankruptcy trustee.  However, there are additional avenues for the business to follow.  A business may acquire financing and loans, to continue the business, by giving lenders first priority on earnings.  A debtor may cancel or reject existing contracts, with the blessing of the bankruptcy court. The business is protected from litigation from any creditors or other businesses with the court imposing an automatic stay of litigation. During this stay, all collection agencies are halted and put on hold.

If the business debits outweigh the assets, the business owners are typically left with nothing after reorganization.  The creditors are left with ownership of the newly reorganized company.

The Plan 

The bankruptcy trustee and the business will agree on a reorganization plan.  This plan will develop the process in how the business will continue and how to pay assets.  Chapter 11 requires a business to be able to handle the reorganization and have the capacity to move forward.  Many small businesses fail a Chapter 11 bankruptcy and end up filing Chapter 7 and liquidating the assets.

Creditors are allowed to vote on the proposed plan, giving them some say in how the process will move forward. Chapter 11 can take several years or months for a business to move through, depending on the size of the business and the complexity of the case.

Process

In Arizona, a business owner has the right, usually up to 120 days from filing, to propose a plan of reorganization.  If this time period elapse without a plan by the debtor, creditors may propose plans.  The court will assess the plans against a set criteria to see if the plan can be approved.  The judge holds the power to approve the plan.

Whoever proposes the plan, the plan must be confirmed by all the creditors.  If even one creditor disagrees, the plan mast still be approved but the plan must meet a further set of requirements.  The court will look at the plan and assess whether the plan is fair and equitable for the class of creditors and that there is no discrimination.

If the plan fails this test, the court may transfer the proceedings to a Chapter 7, and the business would go into liquidation.  The court may also dismiss the case outright, where the status of the business would go back to what is was before the filings.  The stay would be lifted and collection proceedings and any litigation would likely proceed.

Filing for Chapter 11 bankruptcy is not the best plan for every business or individual.  Hiring an attorney to review the facts is essential to ensure the correct chapter filing.  Filing is also expensive.  Arizona charges $1,167 for the filing fee and $550 for a miscellaneous administrative fee.

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