About Chapter 11

Filing of Chapter 11 Petition

A Chapter 11 filing is generally a voluntary action taken by a company to protect its ongoing business from financial claims while it continues operating its business. During a Chapter 11 proceeding, the company reorganizes financially and, at times, operationally so that it can meet the claims of those to whom it owes money. A Chapter 11 filing includes an automatic stay that immediately freezes all claims against the company that predate the filing, stops all lawsuits against the company, and precludes creditors from exercising control over the company's property. Chapter 11 reorganization is entirely different from other kinds of bankruptcy proceedings where the focus is on liquidating the company. Companies commonly file for Chapter 11 voluntarily because it provides a process for the company to restructure and to emerge as a viable business.

Under a Chapter 11 proceeding, a company typically maintains its business operations and often continues to provide employees with salaries and benefits. It is also able to do business with suppliers and customers in a routine manner so that it can continue to generate funds to support ongoing operations and to satisfy creditors

Appointment of Official Creditors' Committee

After the company files for Chapter 11 protection, a government agency, the Office of the U.S. Trustee, appoints an official Creditors' Committee. The Creditors' Committee typically includes anywhere from 5 to 11 of the company's largest creditors. The U.S. Trustee will usually try to include several types of creditors (e.g., trade creditors, banks, bondholders, unions, landlords, etc.) so that the Creditors' Committee is a representative body. The composition of the Committee depends on the makeup of the particular debtor's creditor group. Normally, this Committee retains counsel and becomes involved in the Court-supervised process to ensure that creditors are treated fairly.

Meeting of Creditors

A joint meeting of company representatives and people who believe the company owes them money (called the 341 meeting because it is required under section 341 of the U.S. Bankruptcy Code) typically occurs approximately 30-45 days after a Chapter 11 filing. A notice of the 341 meeting, along with notice of the commencement of the case, will be mailed to all creditors within the first few weeks of the filing.

Notice to Creditors of Bar Date

Another major step in the Chapter 11 process is providing notice to anyone who believes they have a claim (financial or otherwise) against the company. Notice procedures, which normally include advertising, are established. Notice is given to people with claims alerting them that their claims must be brought forward, by filing a "proof of claim," by a certain date that is referred to as the "bar date." Claimants are usually provided with a period of time from the date of the notice to file their proofs of claim. Failure to file a claim by the bar date usually results in the disallowance of the claim and no recovery by that creditor. Once the Court has gathered all of the claims that resulted from the bar date notice, hearings are held to determine the value of any claims that are disputed.

Development of Plan of Reorganization

One of the primary objectives of the company in bankruptcy is to develop a business plan and negotiate with its creditors to formulate a reorganization plan. The company has the exclusive right by law to propose such a plan of reorganization during the first 120 days of the Chapter 11 process. If the company is proceeding in good faith, the exclusive period may be, and usually is, extended by the Bankruptcy Court, up to a maximum period of 18 months. Once the Plan of Reorganization is formulated and documented, it will be filed with the Bankruptcy Court.

Presentation of Disclosure Statement to Bankruptcy Court

The Debtor will present a Disclosure Statement to the Court and creditors, along with the Plan of Reorganization. The Disclosure Statement contains complete financial information and also explains the company's proposed plan for paying its creditors. The Bankruptcy Court will determine whether the Disclosure Statement contains adequate information for the creditors to decide whether to vote to accept or reject the Plan of Reorganization. If the Disclosure Statement is approved by the Court, the company will then send it, along with the proposed Plan of Reorganization and a ballot, to all creditors and interest holders in the company. Those parties can then vote on the Reorganization Plan by an announced voting deadline.

Voting on the Plan and Confirmation

If the required number of interested parties votes in favor of the plan, the company will then seek Bankruptcy Court approval, or confirmation, of its Plan of Reorganization. If the plan is confirmed by the Court, the claims of creditors will be satisfied as provided for in the plan. At this point, the company can emerge from Chapter 11 as a reorganized company and operate its business as described in its Plan of Reorganization.