Chapter 11

Chapter 11 is one among the fifteen chapters under Title 11 of the United States Bankruptcy Code. It permits reorganization in case of bankruptcy and can be filed by every business regardless of whether it is a corporation, sole proprietorship or partnership, as well as individuals. But mostly, it is used by organized businesses.

Chapter 11 bankruptcy has no limitations on the amount of debt incurred, and debtors will have to propose a reorganization plan to keep their business afloat until they are in a position to pay off their creditors over time. For this reason, whenever a case is filed under Chapter 11, it is often called a reorganization bankruptcy.

How Chapter 11 works

Once a business file for Chapter 11 bankruptcy, its business operates under court supervision, and in such a way to benefit the creditors so that the debt can be paid off as soon as possible. However, it must be noted that the business is still in possession of all its assets, and the role of the court is to oversee its operations, not overtake the business itself. However, if the business/debtor’s management is proven to be ineffective or dishonest, the court may appoint a trustee.

The U.S. Trustee usually appoints a creditors committee, chosen from among twenty largest, unsecured creditors. They are also not insiders. This committee is like a representative for all involved creditors, and it provides oversight for the “reorganizational” operations of the debtor. The committee is also the body that the debtor negotiates with for an acceptable reorganizational plan.

This plan can be confirmed by the committee only when the creditors vote to agree to it. The creditors are divided into different groups by the plan, based on their claims against the debtor, and each of their votes are functions of the amount of their claims.

In the case where the debtor cannot get the creditors to agree to the proposed plan, a plan can be “crammed down” and be confirmed if certain statutory tests are met, despite opposition from creditors.

Toys R Us Chapter 11 bankruptcy case

In September 2017, America’s popular toy retailer, Toys R Us filed for Chapter 11 bankruptcy. The retailer has a total of $4.9 billion in debt, out of which $400 million has interest payments that are due in 2018. Another $1.7 billion is due in 2019. Chairman and CEO, Dave Brandon said that this move is the right one that will relieve the company of its debts and make sure that the iconic brand lives on for many more years.