Why chapter 11

At its clumsiest, this can create a sort of zombie effect, where things just seem off. When a brand name like that goes on the market, Toubassy sets about figuring out where and how long ago its revenue peaked, and how much affinity and awareness the brand has among potential shoppers — indicators of whether it would be worth the time, capital, and risk involved in a relaunch.

In the case of Wet Seal, Toubassy took notes from the success of the hyper-popular fashion e-commerce site Fashion Nova , which is known for its collaborations with Cardi B, cloning everything the Kardashians wear , and releasing clothing in a mind-melting 24 hours. Has it been successful? There are certain advantages to building a new company around an existing brand name, rather than starting fresh: Though it may have been tarnished somewhat by bankruptcy, customers are already familiar and, ideally, friendly with it.

Under BAPCPA, retailers now get a maximum of days a day deadline, plus a single day extension to make that decision. This matters because it put a massive time crunch on retailers, which now have significantly less time to figure out which stores they ought to keep open and which they should close. It takes days to organize and run a going-out-of-business sale, says Kibler, effectively giving the retailer a mere 90 days to figure out its store closure strategy.

Though Kibler says the restructuring analysis that used to take place during bankruptcy now happens before a company files, this time pressure has contributed to retailers being less likely to reorganize and more prone to liquidate and sell their intellectual property. As Kibler said, a company needs to have a really good reason to reorganize — a good reason to exist — and the rise of e-commerce has made retailers with massive store presences obsolete. Second chances may be a beloved American ideal, but so is innovation and the growing pains that come with it.

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By choosing I Accept , you consent to our use of cookies and other tracking technologies. Sarah Lawrence for Vox. The court, on motion by a party in interest or the U.

Moreover, the U. The trustee is appointed by the U. Alternatively, a trustee in a case may be elected if a party in interest requests the election of a trustee within 30 days after the court orders the appointment of a trustee. In that instance, the U. The case trustee is responsible for management of the property of the estate, operation of the debtor's business, and, if appropriate, the filing of a plan of reorganization.

Section of the Bankruptcy Code requires the trustee to file a plan "as soon as practicable" or, alternatively, to file a report explaining why a plan will not be filed or to recommend that the case be converted to another chapter or dismissed.

Upon the request of a party in interest or the U. The appointment of an examiner in a chapter 11 case is rare. The role of an examiner is generally more limited than that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation conducted.

If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform.

Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor's schedules to determine whether some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken.

The examiner may not subsequently serve as a trustee in the case. Examiners may not be appointed in subchapter V cases. The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.

As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed. The filing of a petition, however, does not operate as a stay for certain types of actions listed under 11 U. The stay provides a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.

Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt.

The Bankruptcy Code permits applications for fees to be made by certain professionals during the case. Thus, a trustee, a debtor's attorney, or any professional person appointed by the court may apply to the court at intervals of days for interim compensation and reimbursement payments.

In very large cases with extensive legal work, the court may permit more frequent applications. Although professional fees may be paid if authorized by the court, the debtor cannot make payments to professional creditors on prepetition obligations, i. The ordinary expenses of the ongoing business, however, continue to be paid. The debtor except for a "small business debtor" has a day period during which it has an exclusive right to file a plan.

This exclusivity period may be extended or reduced by the court. But in no event may the exclusivity period, including all extensions, be longer than 18 months. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. A chapter 11 case may continue for many years unless the court, the U. The creditors' right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.

The debtor in possession or the trustee, as the case may be, has what are called "avoiding" powers. These powers may be used to undo a transfer of money or property made during a certain period of time before the filing of the bankruptcy petition. By avoiding a particular transfer of property, the debtor in possession can cancel the transaction and force the return or "disgorgement" of the payments or property, which then are available to pay all creditors. Generally, and subject to various defenses, the power to avoid transfers is effective against transfers made by the debtor within 90 days before filing the petition.

But transfers to "insiders" i. In addition, under 11 U. Avoiding powers prevent unfair prepetition payments to one creditor at the expense of all other creditors. Although the preparation, confirmation, and implementation of a plan of reorganization is at the heart of a chapter 11 case, other issues may arise that must be addressed by the debtor in possession.

The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise.

If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court. A debtor in possession may not use "cash collateral" without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected.

Section defines "cash collateral" as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor's security interest.

When "cash collateral" is used spent , the secured creditors are entitled to receive additional protection under section of the Bankruptcy Code. The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession.

A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide "adequate protection" to the creditor. Adequate protection may be required to protect the value of the creditor's interest in the property being used by the debtor in possession.

This is especially important when there is a decrease in value of the property. The debtor may make periodic or lump sum cash payments or provide an additional or replacement lien that will result in the creditor's property interest being adequately protected. When a chapter 11 debtor needs operating capital, it may be able to obtain it from a lender by giving the lender a court-approved "superpriority" over other unsecured creditors or a lien on property of the estate.

Before confirmation of a plan, several activities may take place in a chapter 11 case. Continued operation of the debtor's business may lead to the filing of a number of contested motions.

The most common are those seeking relief from the automatic stay, the use of cash collateral, or to obtain credit. There may also be litigation over executory i.

Delays in formulating, filing, and obtaining confirmation of a plan often prompt creditors to file motions for relief from stay, to convert the case to chapter 7, or to dismiss the case altogether. Frequently, the debtor in possession will institute a lawsuit, known as an adversary proceeding, to recover money or property for the estate. Adversary proceedings may take the form of lien avoidance actions, actions to avoid preferences, actions to avoid fraudulent transfers, or actions to avoid post-petition transfers.

At times, a creditors' committee may be authorized by the bankruptcy court to pursue these actions against insiders of the debtor if the plan provides for the committee to do so or if the debtor has refused a demand to do so. Creditors may also initiate adversary proceedings by filing complaints to determine the validity or priority of a lien, revoke an order confirming a plan, determine the dischargeability of a debt, obtain an injunction, or subordinate a claim of another creditor.

The Bankruptcy Code defines a claim as: 1 a right to payment; 2 or a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment. Generally, any creditor whose claim is not scheduled i. But filing a proof of claim is not necessary if the creditor's claim is scheduled but is not listed as disputed, contingent, or unliquidated by the debtor because the debtor's schedules are deemed to constitute evidence of the validity and amount of those claims.

If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim.

It is the responsibility of the creditor to determine whether the claim is accurately listed on the debtor's schedules.

The debtor must provide notification to those creditors whose names are added and whose claims are listed as a result of an amendment to the schedules. The notification also should advise such creditors of their right to file proofs of claim and that their failure to do so may prevent them from voting upon the debtor's plan of reorganization or participating in any distribution under that plan. When a debtor amends the schedule of liabilities to add a creditor or change the status of any claims to disputed, contingent, or unliquidated, the debtor must provide notice of the amendment to any entity affected.

An equity security holder is a holder of an equity security of the debtor. Examples of an equity security are a share in a corporation, an interest of a limited partner in a limited partnership, or a right to purchase, sell, or subscribe to a share, security, or interest of a share in a corporation or an interest in a limited partnership.

An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim. A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled as disputed, contingent, or unliquidated.

An equity security holder whose interest is not scheduled or is scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it. A properly filed proof of interest supersedes any scheduling of that interest.

Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest. A debtor in a case under chapter 11 has a one-time absolute right to convert the chapter 11 case to a case under chapter 7 unless: 1 the debtor is not a debtor in possession; 2 the case originally was commenced as an involuntary case under chapter 11; or 3 the case was converted to a case under chapter 11 other than at the debtor's request.

A debtor in a chapter 11 case does not have an absolute right to have the case dismissed upon request. A party in interest may file a motion to dismiss or convert a chapter 11 case to a chapter 7 case "for cause. Alternatively, the court may decide that appointment of a chapter 11 trustee or an examiner is in the best interests of creditors and the estate. Section b 4 of the Bankruptcy Code sets forth numerous examples of cause that would support dismissal or conversion.

For example, the moving party may establish cause by showing that there is substantial or continuing loss to the estate and the absence of a reasonable likelihood of rehabilitation; gross mismanagement of the estate; failure to maintain insurance that poses a risk to the estate or the public; or unauthorized use of cash collateral that is substantially harmful to a creditor.

Cause for dismissal or conversion also includes an unexcused failure to timely compliance with reporting and filing requirements; failure to attend the meeting of creditors or attend an examination without good cause; failure to timely provide information to the U.

Additionally, failure to file a disclosure statement or to file and confirm a plan within the time fixed by the Bankruptcy Code or order of the court; inability to effectuate a plan; denial or revocation of confirmation; inability to consummate a confirmed plan represent "cause" for dismissal under the statute. In an individual case, failure of the debtor to pay post-petition domestic support obligations constitutes "cause" for dismissal or conversion.

Section c of the Bankruptcy Code provides an important exception to the conversion process in a chapter 11 case. How Does Chapter 11 Bankruptcy Work? Collection Actions Stop All bankruptcy chapters work by stopping the collection process. For instance, the stay will temporarily stop: payment requests an eviction or foreclosure a collections trial bank levies, till taps, property seizure, and other collection processes.

Filer Retains Control of the Business Unlike other bankruptcy chapters, a bankruptcy trustee isn't put in charge of the business and other bankruptcy property.

Debt Relief Through a Payment Plan The goal of Chapter 11 is to create a financial plan that the filer, creditors, and the court agree will enable the company to remain open and prosper. Chapter 7 for individuals. People who file for Chapter 7 keep the things they need to maintain a household and employment. All other property gets sold for the benefit of creditors. In exchange, qualifying debt gets discharged without the need to pay into a repayment plan. Chapter 7 for small business owners.

It's unusual for a small business to file for Chapter 7. Not only will Chapter 7 close most companies, but business entities other than sole proprietors aren't entitled to a debt discharge. Plus, a business owner can discharge more debt—business and personal alike—by personally filing an individual Chapter 7 case after the business closure. But Chapter 7 can make sense in some cases.

For instance, sole proprietors with service-only businesses often do well filing for Chapter 7 bankruptcy because they can discharge personal and business debt without jeopardizing the service-focused business. Explore the differences between Chapter 7 and 11 bankruptcy. Chapter 13 for individuals and small business owners. Companies can't file a Chapter 13 case; however, sometimes stakeholders find that it's cheaper to file Chapter 13 individually if reorganizing personal finances provides enough financial relief to keep the company afloat.

For instance, paying a reduced amount toward personal credit cards and other debt will often allow the filer to draw less from the business. Learn more about Chapter 13 vs. Chapter 11 bankruptcy. Chapter 11 for individuals and small business owners.

Sometimes Chapter 11 bankruptcy is the only option available for a small business. In that case, Chapter 11, Subchapter V includes special provisions to streamline and expedite Chapter 11 bankruptcy for small business owners. Starting a Chapter 11 Bankruptcy A Chapter 11 case begins with the filing of a petition in bankruptcy court. Decisions Made by the Bankruptcy Court While the debtor ordinarily continues running the business as a debtor in possession, the bankruptcy court must approve: any assets the debtor wouldn't sell in the ordinary course of business, such as real property entering into or breaking a lease mortgage or other secured financing arrangements that allow the debtor to borrow money shutting down or expanding business operations entering into or modifying union, vendor, licensing, and other contracts and agreements, and the retention of, and payment of fees and expenses to, attorneys and other professionals.

Creditors and the Creditor Committee Creditors, shareholders, and other parties in interest may support or oppose actions that require bankruptcy court approval. The Disclosure Statement The filer must fully disclose background information so that a creditor can make an informed decision about the feasibility of the proposed plan. Chapter 11 Reorganization Plans Ordinarily, the debtor has the exclusive right to propose a reorganization plan for the first four months; however, the court can extend the debtor's "exclusivity period" for to up 18 months after the petition date.

Chapter 11 Plan Confirmation In reality, the debtor and creditors can agree to any plan that they choose. If a creditor objects to the plan, however, the court will consider factors, including: Feasibility.

A creditor with a lien against real estate or personal property such as inventory or equipment is secured. The debtor's owners cannot retain anything on account of their equity interests unless all obligations are paid in full, either immediately upon plan confirmation or over time and with interest.

The bankruptcy court can allow equity holders to retain ownership interests in the debtor in exchange for "new money" contributed to pay reorganization expenses. Otherwise, however, equity holders lose all ownership rights upon plan confirmation. Talk to a Bankruptcy Lawyer Need professional help?

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