Chapter 11 Bankruptcy and the Creditors’ Committee

Mon, Oct 15, 2012


Chapter 11 bankruptcy is primarily for businesses, although attorney Christopher D. Smith (with SmithLaw in Sarasota, Florida) has seen it filed by individuals from time to time.

What is Chapter 11 bankruptcy?

Chapter 11 bankruptcy (for businesses) allows for reorganization of the business. It is filed in the hopes of keeping the business alive long enough to pay off debts and usually to stay in business after the bankruptcy phase is finished. This differs from Chapter 7 bankruptcy, which requires liquidation of assets and for the business to close in an effort to pay off debts. During Chapter 7, assets and the money from the sale of the business are distributed to the creditors owed—up to the amount available. (This means that sometimes the creditors are not all paid off and some money is discharged.)

During Chapter 11 bankruptcy, the business owner is still involved—but as the debtor in possession. The appointed trustee is the one running the business and a bankruptcy plan is put in place to help the business get out of debt or emerge as a new company. This plan varies but can include new loans, liquidation of some assets or parts of a business, or cancelling some contracts the business has already signed—all in an effort to eventually pay back creditors. An interesting point about Chapter 11 bankruptcy is that small businesses can be treated differently, as long as they make the designation properly.

Chapter 11 bankruptcy gets quite complicated. It involves many aspects that other types of bankruptcy do not. A great resource for finding out further information is the United States Courts website.


On to the creditor’s committee…

Creditors play a more involved role in a Chapter 11 bankruptcy. They are still separated into secured and unsecured debts. (Secured debts are backed up by collateral and unsecured debts are not.) The Creditor’s Committee serves as a fiduciary and looks out for the interests of all unsecured creditors.

The bankruptcy courts have the ability to create a creditor’s committee in an effort to make sure all creditors are being looked after and that they are comfortable with the progress of the bankruptcy. A creditor’s committee is not required in all cases, but can be mandated by the court.

The committee usually consists of unsecured creditors, as their interests can often be downplayed (secured creditors tend to have priority in bankruptcy cases). But, the bankruptcy court can also include secured creditors on creditor’s committees to be sure the playing field is even. (In addition, a creditor is not required to be on the creditor’s committee-it is made up of willing participants.) Creditors communicate with the business owner, trustee, and the court if they feel that the committee needs to be re-evaluated and/or re-populated during the bankruptcy proceedings.

The creditor’s committee idea was created in an effort to make sure that the creditors are happy with the way the proceedings and reorganization is going. The committee is loosely given the duty of making sure that all creditors involved in the Chapter 11 bankruptcy feel the bankruptcy proceedings are going well. The members also provide information to other creditors that are not members of the committee. Thus, they communicate with the business owner, the courts, and the other creditors throughout the bankruptcy proceedings. However, they must work within the confines of the United States Chapter 11 bankruptcy laws.

Businesses facing bankruptcy need to make careful choices when filing bankruptcy. Chapter 11 might be a great way to keep the business going—but those choosing that option must remember that it can be complicated and involves creditors even more than a traditional case.

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