Chapter 11 is the reorganization chapter of the United States Bankruptcy Code. A business that files under it usually keeps operating and proposes a plan to pay creditors over time, instead of selling everything off and closing.
The federal courts describe the shape of it in one sentence. Usually the debtor remains in possession, has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money (United States Courts, Chapter 11 Bankruptcy Basics). It is used primarily by incorporated businesses, and individuals whose debt exceeds the maximum limit for Chapter 13 also file it (IRS, Chapter 11 bankruptcy, reorganization).
The chapter number belongs to Title 11 of the United States Code, which is the Bankruptcy Code. The Internal Revenue Code has a chapter 11 of its own, and it is the estate tax (26 U.S.C. Subtitle B, Chapter 11). Nothing connects the two but the number, and the tax one is the sense used in bequest and step-up basis.
The Debtor Runs the Case, With Two Carve-Outs
The statute hands the debtor the trustee’s job rather than a lesser version of it, and then removes exactly two things.
Subject to any limitations on a trustee serving in a case under the chapter, and to such limitations or conditions as the court prescribes, a debtor in possession has all the rights and powers of a trustee serving in such a case, and performs all of that trustee’s functions and duties. The first carve-out is the right to compensation under section 330. The second is the duties specified in section 1106(a)(2), (3) and (4) (11 U.S.C. 1107(a)).
Those three excepted duties make sense once you read them. They are filing the debtor’s own list, schedule and statement if the debtor has not, investigating the debtor’s acts, conduct, assets, liabilities and financial condition, and filing a statement of that investigation (11 U.S.C. 1106(a)). A debtor cannot usefully be made to investigate itself, and it files its own schedules already.
Read the opening words as well as the grant. Both of those clauses are conditions, not decoration: the court can impose its own limits at any point, and every limit that would bind a trustee binds the debtor in possession too.
Filing Stops Collection, Except Where the Code Says It Does Not
The stay is automatic, so nobody has to ask for it, and its scope is written as a list rather than a principle.
Except as provided in subsection (b), a petition filed under section 301, 302 or 303 operates as a stay, applicable to all entities, of eight categories of act. They include the commencement or continuation of a judicial, administrative or other action against the debtor that was or could have been commenced before the case began, the enforcement of a pre-petition judgment, any act to obtain possession of or exercise control over property of the estate, any act to create, perfect or enforce a lien against property of the estate, any act to collect or recover a pre-petition claim, and the setoff of a pre-petition debt (11 U.S.C. 362(a)).
The eighth one is the one a tax practitioner should know. The stay also reaches the commencement or continuation of a proceeding before the United States Tax Court concerning the tax liability of a corporate debtor for a taxable period the bankruptcy court may determine, or the tax liability of an individual debtor for a taxable period ending before the order for relief (11 U.S.C. 362(a)(8)).
The opening words carry real weight. Subsection (b) holds a long list of exceptions, so the stay is broad rather than total.
Two Clocks Run on the Plan, and They Are Different Clocks
Popular summaries collapse these into one number. The Code runs two.
The first is exclusivity. Except as the section otherwise provides, only the debtor may file a plan until after 120 days after the date of the order for relief (11 U.S.C. 1121(b)).
The second is acceptance. Any party in interest, including the trustee, a creditors’ committee or a single creditor, may file a plan only if a trustee has been appointed, or the debtor has not filed a plan within that 120 days, or the debtor has not filed a plan accepted by every impaired class before 180 days after the order for relief (11 U.S.C. 1121(c)).
Both can move, and both have a ceiling. On request of a party in interest made within the period concerned, and after notice and a hearing, the court may for cause reduce or increase either one. The 120-day period may not be extended beyond 18 months after the order for relief, and the 180-day period may not be extended beyond 20 months (11 U.S.C. 1121(d)).
So the familiar line that a debtor gets 120 days, extendable to 18 months, describes the first clock only, and it describes it as a deadline to propose a plan when it is really a monopoly on proposing one.
Subchapter V Is the Small Business Track
Subchapter V runs a lighter version of the same chapter. Inside it, the word debtor means a small business debtor, and debtor in possession means that debtor unless removed under section 1185(a) (11 U.S.C. 1182). A standing trustee is appointed where the United States trustee has one available (11 U.S.C. 1183).
Who qualifies is a definition with several limbs. A small business debtor is a person engaged in commercial or business activities, excluding a person whose primary activity is owning single asset real estate, whose aggregate noncontingent liquidated secured and unsecured debts fall at or below a dollar ceiling, not less than 50 percent of which arose from those commercial or business activities. Debts owed to affiliates or insiders are left out of the count. Three categories are then excluded outright: a member of an affiliated group of debtors whose combined debts of the same kind exceed the ceiling, a debtor that is a corporation reporting under section 13 or 15(d) of the Securities Exchange Act of 1934, and an affiliate of such a corporation (11 U.S.C. 101(51D)).
That ceiling is not a fixed number, which is why it is worth reading off the current Code text every time. Each dollar amount in effect under section 101(51D) is adjusted on April 1 at each three-year interval, to reflect the change in the Consumer Price Index for All Urban Consumers, rounding the dollar amount that represents that change to the nearest $25. An adjustment does not apply to cases commenced before it took effect (11 U.S.C. 104).
Where an Accounting Firm Meets Chapter 11
On the tax side, the stay does not excuse anything going forward. It reaches pre-petition matters, and current obligations keep running underneath it. As part of the reorganization, businesses must ensure they are capable of meeting all financial obligations going forward, including federal income and payroll taxes (IRS, Chapter 11 bankruptcy, reorganization). A client in reorganization is still a client with deposit deadlines.
On the reporting side, the case does not end the presumption behind the financial statements by itself. Whether the statements stay on the going concern basis is a separate evaluation, worked through in going concern, where the trigger for leaving that basis is imminence rather than a court filing.
Failure is not hypothetical either. Failure to successfully reorganize and get a debt repayment plan approved may result in a Chapter 11 case being converted to a liquidating Chapter 7 (IRS, Chapter 11 bankruptcy, reorganization), which changes both the accounting and the order in which anyone gets paid. That order is set out in liquidation in business.
Common Questions
Usually, yes. That is the point of the chapter. The debtor may continue to operate its business and may, with court approval, borrow new money, and a plan of reorganization is proposed while the business runs (United States Courts, Chapter 11 Bankruptcy Basics).
No. Insolvency is a financial condition and a Chapter 11 case is a proceeding in a federal court, and the difference between the two, along with the several definitions of insolvent that different bodies of law use, is set out in what it means to be insolvent.
No. Chapter 7 converts assets to cash and pays claims in a statutory order, and the business stops. Chapter 11 is built to keep the business running while creditors are paid under a confirmed plan. A Chapter 11 case can become a Chapter 7 case where the reorganization fails, but the two chapters are not alternatives for the same outcome.
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