Sportslaw Jargon: Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a form of reorganization available to individuals, corporations, and partnerships. It has no specific limits to the amount of the debt and its the common choice for large businesses that are looking to restructure their debts.

Under Chapter 11, the debtor normally remains in possession of its assets, and operates the business under the supervision of the court and for the benefit of the creditors. If the debtor is ineffective in managing his assets or his not trustworthy, a trustee might be appointed by the court. A creditor's committee is usually appointed by the trustee from among the 20 largest, unsecured creditors who are not insiders. The committee represents all the creditors and acts has a body whom the debtor can negotiate an acceptable plan of reorganization.

A Chapter 11 plan gets confirmed only upon the affirmative votes of the creditors. The creditors are divided into classes based on the characteristics of their claims, whose votes are a function of the amount of their claim against the debtor. If the debtor can’t get the votes to confirm a plan, they can attempt to “Cram Down” a plan on creditors and get the plan confirmed despite creditor opposition, by meeting certain statutory tests.

Chapter 11 by far is the most flexible of all the chapters. Its flexibility, however, makes it more expensive to the debtor and the rate of successful Chapter 11 reorganizations is extremely low. Estimates peg that figure as about 10 percent.

J. Martinez