Chapter 11

Chapter 11 bankruptcy is a reorganization process for struggling companies, allowing them to restructure debts, remain operational, and potentially achieve solvency. Typically, the company continues to operate as the "debtor in possession" with trustee-like powers, requiring court approval for significant actions, including borrowing funds. This form of bankruptcy is specifically intended for businesses aiming to restructure their finances while continuing their operations.

Key Features of Chapter 11 Bankruptcy:

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  Allows businesses to reorganize debts and assets while staying operational.
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  The debtor usually remains in control of the business as a "debtor in possession" (DIP).
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  The debtor proposes a plan to repay creditors while restructuring the business. The plan may include reducing debts, renegotiating leases, and liquidating some assets.
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  Creditors and the court must approve the reorganization plan.

Priority of debt

This section outlines the different categories of claims against and interests in a debtor company undergoing bankruptcy proceedings:

1. Secured Claims: These are debts that are supported by specific assets (collateral) of the debtor.
2. Administrative Expenses: These represent the costs incurred during the bankruptcy process itself, as well as costs and expenses associated with the ongoing operations of the business during this period.
3. Priority Unsecured Claims: These are specific types of unsecured debts that the law designates as having a higher priority for repayment compared to other unsecured claims.
4. General Unsecured Claims: This category includes all debts that are not backed by collateral and do not qualify for priority status.
5. Equity Holders: These are the individuals or entities that hold ownership stakes in the debtor company.

Obligations on Creditors

Creditors generally must file proof of claim to obtain a distribution of estate assets. Proofs of claim must be filed before the bar date set by the bankruptcy court. A failure to comply with the ordered time limit may result in the extinguishment of the creditor's claim. Once claims are filed, the debtor has the ability to object to claims, and the bankruptcy court has jurisdiction to adjudicate and liquidate most types of claims.

Transferability of Chapter 11 Claims

Chapter 11 claims are generally transferable, allowing creditors to sell their claims to third-party buyers. This transferability is crucial for creditors seeking liquidity or risk management during the bankruptcy process. Once transferred, the buyer steps into the shoes of the original creditor, inheriting the same rights and obligations regarding the claim. The transfer process is straightforward and well established, involving the submission of a Transfer Agreement to the bankruptcy court.