Chapter 11 Bankruptcy Terms & Definitions

Automatic stay: A form of injunction that prevents secured and unsecured creditors from pursuing legal action against a debtor, including collections, once a Chapter 11 bankruptcy has been filed.

Chapter 11 bankruptcy: A reorganization procedure that can be used by a business (sole proprietors, partnerships and corporations). The debtor files a petition that lists all assets and liabilities, which includes a detailed statement of financial affairs. Usually, the debtor will act as his or her own trustee (see “debtor in possession”) and remains in possession of the estate property. If mismanagement is shown, the court can appoint a trustee to take over.

Claim: An assertion by a creditor stating a right to payment from the debtor at the time bankruptcy is filed.

Confirmation: The Bankruptcy Court’s approval of a repayment plan in a Chapter 11 case.

Creditors’ Committee: Appointed by the trustee and typically includes the seven largest unsecured creditors of the business filing bankruptcy. The committee helps to develop a Chapter 11 repayment plan and consults with the debtor in possession on various issues.

Creditors Meeting: Also called a 341a meeting, it is a meeting of creditors required by section 341 of the Bankruptcy Code during which the debtor is questioned under oath about the debtor’s financial matters by creditors, a trustee, an examiner or the U.S. trustee.

Debtor in possession: Where the debtor remains in possession of the estate property and performs some of the duties of a trustee. The debtor in possession must account for property, monitor and object to any claims relating to the case, and fill out all required paperwork. The debtor in possession is usually the owner or manager of the business filing under Chapter 11.

Discharge: A case filed under Chapter 11 is discharged by the court when the repayment and reorganization plan is confirmed. The debtor is released from all liability for debts filed under the plan in return for following the repayment plan.

Disclosure statement: This statement is filed with the reorganization plan and lists the parties-in-interest, the debtor’s business history and finances. The statement outlines how the debtor got into bankruptcy and how the plan will help get it out of bankruptcy.

Liquidation analysis: In order to justify a reorganization plan, the debtor must demonstrate that the creditors are better off by going forward with reorganization rather than under a simple liquidation of the debtor’s assets.

Monthly operating report: Debtors are required to file monthly reports with the U.S. Trustee’s Office that show receipts and disbursements, changes in its liability and asset picture, and verification that payments, such as taxes and insurance, are being made in a timely way.

Plan: This may be submitted by the debtor during the first four months after filing for protection. It is a proposal for getting out of debt (or bankruptcy). Creditors are allowed to vote on the plan. The plan is accompanied by a disclosure statement that describes the debtor’s financial circumstances.

Small-business debtor: A business with debts of $2 million or less is considered a small-business debtor if the trustee has not appointed a Creditors’ Committee. A small-business debtor is the only party allowed to propose a repayment or reorganization plan during the first 180 days after filing. Therefore, the case can move more quickly than a regular Chapter 11.

Trustee: Assigned by the court to oversee all matters related to the bankruptcy process. If the debtor remains in possession of the estate property (see “debtor in possession”) then the trustee monitors the debtor’s management of the business, the submission of reports, and all other details.

U.S. Trustee: An officer of the United States Justice Department who supervises the administration of bankruptcy cases, estates and trustees. The U.S. Trustee also monitors plans and disclosure statements, creditors’ committees, fee applications and other statutory duties.