Filing a Chapter 11 petition grants a debtor what is known as an automatic stay from the enforcement actions of creditors. This precludes creditors from continuing collection efforts, from bringing a lawsuit, or from filing liens against property or foreclosing on property.
In Chapter 11, a debtor generally remains in control of their estate. A trustee may be appointed for cause (i.e., fraud, dishonesty, incompetence or gross mismanagement) or if such appointment is in the best interest of creditors; however, this relief is relatively rare. A Chapter 11 debtor-in-possession generally has the same rights as a trustee would have if appointed, thus any reference to rights or authority of a debtor would apply to a trustee, if appointed, as well.
Who Can File A Plan
There is no specific time for filing a plan; however, the debtor initially has an exclusive period to file a plan and disclosure statement. This period may be extended or reduced by court order. After the exclusive period expires, a creditor or the case trustee, if one is appointed, may file a plan. The debtor’s exclusive right to file a plan is an incentive for the debtor to act promptly and file a plan.
Benefits of Chapter 11:
A debtor has usually chosen to file for protection under Chapter 11 of the Bankruptcy Code because of pressures from creditors that the debtor is unable to cope with. Immediately upon filing, a stay of creditor actions against the debtor automatically goes into effect. This stay, referred to as the “automatic stay” provides the debtor a breathing spell during which the debtor can attempt to resolve its financial problems and put together a plan of reorganization. The automatic stay will stay pending court actions against the debtor, non-judicial collection efforts and the imposition or enforcement of liens or other encumbrances against the debtor’s property. The automatic stay will not apply to stop actions or proceedings by a governmental unit to enforce such unit’s police or regulatory powers. Another important feature of Chapter 11 is that once a plan of reorganization is approved by the bankruptcy court, such plan will bind all creditors of the debtor and discharge the debtor from any claims arising prior to the bankruptcy. This “discharge” feature of bankruptcy gives the Chapter 11 debtor a fresh start, subject to the debtor’s fulfillment of its obligations under its plan of reorganization. Creditors are permanently enjoined or stopped from seeking to enforce any pre-petition claims or rights against the debtor.