What is the primary purpose of Chapter 11 of the United States Bankruptcy Code?

Chapter 11 of the United States Bankruptcy Code provides a legal framework for the reorganization of businesses and, in some cases, individuals. It allows entities that are unable to service their debts or pay their creditors to restructure their financial obligations and operations under the protection of the federal bankruptcy court, aiming for a path to continued viability rather than immediate liquidation.

How does Chapter 11 bankruptcy differ from Chapter 7 and Chapter 13 bankruptcy?

Chapter 11 is primarily used for the reorganization of businesses, although individuals can also use it. In contrast, Chapter 7 governs the liquidation of assets for businesses and individuals, where a trustee sells off assets to pay creditors. Chapter 13 is specifically designed for individuals with regular income to reorganize their debts through a repayment plan, typically involving lower debt limits than Chapter 11.

Who is eligible to file for Chapter 11 bankruptcy?

Chapter 11 bankruptcy is available to a wide range of entities, including any business regardless of its structure, such as corporations, partnerships, and sole proprietorships. It is also available to individuals, though it is most commonly utilized by corporate entities seeking to reorganize.

What are the main potential outcomes for a business filing for Chapter 11 bankruptcy?

A Chapter 11 bankruptcy case can result in one of three primary outcomes for the debtor: successful reorganization, conversion to a Chapter 7 liquidation bankruptcy, or dismissal of the case. The goal is typically reorganization, but liquidation or dismissal are also possibilities depending on the circumstances and the feasibility of a reorganization plan.

What does it mean for a business to be a 'debtor in possession' under Chapter 11?

In most Chapter 11 cases, the existing management of the business continues to operate its day-to-day operations. This entity is known as the 'debtor in possession' (DIP), and it functions similarly to a trustee, managing the business under the supervision and jurisdiction of the bankruptcy court. This allows the business to maintain continuity while it attempts to reorganize.

What is a plan of reorganization in Chapter 11 bankruptcy?

A plan of reorganization is a formal proposal filed with the bankruptcy court that outlines how the debtor intends to restructure its debts and operations to become financially viable again. It represents a compromise among the major stakeholders, including the debtor and its creditors, and must be confirmed by the court to take effect.

What are the key requirements for a Chapter 11 plan of reorganization to be confirmed by the court?

For a Chapter 11 plan to be confirmed, the bankruptcy court must conclude that the plan complies with applicable laws, was proposed in good faith, and is feasible. Feasibility means the plan is not likely to be followed by further reorganization or liquidation, ensuring the reorganized entity can sustain itself.

How does a Chapter 11 reorganization typically affect the debtor corporation's debt and equity structure?

During a Chapter 11 reorganization, the debtor corporation is often recapitalized, meaning its debt and equity structure is altered. This process typically involves reducing debt and increasing equity, which can lead to the discharge of certain debts and a redistribution of ownership interests to various investor groups, often based on a valuation of the reorganized business.

Why is bankruptcy valuation often a contentious issue in Chapter 11 cases?

Bankruptcy valuation is frequently contentious because it is inherently subjective and significantly impacts case outcomes, particularly regarding how equity and other entitlements are distributed. The methods used for valuation often draw from investment banking and corporate finance but can be complex and lead to disputes among stakeholders.

What is the role of the trustee in a Chapter 11 case?

While the debtor usually acts as the 'debtor in possession' and operates the business, a separate trustee can be appointed for cause. If appointed, the trustee takes over the management of the business operations, similar to how a trustee operates in a Chapter 7 liquidation, to preserve the estate and manage the reorganization process.

What mechanisms does Chapter 11 provide to help debtors restructure their business?

Chapter 11 offers several tools for restructuring, including the ability for the debtor in possession to obtain new financing with priority status, reject and cancel burdensome contracts, and benefit from an automatic stay that halts creditor collection attempts and most litigation against the business.

What is the 'automatic stay' in bankruptcy, and how does it function in Chapter 11?

The automatic stay is a legal injunction that automatically goes into effect when a bankruptcy petition is filed. In Chapter 11, it requires all creditors to cease collection efforts, foreclosures, and most legal actions against the debtor or its property. This protection allows the debtor breathing room to reorganize without immediate pressure from creditors.

Can creditors seek relief from the automatic stay?

Yes, creditors can petition the bankruptcy court to terminate, annul, or modify the automatic stay. The court may grant such relief if it is necessary to balance the interests of the debtor, the estate, and the creditors, allowing for certain actions to proceed if they are deemed appropriate under the specific circumstances.

What happens to a company's owners if the business is insolvent and reorganizes under Chapter 11?

If a company is insolvent (its debts exceed its assets) and it reorganizes under Chapter 11, the original owners' rights and interests may be terminated. In such cases, the company's creditors may become the new owners of the reorganized entity, effectively taking control from the previous shareholders.

What is the 'period of exclusivity' in Chapter 11, and who benefits from it?

The period of exclusivity is a timeframe, typically 120 days from filing, during which only the debtor has the right to propose a plan of reorganization. If the debtor files a plan within this period, an additional 60 days (totaling 180 days) is granted to seek confirmation. This period is designed to give the debtor a primary opportunity to craft a viable reorganization plan.

What is 'cramdown' in the context of Chapter 11 plan confirmation?

Cramdown is a legal mechanism that allows a Chapter 11 plan to be confirmed even if a class of creditors objects. To achieve cramdown, the plan must not unfairly discriminate against the objecting class, and it must be deemed fair and equitable to that class, meaning their legal rights are respected and they receive at least the value of their claims.

What are the consequences if a Chapter 11 plan cannot be confirmed?

If a Chapter 11 plan cannot be confirmed, the bankruptcy court has two main options: it can convert the case into a Chapter 7 liquidation, where a trustee will sell off the remaining assets, or it can dismiss the case. Dismissal typically returns the parties to their pre-bankruptcy positions, and creditors must then pursue their claims under non-bankruptcy law.

What is the role of a disclosure statement in the Chapter 11 confirmation process?

Before creditors can vote on a proposed Chapter 11 plan, the bankruptcy court must approve a disclosure statement. This document provides creditors with adequate information about the plan and the debtor's financial situation, enabling them to make an informed decision when voting on whether to accept the plan.

Why have airlines frequently used Chapter 11 bankruptcy, according to the text?

The text notes that airlines have often used Chapter 11 as a tool to escape burdensome labor contracts, which can represent a significant portion of their operating costs. This has led to criticism and claims that Chapter 11 has been exploited to circumvent employee agreements.

What is the general priority scheme for claims in Chapter 11 bankruptcy?

Chapter 11 generally follows the priority scheme outlined in Section 507 of the Bankruptcy Code. Administrative expenses incurred during the bankruptcy case are typically paid first. Secured creditors, who have collateral backing their claims, are paid before unsecured creditors. Among unsecured creditors, certain priority claims (like those for wages or taxes) are paid before general unsecured claims.

What specific protection does Section 1110 of the Bankruptcy Code offer to secured parties?

Section 1110 provides secured parties with an interest in aircraft, aircraft engines, or related parts with the right to repossess their collateral within 60 days of a bankruptcy filing, unless the airline debtor cures all defaults. This provision allows these secured lenders to bypass the automatic stay if the debtor does not meet specific conditions.

What is Subchapter V of Chapter 11, and who is it intended for?

Subchapter V, added by the Small Business Reorganization Act of 2019, is a specialized part of Chapter 11 designed exclusively for 'small business debtors.' Its purpose is to expedite bankruptcy procedures and make resolutions more economical for smaller businesses, offering advantages over traditional Chapter 11 without excessive costs and burdens.

How does Subchapter V differ from traditional Chapter 11 regarding trustees and creditor committees?

In Subchapter V cases, a 'Subchapter V trustee' is appointed to supervise estate funds and facilitate plan development. Unlike traditional Chapter 11, Subchapter V generally eliminates the automatic appointment of an official committee of unsecured creditors, simplifying the process and reducing costs.

What is a key benefit for small business owners under Subchapter V of Chapter 11?

A significant benefit of Subchapter V is that it allows the small business owner to retain their equity in the business, provided the reorganization plan does not unfairly discriminate and is fair and equitable to all classes of claims and interests. This contrasts with traditional Chapter 11 where owners might lose their stake.

What are 'pre-packaged bankruptcies' in the context of Chapter 11?

A pre-packaged bankruptcy, or pre-planned approach, involves the debtor negotiating and agreeing upon a reorganization plan with its creditors *before* formally filing for Chapter 11 protection. This can significantly speed up the process, as many key agreements are already in place, allowing the company to emerge from court protection more quickly.

What does it mean for a company to operate under the 'protection' of the court in Chapter 11?

Operating under court protection in Chapter 11 means the company is shielded from immediate creditor actions by the automatic stay. This protection allows the business to continue operating, negotiate with creditors, and attempt to reorganize its finances and operations without the threat of lawsuits or asset seizures, under the court's oversight.

What has been the trend in the frequency of Chapter 11 filings?

The text indicates that Chapter 11 cases saw a significant drop, decreasing by 60% from 1991 to 2003. This decline has been attributed to businesses increasingly turning to faster, less expensive, and more private bankruptcy-like proceedings under state law, although another study suggested the drop might be due to misclassification of consumer cases as business cases.

Which entity filed the largest bankruptcy case in history according to the provided data?

According to the data presented, Lehman Brothers Holdings Inc. filed the largest bankruptcy case in history, listing $639 billion in assets at the time of its Chapter 11 filing in 2008. This event was a significant moment in the global financial crisis.

What happened to some of the largest companies that filed for Chapter 11 bankruptcy, such as Lehman Brothers and Enron?

The text notes that some of the largest companies that filed for Chapter 11, including Enron, Lehman Brothers, MF Global, and Refco, ceased operations entirely. Others were acquired by different entities, or they successfully emerged from bankruptcy as reorganized companies, sometimes under a similar name.

What is the significance of the 'Assets adjusted to the year 2012' column in the table of largest cases?

The 'Assets adjusted to the year 2012' column in the table provides a historical perspective on the scale of these bankruptcies by adjusting their pre-filing asset values to reflect the purchasing power of the US dollar in 2012. This adjustment helps in comparing the relative size of bankruptcies filed in different years.

What does the '#' symbol next to some company names in the 'Largest cases' table signify?

The '#' symbol next to company names in the 'Largest cases' table indicates that these companies did not emerge from Chapter 11 bankruptcy. This means they either ceased operations, were liquidated, or underwent a significant restructuring that fundamentally changed their corporate identity or business model.

What is the purpose of the 'See also' section in the article?

The 'See also' section provides links to related topics and concepts that are relevant to Chapter 11 bankruptcy. It serves as a navigational tool, allowing readers to explore broader areas such as different types of insolvency proceedings in other countries, specific legal concepts, or lists of companies that have filed for bankruptcy.

What is the role of the U.S. Trustee Program in bankruptcy proceedings?

The U.S. Trustee Program, mentioned in the sidebar, oversees the administration of bankruptcy cases. It ensures that bankruptcy laws are followed, monitors the activities of debtors and trustees, and maintains the integrity of the bankruptcy system. In Subchapter V cases, a specific Subchapter V trustee is appointed under the program's supervision.

What is the 'means test' in the context of US bankruptcy law?

The 'means test' is a legal determination used in US bankruptcy law, primarily for consumer bankruptcies, to assess a debtor's ability to repay their debts. It helps determine whether an individual qualifies for Chapter 7 liquidation or must pursue a Chapter 13 reorganization, based on their income relative to the state median.

What is a 'debtor in possession financing' and why might it be unavailable during an economic recession?

Debtor in possession (DIP) financing is a type of loan provided to a company undergoing Chapter 11 bankruptcy, allowing it to continue operations. It may be unavailable during an economic recession because lenders perceive a higher risk of default when the overall economy is weak, making it harder for distressed companies to secure the necessary funding.

What is the 'anti-deprivation rule' mentioned in the context of bankruptcy law?

The anti-deprivation rule is a legal principle in bankruptcy that prevents parties from contracting around the bankruptcy laws by stipulating that a contract will terminate or be forfeited upon the bankruptcy of a party. It ensures that bankruptcy laws, rather than private agreements, govern the distribution of assets in insolvency.

What is the difference between a 'secured creditor' and an 'unsecured creditor'?

A secured creditor holds a claim backed by collateral, such as a mortgage on a property or a lien on equipment. If the debtor defaults, the secured creditor has a right to seize and sell the collateral to satisfy the debt. An unsecured creditor, conversely, does not have specific collateral backing their claim, making them generally lower in priority for repayment.

What is the purpose of the 'automatic stay' in relation to creditors?

The automatic stay serves to protect the debtor by halting all collection actions by creditors. This means creditors cannot initiate or continue lawsuits, garnish wages, repossess property, or otherwise attempt to collect debts from the moment a bankruptcy petition is filed, providing a crucial period of respite for the debtor.

What does it mean for a contract to be 'executory' in bankruptcy law?

An executory contract is a contract where both parties still have significant obligations to perform. In bankruptcy, the debtor (or trustee) must decide whether to assume these contracts, continuing their performance, or reject them, treating the breach as a pre-petition claim.

What are 'priority claims' in bankruptcy?

Priority claims are certain types of debts that are given preferential treatment in bankruptcy proceedings, meaning they must be paid before general unsecured claims. Examples include administrative expenses, certain taxes, and wages owed to employees, as defined by Section 507 of the Bankruptcy Code.

What is the significance of the 'filing court district' in the table of largest cases?

The 'filing court district' indicates the specific federal bankruptcy court where the company filed its Chapter 11 petition. This is important because different districts may have unique local rules and practices that can influence the proceedings and outcomes of a bankruptcy case.

What does the term 'debtor' refer to in the context of bankruptcy?

In bankruptcy law, a 'debtor' is the individual or entity that files for bankruptcy protection. This entity owes money to creditors and seeks to resolve its financial obligations through the bankruptcy process, whether it be reorganization or liquidation.

What is the 'absolute priority rule' mentioned in relation to bankruptcy claims?

The absolute priority rule is a principle in bankruptcy that dictates the order in which creditors are paid. It requires that senior classes of creditors must be paid in full before any junior classes (including equity holders) can receive any distribution. This rule is a key factor in the confirmation of reorganization plans.

What is the difference between a 'reorganization' and a 'liquidation' in bankruptcy?

Reorganization, as seen in Chapter 11, aims to restructure a business's debts and operations to allow it to continue functioning. Liquidation, typically under Chapter 7, involves selling off all the debtor's assets to pay creditors, after which the business usually ceases to exist.

What is the purpose of the '722 redemption' mentioned in the 'See also' section?

Section 722 of the Bankruptcy Code, often referred to as the 'redemption' provision, allows debtors in Chapter 7 cases to redeem certain personal property securing a debt by paying the creditor the amount of the allowed secured claim or the fair market value of the property, whichever is less. This allows debtors to keep essential personal property by paying its value rather than the full debt.

What does 'pari passu' mean in a financial context, particularly related to bankruptcy?

Pari passu is a Latin term meaning 'on equal footing.' In finance and bankruptcy, it signifies that creditors or debt instruments are treated equally, with no priority over one another. If debts are ranked pari passu, they share proportionally in any available assets or recovery.

What is a 'scheme of arrangement' in the context of insolvency law?

A scheme of arrangement is a legal process, often used in the UK and other Commonwealth jurisdictions, that allows a company to reach a compromise or arrangement with its creditors and/or members. It is an alternative to formal insolvency proceedings like liquidation and requires court approval.

What is the function of a 'bankruptcy trustee'?

A bankruptcy trustee is appointed to administer a bankruptcy estate. Their duties typically include gathering and liquidating the debtor's non-exempt assets, distributing the proceeds to creditors according to legal priorities, and overseeing the debtor's compliance with bankruptcy rules. In Chapter 11, the debtor often acts as the trustee (debtor in possession), unless a separate trustee is appointed.

What is the 'United States Trustee Program'?

The United States Trustee Program is a component of the Department of Justice that oversees the administration of bankruptcy cases nationwide. It ensures the efficiency and integrity of the bankruptcy system by monitoring debtors, trustees, and other parties involved in bankruptcy proceedings.

What is the 'Federal Rules of Bankruptcy Procedure' (FRBP)?

The Federal Rules of Bankruptcy Procedure (FRBP) are a set of rules that govern the procedural aspects of bankruptcy cases filed in federal bankruptcy courts in the United States. They work in conjunction with the Bankruptcy Code (Title 11) to provide a comprehensive framework for bankruptcy proceedings.

Chapter 11 Title 11 United States Code Wiki: Chapter 11 Reorganization: A Legal and Financial Framework

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Chapter 11 Overview

Legal Framework

Chapter 11 of the United States Bankruptcy Code (Title 11 of the U.S. Code) provides a mechanism for the reorganization of businesses and, less commonly, individuals. It is primarily utilized by corporate entities seeking to restructure their debts and operations to continue as a going concern.

Reorganization vs. Liquidation

Unlike Chapter 7, which mandates the liquidation of assets, Chapter 11 focuses on rehabilitation. While liquidation can occur under Chapter 11, its core purpose is to allow a debtor to propose and confirm a plan of reorganization, enabling the business to emerge from bankruptcy with a restructured financial and operational framework.

Court Oversight

Chapter 11 proceedings are overseen by federal bankruptcy courts. The debtor typically remains in control of its business operations as a "debtor in possession" (DIP), subject to court supervision and the jurisdiction of the court throughout the process.

Key Features of Reorganization

Debtor in Possession (DIP)

In most Chapter 11 cases, the existing management continues to operate the business as a debtor in possession. This allows for continuity and leverages existing knowledge, though a trustee may be appointed for cause.

DIP Financing

Debtors in possession can obtain new financing, often with priority status, to fund operations during the bankruptcy process. This is crucial for maintaining business viability and facilitating reorganization.

Contract Rejection

Chapter 11 provides mechanisms for the debtor to reject or cancel burdensome executory contracts and unexpired leases, subject to court approval, allowing for the shedding of unfavorable obligations.

The Reorganization Plan

Purpose of the Plan

A Chapter 11 plan is a comprehensive agreement among stakeholders—the debtor, creditors, and equity holders—outlining how the business will be restructured and debts will be handled. It is the central document guiding the case towards resolution.

Exclusivity Periods

Typically, the debtor has an exclusive period (initially 120 days, extendable) to propose a plan. If the debtor fails to do so, or if confirmation is not achieved within a subsequent period (initially 180 days), other parties in interest may propose competing plans.

Creditor Acceptance

For a plan to be confirmed, it generally requires acceptance by classes of creditors and equity holders whose rights are impaired by the plan. Acceptance thresholds are typically a majority in number and two-thirds in amount of claims voting.

Plan Confirmation

Court Approval

The bankruptcy court must approve a disclosure statement providing adequate information for creditors to make an informed decision about the plan before solicitation of votes. The court then holds a confirmation hearing.

Feasibility and Good Faith

Confirmation requires the court to find that the plan complies with bankruptcy law, was proposed in good faith, and is feasible—meaning the debtor is likely to succeed in its reorganization efforts without further need for bankruptcy proceedings.

Cramdown

Even if a class of creditors votes against the plan, the court may still confirm it if the plan meets "cramdown" requirements: it must not discriminate unfairly against that class and must be fair and equitable to them.

Automatic Stay

Protection from Creditors

Upon filing a Chapter 11 petition, an automatic stay immediately goes into effect. This injunction halts most collection actions, lawsuits, and foreclosures against the debtor or its property, providing breathing room for reorganization.

Relief from Stay

Creditors can petition the court for relief from the automatic stay if they can demonstrate cause, such as lack of adequate protection for their interest in collateral or if the debtor is not meeting its obligations.

Executory Contracts

Assumption or Rejection

Section 365 of the Bankruptcy Code allows the debtor-in-possession to assume (continue) or reject (terminate) executory contracts and unexpired leases. This power is critical for shedding unprofitable agreements.

Industry Impact

The ability to reject contracts, particularly labor agreements, has been a significant feature of Chapter 11 filings in industries like airlines, leading to debates about its impact on labor relations and corporate governance.

Priority of Claims

Administrative Expenses

The actual and necessary expenses incurred to preserve the bankruptcy estate during the Chapter 11 case are paid first. This includes costs of administration and professional fees.

Secured vs. Unsecured

Secured creditors, whose claims are backed by collateral, are generally paid before unsecured creditors. Unsecured claims are then paid according to statutory priorities, such as employee wages and taxes, before general unsecured claims.

Subchapter V

Small Business Reorganization Act (SBRA)

Added in 2019, Subchapter V streamlines Chapter 11 for small businesses. It aims to expedite procedures, reduce costs, and increase the likelihood of successful reorganization.

Key Provisions

Subchapter V reserves plan proposal rights for the debtor, mandates a Subchapter V trustee to facilitate the process, eliminates creditor committees, and allows owners to retain equity if the plan is fair and equitable.

Strategic Considerations

Time and Cost

Chapter 11 proceedings can be lengthy and expensive, potentially limiting the chances of success, especially during economic downturns when DIP financing may be scarce.

Pre-packaged Filings

A "pre-packaged" bankruptcy involves negotiating and obtaining creditor approval for a reorganization plan *before* filing Chapter 11. This can significantly expedite the process and reduce costs.

Industry Impact

The airline industry has frequently utilized Chapter 11, often to restructure labor contracts and debt. This has led to significant debate about the use of bankruptcy as a strategic tool.

Statistics and Trends

Filing Frequency

Chapter 11 filings have seen fluctuations over time. Some studies suggest a decline in traditional filings may be linked to an increase in state-law alternatives, while others point to classification issues in reporting.

Largest Cases

The scale of Chapter 11 cases can be immense. Historically, major financial institutions and corporations like Lehman Brothers, Washington Mutual, and General Motors have filed, involving hundreds of billions of dollars in assets.

Company	Filing Date	Assets (Pre-filing)	Assets (Adjusted to 2012)
Lehman Brothers Holdings Inc.	15 Sep 2008	$639.06B	$933B
Washington Mutual	26 Sep 2008	$327.91B	$479B
Worldcom Inc.	21 Jul 2002	$103.91B	$182B
General Motors Corp.	1 Jun 2009	$82.30B	$121B
CIT Group	1 Nov 2009	$71.02B	$104B
Enron Corp.	2 Dec 2001	$63.39B	$113B
Conseco, Inc.	18 Dec 2002	$61.39B	$107B
MF Global	31 Oct 2011	$41.00B	$57.3B
Chrysler LLC	30 Apr 2009	$39.30B	$57.6B
Texaco, Inc.	12 Apr 1987	$35.89B	$99.3B

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References

11 U.S.C. Â§ 1129

11 U.S.C. Â§ 1107

11 U.S.C. Â§ 1121

A full list of references for this article are available at the Chapter 11, Title 11, United States Code Wikipedia page

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Chapter 11 Unveiled

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Chapter 11 Overview ℹ️

⚖️ Legal Framework

🔄 Reorganization vs. Liquidation

🏛️ Court Oversight

Key Features of Reorganization 🔑

💼 Debtor in Possession (DIP)

💰 DIP Financing

📜 Contract Rejection

The Reorganization Plan 📝

🎯 Purpose of the Plan

⏳ Exclusivity Periods

🗳️ Creditor Acceptance

Plan Confirmation ✅

🧐 Court Approval

🤝 Feasibility and Good Faith

⚖️ Cramdown

Automatic Stay 🛡️

🛑 Protection from Creditors

⚖️ Relief from Stay

Executory Contracts 📄

✂️ Assumption or Rejection

✈️ Industry Impact

Priority of Claims 🥇

⬆️ Administrative Expenses

🔒 Secured vs. Unsecured

Subchapter V 🚀

📈 Small Business Reorganization Act (SBRA)

🧑‍💼 Key Provisions

Strategic Considerations 🤔

⏱️ Time and Cost

💡 Pre-packaged Filings

📊 Industry Impact

Statistics and Trends 📈

📉 Filing Frequency

💰 Largest Cases

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References

📜 References

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Disclaimer ⚠️

📜 Important Notice

Dive in with Flashcard Learning!

Chapter 11 Overview

Legal Framework

Reorganization vs. Liquidation

Court Oversight

Key Features of Reorganization

Debtor in Possession (DIP)

DIP Financing

Contract Rejection

The Reorganization Plan

Purpose of the Plan

Exclusivity Periods

Creditor Acceptance

Plan Confirmation

Court Approval

Feasibility and Good Faith

Cramdown

Automatic Stay

Protection from Creditors

Relief from Stay

Executory Contracts

Assumption or Rejection

Industry Impact

Priority of Claims

Administrative Expenses

Secured vs. Unsecured

Subchapter V

Small Business Reorganization Act (SBRA)

Key Provisions

Strategic Considerations

Time and Cost

Pre-packaged Filings

Industry Impact

Statistics and Trends

Filing Frequency

Largest Cases

Teacher's Corner

True or False?

Test Your Knowledge!

Gamer's Corner

Discover other topics to study!

References

Feedback & Support

Disclaimer

Important Notice