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Chapter 11 bankruptcy

Chapter 11 of the Bankruptcy Code generally provides for reorganization—usually of a corporation or partnership. A chapter 11 debtor (bankrupt entity) usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in a chapter 11 bankruptcy filing.

In Texas, as in all states, Chapter 11 of the Federal Bankruptcy Code allows for the reorganization of a debtor's business affairs, debts, and assets. This provision is typically used by corporations and partnerships, but it is also available to individuals and sole proprietorships. Under Chapter 11, a debtor usually proposes a plan of reorganization to maintain business operations and pay creditors over a period of time. The process involves the debtor remaining in control of the business operations as a 'debtor in possession' and working to negotiate terms with creditors under the oversight of the bankruptcy court. The goal is to adjust the debtor’s debts to allow the business to continue while providing a way for creditors to be paid. Texas state law does not alter the federal bankruptcy process, but state laws, such as those governing exemptions and the treatment of certain debts, can impact the proceedings. It is important for those considering Chapter 11 bankruptcy in Texas to consult with an attorney who is experienced in federal bankruptcy law and familiar with Texas-specific considerations.

Texas Statutes & Rules

Texas Business Organizations Code - Title 7, Chapter 101.207
This statute is relevant because it outlines the rights of members and managers of a limited liability company (LLC) in the event of bankruptcy.

Under this section, unless the company's governing documents provide otherwise, a member or manager of an LLC does not cease to be a member or manager solely because of the member's or manager's bankruptcy. This provision ensures that the rights and obligations of LLC members and managers are not automatically altered due to a bankruptcy filing.

Texas Business Organizations Code - Title 2, Chapter 22.211
This statute is relevant as it addresses the effect of bankruptcy on a shareholder's rights in a corporation.

According to this section, a shareholder of a corporation does not lose their rights or status as a shareholder solely because of their bankruptcy. This statute is important for maintaining the stability of corporate governance and shareholder rights during the bankruptcy process.

Texas Tax Code - Title 2, Chapter 171.252
This statute is relevant because it discusses the dissolution of a taxable entity by the comptroller for nonpayment of taxes, which can be a concern for entities considering Chapter 11 bankruptcy.

This section allows the Texas Comptroller to dissolve a taxable entity if it does not pay its taxes. However, if the entity is under federal bankruptcy protection, the comptroller cannot dissolve it while the automatic stay of bankruptcy is in effect. This protection is crucial for entities undergoing reorganization under Chapter 11, as it allows them to address tax obligations through the bankruptcy plan without the immediate threat of dissolution.

Texas Property Code - Title 5, Chapter 55.002
This statute is relevant because it provides an exemption for personal property from seizure for claims of creditors, which may be pertinent to individuals filing for Chapter 11 bankruptcy.

This section lists the types and amounts of personal property that are exempt from seizure by creditors, including home furnishings, farm tools, and certain livestock, among others. These exemptions are important for individuals in Chapter 11 bankruptcy because they allow debtors to retain essential property while reorganizing their debts.

Texas Finance Code - Title 3, Chapter 34.203
This statute is relevant as it pertains to the effect of bankruptcy on the rights of secured creditors.

Under this section, a secured creditor retains the right to enforce their security interest or lien against a debtor in bankruptcy, subject to the provisions of the federal Bankruptcy Code. This statute recognizes the rights of secured creditors in the context of a debtor's bankruptcy and underscores the interplay between state law and federal bankruptcy proceedings.

Federal Statutes & Rules

11 U.S.C. Chapter 11 - Reorganization
This chapter of the United States Code provides the legal framework for the reorganization of businesses facing bankruptcy, which can include corporations, partnerships, and individuals with substantial debts.

Chapter 11 of the Bankruptcy Code is designed to allow for the reorganization of a debtor's business affairs, debts, and assets. It enables a debtor to propose a plan to keep the business operational while paying creditors over a period of time. The process is initiated by filing a petition in bankruptcy court. The debtor (referred to as the 'debtor in possession') retains control of the business operations but must operate under the oversight of the court. A trustee may be appointed if there is cause, such as fraud or incompetence. The debtor has an exclusive period in which to propose a reorganization plan, after which creditors may also propose plans. The plan must be voted on by creditors and confirmed by the court. It typically involves downsizing business operations to reduce expenses, renegotiating debts, and sometimes liquidating a portion of the assets to pay creditors. Upon confirmation of the plan, the debtor is bound to the payment plan and, upon completion, most remaining debts are discharged. However, if the plan is not confirmed, the case may be converted to a Chapter 7 liquidation or dismissed.

11 U.S.C. § 1121 - Who May File a Plan
This section specifies who is eligible to file a reorganization plan under Chapter 11 and the exclusivity period for the debtor to propose a plan.

Under 11 U.S.C. § 1121, the debtor has an exclusive right to file a reorganization plan within 120 days after the date of the order for relief under this chapter. This period may be extended or reduced by the court. However, the court may not extend this period beyond 18 months. After the exclusivity period, or if the exclusivity period is waived, creditors and other parties in interest may propose reorganization plans. The debtor also has the exclusive right to solicit acceptances for the plan during the first 180 days after the order for relief, which the court may extend up to 20 months. This exclusivity period allows the debtor an opportunity to negotiate with creditors and formulate a plan without competing plans being presented simultaneously.

11 U.S.C. § 1123 - Contents of Plan
This section outlines what must be included in a Chapter 11 reorganization plan.

Section 1123 of the Bankruptcy Code dictates the mandatory and discretionary provisions of a Chapter 11 plan. The plan must designate classes of claims and interests, specify any class that is not impaired under the plan, and provide the same treatment for each claim within a particular class. It must also provide adequate means for the plan's execution. Discretionary provisions may include curing or waiving of any default, provisions for the management of the reorganized debtor, and any other necessary components to the reorganization. The plan must also comply with the applicable provisions of the Bankruptcy Code to be confirmed by the court.

11 U.S.C. § 1129 - Confirmation of Plan
This section sets forth the requirements for the confirmation of a Chapter 11 reorganization plan by the bankruptcy court.

Section 1129 stipulates the conditions under which a reorganization plan may be confirmed by the court. The plan must be feasible, proposed in good faith, and in the best interests of creditors. Each class of claims must either accept the plan or receive at least as much as they would under a Chapter 7 liquidation. The plan must provide for the payment of priority claims in full unless agreed otherwise. Administrative and tax claims must be paid as well, typically over a period of up to six years from the date of assessment. The debtor must be able to commence payments as required by the plan. If all requirements are met and the plan is fair and equitable, the court will confirm the plan. If the plan is not accepted by all classes of creditors, it may still be confirmed through a process known as 'cramdown,' if it does not discriminate unfairly and is fair and equitable with respect to each dissenting class.