In years past, Chapter 11 bankruptcy was only used by larger corporations, because it presented a complex form of bankruptcy protection. In more recent years, Chapter 11 has become a suitable option for businesses both large and small.
Chapter 11 is designed to help companies succeed long-term. It grants time and adjustments so the failing business can regroup and recover. The ultimate goal is for businesses to emerge from a Chapter 11 bankruptcy as a stronger, healthier organization. Alternatively, sometimes the goal may be to optimally shut down a business in an organized, most beneficial manner, especially when faced with very aggressive creditors.
While Chapter 11 bankruptcy is an excellent option for some small businesses, it is not an ideal solution for all businesses. Our experienced bankruptcy lawyers will review your individual financial circumstances to determine whether Chapter 11 bankruptcy is a good option for your business.
What is Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a reorganization of debt (or an organized shutdown) that is primarily used by businesses that need to restructure their finances. This form of bankruptcy provides a viable option for keeping a business open, while the company works to get itself back on track.
Like Chapter 13, the bankruptcy process works to reorganize debt to make it more manageable. The restructuring plan could include modifying existing interest rates, payment due dates, or amounts, and in some cases, it may erase debt entirely.
When filing for bankruptcy, the business must present a plan for debt repayment. This repayment plan may be accompanied by a business restructuring plan that is needed to support the debt repayment. This plan must be approved by the courts.
Advantages of Chapter 11
A big advantage of Chapter 11 is that it is not a liquidation of assets like Chapter 7 bankruptcy. Businesses can retain their assets and they do not need to sell off assets to pay creditors unless that is desired or necessary to come up with a practical plan.
Chapter 11 also allows businesses to continue normal operations while navigating through the bankruptcy process and while paying the outstanding debt.
Chapter 11 also provides an automatic stay that pauses the collection process so business owners can create a workable payment plan. This automatic stay will temporarily stop payment requests, eviction or foreclosures, bank levies, property seizures, and other collection processes that are causing strain on the business.
Disadvantages of Chapter 11
One of the largest disadvantages of Chapter 11 is time and complexity. The process of plan creation and court approval takes more time than other bankruptcy options. Another disadvantage of Chapter 11 is the need for profitability in the future. Debtors seeking to reorganize under chapter 11 must show a profitable operation when their debts and obligations are reorganized. However, as mentioned above, a Chapter 11 may also be used to sell off assets and liquidate in an orderly fashion, but the business remains in control as opposed to a Trustee in Chapter 7 cases.
Chapter 11 FAQs
While individuals and companies can file for bankruptcy without a lawyer, it is not advisable. A knowledgeable bankruptcy attorney can help you decide which form of bankruptcy is best for your busines and they can save you hours of research and costly processing mistakes.
Chapter 11 doesn’t require an ongoing source of income or debt-level limits. The same is not true for Chapter 13. A Chapter 13 bankruptcy requires a steady source of income that can be used to calculate what sort of monthly payment would be reasonable for you. Individuals whose debt exceeds the maximum limit for Chapter 13 may opt to file Chapter 11.
Your business can continue operating throughout Chapter 11 proceedings. The goal of a Chapter 11 bankruptcy is to stop collections activity to give the business time to work out a repayment plan with creditors and recover from the financial hardship it is currently facing.
Yes, although it is rare. Most individuals who file for Chapter 11 will do so because they have income or debts that exceed the allowable limits under Chapter 13 and Chapter 7.
The eligibility rules for Chapter 11 protection are:
- Can be an individual, partnership, corporation, or any other business entity.
- Must file a schedule of assets and liabilities, current income, current expenses, a schedule of contracts and leases, as well as a statement of financial affairs.
- If the debtor failed to appear in court, comply with court orders, or had a prior bankruptcy filing dismissed during the preceding 180 days, then the debtor cannot file for bankruptcy.
- Any individual attempting to file under Chapter 11 protection must have received credit counseling from an approved agency during the preceding 180 days.
Most Chapter 11 filings take between six months and two years.
The filing fee for Chapter 11 is $1,717. This does not include fees paid to your bankruptcy attorney.
Chapter 11 will have no direct impact on the payment of employee's earned wages. However, some employees may be laid off as a cost-cutting measure or as part of the restructuring of the business.
Businesses seeking to reorganize under chapter 11 must file documents with the bankruptcy court and this information will contain a substantial amount of financial information. These documents are public record, so they will be available to anyone who reviews the court files.
If you successfully complete your bankruptcy plan you will receive a discharge of debt. A discharge releases you from personal liability for certain dischargeable debts and some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on the unique facts and circumstances of each case.