What is Chapter 11 Bankruptcy?
Chapter 11 Bankruptcy is a type of bankruptcy designed to allow individuals with large debts and assets or businesses to reorganize their debts so that they can pay back debts in a more advantageous manner while the individual or business continues to operate.
A plan is structured to provide chapter 11 bankruptcy protection to reorganize debts or liquidate assets so that the debtor (the individual or business in the chapter 11) can continue to operate their business or, in some cases, liquidate the business. By keeping the business operating during financial distress, its assets are often worth more and can be sold for more, or the business itself can be sold for more, or its debts can be restructured in a more advantageous manner so that the business can continue to operate.
As you can imagine, Chapter 11 bankruptcies are very dynamic and vary significantly from case to case.
How Does chapter 11 Work?
There are a lot of complicated aspects of a Chapter 11 bankruptcy. Chapter 11 can be filed by individuals or corporate entities like a Corporation or Limited Liability Company. In a typical case, the U.S. Trustee, which is the enforcement and regulatory arm of the Justice Dept., will, in most cases appoint one or more committees to represent the interests of creditors and stockholders to work with the company to develop a plan of reorganization to get out of debt.
In an ideal Chapter 11 case, the plan would be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly.
While the company implements and complies with the bankruptcy plan, the normal management continues to run the day to day business operations. However, all significant business and financial decisions must still be approved by a bankruptcy court.
How Does Chapter 11 Work for Companies?
Chapter 11 allows a company or corporation to continue to operate while in bankruptcy. No debt caps are in place in a business bankruptcy Chapter 11, as in Chapter 7 and Chapter 13. The business retains its assets and operates under the supervision of the Court. If the management of the company is not effective, a Trustee may be appointed.
How Long Can a Company Stay in Chapter 11?
A company, individual, or corporation may remain in a Chapter 11 bankruptcy for as long as necessary to fulfill the terms of the plan of reorganization, which typically lasts six months to two years.
Why File Bankruptcy Chapter 11
A Chapter 11 bankruptcy is a good option for companies wishing to continue to operate while dealing with their creditors and for individuals who exceed the debt caps for Chapters 7 and/or 13. It is a costly bankruptcy and is, therefore, one of the least common filed. Now that Subchapter V of Chapter 11 is an option for many businesses, it will bring the costs down to more feasibly reorganize a company in chapter 11 bankruptcy.
What is Chapter 11 Bankruptcy Subchapter 5?
The Small business Reorganization Act (SBRA) was signed into law in April 2019. It created a new subchapter of Chapter 11 called subchapter V. Subchapter 5 allows businesses to file bankruptcy in a much more streamlined and cost-effective reorganization than a traditional Chapter 11 bankruptcy. This subchapter contains provisions and options that are not available under a normal Chapter 11 Bankruptcy. Subchapter V better enables small businesses to quickly and inexpensively move through the bankruptcy process.
Do I Qualify for Bankruptcy Chapter 11?
You or your business may qualify, but a consultation with a bankruptcy lawyer should be your first step. A Chapter 11 bankruptcy is a good solution for individuals debtors who have debts greater than the debt/asset cap of the Chapter 13 bankruptcy and for businesses that wish to continue operations and have the ability to negotiate with their creditors to create a reorganization plan. A consultation with our attorney can help you decide whether Chapter 11 is the right option for you.
What Is the Difference Between Chapter 7, 11, and 13?
A Chapter 7 bankruptcy is a liquidation bankruptcy, with no restructuring of debts and business cannot continue to operate. A trustee is appointed, and any non-exempt assets are liquidated.
Chapter 13 is a personal repayment bankruptcy where a monthly payment is made to a Trustee for three to five years. There is a debt cap on this bankruptcy, and incorporated businesses are not eligible to file Chapter 13 bankruptcy.
Individuals or companies can file a Chapter 11 bankruptcy, and a Trustee is not necessarily appointed. The debtor remains in possession of their assets and negotiates a reorganization plan with their creditors.
Chapter 7 is typically the least expensive, followed by Chapter 13, and with Chapter 11 being the most expensive and complicated.
Chapter 7 vs Chapter 11 Bankruptcy
In a Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate or sell the company’s assets, and the money is used to pay off the company’s debt, which may include debts to creditors and investors.
In Chapter 11 of the Bankruptcy Code, a company can reorganize its business and try to become profitable again. Management continues to run the day to day business operations, but all significant business decisions must be approved by a bankruptcy court.
Chapter 11 Bankruptcy vs Chapter 13
In Chapter 11, a company can reorganize its business and try to become profitable again. Management continues to run the day to day business operations, but all significant business decisions must be approved by a bankruptcy court.
Chapter 13 Bankruptcy is a must simpler and less complicated bankruptcy than a Chapter 11. Under Chapter 13 of the Bankruptcy Code, only an individual/person can file bankruptcy, not a corporation or individual company. Therefore, Chapter 13 is not available for most business situations.
How Long Does Chapter 11 Take?
There is no absolute requirement for a Chapter 11 bankruptcy. Some cases resolve in as little as two months, but most cases take between six months to two years.
How Long Will Chapter 11 Stay on My Credit Report?
A Chapter 11 bankruptcy will stay on your credit report for ten years.
How Often Can You File Chapter 11?
There is no limit to how often you can apply for and receive a discharge in a Chapter 11 bankruptcy. An individual Chapter 11 cannot be filed if a bankruptcy was dismissed under any chapter within the 180 days preceding the filing due to debtors:
- failure to appear before the court,
- failure to comply with court orders,
- or was voluntarily dismissed after a motion for relief from stay was filed by a secured creditor.
An individual may not file a Chapter 11 if credit counseling was received in the 180 days preceding the filing. There are emergency situations where there are exemptions for these situations.
Can Chapter 11 Stop Foreclosure?
Yes, Chapter 11 can stop foreclosure as it allows for negotiations with creditors, which could result in the mortgage lender modifying the loan.
Can I Keep My Car if I File Chapter 11?
Debtors in Chapter 11 bankruptcy can typically retain their assets and restructure the debts associated with secured collateral, so vehicle loans may be modified in order to keep the vehicle.
Chapter 11 Bankruptcy Requirements
Chapter 11 bankruptcies are filed by partnerships, LLCs, corporations, and a limited number of individuals. A Chapter 11 business case may be filed voluntarily by the company or involuntarily by agreement of a group of creditors owed by the debtor.
After a petition is filed, a reorganization plan is submitted for review by the creditor committee. The plan goes through confirmation with the court, where it is reviewed for
- feasibility—the likeliness of success;
- good faith—proposed with good intentions;
- in the best interests of the creditors—creditors have to receive payments equal to what they would receive if the assets were liquidated;
- and equitable and fair—every creditor is receiving their fair due.
Chapter 11 Bankruptcy Exemptions
Exemptions are limits of allowable assets that can be kept or retained through the bankruptcy process. Exemptions are placed on property to protect it through the bankruptcy process. The limits are set by federal or state law. An individual may keep or retain a limited amount of assets as allowed by the exemptions.
In a non-individual chapter 11 bankruptcy like a corporate bankruptcy, there are no allowable exemptions since the entity is not a person or individual, but rather is a business.
Chapter 11 Bankruptcy Schedules
The filing of the Chapter 11 bankruptcy schedules includes a list of all of the Debtor’s assets, debts, income, expenses, leases, co-debtors, and applicable laws protecting assets. The schedules in Chapter 11 bankruptcy are similar to the schedules in Chapter 7 and Chapter 13. However, they are different in that they provide much more data on business information.
There are some additional forms that are required to be filed in a Chapter 11 bankruptcy that are not necessary in Chapter 7 bankruptcy or Chapter 13 bankruptcy. To see examples of schedules visit the United States Courts bankruptcy forms page.
Is There a Trustee in Chapter 11?
Not necessarily. A Trustee is only appointed in cases where the Courts feel it necessary. The US Trustee oversees the case regardless if there is a Chapter 11 Trustee or not.
How does a Chapter 11 Trustee Get Paid?
There is a fee charged quarterly by the US Trustee’s Office for the overseeing of the Chapter 11 plan. The Chapter 11 Trustee would also be paid through the bankruptcy estate, should one be appointed.
What Is a Debtor-in-Possession Account?
After filing a chapter 11 bankruptcy, the debtor must close any existing bank accounts that it has possession or control of and open new bank accounts maintained pursuant to 11 U.S.C. section 363(c)(4). This statute provides the rules in which the bank accounts must be established and maintained. These new accounts are commonly called Debtor-in-possession accounts.
What Is the Absolute Priority Rule in Chapter 11?
The absolute priority rule is a linchpin concept of a Chapter 11 bankruptcy, which states that senior class debts have to be paid in full before equity holders or junior creditors can receive payment or distribution under the Chapter 11.
Who Gets Paid in Chapter 11?
The debts which are paid in Chapter 11 are negotiated amongst the Debtor and the Creditor’s Committee. Negotiations are made, and a reorganization plan is adopted, specifying the terms of the repayment. This varies significantly with each filing.
Do Chapter 11 Bankruptcies Get Discharged?
Yes, Chapter 11 bankruptcies receive discharges of debts which are eligible for discharge and were incurred pre-confirmation.
What are the steps in filing Chapter 11 bankruptcy?
There are multiple steps to filing Chapter 11 Bankruptcy depending on the case and fact pattern. Below is a very basic example:
- Pre-filing bankruptcy preparation
- Filing the petition
- 341 Hearing conducted by U.S. Trustee
- Filing the reorganization plan
- Negotiating with the creditors
- Adopting a reorganization plan
- Confirmation of the reorganization plan
- Fulfilling the terms of the plan
Benefits of Filing Bankruptcy Chapter 11
Ultimately, Chapter 11 bankruptcy offers some powerful tools to help an individual or struggling business continue to remain in possession of its assets and business operations while getting back on its feet. This type of bankruptcy is not just about cleaning up debt but rather putting it back on a profitable footing.
Finding solutions to complex financial problems can be challenging, so hiring an attorney with experience is an essential step to success. We have the knowledge and skill set necessary to guide individuals and businesses through a successful Chapter 11 proceeding. If you want to discuss your options or learn more, please contact us. We have been doing this for over 20 years and will make the consultation comfortable and easy while giving you the information you need to make an informed decision on your future.