Are you feeling the weight of your debt payments and struggling to make ends meet? Debt can drastically increase stress as creditors come calling, interrupting business operations and daily life. In some cases, you might simply be unable to repay the debts you owe. If so, Chapter 11 bankruptcy could be a way to start fresh.
While bankruptcy might be the right option in some cases, you shouldn’t take this decision lightly. Filing for bankruptcy in the U.S. incurs its own set of costs (and headaches). Before filing a chapter 11 bankruptcy case, familiarize yourself with the pros and cons of this reorganization option as well as alternatives that could be a better fit.
What is Chapter 11 bankruptcy?
A Chapter 11 bankruptcy helps businesses and individuals reorganize their debts and pay creditors over time. With this type of bankruptcy, businesses and individuals keep control of their assets and create a new plan to pay off their creditors.
However, the court maintains oversight and will intervene if it feels that the debtor is unable to manage the business effectively or has demonstrated unethical business practices. A bankruptcy trustee is often appointed to make recommendations to the court or managing debtor payments.
Chapter 11 bankruptcy is less common than Chapter 7 or Chapter 13 bankruptcy. However, with the impact of the COVID-19 pandemic on businesses in the U.S., the number of Chapter 11 bankruptcy increased year over year to 7,568 filings in 2020.
Who is eligible for Chapter 11 bankruptcy?
Most Chapter 11 bankruptcy cases are filed by businesses. However, both businesses and individuals are eligible to file. This includes corporations, limited liability companies, partnerships, sole proprietors, and individuals (including married couples).
Chapter 11 is usually sought after in situations where a company has too much debt to operate properly. Reorganization focuses on presenting a plan to restructure finances and finding a practical way to repay debts over a set period of time.
What type of debt is eligible for discharge under Chapter 11?
The goal of Chapter 11 bankruptcy is to reorganize debts and pay creditors over time.
When a reorganization plan is made, the original debt agreement is discharged. The debtor is now responsible for making payments under the new repayment plan. This can mean that the debtor ultimately pays less than was originally owed.
Some debts can’t be discharged with a new repayment plan. This includes child support, alimony, certain taxes, secured loans, student loans, and debts for injury caused by driving under the influence.
Secured debts such as car loans or mortgages may still be considered in the bounds of a Chapter 11 filing. Outstanding balances may be extended to a greater payment period or interest rates adjusted to make the repayment more feasible for the debtor. When it comes to unsecured debts like credit cards or outstanding personal loans, creditors are likely to involve themselves in Chapter 11 bankruptcy hearings.
How much does Chapter 11 bankruptcy cost?
Filing for Chapter 11 bankruptcy is more expensive than filing for Chapter 7 or 13. When filing, debtors must pay a $1,167 case filing fee and a $550 miscellaneous administrative fee. This is in addition to attorney fees, which can become quite costly due to the time and complexity of these cases.
In comparison, the fees for filing Chapter 7 bankruptcy are $335, and the fees for filing Chapter 13 bankruptcy are $310. It’s best to hire a bankruptcy attorney to help with all types of bankruptcy filings.
How is Chapter 11 bankruptcy different from Chapter 7 bankruptcy?
The goal of Chapter 7 bankruptcy is to liquidate non-exempt assets to pay creditors. Under Chapter 7, once a debtor’s assets have been liquidated, the remaining debt will be discharged.
Unlike Chapter 7 bankruptcy, the goal of Chapter 11 bankruptcy is to reorganize debts and create a new payment plan to satisfy their creditors. This helps the debtor keep their assets and, if they are a business, remain in operation while paying off debt over time (usually 3-5 years).
How is Chapter 11 bankruptcy different from Chapter 13 bankruptcy?
Chapter 11 and Chapter 13 have similar goals. Both aim to help the debtor keep their assets and create a new payment plan so that creditors still receive at least a portion of their money.
Aside from those similarities, there are a couple of key differences.
Both businesses and individuals can file for Chapter 11 bankruptcy. Only individuals can file for Chapter 13 bankruptcy.
Chapter 13 bankruptcy has a lower threshold for debt. To qualify, individuals can have up to $394,725 of unsecured debt or $1,184,200 of secured debt. These limits don’t apply in a Chapter 11 case. Individuals who file under Chapter 11 usually do so because they have too much debt to qualify for a Chapter 13.
Chapter 11 bankruptcy process
Bankruptcy proceedings can be drawn out, stressful, and complex. Just understanding the legal terminology is a challenge. In fact, Chapter 11 is the most complicated bankruptcy option. If you are considering reorganization under Chapter 11, here’s what you can expect from the process.
1) Credit counseling
Individuals filing for Chapter 11 bankruptcy must complete a counseling course from an approved credit counseling agency within 180 days before filing. During the credit counseling program, a debt repayment plan will be created.
2) Petition is filed
Either the debtor or the creditors file a bankruptcy petition. These petitions can be denied if the debtor does not attend the required credit counseling course. Note that while a business owner might pursue Chapter 11 intentionally to reorganize debts, creditors can also take initiative to use this option as a way to force a debtor to pay back what is owed.
Along with this filing, they must also file a schedule of:
- Assets and liabilities
- Income and expenditures
- Contracts and leases
- Financial affairs
- Debt repayment plan from credit counseling
- Evidence of payment from employers, if any, received 60 days before filing
- A statement of monthly net income and any anticipated increase in income or expenses after filing
- A record of any interest the debtor has in federal or state qualified education or tuition accounts
3) Fees are paid
Upon filing the Chapter 11 petition, the debtor pays the filing fee of $1,167 and an administrative fee of $550. These fees go toward the initial costs for the professionals and advisors involved in managing the bankruptcy proceedings. If you retain a separate bankruptcy attorney, you may also have to set aside funds or start paying for legal services.
4) Automatic stay
Once the bankruptcy petition is filed, a stay automatically goes into effect. Creditors cannot continue collection activities or repossess any property while a Chapter 11 bankruptcy plan is being created.
5) Debtor in possession
Once the petition is filed, the debtor assumes the role of debtor in possession. This means that the debtor can keep possession of assets during the debt reorganization.
5) Disclosure statement and reorganization plan filed with the court
The debtor files a document that includes information on their assets and liabilities. The document needs to have enough information to help a creditor decide if they will approve the debt reorganization plan. This can include ideas for a repayment schedule over a more realistic period of time, plans for existing assets, and debt relief or discharge requests.
6) Creditors vote
Creditors who are paid less than the full value of their debt under the plan will vote on the plan by ballot. This can span a wide variety of represented interests including unsecured creditors such as credit card companies, landlords, and lenders with more to lose if they miss out on adequate compensation. Equity security holders, such as shareholders, may also file proof of interest and vote on the reorganization plan.
7) Confirmation hearing
Once the ballots have been collected, the court conducts a confirmation hearing to determine whether to approve the plan. In some cases, the Chapter 11 bankruptcy court may decide to accept a plan without creditor approval. This happens less frequently and also restricts options for debt relief. The debt reorganization plan becomes a new contract of sorts between the debtor and the creditors, outlining the new terms for repayment and resolution.
Newer bankruptcy code: Taking advantage of Subchapter V of Chapter 11
A more recent addition to the U.S. Bankruptcy Code is Subchapter V, also known as the Small Business Reorganization Act (SBRA). Added in 2020, this provision allows for faster and more affordable Chapter 11 filing and debt relief. This can be especially beneficial to a small business debtor with debt not exceeding $2.7 million. These limits were raised to address the additional strain of the COVID-19 pandemic on small business owners as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020.
Bankruptcy court hearings under Subchapter V start within 60 days, and debtors are required to submit plans for addressing creditors and financial reorganization within 90 days of filing. Debtors are still required to move through a court approval process and have their plan reviewed by their creditors. Plans are approved only if the court believes the debtor can pay back, and a trustee is put in place (that the debtor must pay for) to act as an advisor throughout the process.
Business owners can continue to operate as a debtor in possession but may have restrictions on company operations, the sale of assets, or new business contracts.
While Subchapter V filings can be quicker and less expensive to navigate than traditional Chapter 11 bankruptcy, a small business debtor can still benefit from hiring an attorney familiar with this new Chapter 11 bankruptcy code.
The requirements and rulings are many, and both bankruptcy court and bankruptcy code could be difficult to navigate efficiently on your own. While you may be tempted to skip this step to save money, you can research credible attorneys that understand your needs and your budget.
Other alternatives to consider
If you’re struggling to make debt payments, there are other options to consider before turning to Chapter 11 bankruptcy. Remember that Chapter 11 filings can become expensive, lingering experiences that help satisfy creditors while leaving a longer term negative effect on both an individual and a debtor corporation.
If you have a large number of unsecured debts that you want to get rid of, debt settlement might be a good option.
During debt settlement, the debtor pays the creditor a portion of the total balance to settle the debt. You’re often able to negotiate to settle your debt for less than you owe.
Debt settlement can still negatively affect your credit score. If your creditor labels your debt as settled rather than paid in full, it will show on your credit report. Just like with a Chapter 11 bankruptcy, a debt settlement can stay on your credit report for years.
You also stop making payments to your creditor during the debt settlement process. This will show up as late or missed debt payments on your credit report, which will mean your credit score will be impacted while you sort out your debts.
While debt settlement can be painful, it can help you avoid the lengthy Chapter 11 bankruptcy process and other negative consequences. Once you settle your debt, you can begin the process of rebuilding your credit.
Not all debt settlement agencies are reputable, though. If you decide to pursue debt settlement, be sure that you check out company reviews and compare options.
And if you’re looking for help right now, get a free consultation with a debt settlement company today.
If you’re considering bankruptcy and part of your debt includes unpaid taxes, remember that Chapter 11 Bankruptcy won’t discharge that debt. You might want to consider tax relief options instead.
A tax relief firm can help negotiate a reduction in the amount of taxes that you owe or create a repayment plan that you can afford.
Do you qualify for tax relief? Find out now.
What are the drawbacks of filing a Chapter 11 case?
If you’re struggling with debt payments, Chapter 11 can provide some relief. However, you need to be aware of a few serious consequences as well.
Benefits of Chapter 11 reorganization
- No debt limits as there are with Chapter 7 or Chapter 13
- Ability to reorganize debt and keep your assets while you pay creditors over time
- The ability for businesses to stay in operation during the bankruptcy process
Drawbacks of Chapter 11 reorganization
- Not all debts qualify to be discharged under the reorganization
- Filing is costly and usually requires hiring an attorney, which adds to the cost.
- It can remain on your credit report for up to 10 years, making it difficult to borrow money in the future.
- It’s a long process—the debt repayment process can take years.
What you need to know
A Chapter 11 bankruptcy helps businesses and individuals reorganize their debts and pay creditors over time. With this type of bankruptcy, you keep control of your assets and create a new plan to pay off their creditors.
Chapter 11 bankruptcy is less common than Chapter 7 or Chapter 13 bankruptcy. Most Chapter 11 bankruptcy cases are filed by businesses. However, both businesses and individuals are eligible to file.
The goal of Chapter 11 bankruptcy is to reorganize debts and pay creditors over time. When a reorganization plan is made, the original debt agreement is discharged. The debtor is now responsible to make payments under the new repayment plan.
Filing for Chapter 11 bankruptcy is a big decision that can negatively affect your financial health for years.
It may provide some relief, but you should consider other options first. Debt settlement or tax relief, for example, may be better alternatives to help pay off your debt.
It’s important to review and compare each option before deciding to file for Chapter 11 bankruptcy.