Are you feeling the weight of your debt payments and struggling to make ends meet? If so, you may be looking at Chapter 11 bankruptcy as a way to start fresh.
While bankruptcy might be the right option in some cases, you shouldn’t take this decision lightly. Read on for a complete overview of Chapter 11 bankruptcy to help you decide if it’s the right path for you.
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.
Chapter 11 bankruptcy is less common than Chapter 7 or Chapter 13 bankruptcy. In 2017, there were 7,052 filings.
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, LLCs, partnerships, sole-proprietors, and individuals (including married couples).
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 plan for reorganization is made, the original debt agreement is discharged. The debtor is now responsible to make payments in accordance with the new repayment plan.
This new repayment plan often means the debtor is paying less than they originally owed.
There are some debts that 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.
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.
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 an attorney to help with all types of bankruptcy filings.
How is chapter 11 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. 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 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 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 debt limits don’t apply in a Chapter 11 bankruptcy. 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
Here’s what the process for filing a Chapter 11 bankruptcy looks like:
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 petition for bankruptcy. 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 petition, the debtor pays the filing fee of $1,167 and an administrative fee of $550.
4) Automatic stay
Once the bankruptcy petition is filed, a stay automatically goes into effect. This means that creditors aren’t able to continue collection activities or repossess any property while a plan for bankruptcy 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.
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.
7) Confirmation hearing
Once the ballots have been collected, the court conducts a confirmation hearing to determine whether to approve the plan.
Other alternatives to consider
If you’re struggling to make debt payments, there are other options to consider before bankruptcy.
If you have a large amount 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 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 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 takes a hit.
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 the debt settlement route, 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.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.