What is a Chapter 11 Bankruptcy?

Corporations, partnerships, and sole proprietors that want to remain in business and reorganize their finances can file a Chapter 11. A Chapter 11 restructures the debt, either by reducing the debt or by extending the time to repay. A liquidation of all or a portion of the debtor’s assets may occur depending on the specifics of each case.

Is Chapter 11 Reorganization a Viable Option for Saving Your Business?

A business or an individual can use a Chapter 11 to restructure its finances through a plan of reorganization approved by the bankruptcy court. The Chapter 11 plan usually reduces the business or individual’s debts and changes their payment terms. The goal is to help the business or individual balance its income and expenses, return to profitability and be able to continue in operation in a sustainable way.

Although you tend to hear about Chapter 11 when it is used by major corporations, most Chapter 11 cases are filed by much smaller businesses. The code has special provisions for “small business debtors” intended to streamline the process and keep down its costs.

Who and What Can File under Chapter 11?

Individuals and almost all business entities are eligible to file a Chapter 11 case. Included are corporations, partnerships, limited liability companies and their individual owners. This is different than Chapter 13, which is only available to individuals and not to business entities. Also, unlike Chapter 13, there are no debt or income requirements or limitations in Chapter 11.

Why File Under Chapter 11?

The main purpose of this legal option is to preserve a business that would otherwise not survive.

Practically speaking, a Chapter 11 case is usually filed to get protection from some immediate threat to the viability of a business. A major creditor is usually in the midst of or about to seriously disrupt or even destroy the business’s operation with some form of debt collection, such as the foreclosure of the business’s real estate or termination of the premises lease, the repossession of key business equipment or garnishment of the incoming receivables.

Are You a Good Candidate for Chapter 11 Reorganization?

Chapter 11 is strong medicine, but it has serious side effects. It is expensive — costing much more in both court fees and attorney fees than Chapter 7 or 13 — and it is tough on the reputation of a business. Like any bankruptcy, it should only be done after looking closely at all the alternatives and concluding that it will likely meet the goals set out for it.

In general, your business may a good candidate for Chapter 11 if it has a viable core operation that can be preserved and strengthened if given a break from creditors’ collection actions. The business needs to have some strengths around which it can be reorganized. It usually has tangible or intangible assets of significant value that would be lost to imminent repossession or foreclosure, and that value needs to be preserved for the benefit of the business and its overall creditors.

How Chapter 11 Bankruptcy Works

When a business files for Chapter 11, it is one of two ways. Either the business owner or debtor files a petition with the Federal Bankruptcy Court or business’s creditors submit an involuntary petition. In order for creditors to file an involuntary petition, a series of requirements must be met.

Unless otherwise ordered by the court, the debtor must file:

  • A schedule of liabilities and assets
  • A schedule of current expenditures and income
  • A schedule of unexpired leases and contracts
  • A financial affairs statement

If the debtor is a person or individual, he or she must file additional documents with the court including:

  • A certificate stating the individual attended credit counseling
  • A copy of the repayment plan developed during the counseling course
  • Evidence of wages earned for 60 days prior to filing the bankruptcy petition
  • A statement detailing net income per month and any expected increases in expenses or income
  • A list of interest the debtor has on any student loans at the state and federal level

Generally speaking, a Chapter 11 bankruptcy filing costs an initial fee of $1,000 and an additional administrative fee of $39. These fees are due to the court clerk at the time of filing. In the event an individual cannot afford the fee, the court has the ability to allow him or her to make installment payments. The final payment, however, is due within 180 days of the filing date. When a couple files a joint petition, they are not subject to additional fees. Failure to pay the filing and administrative fee on time can result in the dismissal of the bankruptcy petition as ordered by the judge.

As previously mentioned, Chapter 11 is most often used by businesses. When this business is a corporation, it becomes the debtor. In other words, the personal assets of the company’s stockholders are not at risk, aside from what they have invested in the company. In a partnership, the partners’ personal assets are subject to the bankruptcy proceedings. This may also require the partners to file for bankruptcy on an individual basis to protect their assets.

The United States trustee is tasked with supervising the bankruptcy administration. The trustee monitors the Chapter 11 proceedings. He or she also conducts a meeting with the creditors. During this meeting, the trustee and creditors have the option of questioning the debtor while under oath. The trustee will also enforce various requirements including the reporting of monthly income, operating expenses, the establishment of new bank accounts, and the paying of taxes and other employee withholdings. These services do come with a cost and are paid by the debtor on a quarterly basis. The fee can range between $250 and $10,000 depending on the debtor’s disbursement plan. In the event the debtor fails to comply with the repayment plan and pay the trustee in a timely manner, the trustee has the ability to file for dismissal of the bankruptcy.

It’s important to note that in many cases, a Chapter 11 bankruptcy can be avoided in favor of the much less onerous Chapter 7 or Chapter 13 bankruptcies.  While Leinart Law Firm does not actively handle Chapter 11 Bankruptcy cases, we can help you analyze what type of business bankruptcy your company might need.  Contact Leinart Law Firm at 469-232-3328 to schedule your initial consultation today!