chapter 11 bankruptcy

What Is Chapter 11 Bankruptcy?

            Chapter 11 bankruptcy is an option for businesses and individuals to reorganize their debts.  Chapter 11 offers debtors options that aren’t available in Chapter 13 individual consumer reorganizations, and it provides an opportunity for businesses to emerge from bankruptcy “leaner and meaner” as a way to survive tough financial times.

Q:  Wait, Chapter 11 can be filed by individuals too?

A:  Yes, individuals can file Chapter 11 cases.  It’s far less common than business filings, but it can be done and be quite effective.

Q:  Why would an individual ever file Chapter 11 bankruptcies?

A:  For a few reasons.  First, Chapter 11 doesn’t contain the debt limits that Chapter 13 does.  Debtors with over $419,275 in unsecured debts or $1,257,850 in secured debts (in 2019 figures) are not eligible for a Chapter 13 case.  Chapter 11 also loosens rules on the treatment of mortgage creditors.  A loan, even one that’s come due in full through maturity, can be extended an additional 5-20 years.  Chapter 13 plans only allow 5 years of payments, so this additional time can be critical in making a plan work.

Q:  How does Chapter 11 work? 

A:  In a Chapter 11 filing, the individual (or business) declares bankruptcy and becomes a “debtor-in-possession”, holding onto all of their assets and proposing a plan to repay creditors.  Creditors then vote on a plan and a court-approved disclosure statement that get mailed, and the plan will either be confirmed (approved) or rejected by the Bankruptcy Court.  Because most large corporations elect to file in places like Delaware or New York, most Chapter 11 filings in Kansas and Western Missouri are small businesses or, occasionally, real estate holdings.

Q:  I heard Chapter 11 is going through some changes.  True?

A:  Actually, yes.  One bill recently passed by congress and signed into law by President Trump will make major changes to “small business” Chapter 11 cases beginning in mid-February 2020. Currently, most cases are overseen by the office of the United States Trustee, part of the Justice Department.  Few cases have trustees appointed as Chapter 7 and Chapter 13 cases do.  Under the new laws, a trustee would be appointed, qualified debtors would not need to file disclosure statements, and a plan would be due from the debtor within 90 days of filing to help speed up the process of reorganizing businesses.  Some plans may even be approved even if no classes of claims vote for the plan. 

Q:  Can I afford Chapter 11 bankruptcy?

A:  Perhaps.  Chapter 11 has the largest court filing fee, at $1717 as of the most recent increase.  It’s reasonable to expect your attorney to need a retainer of several thousand dollars in advance to do work necessary to prepare for bankruptcy and get bankruptcy schedules and pleadings prepared.  After the case is filed, your attorney will need to move the court to approve your lawyer as counsel and permit post-bankruptcy payments.  Still, reorganizing under Chapter 11 can save your business (or yourself) thousands in long-term debt payments and provide a way to reorganize and thrive again.

The biggest advantage you can provide yourself and your attorney in a Chapter 11 is time.  Most law firms can file an emergency Chapter 13 petition in a day and stop a foreclosure sale.  But Chapter 11 cases involve significantly more work in advance and in the first few days of the case.  Even seasoned attorneys need time to prepare for Chapter 11 case filings and ensure your case does not get dismissed early on.

For more information on Chapter 11 filings for small businesses or individuals, call today to schedule a free initial consultation with an attorney to walk through your options.  As always, we are here to help.