What is Chapter 11 Bankruptcy?

In Chapter 11 bankruptcy, businesses dealing with considerable debts have the opportunity to cure them by re-organizing their payment arrangements and restructuring their company.

Many businesses consider Chapter 11 bankruptcy when they have suffered a temporary financial burden and hope to remain open once they get caught up on their outstanding payments.

Is Chapter 11 Just for Large Corporations?

Large corporations commonly use Chapter 11 bankruptcy. However, small business owners may also be eligible for Chapter 11 bankruptcy if they hope to remain in business and get caught up on past due payments.

What Are the Pros & Cons of Filing for Chapter 11 Bankruptcy?

This form of bankruptcy has many benefits that could get you back on track financially; however, it may not always be the right option if the cons outweigh the pros. We’ll ensure you have all you need to make the right decision.

Pros of Chapter 11 Bankruptcy

  • You can restructure your business and renegotiate your debts
  • You maintain control of your business
  • Collection calls end
  • Allows you to set up an affordable payment plan that erases your debt over time

Cons of Chapter 11 Bankruptcy

  • It’s time-consuming—repayment plans are structured over 3 to 5 years
  • The potential for considerable fees
  • You may not qualify depending on the income and debt requirements

If you can successfully move through the Chapter 11 bankruptcy process and rebuild your business, the costs of doing so could prove worthwhile. Nevertheless, you should still speak with your bankruptcy attorney to discuss whether Chapter 11 is the right fit for you.

Is Chapter 11 Right for You?

Chapter 11 bankruptcy may not always be the best choice. There are multiple other types of bankruptcy, including Chapter 7 and Chapter 13:

  • Chapter 7 Bankruptcy – Relinquishing your property and assets or shutting your company’s doors to re-pay creditors and discharge debts.
  • Chapter 13 Bankruptcy – Small business owners and individuals could retain possession of their assets, property, or business by formulating an affordable repayment plan.

How Does Chapter 11 Bankruptcy Help You?

  • Obtaining an Automatic Stay – Once you declare bankruptcy, collection agencies and creditors are no longer allowed to attempt to collect your outstanding debt.
  • Retaining Control of Your Business – In a Chapter 7 bankruptcy declaration, you must sell your assets and property to cover the cost of your debt. However, Chapter 11 bankruptcy allows you to retain possession of your business and continue paying down your debt.

What is the Process for Filing Chapter 11 Bankruptcy?

The Chapter 11 bankruptcy process is as follows:

  • Step 1: Declare bankruptcy – Your attorney will help you prepare your bankruptcy petition to start the filing process.
  • Step 2: Appoint a trustee – Once you have filed for bankruptcy, you will be referred to as the “debtor in possession” and can continue your normal business operations. In some instances, a trustee may be appointed to oversee your case.
  • Step 3: The automatic stay – After your bankruptcy petition has been filed, creditors are prohibited from attempting to collect your debts. This is known as an automatic stay.
  • Step 4: Your disclosure statement – A disclosure statement contains a list of your assets and liabilities, your creditors, your expenses and income, your spouse’s information, and other information that gives the court a clearer understanding of your financial state.
  • Step 5: Creditors are notified – A notice to creditors will be sent out to all creditors listed in your disclosure statement. Creditors who were not listed on your disclosure statement will need proof of claim to be listed on your bankruptcy declaration.
  • Step 6: Formulating your reorganization plan – You must work closely with your attorney to structure a repayment plan to cover your outstanding debts.
  • Step 7: Creditors Vote to Approve Your Plan – The bankruptcy court will review your repayment plan, and creditors can vote to determine whether your repayment plan should be approved.
  • Step 8: Your bankruptcy reorganization plan is confirmed – If there have been no objections made to your repayment plan, the bankruptcy court will hold a confirmation hearing to ensure your repayment plan is feasible and proposed in good faith.
  • Step 9: Administration and modification of your bankruptcy declaration – After confirming your bankruptcy, you must make your payments as arranged. You can adjust your plan by requesting a modification through the bankruptcy courts.
  • Step 10: The final decree – Once you meet the terms of your reorganization plan, your debts will be discharged, your bankruptcy case will be closed, and you will officially be debt-free.

What is Subchapter V?

Due to pandemic-related debts, small businesses are eligible for Subchapter V of the Small Business Reorganization Act (SBRA). This process may be faster for companies that would otherwise be eligible for Chapter 11 bankruptcy. You may qualify for Subchapter V if:

  • You are eligible for Chapter 11 and meet the necessary criteria
  • You approve the court’s case status within 60 days
  • You prepare your reorganization plan within 90 days of your bankruptcy declaration

This Subchapter of Chapter 11 bankruptcy could be a good fit for your case if:

  • You are interested in moving forward with your case quickly
  • You want a trustee to help coordinate your reorganization plan
  • You want control and how your reorganization plan is negotiated
  • You hope to avoid paying trustee fees

What Happens if a Reorganization Plan is Denied?

Creditors could reject a borrower’s reorganization plan. If this happens, the bankruptcy court will consider the following:

  • The best interests of the creditors – The court ensures the creditor is awarded a minimum of the amount they would have received if the borrower had declared Chapter 7 bankruptcy and been forced to liquidate their assets or property.
  • The reorganization plan’s feasibility – The reorganization plan must be likely to succeed. You should prepare to provide proof that you can cover not only your outstanding payments as described but your regular monthly expenses as well.
  • The reorganization plan was proposed in good faith – You must be declaring bankruptcy under the letter of the law, as opposed to declaring bankruptcy as a way to break the law.
  • Your plan is considered fair and equitable – A reorganization plan will only be considered reasonable and equitable if secured creditors are going to be paid the value of their collateral and the creditor cannot retain property ownership based on equity.

How Much Does Chapter 11 Bankruptcy Cost?

The amount it will cost to declare Chapter 11 bankruptcy can vary annually. As of 2020, the administrative fees for declaring Chapter 11 bankruptcy are $571.

However, if you divide your bankruptcy petition into two separate business owners, you should expect to pay an additional $571 in administrative costs.

Additionally, you will have to pay $1,167 for the privilege of filing a divided case motion, and the same if you are hoping to reopen a dismissed Chapter 11 bankruptcy case. If you have additional questions or concerns regarding the costs of declaring Chapter 11 bankruptcy, do not hesitate to contact your lawyer for help.

quote icon

I never hesitate...

… to refer colleagues and friends to Chad’s services, as he offers a robust depth of knowledge and natural “bedside manner” — a combination rarely seen among attorneys.

Alex Thiele ★ ★ ★ ★ ★