Chapter 11 bankruptcy is often referred to as “reorganization bankruptcy” as it involves the reorganization of the debtor’s assets, debt and business operations. When a corporation files for Chapter 11, they are not relieved of their debt however they are given more time to repay their debts back to the creditors. This is the most complex of the bankruptcy cases and, because so, is typically the most expensive proceeding.
Who Can File for Chapter 11 Bankruptcy?
Chapter 11 bankruptcy cases are typically filed by corporations, limited liability companies, and business partnerships. Individuals that are in substantial debt and have too much income to qualify for Chapter 7 or Chapter 13 bankruptcy may also apply for Chapter 11 as well. If you are an individual considering filing for Chapter 11 the debt must meet the following two requirements:
- Secured debt (mortgage, auto loans) must not exceed $1,184,200
- Unsecured debt (credit card, medical bills, student loans) must not exceed $394,725
Because of how expensive Chapter 11 is to file, most businesses and individuals will exhaust all other options before putting in their Chapter 11 claim.
How Does Chapter 11 Bankruptcy Work?
When a corporation has reviewed all their options and decides that Chapter 11 is the right course for their organization, they will file a petition with the bankruptcy court, typically in the state where their business operates. Once the petition has been filed to the court, the Chapter 11 proceedings begin.
Business as Usual
When people hear that a company has filed Chapter 11, many assume the business has gone out of business however that is not the case. The debtor will continue to run their business operations as usual and are referred to as the “debtor in possession” (also called the “DIP”).
The Debtor Presents Their Reorganization Plan
During Chapter 11 bankruptcy, the debtor is given the opportunity to reorganize their operations and present a plan to pay back their creditors in a way that makes the most sense for their business. This plan could include liquidating assets, downsizing operations, and renegotiating the terms of their debt with their creditors. The court can allow up to 18 months from the time the petition for bankruptcy is filed for the company to present its reorganization plan to the bankruptcy court.
The Chapter 11 Plan Is Accepted
Once the debtor has presented its plan to the bankruptcy court, the court will determine whether the plan will be considered confirmed (approved). There are many requirements that the plan must meet before it reaches confirmation. One of these requirements is that the plan must be feasible, and the debtor must prove they will be able to financially afford not only its expenses but also the repayment of their debt to the creditors. Another requirement is that the debtor must show that their plan is in the best interest of their creditors and that it is fair and equitable. If the bankruptcy court feels that the debtor’s proposed plan meets all the confirmation requirements, they accept the plan and the debtor will begin to operate under the terms of the plan.
Although a company can continue to operate while under Chapter 11 proceedings, it will lose control over most major decisions to the bankruptcy court. The court will oversee and have the final say over any sales of assets, changing business operations to either expand or minimize, adjustments to rental agreements, and entering unions. They will also make the decisions regarding the retainment and fees of attorneys as well as any new contracts that may arise.
How Long Does Chapter 11 Bankruptcy Last?
Unlike some of the other Chapters of bankruptcy, there are no defined time limits for the case to last. When a business has decided to file for Chapter 11, it will present its reorganization plan to the bankruptcy court. Based on the amount of their debt, their reorganization plan, the terms of their repayment plan to creditors as well as the success of their business operations, cases can take anywhere from a few months through a couple of years.
How Does Chapter 11 Bankruptcy End?
Not only is Chapter 11 the most expensive and most complex chapter of bankruptcy, but it also has an exceptionally low chance of success. When a company reaches the point of filing for Chapter 11, it is already struggling to survive financially and is hoping to be able to recover under the umbrella of bankruptcy. Studies show that only about 10% to 15% of companies that file Chapter 11 can successfully reorganize their operations and pay their commitments to the creditors. If a company cannot find a way to successfully reorganize and fulfill the obligations of its repayment plan, its case can be dismissed or moved to a liquidation case.
Do You Need More Information on Chapter 11 Bankruptcy?
If you are an individual or business that has found yourself struggling financially and think Chapter 11 may be your best step towards a fresh start, it is important to speak with an experienced bankruptcy attorney. A bankruptcy attorney will help you through the petition process and work with you to find the best options for your specific situation. Complete our free evaluation to be connected with a local attorney in your area to discuss your next steps today.