Chapter 11 bankruptcy is also known as “reorganization bankruptcy.” It can also be called “business bankruptcy” because it’s primarily meant for businesses, including small businesses, sole proprietorships and partnerships. However, it can also be used by individuals whose assets are too big to qualify for Chapter 7 or Chapter 13.
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Chapter 11 bankruptcy reorganizes assets and often implements a debt repayment plan similar to the repayment plan you see with Chapter 13. The major difference is that with Chapter 11, you usually maintain control over assets during the filing rather than control passing to a bankruptcy trustee. Even after you file, you continue to operate the business as the “debtor in possession (DIP)” under the oversight of the court.
- Chapter 11 bankruptcy is mostly for businesses. Individuals file for Chapter 11 when they have unusually large amounts of debt.
- They repayment system of Chapter 11 is much more complicated than Chapter 7 or Chapter 13 bankruptcy.
- Before committing to Chapter 11 bankruptcy, explore alternatives such as: a debt consolidation loan, a debt management program, debt settlement, etc.
How Chapter 11 bankruptcy works
- Chapter 11 can be voluntary or involuntary:
- A voluntary filing means you file yourself
- An involuntary filing means a creditor or group of creditors petition the court to declare you insolvent and force a filing.
- As with any bankruptcy filing, with a voluntary Chapter 11 the debtor must typically go through pre-bankruptcy credit counseling within 180 days prior to the filing date.
- If you develop a repayment plan during the credit counseling process, it must be formally submitted to the court for approval.
- The court charges two fees that must be paid in full before filing can proceed:
- A $1,176 case filing fee that can be split into a maximum of 4 installments; the final installment must be received within 120 day of the filing date.
- A $550 miscellaneous administrative fee that can be filed in similar installments
- If fees are not paid on time, the case is dismissed
- In most cases, no trustee is appointed during Chapter 11. Instead, the debtor continues to operate as the “debt in possession” (DIP).
- If there is evidence of fraud, dishonesty or gross mismanagement, then a trustee may be appointed in rare cases.
- The DIP (or trustee) then typically files a written disclosure statement and plan of reorganization. This outlines how each creditor’s claim will be handled moving forward.
- The filer has 120 days after the filing date to submit a reorganization plan.
- The filer has 180 days to persuade creditors to accept the plan.
- Creditors who will not receive the full amount they are owed on existing debts are allowed to vote on whether they accept the plan or not.
- The disclosure statement is then approved by the court and vote ballots are tallied; then the court holds a confirmation hearing to determine whether the plan is accepted.
- If so, the existing debts are discharged and the filer is responsible to repay creditors as outlined in the reorganization plan.
- Chapter 11 can take anywhere from a few months to 6 years or more to complete, depending on the complexity of the filing
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Who can file for Chapter 11 bankruptcy?
Chapter 11 Corporation
If a business (one not defined as a small business as outlined below) chooses to file for Chapter 11, the personal assets of the stockholders are not at risk of liquidation. In other words, only the assets of the business are considered during the reorganization process.
Chapter 11 Small Business
Small businesses are allowed special dispensations when filing for Chapter 11. A small business is defined as any person or entity engaged in business or commercial activities with less than $2,490.925 in creditor claims.
These are some of the differences you can expect with a Chapter 11 small business cases:
- The court may order that no creditor’s committee would be created. This committee usually represents the creditors during the reorganization process.
- The court may waive the need to file a disclosure statement, which can significantly expedite the filing process.
- The “exclusive” time to file a reorganization plan is extended from 120 to 180 days.
- Small business cases are also subject to additional filing statements.
Chapter 11 Partnership
If you have a business partnership, then the business assets typically exist apart from the partners’ personal assets. However, personal assets may be subject to liquidation unless the partners file for bankruptcy protection.
Chapter 11 Sole Proprietorship
In this case, the assets of the business are not considered separate from the proprietor’s assets, so your assets may be at risk of liquidation in order to settle creditor claims.
Chapter 11 Individual or Joint Filing
In rare cases, individuals or spouses may file for Chapter 11 bankruptcy if personal asset totals are too high to file for Chapter 7 or Chapter 13. The current dollar amounts according to 11 USC §109(e), which is adjusted every 3 years, has the unsecured debt maximum at $419,275, and the maximum dollar amount for secured debt is at $1,257,850. If a couple files for Chapter 11 jointly, there is only one filing and one administrative fee charged for both parties.
You could also consider alternatives to bankruptcy if you have lower amounts of debt and want to preserve your credit.
Need help starting the filing process? We’re here so you can get the fresh start you need.
Chapter 11 vs. Chapter 7
Chapter 7 is a form of bankruptcy common among those who have no way to afford repaying their debts. It’s called “liquidation bankruptcy” because you must liquidate your assets to repay creditors. This doesn’t mean you have to give up everything — you can still keep things like your house and your car, as long as their value is below a certain amount.
|Chapter 11||Chapter 7|
|Commonly called:||Reorganization bankruptcy||Liquidation bankruptcy|
|How it settles your debts:||Creates a complex repayment plan that separates creditors into different classes and prioritizes certain debts over others||Sells available assets that don’t qualify for exemption for lump-sum payoff|
|How long it takes:||4-18 months to come up with the reorganization plan; up to 6 years to complete||About 90-120 days|
|Credit report listing||10 years from the date of filing||10 years from the date of filing|
Chapter 11 vs. Chapter 13
Chapter 13 bankruptcy is best for those who can afford to repay some of their debt through monthly payments. This type of bankruptcy does have a filing fee of $335, but this is still smaller than the Chapter 11 fees.
|Chapter 11||Chapter 13|
|Commonly called:||Reorganization bankruptcy||Wage earner bankruptcy|
|How it settles your debts:||Creates a complex repayment plan that separates creditors into different classes and prioritizes certain debts over others||Sets up a monthly repayment plan|
|How long it takes:||4-18 months to come up with the reorganization plan; up to 6 years to complete||Up to 5 years, depending on your repayment plan|
|Credit report listing||10 years from the date of filing||7 years from the date of filing|
Final tips for going through Chapter 11 bankruptcy
Make sure it’s the right type of bankruptcy for you
Those looking to file for personal bankruptcy should probably look elsewhere. Unless you’re in a very unique situation, it’s likely that Chapter 7 or Chapter 13 would be a better fit.
Find the right attorney
As with any type of bankruptcy, if you move forward with Chapter 11, you will need legal representation. Follow our guide to choosing the right bankruptcy attorney.
Article last modified on January 25, 2021. Published by Debt.com, LLC