What Is Chapter 11 Bankruptcy? – Quick Bankruptcy Guide
Chapter 11 Bankruptcy is a section of the U.S. Bankruptcy Code designed to allow financially struggling businesses to reorganize their finances and maximize the return to their creditors. Chapter 11 used to be “reserved” for large corporations only, but it has since evolved to include big and small businesses. Chapter 11 is also open to individuals who don’t qualify to file for Chapters 7 and 13.
How Does Chapter 11 Bankruptcy Work?
Businesses often file for Chapter 11 Bankruptcy during a temporary downturn and when they are pinched financially. Chapter 11 can help companies stay open during challenging economic situations to regroup and create a more viable repayment plan for their creditors. Common business problems that lead to this type of bankruptcy include trouble meeting payroll or rent, avoiding paying vendors, or struggling with foreclosure.
- Collection Actions Stop
Like other bankruptcy chapters, Chapter 11 works by stopping certain collection processes. Once you file for it, the “automatic stay” will prohibit the majority of your creditors from pursuing you. The idea is to give you a breather during which you, your creditors, and the court can address your situation and reorganize it. This automatic stay will temporarily stop:
● A collections trial
● Payment requests
● Bank levies, property seizure, till taps, etc.
● An eviction or foreclosure
● Other collection processes
- Filers Retain Control of the Business
Unlike other bankruptcy chapters, with Chapter 11, the filer continues to run the everyday business operations as a “debtor in possession.” No bankruptcy trustee is assigned to be in charge of your company during the Chapter 11 Bankruptcy.
- Debt Relief Through a New Payment Plan
This bankruptcy chapter aims to create a repayment plan that the filer, the court, and the creditors will agree on to enable the company to remain operational. In some cases, the plan can discharge debt entirely, or in other situations, it will include terms like payment due dates and modifying interest. It depends on the financial condition of the business and the amount of debt they have.
Filing for Chapter Chapter 11 Bankruptcy
Every Chapter 11 case starts by filing for a petition in the bankruptcy court. Chapter 11 cases are typically voluntary, which means the debtor has to take the initiative and seek bankruptcy relief. However, there are some cases when creditors will unite to file an involuntary bankruptcy petition against the debtor.
There is no set time limit for the duration of a Chapter 11 case. Some cases wrap up within a couple of months, while others can take up to two years. The common time frame is anywhere from six to 24 months.
During Chapter 11, the bankruptcy court must approve how the business will operate, the assets that won’t be sold, mortgage agreements, and other terms on which the debtor should agree.
Suppose you’re preparing to file for Chapter 11 Bankruptcy or are considering your options. In that case, a bankruptcy attorney will be in the best position to consult you by explaining the procedures and outcomes you can expect in your situation. Legal Chiefs is here to help you find the right legal representative for your case!
Bankruptcy is a section of the law that allows debtors who are unable (fully or partially) to pay their outstanding debts to get a fresh start and get financial relief. Keep in mind that not all debts qualify to be removed in a bankruptcy case (e.g., student loans). The U.S. Supreme Court explains bankruptcy law as a way to give individuals and entities a new opportunity in life by starting fresh without the pressure and discouragement of preexisting debt. Federal bankruptcy law consists of chapters published in the Bankruptcy Code.
The U.S. Bankruptcy Law covers six different types of bankruptcy, each described in a separate chapter in the Bankruptcy Code. Although they differ in terms and procedures, their common goal is to provide permanent relief from certain outstanding debts. In other words, they help to discharge the debtor’s dischargeable debts. These are the different types of bankruptcy you can file:
Chapter 7: This chapter provides liquidation of the non-exempt assets of the debtor. Certain assets, like a car or a home, may be exempt from bankruptcy, which means the debtor can likely keep them under this chapter. The court appoints a trustee who will oversee the debtor’s non-exempt assets and will handle their sale. The proceeds will go to the creditors. Chapter 7 is open both to individuals and businesses.
Chapter 9: This chapter is intended to help municipalities to reorganize their debts. It is open to towns, cities, villages, municipal utilities, taxing districts, and school districts.
Chapter 11: Intended to help partnerships and corporations, chapter 11 bankruptcy aims to provide a supervised reorganization of a business by allowing the debtor to keep running the business while following a court-ordered payment plan.
Chapter 12: It consists of bankruptcy provisions for family farmers and fishers.
Chapter 13: It is aimed at helping individuals with a steady regular income to create a repayment plan, usually within three to five years, and discharge the remaining dischargeable debt.
Chapter 15: This chapter applies to cross-border bankruptcies that involve foreign parties.
Since bankruptcy can have a lasting negative effect on your credit, you should consider it a last resort option. It is a good idea to hold off on filing if you believe there is a chance to improve your financial situation or that you will have substantial expenses in the near future because there is a limit to how often you can file for bankruptcy.
The moment you file for bankruptcy, this will trigger an automatic stay that will stop wage garnishment, lawsuits, foreclosure, and collection efforts. So, if you want to stop the repossession of your car or the foreclosure of your home, and you have the income to pay off that debt, it may be a good idea to file for Chapter 13, for example. Of course, you should ideally consult with a lawyer before you take any legal action.
Is there a specific amount of debt to qualify for bankruptcy?
Generally speaking, there is no preset minimum amount of debt you need to qualify for bankruptcy. However, certain debt limits apply to Chapter 13, for instance. The maximum amount changes constantly, but it currently is $383,175 for unsecured debt and $1,149,525 for secured debt. If your outstanding debt is relatively low, it’s wise to consider alternative solutions to bankruptcy to ensure that filing for one of the six chapters is still an option for you in the near future. It’s an important consideration because there are limits on how many times a person can discharge debts in bankruptcy.
It is possible, but it depends on the type of debt you have. Most consumer debt can be discharged in a bankruptcy case, but if you forget to include a debt in the process of filing, it will not be discharged. In addition to that, creditors have the right to object to the discharge of any debt.
There are 19 categories of non-dischargeable debts that cannot usually be eliminated (unless a creditor decides not to challenge your effort to discharge them). Some of them include child support, alimony, certain tax debts, criminal restitution, and condo fee debts.
Do I need a lawyer to file for bankruptcy, or can I do it on my own?
It is allowed for individuals to file for bankruptcy without a lawyer. Debtors who decide not to use legal help in the filing process are responsible for understanding local court procedures and what relevant bankruptcy laws apply to them. In general, however, bankruptcy law is very complex and can be confusing. Understanding the process is key, and it is a good idea to consult with a bankruptcy lawyer about your circumstances to ensure you get the best outcome.