What is a Chapter 11 bankruptcy? Chapter 11 bankruptcy is a tool that is used most often by business owners when their business is drowning in debt and needs relief. This bankruptcy allows a business to reorganize and repay debt, while still conducting business as usual. The reorganization is very structured and must be approved and monitored by the bankruptcy court.
Who can file Chapter 11? Large businesses or small businesses, as well as individuals with excessive amounts of debt are eligible to file for Chapter 11. Individuals usually only file Chapter 11 if they have debt that exceeds the Chapter 13 bankruptcy limits: as of April 1, 2016, secured debt of $1,184,200; unsecured debt of $394,725.
How does Chapter 11 work? When a business or an individual files Chapter 11, they retain their property and continue business as usual. The business or individual is known as both the debtor and the “debtor-in-possession.” If the business has employees, the employees continue to be paid; however, the business no longer has a right to compensation. Activities such as acquiring loans, or accepting or rejecting new contracts to continue business as usual are still allowed, but may require court approval.
A disclosure statement is submitted to the court providing the workings and operation of the business. This document must be approved by the court and is used to provide the creditors with information, which will help them determine if a reorganization would be possible. A meeting of the creditors takes place to agree or disagree to accept a reorganization plan.
Next, the business/individual creates a reorganization plan to be presented to the creditors. The creditors must agree to the terms of the plan. These plans often include stipulations for a third-party agent to execute the payment arrangements. A date for discharge of the plan is also included in the agreement once all or most of the debts have been satisfied.
Chapter 11 bankruptcies are very complex and require an experienced bankruptcy attorney. They can also be costlier than a typical Chapter 7 or Chapter 13 and require a $1,167 filing fee.
Source: The Balance, “What is Chapter 11 Bankruptcy?,” David Haynes, accessed Nov. 22, 2016
