Chapter 11 Bankruptcy

Debtors with a regular income can use Chapter 11 bankruptcy to cope with their overwhelming debts, but there are long-term consequences for consumers who take this route.

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Most people know more about the Chinese alphabet than the U.S. bankruptcy system. The most common filings are Chapter 7 or Chapter 13, though other options can add to the confusion.

Ever heard of Chapter 11?

It’s for big-money bankruptcies and usually used by businesses, though individuals can also file Chapter 11s. Both are using it more often as the economy sputters out of the pandemic era.

Commercial Chapter 11 filings increased 72% in 2023 to 6,569, according to Epiq AACER, which tracks U.S. bankruptcy data. Former New York mayor Rudy Giuliani was among the many private individuals who filed for Chapter 11, after he was hit with a $148 million court judgment.

“We expect the increase in number of consumer and commercial filers seeking bankruptcy protection to continue in 2024 given the runoff of pandemic stimulus, increased cost of funds, higher interest rates, rising delinquency rates, and near historic levels of debt,” said Michael Hunter, vice president of Epiq AACER.

In other words, a lot more bankruptcies are on the way. If you get cast into that maze, Chapter 11 might be an option worth considering, even if you weren’t penalized $148 million in a defamation suit.

What Is Chapter 11 Bankruptcy?

Chapter 11 is often called a “reorganization bankruptcy” because it allows businesses or other entities to keep operating while they restructure their finances. They either file a reorganization plan voluntarily or can be forced into that if three or more creditors file a petition with the bankruptcy court.

How Chapter 11 Bankruptcy Works

Filing a plan provides instant relief, since creditors are temporarily prohibited from taking any action. The business or individual has four months to come up with a reorganization plan, though that can be extended to 18 months. After that, creditors can propose reorganization plans.

The plan defines how the business will operate to pay its financial obligations. Plans usually include downsizing to reduce expenses and free up assets.

Once the plan is filed, creditors vote whether to accept or reject it. They usually cooperate since the next option is Chapter 7 bankruptcy, in which assets are liquidated and creditors could get little or nothing.

If the plan is rejected, the business or individual can ask for a “cram down,” in which they ask the judge to force creditors to accept it. In other words, they want to cram it down the creditors’ throats.

There’s no time limit for completing the plan. Cases typically take six months to two years, but some last more than five years.

Process of Chapter 11 Bankruptcy

Filing a Chapter 11 is not quite like trying to learn Mandarin Chinese, but things can get complicated. The process does have a basic format, however.


The case begins with the filing of one of two possible petitions with the bankruptcy court. A voluntary petition is filed by the debtor, who willingly submits to the process. An involuntary petition is filed by the creditors to force the debtor to act.

The filings are made in official forms prescribed by the courts. They require information on the schedules of assets and liabilities, current income and expenditures, contracts and leases and a statement of financial affairs.

Automatic Stay

Filing a bankruptcy petition brings an automatic stay of action against the debtor. Creditors can’t try to collect or enforce existing liens. This means all judgments, collection activities, foreclosures and repossession of property are suspended.

There are exceptions, such as when the debtor has no equity in the property and the property isn’t necessary for a reorganization plan. In such cases, the creditor can ask the court to lift the stay.

Debtor In Possession

This is the person or entity that files for bankruptcy. The debtor in possession usually acts as the bankruptcy trustee, which means they are responsible for meeting reporting requirements and proposing a viable reorganization plan.

The debtor in possession also retains the right to operate their business with limited oversight from the court.

Meeting with Creditors

After filing a petition, a trustee will appoint a committee of creditors. It usually consists of unsecured creditors who hold the seven largest claims against the debtor in possession.

The committee meets with the debtor in a “341 meeting” (the name comes from Section 341 of the Bankruptcy Code). The meeting examines the facts of the case and allows the parties to negotiate a reorganization plan for keeping the business open while repaying creditors.

Plan Proposal

The debtor in possession has 120 days to file a reorganization plan, though the court can extend that up to 18 months. After that, creditors can propose their own plans. It must be accepted by a majority of the creditors and account for at least two-thirds of the debts owed.

The court must agree the debtor in possession can make the monthly payments, and the plan must provide creditors with more money than they would have received under Chapter 7 bankruptcy.

Confirmation of Plan

After enough creditors vote to accept the plan, a confirmation hearing to make sure the plan meets statutory requirements. If the court approves, the repayment period begins.

Discharge of Debts

This is the ultimate goal for debtors. Once they have fulfilled their obligations to the plan, their remaining debts are discharged. They no longer owe the debt, so creditors can no longer pursue it. Freshly free of debt, the person or business can get a fresh start.

How Long Does Chapter 11 Bankruptcy Take?

There is no start-to-finish time limit for a Chapter 11 filing. Some cases are resolved in a few months. Many others drag out for five years or longer.

There are certain deadlines along the way. As noted earlier, the person or entity filing for Chapter 11 has four months to propose a reorganization plan, though that can be extended up to 18 months.

After the court approves the plan, the debtor usually has 30-90 days to begin repaying creditors. And when the bankruptcy proceedings are over the effects are still felt, since Chapter 11 stays on your credit report for seven years.

Who Is Eligible for Chapter 11 Bankruptcy?

Almost any person or business is allowed to file for Chapter 11 bankruptcy. There are no limitations or requirements about the amount of debt or income for the entity doing the filing.

Basically, if you need to reorganize your business or personal finances, you can file for Chapter 11 bankruptcy. The main drawback is the expense and legal fees, which can be appreciably higher than Chapter 7 or 13 filings.

Who can’t file Chapter 11? Government agencies, insurance companies, banks, estates, nonbusiness trusts, stockbrokers or commodity brokers or Small Business Administration-licensed investment companies. Nor can an individual who has had another bankruptcy case dismissed on certain grounds in the previous six months.

Cost of a Chapter 11 Bankruptcy

Filing a Chapter 11 bankruptcy costs $1,738 but keep your checkbook handy. In complicated cases, legal fees are enough to buy your lawyer a new Rolls-Royce or two.

Typical fees run from $15,000 to $30,000 but can skyrocket into seven figures if multiple lawyers and extended litigation are involved.

Chapter 11 Personal Bankruptcy

So, why could an individual choose a Chapter 11? It’s a viable option if A) they don’t want to liquidate all their assets in Chapter 7, or B) have too much debt to qualify for a reorganization plan under Chapter 13.

Your secured debts (mortgage, car payment, etc.) and unsecured debts (credit cards) can’t exceed $2,750,000 to qualify to file for a Chapter 13 bankruptcy.

That’s why celebrities, pro athletes and prominent figures like Giuliani often file Chapter 11 if they run into financial problems. Real estate investors also find Chapter 11 useful since it allows assets to be written down.

For instance, if you own a property worth $98,000 but owe $150,000 on the loan, you can reduce the principal balance of the mortgage to the value of the property. So your new mortgage number would be $98,000.

Chapter 11 also allows you to reduce the interest rate and extend repayment terms. That means lower monthly payments.

Pros of Chapter 11 Bankruptcy

No business wants to file bankruptcy, but a Chapter 11 can be a pretty good lifeline. If nothing else, you can delay putting up a “Going Out of Business Sale” sign until you have a chance to get your financial house in order. Here are some specific advantages:

Continued Operation

Unlike Chapter 7 bankruptcy, Chapter 11 does not require the business to shut down and liquidate its assets. You can keep the business running, albeit with court oversight. If nothing else, that allows you to stay in touch with your customers and hopefully keep doing business with them.

Cash Flow for Repayment

You can’t repay creditors if you don’t have any money coming in. Chapter 11 not only allows you to keep some cash flow, but it also offers emergency financing options to help fund a recovery.

Specifically, the court can authorize debtor-in-possession financing that gives lenders preferential terms if they offer financing to a company in Chapter 11.

Protection from Creditors

Filing a Chapter 11 gets you an automatic stay, meaning creditors have to call off the dogs. They are prevented from taking any action against you until a repayment plan has been finalized or the bankruptcy has been discharged.

Higher Recovery for Creditors

Creditors are generally receptive to Chapter 11 filings since they stand to recoup at least some of their money. The recovery rates typically vary from 10% to 40%. That’s not great, but it beats getting pennies (or less) if the debtor files a Chapter 7.

Cons of Chapter 11 Bankruptcy

There’s a stigma associated with any bankruptcy, and that can be especially harmful to businesses. Besides the reputational damage, Chapter 11s can limit employee compensation, make financial information public, and pose other drawbacks.


Most individuals who file for bankruptcy can sit down, look at their home budget and figure out where they went wrong. It’s not nearly as simple for businesses and high-wealth individuals, who have multiple streams of income, expenses, investments, payroll obligations and other financial concerns. Figuring all that out takes a lot of time and money.

High Costs

One group doesn’t really mind the complexity – lawyers. Sorting through a Chapter 11 bankruptcy requires a lot of billable hours. When Sears Holdings went kaput, the legal bills and other fees were almost $250 million, according to Debtwire data. Chances are your Chapter 11 won’t be that astronomical, but it will not be cheap.

Chapter 11 vs. Chapter 7

With a Chapter 7 bankruptcy, there is no reorganization plan or restructuring of debt to continue operations. It’s a straight liquidation of assets in which a trustee is appointed to sell a person’s non-essential assets.

Houses and cars are usually put up for sale. Among the items that can be protected are pensions, reasonable, necessary clothing, household goods and jewelry up to a certain value.

The proceeds go to creditors and the filer is legally cleared of debt. Legal fees are usually not an issue, though there is a $338 filing fee. Those that qualify for a low-cost bankruptcy may be able to waive the filing fee.

That’s the good news. The bad news is your credit score is wrecked. A Chapter 7 bankruptcy will show on your credit report for 10 years, and it will be near-impossible to get a loan at a reasonable interest rate.

» More about: Chapter 7 vs. Chapter 11 Bankruptcy

Chapter 11 vs. Chapter 13

Both allow businesses to continue operating under reorganization plans. But as stated earlier, your bills can’t exceed $1,395,875 in secured debt (mortgage, car payments) and $465,275 in unsecured debt (credit cards) to qualify for a Chapter 13 bankruptcy.

That doesn’t mean you have to file a Chapter 13 if your debts are lower than those thresholds. But most businesses choose Chapter 13 since it is simpler and less expensive.

Unlike Chapter 11, a trustee is always appointed in a Chapter 13 case. He or she reviews the proposed reorganization plan and makes recommendations to the court on how to proceed.

The trustee also collects payments and distributes them to creditors. If the debtor fails to meet the repayment requirements, the trustee can ask the court to dismiss the case or convert it to a Chapter 7 liquidation.

Chapter 13 creditors also don’t get to vote on reorganization plans. That streamlines the process, but it still takes three to five years for it to play out.

Alternatives to Chapter 11 Bankruptcy

If the cost, time, and low success rate for Chapter 11 filings are too discouraging, consider these options.

  • Asset Sales: In some cases, a restructuring plan can work when it includes some of a company’s assets being sold. It can be managed outside of bankruptcy, and it might provide the debtor with a greater amount to pay off creditors.
  • Restructuring with a Fiduciary: By assigning a trustee (a fiduciary) to manage the restructuring process, it might be possible to arrange an agreement in which a company’s secured creditors are repaid more quickly than a Chapter 11 would mandate. The unsecured creditors, in this arrangement, are paid back over time from some of the revenue generated by the still-operating business.
  • Section 363: This is a faster version of Chapter 11 bankruptcy. A Section 363 sale occurs during the bankruptcy process. The parties negotiate an asset sale and present it to the court for approval. It can address at least some of a company’s debts quickly and efficiently.

Hire a Professional Counselor

It’s a requirement that all individuals who file for any form of bankruptcy must obtain pre-bankruptcy credit counseling before they file. That’s especially important in Chapter 11 cases because Chapter 11 is the most complicated and expensive form of bankruptcy.

A credit counselor can help you understand the advantages and disadvantages specific to your Chapter 11 case and explain your alternatives.

The agency offering credit counseling must be approved by the U.S. Trustee Program office, and your session must take place within 180 days before filing for bankruptcy.

If you decide to file, a credit counselor can be invaluable to have on board throughout the process. You’ll be dealing with your own stressful business or personal financial situation, and you’ll be in numerous negotiations with creditors as well as making a series of court appearances.

With all that, it just makes sense to have an expert at your disposal.

About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet.


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