Chapter 11 Bankruptcy – Causes & Solutions

    Chapter 11 bankruptcy, also called reorganization, is a type of bankruptcy designed to allow companies to restructure their debts. Under the plan, companies can pay off their debts over a period of time without having to sell assets or stop doing business.

    Although individuals may file for bankruptcy under Chapter 11, it was created for and is predominantly used by businesses.

    Who Can File Under Chapter 11?

    Chapter 11 is used primarily by larger companies that want to continue doing business throughout the bankruptcy process and after it is completed. With this goal, Chapter 11 is a better option than Chapter 7. Filing under Chapter 7 would mean companies are unable to continue operating because all of their assets are sold to pay off debts.

    Chapter 11 also may be used by individuals, though Chapters 7 and 13 are significantly more common options for individual bankruptcy. However, Chapter 11 may be a good option for individuals who are forced into Chapter 7 bankruptcy. If this is the case, they can choose to convert it into Chapter 11, allowing them to keep their property.

    This form of bankruptcy is almost never used by small businesses. Unlike larger corporations, smaller enterprises can rarely afford to pay the legal fees and complete the reorganization plan as required by Chapter 11.

    Filing for Bankruptcy Under Chapter 11

    Before individuals or companies file for bankruptcy under Chapter 11, they must receive credit counseling. This is to ensure that bankruptcy is the right choice and that less drastic measures such as debt settlement or debt consolidation would not help alleviate the debtor’s burden.

    Any person or company that files for bankruptcy under Chapter 11 must pay $1,046 in filing and administrative fees, which can be paid in installments.

    Chapter 11 creates an automatic stay, meaning that debt collection actions and foreclosures are put on hold until the bankruptcy is official.

    After filing, the individual or company has 120 days to propose a plan of reorganization to the court. This time frame, called the exclusivity period, can be extended up to 18 months at the court’s discretion.

    For individuals, the reorganization plan is similar to the repayment plan created in a Chapter 13 bankruptcy and includes a debt repayment schedule.

    For corporations, the plan is more complex. A committee of stockholders works with a committee of creditors to negotiate a fair plan.

    Typically, portions of the debt are forgiven, similar to Chapter 13. Affected creditors have the opportunity to vote on the plan, with more weight being given to those owed the most. After creditors have accepted it, the court gives the final confirmation to go ahead with the reorganization plan.

    If a submitted plan is not approved by creditors within 180 of the initial filing, any of the creditors can submit a plan for the court to consider. In some cases, the court may confirm the original plan even if some creditors have rejected it. This can occur if the court decides the plan is fair to all creditors.

    Alternatively, the court may deem that the company or individual does not have enough assets to follow any sort of repayment plan. In these cases, the court may force the entity to instead file for Chapter 7 bankruptcy, which liquidates assets.

    Carrying Out the Repayment Plan

    Once a plan is agreed upon, it can take up to several years to complete. A debtor must make payments to each creditor as outlined in the court-approved plan.

    If at any time the debtor stops making payments as agreed, the case may be converted or dismissed. If the case is dismissed, the individual or company owes all its debts in full and can no longer follow the partial-repayment plan. If the case is converted into a Chapter 7 bankruptcy, the entity’s valuable assets are sold to help repay creditors.

    If you’re considering filing for personal bankruptcy or corporate bankruptcy under Chapter 11, make sure you’ve considered every alternative. It’s also helpful to go into a Chapter 11 bankruptcy with a plan of reorganization in mind. Without the right preparation, Chapter 11 may not restructure your finances as you had hoped.

    Al Krulick

    Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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