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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Chapter 11 is the section of the bankruptcy code that allows businesses to reorganize their debts. It typically involves large sums of money, but individuals can also use it.

They rarely do since Chapter 7 and Chapter 13 are usually quicker and cheaper. In fact, in the 12-month period that ended Sept. 30, 2017, there were 486,542 Chapter 7 filings, 296,599 Chapter 13 filings and only 7,052 Chapter 11 filings.

But if you have a lot of assets and are struggling with debt, Chapter 11 is worth investigating.

What is Chapter 11 Bankruptcy?

Chapter 11 is often called the “reorganization bankruptcy.” It’s for businesses that want to keep operating but need time to restructure their finances in order to pay the bills.

Filing can be done voluntarily, or it can be forced on a business if three or more creditors file a petition with the bankruptcy court.

Once filed, 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 is basically a contract between the debtor and creditor that defines how the business will operate and pay its financial obligations. Most plans include some downsizing to reduce expenses and free up assets.

Once a business or individual files the plan, creditors vote whether to accept it. They are usually cooperative since the next option is usually filing for a Chapter 7 bankruptcy. In Chapter 7, assets are liquidated and creditors could get little or nothing.

There are three classes of creditors – priority, secured and unsecured. They must vote in favor for it to be approved by bankruptcy court.

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

There is no time limit on completing the repayment plan. Most take between six months and two years.

The Chapter 11 filing fee is $1,717, but that’s just the start since Chapter 11 bankruptcies are usually complicated. Expect to spend at least $10,000 on legal fees, though they have been known to run into the millions of dollars.

Chapter 11 Personal Bankruptcy

So why would an individual choose Chapter 11? It’s a viable option if they A) 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 debts can’t exceed $1,184,200 in secured debt (mortgage, car payments) and $394,725 in unsecured debt (credit cards) in order to qualify.

That’s why celebrities and pro athletes often file Chapter 11. Real estate investors also find it handy 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 principle 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 would mean lower monthly payments.

Chapter 11 Business Bankruptcy

The debtor continues to operate the business, though the bankruptcy court must approve major decisions. It can also appoint a trustee to take over if it finds sufficient cause, like fraud, dishonesty or incompetence.

Some of the biggest companies in America have filed for Chapter 11. Heading that list is General Motors, which filed in 2009.

It sold companies subsidiaries like Saturn, Hummer and Saab. It also got a $51 billion bailout from the U.S. Treasury which ended up costing taxpayers about $12 billion after all the smoke cleared.

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 $245 filing fee.

That’s the good news. The bad news is your credit score is wrecked and you will have a near-impossible time getting 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 $1,184,200 in secured debt (mortgage, car payments) and $394,725 in unsecured debt (credit cards) in order to qualify for a Chapter 13.

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 the 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.

The approval process is less complicated than a Chapter 11, since creditors don’t get to vote on the reorganization plan. Chapter 13 cases usually take three to five years to complete.

Do Chapter 11 Bankruptcies Work?

Not usually. Studies vary, but the success rate is probably 10% to 15%. The low statistics are not surprising considering business are already in deep financial stress and a Chapter 11 is the last-gasp effort to keep operating.

What you need is a lot of determination, a good lawyer and fair amount of luck. Though the best strategy is to avoid bankruptcy regardless of what Chapter is filed.

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. Bill can be reached at [email protected].


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