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 and typically involves large sums of money. Individuals can also use it, though they rarely do since filing for bankruptcy under Chapter 7 and Chapter 13 are usually quicker and cheaper.

In fact, in the 12-month period that ended Dec. 31, 2021, there were only 470 nonbusiness (meaning, individual) Chapter 11 filings nationally, compared to 279,649 nonbusiness Chapter 7 filings and 119,150 nonbusiness Chapter 13 filings, according to U.S. Bankruptcy Courts statistics.

Businesses, on the other hand, filed 4,366 Chapter 11 bankruptcies last year, along with 8,678 Chapter 7 filings and 852 Chapter 13 filings.

But if you have a lot of assets and are struggling with debt, filing for Chapter 11 as an individual (or a married couple filing jointly) is worth investigating.

What Is Chapter 11 Bankruptcy?

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

In addition to being able to continue to operate, the advantage of filing Chapter 11 is that it immediately stops calls from debt collectors, at least in the short term.

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 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. Each class of creditors must vote on the reorganization plan and it must be approved by the bankruptcy court. If the plan includes a schedule that will have some claims not paid in full or when they were originally due – called “impaired” claims – at least one class of those creditors must vote in favor of the plan.

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 $1,738, but that’s just the start since Chapter 11 bankruptcies are usually complicated. Expect to spend at least $10,000 on legal fees, though fees have been known to run into the millions of dollars.

» Learn More: Can You File Bankruptcy Online?

Who Is Eligible for Chapter 11 Bankruptcy?

Almost any person or business is allowed to file for Chapter 11 bankruptcy. Because there are no limitations or requirements about the amount of debt or income for the entity doing the filing, Chapter 11 is available to most individuals, corporations, partnerships, joint ventures and limited liability companies.

Basically, if you need to reorganize your business or personal finances, you can file for Chapter 11 bankruptcy.

So who can’t? Government agencies, insurance companies, banks, estates, nonbusiness trusts, stockbrokers or commodity brokers, Small Business Administration-licensed investment companies – none of them can file for Chapter 11. Nor can an individual who has had another bankruptcy case dismissed on certain grounds in the previous six months.

If you can manage the expense of the filing and legal fees (a big ‘if’) and aren’t among those exceptions, Chapter 11 is an available remedy.

How Long Does Chapter 11 Take?

Because there is no start-to-finish time limit for the Chapter 11 process, a case can last for years. Compared to other kinds of bankruptcy, Chapter 11 bankruptcies sometimes are prolonged operations, which is why they can be costly.

It’s true that many cases are completed, repayment and all, within six months to two years after they are filed, and some wrap up even sooner than that. But the larger and more complex Chapter 11 filings can last for five years or longer, depending on the amount of litigation involved and the terms of the reorganization plan.

For example, if the plan includes an extended payout or the debtor needs to complete a long-term contract in order to manage the repayment, the case will remain open.

The first stage of a Chapter 11 bankruptcy is called pre-confirmation, which is the time leading up to when the bankruptcy court approves the reorganization plan. The person or entity filing the Chapter 11 has four months after the filing date to propose the plan, but that deadline can be – and often is — extended for up to 18 months.

Since 2019, there has been an exception to that extension rule for small businesses in Chapter 11. Subchapter V of Chapter 11 bankruptcies expedites the process by imposing shorter deadlines and increasing flexibility in negotiating reorganization plans with creditors. It makes bankruptcy easier for small businesses, but small business owners who file under Subchapter V rarely are granted the deadline extension.

Once a reorganization plan is presented, votes are taken and modifications are made as part of the confirmation process. That, of course, takes time.

If the proposed plan isn’t accepted by the creditors, the court will consider a number of factors, including the likelihood of the proposal’s success, the good faith with which it was assembled, the best interests of the creditors and whether the plan is fair and equitable. The clock on the case keeps running through all of that.

If there is still no agreement, it’s the creditors’ turn to propose a reorganization plan, and the proceedings essentially start anew.

In the second phase – post-confirmation – the debtor usually has 30 to 90 days after the court approves the plan to begin issuing repayments to the creditors. But because there is an order in which the creditors are paid – priority creditors first, secured creditors next and unsecured creditors last – the payouts often are extended over a long period of time.

Too, the bankruptcy court will have to approve any major business decisions the debtor wants or needs to make during the bankruptcy, such as entering into or breaking a lease, new transactions in which the debtor borrows money, taking on or modifying contracts, as well as the payment of attorney fees and expenses.

Even when the bankruptcy is over, the ramifications for the filer’s credit are long-lasting. A Chapter 11 filing will remain on your credit report for the next seven years. If you are the owner of a business that goes through Chapter 11, its presence on the credit report can be a hindrance if you try to open another business in the future.

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.

As of April 1, 2022, your debts can’t exceed $1,395,875 in secured debt (mortgage, car payments, etc.) and $465,275 in unsecured debt (credit cards) in order to qualify to file under Chapter 13.

That’s why celebrities and pro athletes often file Chapter 11. They’ve exceeded the Chapter 13 debt limits. 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, such as fraud, dishonesty or incompetence.

Some of the biggest companies in America have filed for Chapter 11, including companies such as General Motors in 2009 and, more recently, Hertz, J.C. Penny and Neiman Marcus during the pandemic in 2020.

General Motors sold company subsidiaries such as 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 $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 the next 10 years, 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 $1,395,875 in secured debt (mortgage, car payments) and $465,275 in unsecured debt (credit cards) in order 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 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 Chapter 13 approval process is less complicated than a Chapter 11, since creditors don’t get to vote on the Chapter 13 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 no higher than 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. The rules are complex and the costs are high compared to other forms of bankruptcy.

You need a lot of determination, a good lawyer and a fair amount of luck.

Even when a Chapter 11 business bankruptcy is completed, it can have lingering effects. It can influence some of the important intangibles in a negative way, such as customer goodwill, brand value, and business relationships.

Of course, the best strategy is to avoid bankruptcy regardless of what Chapter is filed.

Alternatives to Chapter 11 Bankruptcy

If the cost, the time and that low 10% to 15% success rate for Chapter 11 bankruptcy filings are too discouraging, it might be worth exploring some of the available alternatives.

Among them are:

  • 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 Credit 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 also explain the alternatives available to you.

The agency offering the credit counseling must be approved by the U.S. Trustee Program office, and your session with the counselor must take place within 180 days before you file 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 appearances in bankruptcy court.

It makes sense to have expert help at your disposal from start to finish.

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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