Chapter 11 Bankruptcy Explained by Chad Van Horn

Chapter 11 bankruptcy explained in simple terms is the bankruptcy reorganization route offered to individuals with significant debt (defined later), partnerships, LLCs, and corporations. Filing under this type of bankruptcy is referred to as a “reorganization” bankruptcy because the filing entity (individual or business) is not discharging all of its debts, but putting a plan together to make payments to the creditor’s over time.  Most of the time, creditors to not get paid in full.

Chapter 11 Bankruptcy Explained

Chapter 11 bankruptcy explained under the bankruptcy code is the way in which a debtor works out a reorganization plan. It allows them to keep their business open while paying creditors back over a period. 

Out of 794,960 bankruptcies filed in 2016, less than 1%, or 7,292 were Chapter 11 bankruptcy filings. Of these, 6,174 filings were business bankruptcy filings. It’s common for businesses, such as limited liability companies (LLCs), rather than individuals, to file Chapter 11 bankruptcy, however there are some unique times that it makes sense for an individual to file for Chapter 11 banrkuptcy.. 

Examples of large corporations that have filed Chapter 11 bankruptcy include:

  • Toys R Us
  • Lehman Brothers
  • United Airlines
  • BankUnited
  • K-Mart
  • HH Gregg
  • Gander Mountain
  • Charter Communications
  • Delta Air Lines
  • Macy’s
  • Trump Entertainment Resorts
  • United Airlines

These bankruptcy cases catch the eye of the public since they impact consumer habits. With that said, the above list barely touches on the numerous companies that have been forced to file for bankruptcy in an attempt to pay off massive amounts of debt. Additionally, not all businesses opt for Chapter 11; other alternatives include Chapter 7 liquidation or a Florida State Court alternative known as an Assignment for the Benefit of Creditors. Chapter 11 bankruptcy explained is the primary focus of this post. Before filing bankruptcy, check out the facts below. 

Filing for Chapter 11 Bankruptcy

Businesses file for Chapter 11 bankruptcy to restructure obligations and debts. Individuals that are not eligible for Chapter 7 or 13 often file for Chapter 11 bankruptcy, mainly because of the debt limitations imposed by 11 U.S.C. 109(e).  As of the writing of this article, the debt limitations for filing Chapter 13 are $394,725.00 for unsecured debts and $1,184,200.00 for secured debts. 

A debtor must begin the bankruptcy filing process like every other bankruptcy chapter by submitting the petition paperwork with the bankruptcy court local to the region where the filer lives or has a residence. Depending on the situation, the finalization of a Chapter 11 bankruptcy could take as little as 6 months or many years.

Unless otherwise indicated by the court, the following information must be filed with the bankruptcy court:

  • Social Security or Tax Identification Number
  • Residence
  • Location of Principal Assets (if the filer is a business)
  • Schedules of liabilities and assets
  • Schedule of current expenditures and income
  • Schedule of executory contracts and unexpired leases
  • Statement of financial affairs

For those debtors with a wife or husband, additional documentation is required at the time of filing. In this instance, a husband and wife are given the choice of filing either a joint petition or individual petitions. 

Any bankruptcy-related fees must be paid to the clerk of the court at the time of filing unless granted permission to make installment payments. If the debtor fails to pay the fees, the bankruptcy case may be dismissed.

Operating During Bankruptcy Filing

The business or indviduals are allowed to continue operating while filing for Chapter 11 bankruptcy. The debtor is also known as the debtor in possession. If the business is determined to have been involved in any instance of fraud, dishonesty, or if management is highly incompetent, a trustee may be appointed to operate the business during the filing process. 

Even though it is the responsibility of the debtor to manage and bring the company back out of bankruptcy, the business is not allowed to make particular decisions throughout the duration of the bankruptcy case, unless they’ve received the permission of the bankruptcy courts. Examples of this include:

  • Sale of assets (like property) except items like inventory
  • Starting/terminating a rental agreement
  • Stopping/expanding business operations
  • Contracts concerning vendors and unions
  • Attorney-related decisions (retaining and paying)

The debtor in possession is also not permitted to arrange for any loan to begin after the bankruptcy is finished. 

 

Business Debt Under Chapter 11

Another reason businesses choose this route, as Chapter 11 bankruptcy explained in this post is it has no limit on the amount of debt, unlike Chapter 13 for instance. The bankruptcy court may grant the business an exemption from repaying some or all of its debts. 

The business has the opportunity to present a debt reorganization plan. It typically includes a plan to downsize the business operations in an attempt to reduce expenses, as well as a strategy for renegotiating debts. In many instances, debtors resort to liquidating all assets to repay their creditors. 

A fair and reasonable reorganization plan is more likely to be accepted by the courts. The debtor must prove the business can raise the funds to repay its creditors throughout the duration of the plan. Once the plan is confirmed as proposed in good faith, the bankruptcy proceedings move forward. If the plan will not benefit the creditors or if no plan is proposed, the creditors may propose their own plan.

Chapter 11 Bankruptcy for Small Businesses

The majority of small businesses don’t choose to file under a Chapter 11 because it can be uncertain, complicated, time-consuming, and expensive. For all its negatives, this is the only way for small businesses to restructure and continue operating. 

Some things to know:

  • The debtor must be involved in commercial or business dealings 
  • Owes debts of $2,566,050 or less
  • The bankruptcy court can order that no creditors’ committee be appointed
  • May be subjected to additional filing and reporting duties
  • Subject to additional U.S. Trustee oversight
  • Only has 300 days to propose Chapter 11 plan (can be extended by courts)
  • Exclusivity period to propose plan extended to 180 days
  • The disclosure statement can be waived by the bankruptcy court

Contact Van Horn Law Group

Even though Chapter 11 bankruptcy explained in this post makes it seem as though with the careful reorganization of debt, debtors should be able to pay back their creditors—it’s not that simple. The success rate of Chapter 11 reorganization is 10 to 15 percent. Many businesses are forced to liquidate assets and close up shop. If you’re drowning in debt, don’t navigate it alone. Contact the experts at Van Horn Law Group to discuss your options, today!

About Chad Van Horn

Chad T. Van Horn, Esq. is a South Florida business leader and founding partner attorney of Van Horn Law Group, P.A. Through a combination of dedicated philanthropy, spirited entrepreneurship and legal expertise, he applies his resources and network to helping people. Learn more about Chad Van Horn

Chad Van Horn

Chad T. Van Horn, Esq. is a South Florida business leader and founding partner attorney of Van Horn Law Group, P.A. Through a combination of dedicated philanthropy, spirited entrepreneurship and legal expertise, he applies his resources and network to helping people. Learn more about Chad Van Horn

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